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, 1999
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 0-21178
UNITED TEXTILES & TOYS CORP.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C>
Delaware 13-3626613
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)
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1385 Broadway, Suite 814, 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, $0.01 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 no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is 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 its fiscal year ended March 31, 1999 were
$34,377,018.
The aggregate market value of the voting stock on July 26, 1999 (consisting
of Common Stock, par value $0.01 per share) held by non-affiliates was
approximately $272,285 based upon the closing price for such Common Stock on
said date ($0.625), as reported by a market maker. On such date, there were
4,550,235 shares of Registrant's Common Stock outstanding.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
History
United Textiles & Toys Corp. (formerly Mister Jay Fashions International,
Inc.) (the "Company") is a Delaware corporation which was organized in March
1991 and 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 ($0.01 above
the closing price on December 31, 1997) as payment for $1 million 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 the Company
At fiscal year end March 31, 1999, 3,571,429 (or 78.5%) of the Company's
shares of Common Stock were owned by Multimedia, the Company's parent. The
president, chief executive officer, and a director of Multimedia is Ilan Arbel
who is also the president and a director of the Company. Multimedia is a
Delaware corporation and public company which was organized in 1994. It is owned
approximately 67.7% by U.S. Stores Corp., a company of which Mr. Arbel is the
president and a director. U.S. Stores Corp. is owned 100% by American Telecom
PLC ("ATPLC"), a British public corporation, which is owned approximately 80% by
Europe American Capital Foundation ("EACF"), a Swiss foundation, which is the
parent corporation also of Frampton Industries, Ltd. ("Frampton") and ABC Fund,
Ltd. ("ABC"), entities affiliated with the Company.
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The following chart depicts the Company's ownership structure:
Europe American Capital Foundation
|| || ||
\/ \/ \/
Frampton Industries, Ltd.(100%) American Telecom PLC (80%) ABC Fund, Ltd. (100%)
||
\/
(100%)
U.S. Stores Corp.
||
\/
(67.7%)
Multimedia Concepts International, Inc.
||
\/
(78.5%)
United Textiles & Toys Corp.
||
\/
(45.2%)
Play Co. Toys & Entertainment Corp.
Ownership of Play Co. Toys & Entertainment Corp.
Until July 1996, the Company was the majority shareholder of American Toys,
Inc. ("Atoys"), the then majority shareholder of Play Co. By corporate
resolution dated June 1, 1996, the Company authorized Atoys to spin-off (the
"Spin-off Distribution") to its stockholders the Play Co. shares of common stock
owned by Atoys. The Spin-off Distribution was effected in August 1996.
The Company owns 2,489,910 (or 45.2%) of the outstanding shares 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. Play Co. has two operating
subsidiaries, Toys International.COM, Inc. ("Toys") and Play Co. Toys Canyon
Country, Inc. ("Canyon"). Toys is owned 93.4% by Play Co., and Canyon is
wholly-owned by Play Co. (Play Co. and its subsidiaries collectively are
referred to herein as Play Co. except where specific delineation is necessary.)
Toys operates twelve stores and has been assigned all profits, receipts, and
other revenues generated by the one store leased by Canyon and by six Play Co.
stores.
Business of Play Co. Toys & Entertainment Corp.
Play Co., a Delaware corporation, was founded in 1974, at which time it
operated one store under the name "Play Co. Toys" in Escondido, California. At
present, Play Co. and its subsidiaries operate an aggregate of twenty-six stores
throughout Southern California (in the Los Angeles, Orange, San Diego,
Riverside, and San Bernardino Counties) and in (i) Tempe, Arizona, (ii) Las
Vegas, Nevada, (iii) Dallas, Texas, (iv) Auburn Hills, Michigan, and (v)
Chicago, Illinois. Play Co. intends to expand its operations geographically and
in accordance therewith has executed leases to open ten additional stores by the
end of calendar year 2000. These stores shall be located in California (San
Francisco, San Ysidro, and Mission Viejo), Nevada (Las Vegas), Texas (Houston),
North Carolina (Charlotte), Tennessee (Nashville), and Illinois (Schaumberg).
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Approximately 75% of Play Co.'s stores offer educational, new electronic
interactive, and specialty and collectible toys and items for sale and are
strategically located in highly trafficked, upscale malls. The remaining 25%
sell traditional toys and games and are located in strip shopping centers. Given
the favorable results obtained from a two year market test of the sale of
children's swimwear in its stores, Play Co. recently expanded its product mix
and now offers a limited number of children's swimwear and accessories for sale
in many of its stores.
Since 1997, Play Co. has embraced and implemented a new store design and
layout, remodeled most of its older stores, closed non-profitable stores, and
expanded its geographic market from exclusively Southern California to the
mid-western United States. Since 1996, Play Co. has opened eight stores which
are considered by management to be high-end retail toy and educational,
electronic interactive stores. These outlets, and those Play Co. expects to open
in the future, offer items comparable in quality and choice to those offered by
FAO Schwarz, Warner Brothers, and Disney Stores and are expected to attract
clientele similar to those attracted by such stores.
In April 1999, Play Co. debuted the first of three dedicated electronic
commerce websites. This site, www.ToysWhyPayRetail.com, represents a new trade
name and allows consumers to purchase, at near wholesale prices, overstocks,
special buys, and overruns on mostly name-brand toys purchased by Play Co. out
of season. Play Co. plans to offer approximately 1000 items for sale on the
website. The second electronic commerce website, www.Playco.com, is currently
being developed to a state-of-the-art standard in conjunction with an Internet
consulting firm. This second site, which will offer collectible and imported
specialty merchandise such as die-cast cars, dolls, plush toys, trains, and
collectible action figures, is expected to open in the fall of 1999. In
conjunction with the website launch, Play Co. plans to place computer kiosks in
its retail locations in order to permit customers to place orders on the website
for goods otherwise not sold in such stores.
Because Play Co.'s new and newly remodeled stores 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, such stores have shown and are expected to continue to show higher gross
profits than Play Co.'s older stores (which focused primarily on the sale of
traditional toys).
Acquisition of Toys International
In January 1997, Play Co. acquired substantially all of the assets of Toys.
The acquisition, in principal, included the assignment to Play Co. of the three
store leases then 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" operating name trademarks and also assumed the existing leases
at Toys' three store locations: two of such locations operate under the
tradename "Toys International," and the third operates 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. Both promissory notes were repaid in full under agreed terms. 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. through
April 1997, during which time he advised Play Co. regarding Toys' then
operations, vendors, policies, employees, etc.
Merchandising Strategy; Store Design
Play Co. believes it important to offer an environment that is less
intimidating and more "user friendly" than the environments provided by some of
the larger toy retailers whose businesses compete with Play Co. In view of this
belief, Play Co. actively embraces a policy of affording its customers courtesy,
respect, and ease of convenience. Play Co. provides trained store clerks to
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assist customers with all of their shopping needs and stocks its merchandise at
eye level for its patrons' convenience.
In 1996, management determined that current and prospective consumers,
whose needs and desires are influenced by prevailing musical, fashion,
recreational, and entertainment trends, require variety and demand in addition
to traditional products; namely, they desire the most fashionable products. In
an effort to meet the rapidly changing needs of its consumers, Play Co. designed
new outlets which provide a combination of (i) new educational, electronic
interactive, specialty, hobby, and collectible toys and goods and (ii)
traditional toys and games. In addition, it sought out, has opened, and
continues to open outlets located in highly trafficked malls, rather than in the
strip shopping centers where it originally opened its stores. In addition, 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 current and imminent industry demands.
Product and Trend Analysis
Play Co. continually assesses trends and demands in the industry, refines
its store formats and/or product lines as needed, and analyzes and evaluates
markets for future store openings, merchandise lines, and marketing strategies.
Play Co. operates its stores under the names "Play Co. Toys," "Toys
International," "Toy Co.," and "Tutti Animali" depending upon the product mix
and location.
Play Co. offers a broad in-stock selection of products at prices generally
competitive within the industry. While it does not stock the depth or breadth of
selection as some of its larger competitors do, Play Co. does strive to stock
all basic categories of toys and all television advertised items and continues
to emphasize specialty and educational toys in its stores. Product Lines
Play Co.'s older stores, which are located in strip shopping centers, sell
children's and adult toys, games, bicycles and other wheel goods, sporting
goods, puzzles, Nintendo and Sony electronic game systems (and cartridges
therefor), cassettes, and books. These stores offer in excess of 15,000 items
for sale, most of which are major brand name toys and hobby products.
Play Co.'s new (post 1996) and remodeled stores, while also offering the
aforesaid products for sale, stock a mix of educational toys, specialty stuffed
animals such as Steiff and North America Bears, Small World toys, LBG trains,
CD-ROMs, computer software games, and Learning Curve and Ty products. Play Co.'s
Tutti Animali store, located in the Crystal Court Mall in Costa Mesa,
California, primarily sells stuffed animals.
Play Co. periodically reviews each individual store's sales history and
prospects on an individual basis to decide on the appropriate product mix to
stock thereat. During calendar years 1997 and 1998, Play Co. market tested the
sale in its stores of a limited number of pieces of children's swimwear
manufactured by Breaking Waves, Inc. ("BWI"), an affiliate. (Play Co.'s chairman
is also (i) the president of Shopnet.com, Inc. ("Shopnet"), the parent
corporation of BWI, and (ii) the father-in-law of the Company's president.)
Since those market tests proved successful, in November 1998, Play Co. entered
into a sales agreement with BWI pursuant to which BWI agreed to sell to Play Co.
on a wholesale basis, and Play Co. agreed to purchase from BWI, during each
season during which swimwear is purchased, an agreed upon number of pieces of
merchandise for its retail locations. Play Co. further agreed to provide
advertising, promotional materials, and ads of the merchandise in all of its
brochures, advertisements, catalogs, and all other promotional materials,
merchandising programs, and sales promotion methods, in all mediums utilized by
same. Play Co.'s swimwear sales comprise a small portion (less than 1%) of its
total sales.
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Suppliers and Manufacturers
Play Co. purchases a significant portion of its products from approximately
five manufacturers and ships them to its stores from its warehouse 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.
Warehousing, Shipping and Inventory Systems
Play Co.'s stores are serviced from one distribution facility which is
approximately 37,000 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. Through this
system, Play Co. analyzes product sales 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 in the fourth calendar quarter,
during the holiday season, during which period some stores are restocked on a
daily basis. Play Co. ships to its stores in California by its own leased
vehicles. Play Co. ships to stores located outside of California via truck load
or less than truck load independent trucking companies.
Seasonality
Since inception, Play Co.'s business has been highly seasonal, with the
majority of its sales and profits being generated in the fourth calendar quarter
of the year, particularly during the November and December holiday season.
Termination of Military Base Sales
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 year 1998 (2% of sales) and fiscal year 1997 (3% of sales),
Play Co. ceased such sales as of July 1998. Wholesale sales to military bases
were approximately 1% of sales in fiscal year 1999.
Trademarks
In 1976, 1994, and 1998, Play Co. received federal registrations for the
trademarks "Play Co. Toys," "TKO" and "Toy Co." respectively. "Play Co. Toys"
and "Toy Co." are utilized in connection with certain of Play Co.'s stores.
"TKO" was used for certain items Play Co. previously manufactured. Play Co. also
utilizes the tradenames "Toys International" and "Tutti Animali."
Financing through FINOVA Capital Corporation
On January 21, 1998, Play Co. entered into a $7.1 million secured,
revolving Loan and Security Agreement (the "FINOVA Agreement") with FINOVA
Capital Corporation ("FINOVA"). The credit line offered under the FINOVA
Agreement replaced the $7 million credit line Play Co. previously had with
Congress Financial Corporation (Western) (the "Congress Financing"). Neither
FINOVA nor Congress is affiliated with Play Co. or the Company. Play Co. repaid
the Congress loan on February 3, 1998.
