SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Period Ended June 30, 1996
Commission File Number O-24742
AMERICAN TOYS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3704059
(State of Incorporation) (I.R.S.employer Identification No.)
2694 Bishop Drive
Suite 213
San Ramon, CA 94583
(510) 830-8801
(Address and Telephone Number of Principal Executive Offices)
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 preceding
12 months and (2) has been subject to such filing requirements for the past 90
days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes____ No____
APPLICABLE ONLY TO CORPORATE ISSUERS
Common stock, par value $.01 per share: 5,000,000 shares outstanding as of
July 31, 1996.
<PAGE>
AMERICAN TOYS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated balance sheet (unaudited) at June 30, 1996 F - 1
Consolidated statements of operations (unaudited) for the
three months ended June 30, 1996 and 1995 F - 2
Consolidated statement of stockholders' equity (unaudited)
for the three months ended June 30, 1996 F - 3
Consolidated statements of cash flows (unaudited) for the
three months ended June 30, 1996 F - 4
Notes to consolidated financial statements (unaudited) F -5 - F - 15
ITEM 2 - MANAGMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS F - 16 - F -17
PART II - OTHER INFORMATION F - 18
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
AMERICAN TOYS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(Unaudited)
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ASSETS
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Current Assets:
Cash $232,638
Accounts Receivable 107,403
Merchandise Inventories 7,518,770
Due from Stockholders 211,473
Other Current Assets 251,969
----------------
Total Current Assets 8,322,253
Equipment, improvements and fixtures, net 1,849,864
Deferred financing costs, net 340,013
Deposits 59,285
Investment in common stock 1,800,000
--------------
Total Assets $12,371,415
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note Payable $4,256,794
Accounts Payable 4,198,289
Accrued Expenses 136,096
Due to Affiliates 51,500
------------
Total Current Liabilities 8,642,679
Deferred Rent Liability 177,112
Total Liabilities 8,819,791
Security Interest 603,660
Commitments and contingencies (Note 7) ---
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000,000, issued and outstanding
4,000,000 66,820
Additional paid-in capital 11,366,818
Accumulated deficit (7,935,674)
Subtotal stockholders' equity 3,497,964
Less: stock subscription receivable (550,000)
Total stockholders' equity 2,947,964
Total liabilities and stockholders' equity $12,371,415
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
<PAGE>
AMERICAN TOYS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
(Unaudited)
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1996 1995 1995 (pro-forma)
Net Sales $3,184,903 $4,138,397 $4,138,397
Costs and expenses:
Cost of sales 2,151,718 2,795,232 2,795,232
Operating expenses 1,853,800 2,304,259 2,304,259
Interest expense and financing costs 179,174 85,509 85,509
- -------
Total costs and expenses 4,184,692 5,185,000 5,185,000
- ---------
Loss before minority interest and
cumulative effect of a change in
accounting principle (999,789) (1,046,603) (1,046,603)
Minority interest in net loss 274,409 304,860 345,379
- -------
Loss before cumulative effect of a
change in accounting principle (725,380) (741,743) (701,224)
Cumulative effect of a change in
accounting principle (Note 5) (459,435) _______ _______
- ----------
Net Loss $(1,184,815) $(741,743) $(701,224)
============
Loss per common equivalent share:
Loss before minority interest and
cumulative effect of a change in
accounting principle $(.52) $(1.35) $(1.35)
Minority interest in net loss .14 .39 .44
- -- ---- ---
Loss before cumulative effect of a
change in accounting principle (.38) (.96) (.91)
Cumulative effect of a change in
accounting in principle (Note 5) (.24) ___ ___
- -----
Net Loss $(.62) $(.96) $(.91)
======
Weighted average number of common
shares outstanding 1,929,330 772,745 772,745
=========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
<PAGE>
AMERICAN TOYS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 1996
(Unaudited)
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Common Stock
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Shares Amount Additional Accumulated Total
Paid-in Deficit Stockholders'
Capital Equity
Balances at March 31, 1996 893,995 $35,760 $6,724,470 $(6,750,859) $9,371
Cumulative effect of a change in --- --- 2,873,408 --- 2,873,408
accounting principle (Note 5)
Issuance of Common Stock 3,106,005 31,060 1,768,940 -- 1,800,000
Net loss for the three months
ended June 30, 1996 ---------- ---------- --- (1,184,815) (1,184,815)
----------
Balances at June 30, 1996 4,000,000 $66,820 $11,366,818 $(7,935,674) $3,497,964