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The FINOVA credit line is secured by substantially all of Play Co.'s assets
and expires on August 3, 2000. The FINOVA Agreement is also guaranteed by the
Company. It accrues interest at a rate of floating prime plus one and one-half
percent. Effective July 30, 1998, Play Co. and FINOVA amended the FINOVA
Agreement to increase the maximum level of borrowings under the agreement from
$7.1 million to $7.6 million. Effective September 24, 1998, Play Co. and FINOVA
entered into a second amendment to the FINOVA Agreement to increase the maximum
level of borrowings thereunder from $7.6 million to $8.6 million through
December 31, 1998. As of January 1, 1999, the maximum level of borrowings
returned to the $7.6 million level. In December 1998, the FINOVA Agreement was
amended a third time to reflect FINOVA's taking of a subordinate position with
respect to its lien on only such equipment as has been leased by Play Co. from
Phoenix Leasing, Inc.
In November 1998, pursuant to an agreement with ZD Group, L.L.C. ("ZD") - a
related New York limited liability company, the beneficiary of which is a member
of the family of the Company's president - ZD issued a $700,000 irrevocable
standby letter of credit ("L/C") in favor of FINOVA. FINOVA then lent a matching
$700,000 to Play Co. in the form of a term loan, pursuant to a fourth amendment
to the FINOVA Agreement entered into on February 11, 1999. The term loan from
FINOVA expires on August 3, 2000 and bears interest at prime plus one percent.
In March 1999, Play Co. and FINOVA entered into a Fifth Amendment to Loan and
Security Agreement which stretches the agreed upon (in the FINOVA Agreement)
decrease in advance rate against Play Co.'s cost value of its inventory over a
five month period.
Under the FINOVA Agreement, Play Co. is able to borrow against the cost
value of eligible inventory. Since February 1999, pursuant to the Agreement,
Play Co.'s allowed borrowing has increased by $100,000 to $2.5 million against a
combination of $3 million in standby letters of credit in favor of FINOVA and
restricted cash provided by a subordinated loan. $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 million was
provided in the form of a standby letter of credit issued by Multimedia (the
Company's parent and thus an affiliate of Play Co.), and the other $500,000 was
provided by Play Co.
During fiscal year 1999, Play Co. breached two negative covenants in the
FINOVA Agreement by exceeding maximum levels of capital expenditures and
unsecured and lease financing. FINOVA waived such defaults.
Play Co. believes that it will require a significant increase in its line
of credit as a result of its 50% revenue growth over the past fiscal year and
has approached FINOVA about increasing the line of credit. There can be no
assurance that FINOVA (i) will be amenable to such a credit line increase or
(ii) will provide such an increase under terms that Play Co. deems reasonable.
Trade Financing
Play Co. relies on credit terms from its suppliers and manufacturers to
purchase nearly all of its inventory. Credit arrangements vary for reasons both
within and outside the control of Play Co.. See "-- Suppliers and
Manufacturers."
Fixture Financing
During fiscal year 1999, Play Co. entered into approximately twelve
financing agreements for the leasing of fixtures for its remodeled and new
stores. These agreements were entered into with various entities, none of which
is affiliated with Play Co., and bear terms of between three and five years. The
agreements are payable monthly and provide fixture financing in the approximate
aggregate amount of $849,000. All such financings are secured by Play Co.'s
store fixtures and equipment. Play Co. is currently negotiating additional
financing of this type.
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Competition
The toy 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, Kay Bee Toy Stores, K-Mart, and Wal Mart. Most of Play Co.'s larger
competitors are located in free-standing stores rather than in malls. Kay Bee
stores, however, are located in malls, though their product line is different
than Play Co.'s. Play Co. also competes with on-line toy retailers, such as
eToys Inc. The toy 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.
As a result of the continually changing nature of children's consumer
preferences and tastes, the success of Play Co. is dependent on its ability to
change and adapt to new trends and to supply the merchandise then in demand.
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 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.
Most of the companies with which Play Co. competes have more extensive
research and development, marketing, and customer support capabilities and
greater financial, technological, and other resources than those of Play Co.
There can be no assurance that Play Co. will be successful or that it will be
able to distinguish itself from such larger, better 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 June 30, 1999, the Company had three executive officers and no other
employees. At June 30, 1999, Play Co. had three executive officers,
approximately 151 full time employees, and approximately 332 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 vice
president of retail operations and vice president of merchandising who in turn
report directly to Play Co.'s executive officers.
Recent Developments
On July 27, 1998, the Company purchased 100,000 shares of Play Co.'s Series
E preferred stock for $100,000. In determining the purchase price paid by the
Company, the trading price of the securities - along with the applicable
discounts for illiquidity, lack of marketability, and lack of registration
rights - were considered. The trading price of approximately $2.00 per share was
discounted by 50% for the above reasons.
On January 2, 1998, the Company issued 3,571,429 shares of its Common Stock
to its parent, Multimedia, a company of which the Company's president is
president and a director, at a price of $0.28 per share ($0.01 above the closing
price on December 31, 1997) as payment for $1 million 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.
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In January 1998, the Company guaranteed Play Co.'s loan from FINOVA.
Thereafter, the president of the Company, Ilan Arbel, in a letter dated May 15,
1998, represented, generally, his intent and ability to provide working capital
to Play Co., should same be necessary, through September 30, 1999.
Play Co. Toys & Entertainment Corp.
In July 1999, pursuant to Regulation S of the General Rules and Regulations
Under the Securities Act of 1933, as amended, Toys sold 6.6% of its common stock
in a private transaction in exchange for $2.8 million. It also entered into an
investment agreement with an investment banking firm to take Toys public in an
initial public offering. Toys expects to raise approximately $20 million to $25
million through the sale of 22% of its common stock within approximately 90
days.
In May 1999, Play Co. sold 750,000 shares of Series F Preferred Stock, par
value $0.01 per share, at a purchase price of $1.00 per share, in a private
placement. Play Co. received $657,500 in net proceeds from the sale.
In March 1999, Play Co. borrowed an aggregate of $400,000 from Full Moon
Development, Inc., a corporation not affiliated with Play Co. or the Company,
pursuant to two promissory notes, each in the amount of $200,000. Play Co. has
repaid both notes.
In February 1999, Play Co. entered into a one year agreement with Typhoon
Capital Consultants, LLC ("Typhoon") pursuant to which Typhoon is to provide
financial and other consulting services. In exchange for Typhoon's services, the
agreement provides for the grant of an option to purchase an aggregate of
150,000 shares of Common Stock, exercisable at $1.75 per share until their
expiration on August 30, 2001.
In November 1998, Play Co. borrowed $250,000 from Amir Overseas Capital
Corp. ("Amir"), a corporation not affiliated with Play Co. or the Company, under
a promissory note which bore interest at 12%. In September 1998, Play Co.
borrowed $1 million from Amir, under a promissory note which bore interest at
12%. Both notes have been repaid.
In July 1998, Play Co. entered into a Lead Generation/Corporate
Relations Agreement with Corporate Relations Group, Inc. ("CRG"), a Florida
corporation not affiliated with Play Co. or the Company, pursuant to which CRG
is to provide investor and public relations services to Play Co. for a period of
five years. Under the terms of the Agreement, Play Co. paid $100,000 to CRG upon
execution of the agreement, and a Play Co. shareholder remitted 50,000 shares of
Play Co. Series E preferred stock as a reimbursement for expenses. In addition,
in exchange for CRG's services, the agreement provided for the grant to CRG and
four of its principals options to purchase an aggregate 450,000 shares of Play
Co. common stock at an exercise price of $0.78125 per share and an aggregate
700,000 shares of Series E preferred stock at an exercise price of $2.25 per
share. In connection with these options, Play Co. recorded approximately $35,000
in compensation ($10,000 for the Series E preferred stock options and $25,000
for the common stock options) based on an option pricing model which considered
the volatility of the securities' stock prices, and the short life of the
options, 2/3 of which are exercisable for a two month period and the remaining
1/3 of which are exercisable for an eight month period.
In May 1998, Play Co. commenced an offering of units, each unit comprising
one share of Play Co.'s Series F preferred stock and one Series F preferred
stock purchase warrant, at a purchase price of $3.00 per unit, through Morgan
Grant Capital Group, Inc. as placement agent. Play Co. terminated the offering
in June 1998, and no funds were raised thereby.
In June 1998, ABC, a Belize corporation which is (i) an affiliate of the
Company and Play Co. under common control and (ii) the holder of a 5%
convertible secured subordinated Play Co. debenture - dated January 21, 1998 and
due August 15, 2000 - offered to amend the terms of the debenture to enable the
conversion of the principal amount and accrued interest thereon into shares of
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Play Co. Series E preferred stock, at a conversion price of $1.00 per share.
Play Co. agreed to convert the debenture since the conversion of the debt into
equity would result in a strengthened equity position which Play Co. believed
would provide confidence to its working capital lender, FINOVA, and trade
creditors. Further, converting the debt to equity eliminated on-going interest
expense requirements as well as the cash flow required to repay the debenture.
Simultaneously with its offer to amend the debenture, ABC elected to convert
same as of June 30, 1998 whereby, $1.5 million in principal amount and $33,333
in accrued interest were converted into 1,533,333 shares of Series E preferred
stock. ABC did not receive any registration rights regarding the shares.
Simultaneously, ABC terminated the Subordinated Security Agreement between the
parties and the Intercreditor and Subordination Agreement, dated January 21,
1998, by and between ABC and FINOVA.
The debenture provided for the conversion, at the option of ABC, of the
debenture into shares of common stock of either (i) a subsidiary which Play Co.
intended to form for the purpose of acquiring those stores operated by Play Co.
(or its subsidiaries) which conduct business as "Toys International," or (ii)
any other subsidiary (such as Toys) which might acquire a portion of the assets
and business of Play Co. This option to convert was exercisable at the net book
value of the subsidiary's shares on the date ABC exercised the option with a
limitation on such share ownership being 25% of the total outstanding shares of
said subsidiary. In September 1998, in accordance with the terms of the
debenture, ABC assigned its option to Tudor Technologies, Inc. ("Tudor"), an
entity of which Mr. Moses Mika (a director of the Company and Play Co. and the
father of the Company's president) is a shareholder. On July 15, 1999, Tudor
elected to exercise its right to purchase the Toys common stock and requested
that the exercise price be amended to reflect the book value of Toys at the most
recent fiscal quarter, June 30, 1999. Play Co. agreed to Tudor's request.
ITEM 2. DESCRIPTION OF PROPERTY
Until April 1998, the 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. 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. The office space at this location was leased to U.S. Apparel Corp. (a
subsidiary of Multimedia, the Company's parent), and pursuant to an oral
agreement with U.S. Apparel Corp., the Company paid no remuneration for its use
of the premises. The president of the Company is also the president of U.S.
Stores Corp. and Multimedia. On July 1, 1999, the Company vacated 1410 Broadway
and relocated, with Multimedia (its parent) and U.S. Apparel Corp. (the named
tenant on the lease), to 1385 Broadway, Suite 814, New York, New York 10018.
Pursuant to an oral agreement with U.S. Apparel Corp., the Company pays no
remuneration for its use of the premises.
Play Co. Properties
Until recently, Play Co.'s stores were serviced from two adjacent
distribution facilities (one 37,000 square feet in size, the other 18,000 square
feet in size) encompassing an aggregate of approximately 55,000 square feet, at
550 Rancheros Drive, San Marcos, California. As of April 15, 1997, however, Play
Co. returned approximately 15,400 feet of the 18,000 square foot warehouse space
to the landlord. Play Co. now leases (i) 40,000 square feet of combined office
and warehouse space (approximately 3,000 square feet is office space, and the
remaining 37,000 square feet is warehouse space) and (ii) approximately 2,600
square feet of separate space which houses defective merchandise until same is
either returned to the manufacturers or Play Co. is authorized by the
manufacturers to destroy the goods. The former space is leased at an approximate
annual cost of $247,000, from a partnership of which one of the partners is
Richard Brady, the president and a director of Play Co. The lease expires in
April 2000, and Play Co. believes that it is on terms no more or less favorable
than terms it might otherwise have negotiated with an unaffiliated party. The
latter space is leased at an approximate annual cost of $31,572, from
Dunlop/Townley Holdings. The lease expires in March 2000. From October 1998
through April 1999, Play Co. leased an additional 4,200 square feet of warehouse
space for $2,300 per month to store overflow inventory from its primary
warehouse.
<PAGE>
The following table sets forth the leased properties on which Play Co.'s
(and its subsidiaries') currently operating stores (aggregating 26) are located:
<TABLE>
<CAPTION>
===============================================================================================================================
SIZE IN SQUARE FEET
LEASE BASE RENT
STORE LOCATION EXPIRATION ANNUAL COST
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Play Co. Toys 12,000 July 2006 $108,000.00
Santa Clarita
19232 Soledad Canyon Rd
Santa Clarita, CA 91351
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 7,800 January 2001 $84,840.00
Santa Margarita
27690-B Santa Margarita
Mission Viejo, CA 92691
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 8,250 December 1999 $87,549.72
Chula Vista
1193 Broadway
Chula Vista, CA 91911
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,030 June 2000 $127,880.64
El Cajon
327 N. Magnolia
El Cajon, CA 92020
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 11,323 November 1999 $95,040.48
Simi Valley
1117 E. Los Angeles, Suite C
Simi Valley, CA 93065
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,000 September 2005 $110,753.88
Encinitas
280 N. El Camino Real
Encinitas, CA 92024
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 9,800 December 2004 $117,330.72
Pasadena
885 S. Arroyo Parkway
Pasadena, CA 91105
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 13,125 January 2001 $96,360.00
Orange
1349 E. Katella
Orange, CA 92513
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,478 Month to Month $95,941.80
Redlands
837 Tri-City
Redlands, CA 92373
===============================================================================================================================
<PAGE>
(table continued from previous page)
===============================================================================================================================
SIZE IN SQUARE FEET
LEASE BASE RENT
STORE LOCATION EXPIRATION ANNUAL COST
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,156 August 2002 $88,053.00
Clairemont
4615-A Clairemont Drive
San Diego, CA 92117
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 11,597 March 2004 $91,020.00
Rancho Cucamonga
9950 W. Foothill Blvd, Suite U
Rancho Cucamonga, CA 91730
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,000 October 2004 $64,926.60
Corona
1210 W. Sixth Street
Corona, CA 91720
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 9,400 December 2003 $178,980.00
Woodland Hills
19804 Ventura Blvd., #366
Woodland Hills, CA 91364
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 5,183 January 2004 $159,900.00
South Coast Plaza, Ste. 1020
3333 Bristol Street, Suite 1030
Costa Mesa, CA 92626
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 3,869 January 2001 $145,920.00
Century City
10250 Santa Monica Blvd
Los Angeles, CA 90067
- -------------------------------------------------------------------------------------------------------------------------------
Tutti Animali 1,220 January 2000 5% of Sales
Crystal Court
3333 Bear Street
Cost Mesa, CA 92626
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 3,620 August 2007 $83,260.08
Galleria at South Bay
1815 Hawthorne Blvd., #366
Redondo Beach, CA 90278
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 5,642 January 2003 $112,840.00
Ontario Mills
One Mills Circle, #302
Ontario, CA 91764
===============================================================================================================================
<PAGE>
(table continued from previous page)
===============================================================================================================================
SIZE IN SQUARE FEET
LEASE BASE RENT
STORE LOCATION EXPIRATION ANNUAL COST
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 7,103 October 2002 $163,369.00
Arizona Mills
5000 Arizona Mills Circle, #689
Tempe, AZ 85282
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 7,002 May 2008 $175,483.32
Fashion Outlet of Las Vegas
32100-320 Las Vegas Blvd. So.
Primm, NV 89019
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 9,369 May 2003 $175,483.32
Grapevine Mills
3000 Grapevine Mills Pkwy, Ste. 312
Grapevine, TX 76051
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 5,339 December 2008 $133,475.04
Thousand Oaks
208 W. Hillcrest Drive
Thousand Oaks, CA 91360
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 10,000 May 2008 $195,000.00
Great Lakes Crossing
4236 Baldwin Rd., #551
Auburn Hills, MI 48326
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 12,496 July 2003 $168,696.00
Gurnee Mills Mall
06170 W. Grand Ave., Sp. #559
Gurnee, IL 60031
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 9,400 March 2008 $221,424.00
The Block
20 City Dr. West, Ste. 203
Orange, CA 92868
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 7,002 June 2004 $450,000.00
The Venetian Resort & Casino
3311 Las Vegas Blvd. South, Ste.1212
Las Vegas, NV 89109
===============================================================================================================================
</TABLE>
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Neither the Company's officers, directors, affiliates, nor owners of record
or beneficially of more than five percent of any class of the Company's Common
Stock is a party to any material proceeding adverse to the Company or has a
material interest in any such proceeding adverse to the Company or its parent or
subsidiary.
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 that in October 1997, in the Superior Court of the State of California,
County of San Bernardino, Foothill Marketplace commenced suit against Play Co.
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, in the approximate amount of
$300,000. This action is in the discovery phase and a trial is scheduled for
September 1999.
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 securities were quoted on the Nasdaq SmallCap Stock Market
until August 28, 1997, at which time Nasdaq delisted the Company's securities.
The following table sets forth representative high and low bid quotes as
reported by the OTC Bulletin Board whereon the Company's securities are quoted,
during the periods stated below (quotes prior to August 28, 1997 are reported by
Nasdaq). Bid quotations reflect prices between dealers, do not include resale
mark-ups, mark-downs, or other fees or commissions, and do not necessarily
represent actual transactions. Common Stock
<TABLE>
<CAPTION>
Calendar Period Low High
1997
<S> <C> <C>
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
07/01/98 - 09/30/98 0.20 0.40
10/01/98 - 12/31/98 0.15 0.21
1999
01/01/99 - 03/31/99 0.15 0.25
04/01/99 - 06/30/99 0.22 0.37
07/01/99 - 07/31/99 0.25 0.34
</TABLE>
(1) Reflects the 1 for 10 reverse stock split effected in March 1997.
(2) The Company was delisted from the Nasdaq SmallCap Stock Market on
August 28, 1997.
As of July 26, 1999, there were approximately 15 holders of record of the
Company's Common Stock, although the Company believes that there are
approximately 1600 additional beneficial owners of shares of Common Stock held
in street name. As of July 12, 1999, the number of outstanding shares of the
Company's Common Stock was 4,550,235.
Recent Sales of Unregistered Securities
The Company sold no unregistered securities during the fiscal year ended
March 31, 1999.
<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>
Restated
1999 1998
Balance Sheet Data:
<S> <C> <C>
Working capital (deficiency) $ (3,929,270) $ (996,465)
Total assets 21,147,039 14,359,762
Total current liabilities 17,309,487 10,243,432
Long-term obligations 8,527,116 7,055,549
Stockholders' equity (4,524,506) (3,538,617)
Operating Data:
Net sales $ 34,377,018 $ 23,019,748
Cost of sales 19,590,784 15,222,746
Total operating expenses 13,912,404 10,493,859
Effect of non-cash dividends on convertible preferred stock 1,707,725 1,473,806
Net income (loss) (985,887) (3,578,401)
Income (loss) per common share (0.22) (2.80)
Weighted average shares outstanding 4,550,234 1,276,424
</TABLE>
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.
United Textiles & Toys Corp.'s (the "Company") 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. Toys &
Entertainment Corp. ("Play Co.").
For the year ended March 31, 1999 compared to the year ended March 31, 1998
Consolidated net sales for the year ended March 31, 1999 were $34,377,018.
This represented an increase of $11,357,270, or 49.3% over net sales of
$23,019,748 for the year ended March 31, 1998. The net increase was comprised of
an increase in Play Co.'s net sales of $11,802,703 and a decrease of $445,433 in
the Company's net sales for the comparable period. The Company reported net
sales of $5,788 for the year ended March 31, 1999.
Approximately $7.6 million of Play Co.'s increase came from new stores, and
the remaining $4 million was attributed to a 21.3% increase in same store sales.
<PAGE>
At March 31, 1999, Play Co. had 25 retail locations, compared to 19 retail
locations at March 31, 1998. During fiscal 1999, Play Co. opened six additional
stores.
Consolidated cost of sales was $19,590,784 for the year ended March 31,
1999 as compared to $15,222,746 for the year ended March 31, 1998. This
represented an increase of $4,368,038 or 29%. The increase 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 $12,898,403 for the
year ended March 31, 1999 as compared to $9,235,980 for the year ended March 31,
1998. This represented an increase of $3,622,423 or 40%. The increase can be
attributed to a growth in rent expense, payroll, and related costs associated
with new store openings by Play Co.
Play Co. incurred $27,659 of litigation related expenses in the year ended
March 31, 1999. 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, and
the $27,659 relates directly to that store.
Depreciation and amortization expense in the year ended March 31, 1999 was
$968,342 as compared to $674,338 in the year ended March 31, 1998. This
represented an increase of $294,004 or 44%. The primary reason for this increase
was the resultant depreciation on fixed assets purchased for six new stores
opened by Play Co. during the year ended March 31, 1999.
Total interest expense amounted to $965,051 for the year ended March 31,
1999. This represented an increase of $149,531 or 18%. The increase can be
attributed to a higher level of borrowing by Play Co.
For the year ended March 31, 1999, subsequent to the adjustment for the
minority interest in the net loss of Play Co., the Company reported a
consolidated net loss of $985,887 or $0.22 per common share. For the year ended
March 31, 1998, subsequent to the minority interest adjustment, the Company
reported a consolidated net loss of $2.80. Management attributes the decrease in
net loss per share to increased sales performance of the Play Co. retail units.
Liquidity and Capital Resources
At March 31, 1999, consolidated working capital deficit was $3,929,270 as
compared to a working capital deficit of $996,465 as of March 31, 1998. This
change in consolidated working capital was largely due to additional borrowings
by Play Co. and an increase in accounts payable.
For the year ended March 31, 1999, consolidated operating activities
provided funds of $370,529 as compared to the year ended March 31, 1998 in which
$423,408 was provided by operating activities. The decrease was due primarily to
the increase in inventory at March 31, 1999.
The Company used $2,623,902 in investing activities for the year ended
March 31, 1999 as compared to a usage of $3,288,529 for the year ended March 31,
1998. The decrease is due primarily to a decrease in the purchase of restricted
certificates of deposits, offset by an increase in the purchase of property,
plant & equipment.
Consolidated financing activities generated funds of $1,720,640 during the
year ended March 31, 1999 as compared to a generation of $3,379,831 in funds
during the year ended March 31, 1998. The primary elements in the generation of
financing funds were net borrowings under a new financing agreement by Play Co.
and net proceeds received by Play Co. from notes payable.
<PAGE>
For the years ended March 31, 1999 and 1998, Play Co. generated losses of
$1,566,857 and $3,528,276 respectively, which amounts includes the minority
shareholders' pro rata share. As a result, consolidated net cash decreased from
$659,378 at March 31, 1998 to $126,625 at March 31, 1999.
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, 1999. While Play Co. believes that its new
product mix will remain popular with the consumer market for the remainder of
1999, 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.
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. Play Co. also competes both through its electronic commerce
operations and through its stores against Internet oriented toy retailers such
as eToys, Inc. 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 the 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 product prices over time.
Year 2000
The Company does not believe that the Year 2000 computer issue will have a
significant impact on its operations or financial position and thus does not
believe that it will be required to significantly modify its internal computer
systems. However, if internal systems do not correctly recognize date
information when the year changes to 2000, there could be an adverse impact on
the Company's operations. Furthermore, other entities' failures to ensure year
2000 capability may have an adverse effect on the Company via its subsidiary,
Play Co.
In 1998, Play Co. developed a plan to upgrade its existing management
information system and computer hardware and to become year 2000 compliant. Play
Co. has completed the hardware upgrade and has installed a year 2000 compliant
upgrade to its accounting software. It expects to finish the year 2000
compliance work in the September quarter of 1999. Beyond this issue, Play Co.
has no current knowledge of any outside third party year 2000 issues that would
result in a material negative impact on its operations. It has reviewed its
significant vendors' and financing arm's recent SEC filings vis-a-vis year 2000
<PAGE>
risks and uncertainties and, on the basis thereof, is confident that the steps
it has taken to become year 2000 compliant are sufficient. In continuation of
this review, Play Co. shall continue to monitor or otherwise obtain confirmation
from the aforesaid entities - and such other entities as management deems
appropriate - as to their respective degrees of preparedness. To date, nothing
has come to the attention of Play Co. that would lead it to believe that its
significant vendors and/or service providers will not be year 2000 ready. The
effect, if any, of year 2000 problems on Play Co.'s results of operations if
Play Co. or its customers, vendors, or service providers are not fully compliant
cannot be estimated with any degree of certainty. It is nonetheless possible
that year 2000 problems could have a material adverse effect in that holiday
1999 purchases may be stunted due to consumer uncertainty and that the overall
business environment may be disrupted in Play Co.'s fourth fiscal quarter, which
in turn, would have a material adverse effect on the Company.
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 ("LLC")
mutually agreed that LLC would no longer be the Company's auditors. The
resignation of LLC was not due to any discrepancies or disagreements between the
Company and same 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, 1997 and 1998 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.
During the past two fiscal years, no accountant's report on the Company's
financial statements contained any adverse opinion or disclaimer of opinion or
was modified as to uncertainty, audit scope, or accounting principles.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
Officers and Directors
The following table sets forth the names, ages, and titles of all directors
and officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Ilan Arbel 47 Chief Executive Officer, President, and Director
Rivka Arbel 46 Vice President and Director
Allean Goode 67 Secretary, Treasurer, and Director
Moses Mika 80 Director
</TABLE>
All directors are elected at an annual meeting of the Company's
shareholders and hold office for a period of one year or until the next annual
meeting of stockholders or until their successors are duly elected and
qualified. Vacancies on the board of directors may be filled by the remaining
directors. Officers are appointed 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 and Moses Mika is the father of Mr. Arbel.
As permitted under the Delaware General Corporation Law, the Company's
Certificate of Incorporation eliminates the personal liability of the directors
to the Company or any of its shareholders for damages caused by breaches of said
directors' fiduciary duties. As a result of such provision, stockholders may be
unable to recover damages against directors for actions which constitute
negligence or gross negligence or are in violation of their fiduciary duties.
This provision in the Company's Certificate of Incorporation may reduce the
likelihood of derivative and other types of shareholder litigation against
directors.
Ilan Arbel has been the president, chief executive officer, and a director
of the Company since 1991. Mr. Arbel was the president, chief executive officer,
and a director of Atoys from February 1993 until July 1993 at which time he
resigned as president thereof. In March 1995, Mr. Arbel was reelected president
of Atoys, a position he held, with his directorship, until July 1996. Mr. Arbel
was the president, secretary, and a director of Multimedia from inception until
June 12, 1995. He was reelected a director in August 1995 and president in May
1996. Since its inception, in February 1997, Mr. Arbel has been the president
and a director of U.S. Apparel. From May 1993 to April 1997, Mr. Arbel was a
director of Play Co. (from June 1994 until his April 1997 resignation, he was
chairman). 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. Since 1993, he has been the president 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. He has been
a director of Play Co. since March 1998 and a director of Toys since May 1998.
Mr. Mika is the president of H.D.S. Capital Corp. and the majority shareholder
of European Ventures Corp. Mr. Mika has been retired since 1989.
<PAGE>
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 Atoys 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.
Since March 1996, she has been a vice president of the Company. Since 1986, Ms.
Arbel has been president and a director of Amigal, Ltd., a producer of men's and
women's wear in Israel. Ms. Arbel is the sister-in-law of Ilan Arbel, the
Company's president and chief executive officer.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors, and persons who beneficially own more than
ten percent of a registered class of the Company's equity securities to file
reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission ("SEC"). Officers, directors, and greater
than ten percent beneficial owners also are required by rules promulgated by the
SEC to furnish the Company with copies of all Section 16(a) forms they file.
No person ("a Reporting Person") who during the fiscal year ended March 31,
1999 was a director, officer, or beneficial owner of more than ten percent of
the Company's Common Stock or Series E Stock [which are the only classes of
equity securities of the Company registered under ss.12 of the Securities
Exchange Act of 1934], failed to file on a timely basis reports required by
ss.16 of the Act during the most recent fiscal year except as follows: (i) Ilan
Arbel failed to file Forms 3 and 5, (ii) Rivka Arbel failed to file Forms 3 and
5, (iii) Allean Goode failed to file Forms 3 and 5, (iv) Moses Mika failed to
file Forms 3 and 5, (v) Multimedia and American Telecom PLC failed to file Forms
5, (vi) American Telecom Corp. failed to file Forms 4 and 5, (vii) U.S. Stores
Corp. failed to file Forms 4 and 5, and (viii) Europe American Capital
Foundation failed to file Forms 3 and 5. The foregoing is based solely upon a
review by the Company of (i) Forms 3 and 4 during the most recent fiscal year as
furnished to the Company under Rule 16a-3(e) under the Act, (ii) Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, and (iii) any representation received by the Company from any
reporting person that no Form 5 is required, except as described herein. ITEM
10. EXECUTIVE COMPENSATION
<PAGE>
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 or paid
by the Company during the years ended March 31, 1999, 1998, and 1997 to each of
the named executive officers of the Company.
<TABLE>
<CAPTION>
==================================================================================================================================
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
Salary Bonus Annual Securities
Name and Principal Year ($) ($)(1) Compen Restricted Underlying All Other
Position -sation($) Stock Options/ LTIP Compen-
Award(s)($) SARs (#) Payouts($) sation ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ilan Arbel (2) 1999 -- -- -- -- -- -- --
President, CEO,
and Director
1998 -- -- -- -- -- -- --
1997 -- -- -- -- 300,000 -- --
====================================================================================================================================
</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
Mrs. Arbel were granted options to purchase an aggregate of 300,000 and 40,000
shares, respectively, of the Company's Common Stock at a purchase price equal to
the average bid price for the Company's Common Stock as reported on the Nasdaq
SmallCap Stock Market, for a period of ninety days ending five days prior to
exercise. Such options were exercised in their entirety. See "Certain
Relationships and Related Transactions."
1992 Stock Option Plan
In 1992, the Company adopted a Stock Option Plan (the "SOP"). The board
believes that the SOP is desirable to attract and retain executives and other
key employees of outstanding ability. Under the SOP, 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 SOP and is
generally empowered to interpret it, 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 the 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).
<PAGE>
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 SOP 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 SOP 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 SOP, provided,
however, that certain material modifications affecting the SOP must be approved
by the shareholders, and any change in the SOP that may adversely affect an
optionee's rights under an option previously granted pursuant to same requires
the consent of the optionee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's outstanding Common Stock as of July 27, 1999, by (i)
each beneficial owner of 5% or more of the Company's Common Stock, (ii) each of
the Company's executive officers, directors, and key employees, and (iii) all
executive officers, directors, and key employees as a group:
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of Common Stock
of Beneficial Owner Beneficially Owned 1 Beneficially Owned 2
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Multimedia Concepts International, Inc.
1385 Broadway, Suite 814
New York, New York 10018 3,571,429 78.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Ilan Arbel (3)
c/o United Textiles & Toys Corp.
1385 Broadway, Suite 814 3,571,429 78.5%
New York, New York 10018
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Stores Corp.(4)
1385 Broadway, Suite 814
New York, New York 10018 3,694,579 81.2%
- ------------------------------------------------------------------------------------------------------------------------------------
American Telecom, PLC (5)
8-13 Chiswell Street
London EC 1Y 4UP 3,694,579 81.2%
- ------------------------------------------------------------------------------------------------------------------------------------
Europe American Capital Foundation (6)
Box 47
Tortola British Virgin Islands 4,114,579 90.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Allean Goode
c/o United Textiles & Toys Corp.
1385 Broadway, Suite 814 -- --
New York, New York 10018
- ------------------------------------------------------------------------------------------------------------------------------------
Rivka Arbel
c/o United Textiles & Toys Corp.
1385 Broadway, Suite 814 -- --
New York, New York 10018
- ------------------------------------------------------------------------------------------------------------------------------------
Moses Mika
c/o United Textiles & Toys Corp.
1385 Broadway, Suite 814 -- --
New York, New York 10018
- ------------------------------------------------------------------------------------------------------------------------------------
Officers and Directors as a Group
(4 persons) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(footnotes from previous page)
(1) Unless otherwise noted, all of the shares shown are held by individuals
or entities possessing sole voting and investment power with respect to such
shares. Shares not outstanding but deemed beneficially owned by virtue of the
right of an individual or entity to acquire them within 60 days, whether by the
exercise of options or warrants, are deemed outstanding in determining the
number of shares beneficially owned by such person or entity.
(2) The "Percent of Common Stock Beneficially Owned" is calculated by
dividing the "Number of Shares Beneficially Owned" by the sum of (i) the total
outstanding shares of Common Stock of the Company, and (ii) the number of shares
of Common Stock that such person or entity has the right to acquire within 60
days, whether by exercise of options or warrants. The "Percent of Common Stock
Beneficially Owned" does not reflect shares beneficially owned by virtue of the
right of any person, other than the person named and affiliates of said person,
to acquire them within 60 days, whether by exercise of options or warrants.
(3) Ilan Arbel is the president and a director of each of Multimedia, a
publicly traded company which is the parent of the Company (owning 78.5% of
same) and U.S. Stores Corp., a private company which is the parent of Multimedia
(owning 67.7% of same).
(4) U.S. Stores Corp. is the parent of Multimedia, owning 67.7% of same,
and accordingly is a beneficial owner of the shares of Common Stock owned by
Multimedia. U.S. Stores Corp. also owns 123,150 shares of the Company's Common
Stock in street name.
(5) American Telecom, PLC is a British corporation and the parent of U.S.
Stores Corp., owning 100% of same, and accordingly is a beneficial owner of the
shares of Common Stock owned by U.S. Stores Corp.
(6) EACF is a Swiss foundation and the parent of American Telecom, PLC,
owning 80% of same, and accordingly is a beneficial owner of the shares of
Common Stock owned by American Telecom, PLC. EACF is also the record owner of
420,000 shares of Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Multimedia Concepts International, Inc.
On January 2, 1998, the Company issued 3,571,429 shares of its Common Stock
to its parent, Multimedia, a company of which the Company's president is
president and a director, at a price of $0.28 per share ($0.01 above the closing
price on December 31, 1997) as payment for $1 million 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.
In January 1998, in accordance with certain financing provided by FINOVA,
the Company's subsidiary, Play Co., received $3.0 million in standby L/Cs. $1
million of same was provided by Multimedia, the Company's parent.
Officers and Directors
In May 1996, the Company entered into five year employment agreements with
each of Ilan Arbel and Rivka Arbel. Pursuant to such agreements, Mr. Arbel and
Mrs. Arbel were granted options to purchase an aggregate of 300,000 and 40,000
shares of Common Stock, respectively. Of the aggregate of 340,000 shares,
135,000 were exercised at a purchase price of $1.63 per share and 205,000 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. The
options were exercised and the shares were sold in May and June 1996. See
"Executive Compensation" for a description of the Company's compensation of its
officers and directors.
<PAGE>
American Toys, Inc. Spin-Off
On January 30, 1996, pursuant to the requirements of Play Co.'s loan
agreement with Congress, Atoys (the Company's former subsidiary and Play Co.'s
former parent) converted all $1.4 million of debt owed by Play Co. into equity.
Congress is not affiliated with Play Co.. In exchange for the debt, Atoys agreed
to receive from Play Co. one share of Series D Preferred Stock with the right to
elect 2/3 of Play Co.'s board of directors upon stockholder approval. In August
1996, the one share of Series D Preferred Stock was converted into 385,676
shares of Play Co.'s Common Stock based on the initial amount of the debt
divided by the average price of the shares for a 90 day period prior to the
conversion. This was performed in order for Atoys to spin such shares off to its
stockholders and divest its interest in Play Co. As a result of the spin-off,
the Company (which was the then majority shareholder of Atoys) became the parent
of Play Co.
Play Co. Toys & Entertainment Corp.
The Company guaranteed Play Co.'s loan from FINOVA.
The president of the Company, Ilan Arbel, in a letter dated May 15, 1998,
has represented, generally, his intent and ability to provide working capital to
Play Co., should same be necessary, through September 30, 1999.
On July 27, 1998, the Company purchased 100,000 shares of Play Co.'s Series
E preferred stock for $100,000. In determining the purchase price paid by the
Company, the trading price of the securities - along with the applicable
discounts for illiquidity, lack of marketability, and lack of registration
rights - were considered. The trading price of approximately $2.00 per share was
discounted by 50% for the above reasons.
In the fourth quarter of the year ended March 31, 1999, Play Co. borrowed
$100,000 from Shopnet under an unsecured note, with interest at 9%. Of this
amount, $50,000 has been repaid to date. The original maturity date has been
extended to an unspecified date. In each of April and May 1999, Play Co.
borrowed an additional $100,000 under unsecured notes, with interest at 9% and
maturity on August 31, 1999 and September 30, 1999, respectively.
On November 24, 1998, pursuant to a sales agreement entered into by and
between Play Co. and BWI, BWI purchased 1.4 million unregistered shares of Play
Co.'s common stock in a private transaction. The shares purchased by BWI
represent approximately 25.4% of the total common stock issued and outstanding
after the transaction. The consideration for the stock was $665,000, which
represents a price of $0.475 per share. The price represents an approximate 33%
discount from the then current market price of $0.718 reflecting a discount for
the illiquidity of the shares, which do not carry any registration rights.
$300,000 of the consideration was in cash and the remaining $365,000 was in
product from BWI, primarily girl's swimsuits. The $365,000 value of the swimsuit
inventory was determined by Play Co. based on its analysis of the net realizable
value of the inventory received. Play Co. had previously carried swimsuits from
BWI in its stores on a trial basis. Pursuant to the sales agreement (which has a
term of one year and automatically extends for one year terms unless terminated
by either of the parties), Play Co. agreed to purchase a minimum of 250 pieces
of merchandise for each of its retail locations and to provide advertising
promotional materials and ads of the merchandise in all of its brochures,
advertisements, catalogs, and all other promotional materials, merchandising
programs, and sales promotion methods.
On July 15, 1998, Play Co. borrowed $300,000 from BWI and issued an
unsecured promissory note (at 9% interest per annum) to same in exchange
therefor. The note called for five monthly installments of principal and
interest commencing August 15, 1998 and ending December 30, 1998 and has been
repaid in full.
<PAGE>
On March 1, 1998, Play Co. borrowed $250,000 from BWI and issued an
unsecured promissory note (at 15% interest per annum) to same in exchange
therefor. The note called for ten monthly installments of principal and interest
commencing on March 31, 1998 and ending on December 31, 1998 and has been repaid
in full.
In November 1998, Play Co. entered into an agreement with ZD to secure
additional financing. ZD is a New York limited liability company, the
beneficiary of which is a member of the family of the Company's president.
Pursuant to the ZD agreement, ZD issued a $700,000 irrevocable standby L/C in
favor of FINOVA, Play Co.'s working capital lender (which is not an affiliate of
Play Co.). FINOVA then lent a matching $700,000 to Play Co. in the form of a
term loan, pursuant to a Fourth Amendment to Loan and Security Agreement
executed on February 11, 1999 by and between Play Co. and FINOVA. The term loan
from FINOVA expires on August 3, 2000 and bears interest at prime plus one
percent. As consideration for its issuance of the L/C, ZD will receive a profit
percentage after application of corporate overhead from three of Play Co.'s
stores.
In January 1999, Play Co. and Frampton, an affiliated British Virgin
Islands company, under common control with the Company and Play Co., executed a
letter agreement pursuant to which Frampton has agreed to act as the exclusive
placement agent and financial advisor for Play Co. in connection with a
contemplated proposed offering of convertible debentures. The agreement is for a
term of six months (with a potential two month extension at Frampton's option)
and provides that Frampton shall be provided an investment banking fee of 8% of
the face amount of each debenture funded.
In November 1998, Play Co. entered into an agreement with Frampton to
secure additional financing. Pursuant to the agreement, Frampton loaned $500,000
in the form of a convertible, subordinated debenture due December 31, 1999. The
debenture bears a 5% interest rate and initially was convertible into Series E
preferred stock at a price of $0.10 per share at Frampton's option. This price
represents a 50% discount from the then current (November 10, 1998) market price
reflecting a discount for the illiquidity of the shares, which do not carry any
registration rights. In May 1999, Frampton agreed to amend the conversion price
to $0.20 per share, which represents the full market price on the date of the
original business transaction.
In November 1998, Play Co. entered into an agreement with EACF, an entity
which beneficially controls the Company and its parent and subsidiary, to secure
additional financing. Pursuant to the agreement, EACF loaned $150,000 in the
form of a convertible, subordinated debenture due December 31, 1999. The
debenture bears a 5% interest rate and initially was convertible into Series E
preferred stock at a price of $0.10 per share at EACF's option. This price
represents a 50% discount from the then current (November 10, 1998) market price
reflecting a discount for the illiquidity of the shares, which do not carry any
registration rights. In May 1999, EACF agreed to amend the conversion price to
$0.20 per share, which represents the full market price on the date of the
original business transaction.
In June 1998, Play Co. and ABC, a Belize corporation and an affiliate of
the Company and its parent and subsidiary, the holder of a 5% convertible
secured subordinated debenture - dated January 21, 1998 and due August 15, 2000
(the "Debenture") - offered to amend the terms of the Debenture to enable the
conversion of the principal amount and accrued interest thereon, into shares of
Series E preferred stock, at a conversion price of $1.00 per share. Management
agreed to convert the Debenture since the conversion of the debt into equity
would result in a strengthened equity position which management believed would
provide confidence to Play Co.'s working capital lender, FINOVA, and trade
creditors. Further, converting the debt to equity eliminated on-going interest
expense requirements as well as the cash flow required to repay the Debenture.
Simultaneously with its offer to amend the Debenture, ABC elected to convert
same as of June 30, 1998, whereby, $1.5 million in principal amount and $33,333
in accrued interest were converted into 1,533,333 shares of Series E preferred
stock. ABC did not receive any registration rights regarding the shares.
<PAGE>
Simultaneously, ABC terminated the Subordinated Security Agreement between the
parties and the Intercreditor and Subordination Agreement, dated January 21,
1998, by and between ABC and FINOVA. ABC, or its assigns, retained a right
included in the Debenture, to purchase up to an aggregate of 25% of the
outstanding shares of common stock of Toys. The purchase price per share shall
equal the net book value per share of Toys' common stock as of the date of
exercise using generally accepted accounting principals. The calculation of the
number of shares subject to this right and the purchase price per share shall be
as of the date that Play Co. receives notification that the right is being
exercised. This right shall extend until August 15, 2000 and shall automatically
extend thereafter until August 15, 2003 unless earlier terminated by ABC or its
assignee.
In early April 1999, the president of Play Co. and the chairman of the
board (a relative of the Company's president) each returned his 25,000 shares of
Play Co. Series E preferred stock which were issued to same by Play Co. in March
1998 as bonuses in recognition of their efforts to further Play Co.'s turnaround
toward profitability.
During fiscal 1999, Play Co. remitted an aggregate of $33,000 to Mr.
Rashbaum (chairman of its board) in consideration of the consulting services he
provided therefor. Mr. Rashbaum received $2,500 per month for the first nine
months of the fiscal year, and commencing January 1, 1999, his consulting fee
increased to $3,500 per month. Mr. Rashbaum devotes a significant portion of his
time to Play Co. Among other things, he reviews potential store sites, assists
in strategic planning, reviews all cash outflows, and otherwise works closely
with management in further developing and implementing Play Co.'s ongoing
business strategy.
From April 1996 to June 1997, EACC, an entity of which the Company's
president is president, exercised its options and purchased an aggregate of
3,562,070 shares of Play Co.'s Series E preferred stock for $3,562,070. An
aggregate of 361,500 shares were converted to common stock which, inclusive of
the 250,000 shares of Series E preferred stock issued in June 1997, constituted
an aggregate of 3,450,570 shares of Series E preferred stock outstanding prior
to the Series E Stock public offering in December 1997. The proceeds of the
funds received from this investment enabled the Company (i) to acquire the
assets of Toys (a three store chain) in January 1997, (ii) to finance the
openings of the Santa Clarita, Arizona Mills, Redondo Beach, Ontario Mills, and
Clairemont Mesa stores, (iii) to redesign four store locations, and (iv) to
support the Company's operations during the Company's business turnaround.
The Company's Parents
At fiscal year end March 31, 1999, 3,571,429 (or 78.5%) of the Company's
shares of Common Stock were owned by Multimedia, the Company's parent. The
president, chief executive officer, and a director of Multimedia is Mr. Ilan
Arbel who is also the president and a director of the Company. Multimedia is a
Delaware corporation and public company which was organized in 1994. Multimedia
is owned approximately 67.7% by U.S. Stores Corp., a company of which Mr. Arbel
is the president and a director. U.S. Stores Corp. is owned 100% by ATPLC, a
British public corporation, which is owned approximately 80% by EACF, a Swiss
foundation, which is the parent corporation also of Frampton and ABC, entities
affiliated with the Company under common control.
<PAGE>
PART IV
<TABLE>
<CAPTION>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements of the Company are included as Part
II, Item 7:
<S> <C>
Consolidated Balance Sheets as of March 31, 1999 and March 31, 1998 F-2
Consolidated Statements of Operations for the years ended March 31, 1999
and March 31, 1998 F-4
Consolidated Statement of Changes in Stockholders' Equity for the two years
in the period ended March 31, 1999 F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1999
and March 31, 1998 F-6
Notes to Financial Statements F-8
</TABLE>
(b) During its last fiscal 1999 quarter, the Company filed no Forms 8-K.
(c) All exhibits, except those designated with an asterisk (*), which are
filed herewith, have previously been filed with the Commission either in
connection with the Company's Registration Statement on Form SB-2, under file
No. 33-55548-NY or as indicated by the reference herein and, pursuant to 17
C.F.R.ss.230.411, are incorporated by reference herein. Exhibits previously
filed but not as part of the SB-2 Registration Statement are incorporated herein
by reference to the appropriate document.
<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.
3.9 Certificate of Amendment to Certificate of Incorporation of the Company, filed in March 1997.
4.1 Specimen Common Stock Certificate.
10.1 The Company's Incentive Stock Option Plan.
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>
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
TABLE OF CONTENTS
March 31, 1999 and March 31, 1998
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountant F-1
Consolidated Financial Statements: F-2
Consolidated Balance Sheets as of March 31, 1999 and March 31, 1998 F-4
Consolidated Statements of Operations for the years ended March 31, 1999
and March 31, 1998 F-5
Consolidated Statement of Changes in Stockholders' Equity for the two years
in the period ended March 31, 1999 F-6
Consolidated Statements of Cash Flows for the years ended March 31, 1999
and March 31, 1998 F-8
Notes to Financial Statements
</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, 1999 and 1998 and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended March 31, 1999 and 1998. 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, 1999 and March 31, 1998, and the result of its operations and its
cash flows for each of the two years in the period ended March 31, 1999 and 1998
in conformity with generally accepted accounting principles.
Melville, New York
June 28, 1999
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
CONSOLIDATED BALANCE SHEETS
As of March 31, 1999 and March 31, 1998
<TABLE>
<CAPTION>
Restated
March 31, March 31,
1999 1998
(Note 2n)
ASSETS (Note 7)
CURRENT ASSETS:
<S> <C> <C>
Cash .......................................... $ 126,625 $ 659,378
Restricted certificate of deposit (Notes 4 & 7) 350,000 250,000
Accounts receivables-net ...................... 118,518 136,413
Inventories (Note 2d) ......................... 11,506,284 7,872,804
Prepaid expenses and other current assets ..... 1,315,851 189,516
Loans and advances-officer .................... (37,061) 138,856
------------ ------------
Total current assets ............................ 13,380,217 9,246,967
------------ ------------
PROPERTY AND EQUIPMENT-NET (Note 2f) ............ 5,348,175 2,782,386
------------ ------------
OTHER ASSETS
Restricted certificate of deposit (Notes 4 & 7) . 2,000,000 2,000,000
Deposits and other assets (Note 7) .............. 418,647 330,409
------------ ------------
Total assets .......................... $ 21,147,039 $ 14,359,762
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
CONSOLIDATED BALANCE SHEETS
As of March 31, 1999 and March 31, 1998
<TABLE>
<CAPTION>
Restated
March 31, March 31,
1999 1998
(Note 2n)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable ....................................... $ 14,498,578 $ 8,356,470
Accrued expenses and other current liabilities ......... 626,815 817,788
Due to affiliates ...................................... 831,897 719,174
Current portion of notes payable (Note 9) .............. 1,125,000 350,000
Current portion of capital lease obligations (Note7) ... 227,197 --
------------ ------------
Total current liabilities ...................... 17,309,487 10,243,432
------------ ------------
LONG-TERM LIABILITIES:
Borrowings under financing agreement (Note 7) .......... 7,814,666 5,445,198
Note payable, net of current portion (Note 9) .......... -- 1,500,000
Deferred rent liability ................................ 126,769 110,351
Capital lease obligations - net of current portion
(Note 7) ............................................... 585,681 --
------------ ------------
Total long-term liabilities .................... 8,527,116 7,055,549
------------ ------------
Total liabilities .............................. 25,836,603 17,298,981
------------ ------------
MINORITY INTEREST IN SUBSIDIARY .......................... (165,058) 599,398
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4,7,8,9,10,11 and 13)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000,000 shares
authorized, 4,550,234 shares issued and outstanding
at March 31, 1999 and 4,550,234 shares issued and
outstanding at March 31, 1998
4,550 4,550
Additional paid-in capital ............................. 8,142,281 8, 142,281
Retained earnings (Deficit) ............................ (12,671,337) (11,685,448)
Total stockholders' equity ..................... (4,524,506) (3,538,617)
------------ ------------
Total liabilities and stockholders' equity ..... $ 21,147,039 $ 14,359,762
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-2
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
March 31, March 31,
1999 1998
Restated
(Note 2n)
<S> <C> <C>
Net Sales .......................................................... $ 34,377,018 $ 23,019,748
Cost of sales ...................................................... 19,590,784 15,222,746
------------ ------------
Gross profit ....................................................... 14,786,234 7,797,002
------------ ------------
Operating expenses:
Operating expenses (Notes 13 and 15) ............................... 12,898,403 9,235,980
Litigation related expenses (Note 10) ............................ 27,659 583,541
Depreciation and amortization .................................... 986,342 674,338
------------ ------------
Total operating expenses ................................. 13,912,404 10,493,859
------------ ------------
Operating income (loss) ............................................ 873,830 (2,696,857)
------------
Other income:
Interest and other income ................................ 48,603 --
Interest expense: (Note 7)
Interest and finance charges ..................................... 796,202 526,875
Amortization of debt issuance costs .............................. 168,849 288,645
------------ ------------
Total interest expense ...................................... 965,051 815,520
------------ ------------
(LOSS) BEFORE MINORITY INTERESTS ................................... (42,618) (3,512,377)
Effect of non-cash dividends on convertible preferred stock ........ (1,707,725) (1,473,806)
------------ ------------
(1,750,343) (4,986,183)
------------ ------------
Minority interest in net (loss) of consolidated subsidiary (Note 12) 764,456 1,407,782
------------ ------------
Net (loss) ......................................................... $ (985,887) $ (3,578,401)
============ ============
(Loss) per basic and diluted common share and share equivalents:
Net loss before minority interest ................................ $ (.39) $ (3.91)
Minority interest in net loss .................................... .17 1.10
------------ ------------
Net (loss) ......................................................... $ (.22) $ (2.80)
============ ============
Weighted average number of common shares outstanding ............... 4,550,234 1,276,424
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary Multimedia Concepts International, Inc.)
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Common Accumulated
Paid-in Stock Deficit
Shares Amount Capital Subscribed
<S> <C> <C> <C> <C> <C> <C> <C>
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 (Note 2n) .... (3,578,401)
Balance, March 31, 1998 ........ 4,550,234 4,550 8,142,281 -- (11,685,450)
Net loss for the year ended
March 31, 1999 .............. (985,887)
4,550,234 $ 4,550 $ 8,142,281 $ 0 $(12,671,337)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated 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>
For the Years Ended
March 31, March 31,
1999 1998
Restated
(Note 2n)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ......................................................... $ (985,887) $(3,578,401)
----------- -----------
Adjustments to reconcile net loss to cash
(used) provided for operating activities:
Depreciation and amortization ................................. 986,342 674,338
Deferred rent ................................................. 16,418 (16,574)
Minority interest in net loss of subsidiary ................... (764,456) (1,407,782)
Loss on abandonment of assets ................................. -- 45,255
Changes in assets and liabilities:
Decrease in Accounts Receivable ................................ 17,895 45,007
(Increase) decrease in Merchandise inventories ................. (3,633,480) (748,769)
Increase (decrease) in prepaid expenses and other current assets (1,126,335) 63,385
Increase (decrease) in deposits and other assets ............... (88,238) 1,608
Increase (decrease) in accounts payable ........................ 6,139,243 5,038,000
Increase (decrease) in accrued expenses and other liabilities .. (190,973) 307,341
----------- -----------
Total adjustments ...................................... 1,356,416 4,001,809
----------- -----------
Net cash provided (used) by operating activities ....... 370,529 423,408
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of restricted certificates of deposit ................... (100,000) (2,250,000)
Purchases of property and equipment .............................. (2,699,819) (1,023,273)
Loans (made to) officer ........................................ 175,917 (15,256)
----------- -----------
Net cash (used for) investing activities ............... (2,623,902) (3,288,529)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated 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>
Twelve Months Ended
March 31, March 31,
1999 1998
Restated
(Note 2n)
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Net borrowings under financing agreement .................. $ 2,369,468 $ 1,006,323
Loans and advances - affiliates ........................... 112,723 (84,826)
Issuance of common stock .................................. -- 1,000,000
Repayment under capital leases ............................ (36,551) --
Proceeds from notes payable ............................... 2,700,000 1,750,000
Repayment of notes payable ................................ (3,425,000) (141,666)
Reversal of stock subscription ............................ -- (150,000)
-----------
Net cash provided by (used for) investing activities 1,720,640 3,379,831
----------- -----------
NET INCREASE (DECREASE) IN CASH .............................. (532,733) 514,710
Cash, beginning of period .................................... 659,358 144,668
----------- -----------
Cash, end of period .......................................... $ 126,625 $ 659,378
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid ................................................ $ 796,202 $ 526,875
Taxes paid ................................................... $ 2,150 $ 800
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
UNITED TEXTILES & 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 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 through 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"). 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 effected in August 1996.
Nature of Relationship with Affiliates:
As described in the footnotes following, the Company engages in
transactions with affiliated entities, many of which are under common control.
These entities and the nature of the affiliates are as follows:
Affiliates Under Common Control
Name of Entity and Nature of Affiliation
Multimedia Concepts International, Inc. ("Multimedia"): Majority
stockholder of UTTC. Multimedia currently owns 78.5% of the outstanding common
shares of the Company's common stock. The president and director of Multimedia
is Ilan Arbel, who is also the president and director of the Company.
Europe American Capital Foundation ("EACF"): Foundation which is the sole
stockholder/beneficiary of Frampton Industries, Ltd. and ABC Fund, Ltd., and the
majority stockholder of American Telecom, PLC.
<PAGE>
Note 1. DESCRIPTION OF COMPANY (continued)
Nature of Relationship with Affiliates (continued):
Europe American Capital Corporation ("EACC"): Entity of which Ilan Arbel
and/or his relatives is/are officer(s) and/or director(s).
Frampton Industries, Ltd. ("Frampton"): Entity which is wholly owned by
EACF.
American Telecom PLC: Entity 80% owned by EACF.
ABC Fund, Ltd. ("ABC"): Entity which is wholly owned by EACF.
U.S. Stores Corp. ("U.S. Stores"): A private company whose president is
Ilan Arbel, who is also a director. Parent company of Multimedia.
Other Affiliates
Name of Entity and Nature of Affiliation
ZD Group, L.L.C. ("ZD"): ZD is a New York Trust, the beneficiary of which
is a member of the family of the Company's president.
European Ventures Corp. ("EVC"): Parent company of Shopnet.com. Ilan Arbel
is the president. Moses Mika is the majority shareholder.
Shopnet.com ("Shopnet"): The chairman of Play Co. is the president and a
director of Shopnet.
Breaking Waves, Inc. ("BWI"): This entity is a wholly owned subsidiary of
Shopnet, and also owns 25% of Play Co.'s common stock (Note 12). The president
of BWI is also the chairman of the board of Play Co. and a relative of Ilan
Arbel.
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. DESCRIPTION OF COMPANY (continued)
Nature of Relationship with Affiliates (continued):
The following chart graphically depicts the Company's ownership structure
at March 31, 1999 for those entities under common control:
Europe American Capital Foundation
|| || ||
\/ \/ \/
Frampton Industries, Ltd.(100%) American Telecom PLC (80%) ABC Fund, Ltd. (100%)
||
\/
(100%)
U.S. Stores Corp.
||
\/
(67.7%)
Multimedia Concepts International, Inc.
||
\/
(78.5%)
United Textiles & Toys Corp.
||
\/
(45.2%)
Play Co. Toys & Entertainment Corp.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Principles of Consolidation:
The consolidated financial statements include the accounts of United
Textiles and its subsidiary Play Co.. All material intercompany balances and
transactions have been eliminated in consolidation.
<PAGE>
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
b. 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.
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 this time, 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.
e. 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.
f. 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.
<PAGE>
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
g. Statements of Cash Flows:
For purposes 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.
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 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. 123, 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. For the year ended March 31, 1999, there is no difference between
basic and diluted loss per common share.
F-8
<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)
j. Store Openings and Closing Costs:
Costs incurred 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
balances of any abandoned leasehold improvements are expensed.
In April 1998, the AICPA'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. The Company adopted the
provisions of this statement as of March 31, 1999 without impact given its
historical treatment of store opening costs.
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 effected April 1, 1998. There was no impact of such adoption on the
Company's financial condition and results of operations.
F-9
<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 FSAB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in an entity's
financial statements. This statement requires an entity to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of a statement of
financial position. This pronouncement, which is effective for fiscal years
beginning after December 15, 1997, was adopted by the Company during the fiscal
year ending March 31, 1999 without impact to the financial statements for either
of the years ended March 31, 1999 or 1998.
F-10
<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)
m. Effect of New Accounting Pronouncements (continued):
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
services, geographic areas, and major customers. This pronouncement is effective
for fiscal years beginning after December 15, 1997. Management reviewed the
provision of this statement during the year ended March 31, 1999. While Play Co.
has expanded into several states during the year, it believes operations to be
limited to one reporting segment being a retailer of educational, specialty,
collectible, and traditional toys. All of Play Co.'s sales have been domestic,
and there are no foreign operations.
n. Restatement of Financial Statements - March 31, 1998
The consolidated financial statements for the year ended March 31, 1998
have been restated to reflect a restatement by Play Co. of its dividend
attributable to the beneficial conversion feature of its Series E preferred
stock. This restatement resulted in an increase of $1,473,806 in its originally
reported net loss.
Note 3. INVESTMENT BY MULTIMEDIA CONCEPTS INTERNATIONAL, INC.
On January 2, 1998, the Company issued 3,571,429 shares of its common stock
to 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 45.2% of the outstanding shares of
common stock of Play Co., Multimedia and its management have obtained beneficial
voting control of Play Co.
F-11
<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. (continued)
On January 20, 1998, U.S. Stores acquired 1,465,000 shares of Multimedia's
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 July 18, 1997. The Company's President is also President and
a Director of American Telecom. After this transaction, American Telecom
effectively obtained beneficial voting control of the Company and its
subsidiary, Play Co.
In April 1998, American Telecom exchanged all of 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. Additionally, as part of this transaction, American
Telecom, PLC acquired 100% of the outstanding common shares of U.S. Stores,
thereby effectively making U.S. Stores a direct subsidiary of American Telecom,
PLC and the Company and Play Co. indirect subsidiaries.
Note 4. RESTRICTED CERTIFICATE OF DEPOSIT
At March 31, 1999 and 1998, the Company has three 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 financing to Play Co.
under the FINOVA Capital Corporation agreement ("FINOVA Financing") (Note 7) and
is classified as a non-current asset since the funds in the certificate of
deposit will remain restricted until the letter of credit expires or is released
by FINOVA Capital Corporation ("FINOVA"). The second, in the amount of $250,000,
is collateral for a facility for letters of credit. The third, in the amount of
$100,000, is to cover an increase on the previously mentioned letter of credit
facility.
F-12
<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 year ended March 31, 1999 the Company's Play Co. subsidiary
reported a net loss of $1,566,857. For the year ended March 31, 1998, Play Co.
reported a restated net loss of $3,528,276. These amounts include the minority
shareholders' pro-rata share of net income or loss.
The Company's beneficial and majority shareholder has represented his
intent and ability to provide additional working capital to the Company and its
subsidiary should such be necessary.
Note 6. FIXED ASSETS
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
March 31
1999 1998
----
<S> <C> <C>
Furniture, fixtures and equipment 6,006,444 $4,260,738
Leasehold improvements 2,763,711 1,551,760
Signs 501,798 317,363
Vehicles 104,912 104,912
Construction in progress 68,065 -
9,444,930 6,234,773
Less: Accumulated depreciation and amortization
(4,096,755) (3,452,387)
$5,348,175 $2,782,386
============================ =======================
</TABLE>
Note 7. 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.
<PAGE>
Note 7. FINANCING AGREEMENTS (continued)
In connection with the Congress Financing, and the previous bank line of
credit agreement, European American Capital Corp. ("EACC"), an affiliate (Note
1), provided a $2,000,000 letter of credit for collateral. As compensation to
EACC, Play Co. granted EACC options to acquire shares of its common stock and
preferred stock, the aggregate value of which was $458,000. 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 for the year ended March 31,
1998.
In March 1997, the Congress Financing was amended to provide for, 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 $4,866,324 under the FINOVA
Financing, 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, as amended currently, provides for maximum borrowings
up to $8,300,000 based on a percentage of the cost value of eligible inventory,
as defined. Outstanding borrowings bear interest at 1.5% above prime rate, as
defined (the prime rate at March 31, 1999 and 1998 was 7.75% and 8.5%,
respectively. The agreement matures on August 3, 2000 and can be renewed for one
additional year at the lender's option.
F-13
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. CAPITAL LEASE OBLIGATIONS
During the year ended March 31, 1999, Play Co. entered into several leases
with financing companies that have been classified as capital lease obligations.
The amounts financed ranged from $49,901 to $232,098, with varying monthly
installment payments from $849 to $5,313, at interest rates varying from 12.6%
to 19.6%. The leases, which have maturity dates ranging from October 15, 2001 to
March 1, 2004, require minimum payments as follows:
Year ending
March 31,
2000 $ 249,423
2001 249,423
2002 234,658
2003 213,986
2004 152,672
-------------
Total minimum ease payments 1,100,162
Less amount representing interest (287,284)
Present value of minimum lease payments 812,878
Less current portion (227,197)
Long-term portion $ 585,681
============
F-14
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. NOTES PAYABLE
<TABLE>
<CAPTION>
March 31,
1999 1998
<S> <C> <C>
Note payable to ABC, an affiliate (Note 1),
bearing interest at 5% per annum.
Converted with accrued interest of
$33,333, into 1,533,333 shares of Series E
Preferred Stock.
$ - $ 1,500,000
Note payable to BWI, an affiliate (Note 1),
bearing interest at 15% per annum, paid in
ten monthly installments of $25,000 plus
accrued interest through maturity on December
31, 1998. Note was subordinate to the FINOVA
Financing (Note 7).
250,000
-
Note payable to stockholder of Toys
International non-interest bearing,
guaranteed by UTTC, an affiliate
(Note 1), paid in quarterly installments of
$25,000 through its maturity on January 16, 1999.
100,000
-
</TABLE>
F-15
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Note 9. NOTES PAYABLE (continued)
March 31,
1999 1998
<S> <C> <C>
Note payable to Shopnet, an affiliate
(Note 1), bearing interest at 9% per
annum, payable in monthly installments
of $25,000 with an original maturity of
June 15, 1999. Note has been verbally
extended to an unspecified date.
75,000 -
Note payable to Full Moon Development,
Inc., an unaffiliated entity, bearing
interest at 12%, payable in monthly
installments of $50,000 through maturity on
July 30, 1999.
200,000 -
Note payable to Full Moon Development,
Inc., an unaffiliated entity, bearing
interest at 12%, payable in monthly
installments of $66,667, except for the
final installment which is due at maturity
on June 30, 1999, twenty days after
previous payment.
200,000 -
Convertible debenture to Frampton, an
affiliate (Note 1), bearing interest at 5%
per annum, with interest only payments
due monthly beginning March 1, 1999,
convertible to Series E Preferred Stock,
due at maturity on December 31, 1999.
500,000 -
Convertible debenture to EACF, an affiliate
(Note 1), bearing interest at 5% per
annum, with interest only payments
due monthly beginning March 1, 1999,
convertible to Series E Preferred Stock,
due at maturity on December 31, 1999.
150,000 -
Total notes payable 1,125,000 1,850,000
Less current portion (1,125,000) (350,000)
Long-term portion $ - $1,500,000
========================= =====================
</TABLE>
F-16
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. NOTES PAYABLE (continued)
The above notes, which are carried by Play Co., may carry interest rates
that differ from prevailing interest rates. Play Co. has not provided for
imputed interest on rate discounts or premiums as the effects are immaterial to
the financial statements.
The above convertible debentures to Frampton and EACF are both convertible
into Play Co.'s Series E preferred stock. The debenture holder has the right at
any time prior to the maturity date to convert all or part of the outstanding
principal plus any accrued interest. The conversion price is $.20 per share,
i.e. for every $100,000 converted, the holder would receive 500,000 shares. Each
share of Series E preferred stock is convertible into six shares of Play Co.'s
common stock, at the option of the holder, subject to holding periods.
Note 10. 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 Play Co. 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, of which
$57,820 remains outstanding on one settlement.
The settlement of operations for the year ended March 31, 1999 and 1998
includes $27,659 and $583,541 of "litigation related expenses" which comprise
the settlement costs on the aforementioned leases, legal fees which comprises
the settlement costs on the aforementioned leases and legal fees associated with
negotiations.
Play Co. currently has one remaining landlord/tenant matter which has yet
to be resolved as of March 31, 1999, Play Co. has accrued a liability related to
this matter, which is an estimate by management on its analysis. Play Co.'s
management expects this matter to be resolved without further material effects
on the financial statements.
F-17
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. INCOME TAXES
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:
<TABLE>
<CAPTION>
March 31,
1999 1998
<S> <C> <C>
Federal statutory income tax (benefit) rate 34.0% (34.0%)
Permanent adjustments 4.4 -
State income taxes, net of federal benefit 1.5 0.1
Change in valuation allowance (38.4) 33.9
------ ----
Effective income tax rate 1.5% - %
======================== =========================
</TABLE>
At March 31, 1999, the Company has net operating loss (NOL) carryforwards
of approximately $5,000,000 for federal purposes and approximately $4,800,000
for state purposes. The federal NOLs are available to offset future taxable
income and expire at various dates through March 31, 2013 while the state NOLs
are available and expire at various dates through March 31, 2003.
A portion of the NOLs described above is 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.
F-18
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. INCOME TAXES (continued)
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,
1999 1998
<S> <C> <C>
Inventories $ (329,264) $ (227,696)
AMT tax credits (23,260) (23,260)
Accrued expenses 72,760 (19,779)
Current portion of net deferred income tax (279,764)
(assets) liabilities (270,735)
Depreciation and amortization (211,108) (28,388)
Loss on disposal of assets 127,043 25,926
Net operating loss carryforwards (3,471,124) (3,652,294)
Deferred rent liability (50,099) (43,891)
Income taxes 794 508
Amortization of stock options (200,520) (202,049)
Long-term portion of net deferred income tax (assets) liabilities (3,805,014)
(3,900,188)
Total net deferred income tax (assets) liabilities (4,084,778) (4,170,923)
Valuation allowance 4,084,778 4,170,923
Net deferred income taxes $ - $ -
========================== ==========================
</TABLE>
At March 31, 1999 and 1998, a 100% valuation allowance has been provided on
the net deferred income tax assets since the Company can not determine that it
is "more likely than not" to be realized.
F-19
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. MINORITY INTERESTS IN SUBSIDIARY
The minority interest in Play Co. represents the minority shareholders'
interest (54.8%) of Play Co.'s equity at March 31, 1999. The minority interest,
as reflected in the accompanying consolidated balance sheet, consists of Play
Co.'s Series E preferred stock only. Due to operating losses of Play Co., the
minority interest in common stock has been written down to zero.
On November 24, 1998, pursuant to a sales agreement entered into by and
between Play Co. and BWI, a wholly-owned subsidiary of Shopnet, a related party,
BWI purchased 1.4 million unregistered shares of Play Co.'s common stock in a
private transaction. The President of Shopnet is also the Chairman of Play Co.'s
Board of Directors and the father-in-law of the Company's President. Shopnet is
a publicly traded company. The shares purchased by BWI represent approximately
25.4% of the total common stock issued and outstanding after the transaction.
Note 13. COMMITMENTS AND CONTINGENCIES
Operating Leases:
The Company, until June 30, 1999, occupied space at 1410 Broadway, New
York, NY where it occupied office space with its parent, Multimedia. It vacated
these premises and relocated along with Multimedia to 1385 Broadway, New York,
NY. U.S. Apparel Corp. is the prime tenant on the lease and has allowed the
Company and its parent, Multimedia, to occupy space on a rent free basis.
Play Co. leases its retail store properties under noncancelable operating
lease agreements which expire through October 2009 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, 1999 and 1998, Play Co. incurred rental
expense under all operating leases of $4,104,073 and $3,112,822 respectively.
Contingent rent expense was insignificant during the years ended March 31, 1999
and 1998.
F-20
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. COMMITMENTS AND CONTINGENCIES (continued)
Operating Leases: (continued)
At March 31, 1999, the aggregate future minimum lease payments due under
these noncancelable leases, including approximately $448,000 for the remaining
term of the lease for a closed retail location through November 2003, are as
follows:
<TABLE>
<CAPTION>
Year ending Related Party Office/ Retail
March 31, Warehouse (Note 15) Locations Total
- --------- ------------------- --------- -----
<S> <C> <C> <C>
2000 $ 247,289 $ 5,148,190 $ 5,395,479
2001 20,624 4,952,250 4,972,874
2002 - 4,536,291 4,536,291
2003 - 4,374,766 4,374,766
2004 - 3,472,774 3,472,774
Thereafter - 7,447,655 7,447,655
Total minimum lease payments
$ 267,913 $ 29,931,926 $ 30,199,839
=============
</TABLE>
As of the date of this report, Play Co. has executed leases for the opening
of ten (10) additional stores in California, Nevada, North Carolina, Texas,
Illinois, and Tennessee. The stores are expected to open on various dates in
August 1999 through November 2000 and have varying expiration dates through
2010. The new leases will require expected minimum rental payments aggregating
approximately $27,434,000 over the life of the leases. Accordingly, existing
minimum leases commitments as of March 31, 1999, plus those expected minimum
commitments for the proposed retail locations would aggregate minimum lease
commitments of approximately $57,634,000.
F-21
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. COMMITMENTS AND CONTINGENCIES (continued)
Convertible Debt Agreement:
As discussed in Note 9, Play Co. has a $1.5 million note payable to ABC, 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 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.
In June 1998, ABC, a Belize corporation which is (i) an affiliate of the
Company and Play Co. under common control and (ii) the holder of a 5%
convertible secured subordinated Play Co. debenture - dated January 21, 1998 and
due August 15, 2000 - offered to amend the terms of the debenture to enable the
conversion of the principal amount and accrued interest thereon into shares of
Play Co.'s Series E preferred stock, at a conversion price of $1.00 per share.
Play Co. agreed to convert the debenture since the conversion of the debt into
equity would result in a strengthened equity position which Play Co. believed
would provide confidence to its working capital lender, FINOVA, and trade
creditors. Further, converting the debt to equity eliminated on-going interest
expense requirements as well as the cash flow required to repay the debenture.
Simultaneously with its offer to amend the debenture, ABC elected to convert
same as of June 30, 1998, whereby $1.5 million in principal amount and $33,333
in accrued interest were converted into 1,533,333 shares of Series E preferred
stock. ABC did not receive any registration rights regarding the shares.
Simultaneously, ABC terminated the Subordinated Security Agreement between the
parties and the Intercreditor and Subordination Agreement, dated January 21,
1998, by and between ABC and FINOVA.
The debenture provided for the conversion, at the option of ABC, of the
debenture into shares of common stock of either (i) a subsidiary which Play Co.
intended to form for the purpose of acquiring those stores operated by Play Co.
(or its subsidiaries) which conduct business as "Toys International," or (ii)
any other subsidiary (such as Toys) which might acquire a portion of the assets
and business of Play Co. This option to convert was exercisable at the net book
value of the subsidiary's shares on the date ABC exercised the option with a
limitation on such share ownership being 25% of the total outstanding shares of
said subsidiary. In September 1998, in accordance with the terms of the
debenture, ABC assigned its option to Tudor Technologies, Inc. ("Tudor"), an
entity of which Mr. Moses Mika (a director of the Company and Play Co. and the
father of the Company's president) is a shareholder. On July 15, 1999, Tudor
elected to exercise its right to purchase and requested that the exercise price
be amended to reflect the book value of Toys at the most recent fiscal quarter,
June 30, 1999. Play Co. agreed. Note 13. 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 forty-one percent (41%) of Play Co.'s inventory purchases are
made directly from five (5) manufacturers. Play Co. typically purchases products
from its suppliers on credit arrangements provided by the manufacturers. The
termination of a credit line or the loss of a major supplier of 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 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.
F-22
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. COMMITMENTS AND CONTINGENCIES (continued)
Financing Agreement:
In November 1998, Play Co. entered into an agreement with ZD, a related
party (Note 1), to secure additional financing. Pursuant to this agreement, ZD
issued a $700,000 irrevocable standby letter of credit ("L/C") in favor of
FINOVA, Play Co.'s working capital lender. FINOVA then lent a matching $700,000
to Play Co. in the form of a term loan (Note 7). The term loan expires on August
3, 2000 and bears interest at prime plus one percent.
As consideration for its issuance of the L/C, ZD will receive payments
representing one-third (33%) of the net profits from three of Play Co.'s stores,
Great Lakes Crossing, Gurnee Mills, and Woodfield Mall (scheduled to open late
summer 1999). The net profit of each store will include an appropriate
allocation of corporate overhead. The expense related to the net profits
interest due to ZD will be accrued beginning April 1, 1999, the effective date
of the agreement. The duration of the agreement with ZD is equal to the current
lease term of each of the stores, including any renewals, but in any event not
beyond the Company's fiscal year ending March 31, 2013. The store leases
currently expire, including options for renewal, at various dates through June
2009. The Company will categorize this expense as (effective) interest since
these costs represent compensation to secure additional financing.
Additionally, as long as the agreement is in effect, ZD will have the right
to nominate and appoint one-third of Play Co.'s Board of Directors.
Note 14. YEAR 2000
The Company does not believe that the impact of the Year 2000 computer
issue will have a significant impact on its operations or financial position.
Furthermore, the Company does not believe that it will be required to
significantly modify its internal computer systems. However, if internal systems
do not correctly recognize date information when the year changes to 2000, there
could be adverse impact on the Company's operations. Furthermore, there can be
no assurances that another entity's failure to ensure year 2000 capability would
not have an adverse effect on the Company and its subsidiary, Play Co.
F-23
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. RELATED PARTY TRANSACTIONS
Office and warehouse lease:
Play Co. leases an office/warehouse building from a partnership of which
one of the partners is Play Co.'s Chief Executive Officer and Director. The
original lease was executed in October 1986. The lease term was for a 10-year
period, with increases in the monthly rent tied to the CPI, adjusted every three
years. The lease was amended in 1993 to extend the term through April 2000, with
an option to extend for a period of five years under the same terms and
conditions of the lease. Rent expense under this lease totaled $247,289 for each
of the years ended March 31, 1999 and 1998.
Consulting Fees:
Play Co. made payments aggregating $33,000 and $25,000 to the Chairman of
its Board of Directors for various consulting services during the years ended
March 31, 1999 and 1998, respectively.
Commitment of Financing:
The individual, beneficiary 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. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes and interest was as follows:
<TABLE>
<CAPTION>
Years ended March 31,
1999 1998
<S> <C> <C>
Interest paid $ 809,601 $ 511,924
Income taxes $ 805 $ 800
</TABLE>
F-24
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. SUBSEQUENT EVENTS
Unsecured Promissory Notes:
On April 22, 1999, Play Co. entered into an unsecured promissory note with
Shopnet, an affiliate, (Note 1) for $100,000 at an interest rate of 9% per
annum. The principal payments and accrued interest are due monthly beginning May
31, 1999, with a maturity date of August 31, 1999.
On May 17, 1999, Play Co. entered into an unsecured promissory note with
Shopnet, an affiliate (Note 1) for $100,000 at an interest rate of 9% per annum.
The principal payments and accrued interest are due monthly beginning June 30,
1999, with a maturity date of September 30, 1999.
Private Placement of Series F Stock:
On May 18, 1999, the Board of Directors of Play Co. unanimously adopted a
Corporate Resolution to enter into a Securities Purchase Agreement (the Private
Placement) with several investors. The Private Placement was for 750,000 shares
of Play Co.'s Series F preferred stock ("Series F Stock"), par value of $.01 per
share, for gross proceeds of $750,000. Play Co. was also authorized to amend its
articles of incorporation to change the terms and privileges of the Series F
Stock. The Series F Stock is convertible into two shares of common stock at any
time following the effective date of the registration statement registering the
Series F Stock and underlying shares of common stock for resale.
The Corporate Resolution also authorized Play Co. to file a Registration
Statement with the Securities and Exchange Commission for the securities issued
under the Private Placement.
As part of the Private Placement, Play Co. granted an option to the
Placement Agent and its assignees to purchase an aggregate 350,000 shares of
common stock, with an exercise price of $3.00 per share for a period of four
years from the date of closing of the Private Placement. Additionally, as
commission, the Placement Agent received a 10% fee, or $75,000, and a 1% fee, or
$7,500, to cover administrative expenses. The Private Placement closed on May
27, 1999, providing net cash proceeds of $667,500 to Play Co. before legal and
other administrative expenses.
F-25
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - SUBSEQUENT EVENTS (continued):
Private Placement of Series F Stock (continued):
On the May 27, 1999 closing date of the Private Placement, Play Co.'s
common stock had a closing price of $1.69. As such, the Series F Stock has a
beneficial conversion feature which will result in accounting treatment to
reflect non-cash dividends in future periods in a manner similar to the Series E
preferred stock transactions.
Common Stock Compensation of Consultant:
In May 1999, Play Co. issued 45,333 shares of common stock to a consultant
as compensation for site selections and negotiation of retail location leases.
These services are being provided for new Play Co. stores opening in fiscal
2000. Play Co. has valued the shares based on the May 17, 1999 closing price of
$1.375 per share, less a 10% discount for marketability restrictions for an
aggregate value of approximately $56,000.
Private Placement of Common Stock:
In July 1999, pursuant to Regulation S of the General Rules and Regulations
Under the Securities Act of 1933, as amended, Toys International.COM, Inc.
("Toys") sold 6.6% of its common stock in a private transaction in exchange for
$2.8 million.
Proposed Public Offering:
In July 1999, Toys also entered into an investment agreement with an
investment banking firm to take Toys public in an initial public offering. Toys
expects to raise approximately $20 million to $25 million through the sale of
22% of its common stock within approximately 90 days.
F-26
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized this 30th day of July 1999.
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, 7/30/99
Ilan Arbel President, and Director Date
/s/Allean Goode Secretary, Treasurer, and 7/30/99
Allean Goode Director Date
/s/Moses Mika Director 7/30/99
Moses Mika Date
/s/Rivka Arbel Vice President and Director 7/30/99
Rivka Arbel Date
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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, 1999 and is qualified in its
entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> mar-31-1999
<PERIOD-END> mar-31-1999
<CASH> 126,625
<SECURITIES> 0
<RECEIVABLES> 118,518
<ALLOWANCES> 0
<INVENTORY> 11,506,284
<CURRENT-ASSETS> 13,380,217
<PP&E> 9,444,930
<DEPRECIATION> (4,096,755)
<TOTAL-ASSETS> 21,147,039
<CURRENT-LIABILITIES> 17,309,487
<BONDS> 0
0
0
<COMMON> 4,550
<OTHER-SE> (4,529,056)
<TOTAL-LIABILITY-AND-EQUITY> 21,147,039
<SALES> 34,377,018
<TOTAL-REVENUES> 34,425,621
<CGS> 19,590,784
<TOTAL-COSTS> 13,912,404
<OTHER-EXPENSES> 1,707,725
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 965,051
<INCOME-PRETAX> (985,887)
<INCOME-TAX> 0
<INCOME-CONTINUING> (985,887)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (985,887)
<EPS-BASIC> (.22)
<EPS-DILUTED> (.22)
</TABLE>