=========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
<PAGE>
AMERICAN TOYS, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30,
(Unaudited)
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1996 1995
Cash flows from operating activities:
Net loss $(1,184,815) $(741,743)
Adjustments to reconcile net loss to net cash used for
operating activities:
Cumulative effect of a change in accounting principle (Note 5) 459,435
Depreciation and amortization 149,265 89,159
Amortization of excess of cost over net assets acquired 6,542 19,627
Minority interest in net loss (274,409) (304,860)
Issuance of stock as compensation for services and financing costs 16,000 49,500
Change in operating assets and liabilities:
Accounts receivable 14,183 216,283
Merchandise inventories (1,259,686) (770,821)
Other current assets 79,142 110,440
Deposits (2,000) ---
Accounts Payable 1,320,106 1,210,394
Accrued expenses (177,415) (146,707)
Deferred rent liability (20,823) (6,522)
--------
Net cash used for operating activities (874,475) (275,250)
---------
Cash flows from investing activities:
Equipment, improvements and fixtures acquired (86,907) (30,623)
--------
Net cash used for investing activities (86,907) (30,623)
--------
Cash flows from financing activities:
Proceeds from issuance of common stock --- 675,000
Proceeds, repayment to stockholders 6,250 (173,182)
Net (repayments) proceeds from note payable --- 61,490
Payments on capital lease obligations --- (982)
Borrowing on bank line of credit 853,769 ---
Proceeds from issuance of preferred stock 334,000 ---
Redemption of preferred stock (87,680) ---
Proceeds from affiliates 12,500 ---
Payments of Series B redeemable preferred stock net of interim accretion --- (138,298)
---
Net cash provided by financing activities 1,118,839 424,028
---------
Net increase in cash 157,457 118,155
Cash at beginning of period 75,181 401,010
------
Cash at end of period $232,638 $519,165
========
Supplemental disclosure of cash flow information,
Interest paid $91,858 $93,612
Taxes paid $800 $780
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
<PAGE>
Schedule of non-cash operating and financing activities:
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In connection with the issuance of common stock, 225,000 of common
stock were issued as compensation for services $--- $49,500
In connection with the issuance of preferred stock in lieu of finance charges $16,000 $---
In connection with the conversion of debt into preferred stock $528,070 $---
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
<PAGE>
NOTE 1 - GENERAL
American Toys, Inc. ("the Company") was incorporated in the State of
Delaware on February 12, 1993 for the purpose of acquiring 90% of the issued and
outstanding common stock of Play Co. Toys & Entertainment Corp. ("Play Co."), a
California based retailer of children's toys. As of June 30, 1996, the Company's
ownership in Play Co. had been reduced to 67% as a result of Play Co.'s initial
public offering and other stock transactions as further discussed in Note 4.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the interim financial statements include all adjustments necessary
in order to make the financial statements not misleading. The results of
operations for the three months ended is not necessarily indicative of the
results to be expected for the full year. For further information, refer to the
Company's audited financial statements and footnotes thereto at March 31, 1996,
included in the Company's Annual Report Form 10-KSB, filed with the Securities
and Exchange Commission.
The consolidated financial statements give retroactive effect for a one for
four reverse stock split effected April 17, 1996.
During June 1996, European Venture Corp. ("EVC"), an affiliate of the
Company's President, exercised its option and acquired 3,106,005 shares of
common stock in exchange for 400,000 shares of common stock of Multimedia
Concept International, Inc. ("Multimedia"). Accordingly, as of June 30, 1996,
EVC became a 78% majority stockholder of the Company.
NOTE 2 - STOCK SUBSCRIPTION RECEIVABLE
On October 27, 1995, the Company's then majority stockholder Mister Jay
Fashions International, Inc. ("Mister Jay") exercised its right pursuant to the
terms of a special warrant and purchased 68,750 common shares at $2.00 per share
and issued a twelve month promissory note for $550,000 bearing interest at 8%
per annum, which note together with such shares has been canceled as of July 15,
1996. (See Note 9d for additional information).
NOTE 3 - NOTES PAYABLE
i) Imperial Bank ("Imperial")
Until February 7, 1996, Play Co. had a borrowing agreement with Imperial
which provided for a $5,500,000 line of credit secured by substantially all
assets of Play Co. The Agreement, as amended, advanced funds with interest at
1.5% above the bank's prime lending rate and was guaranteed by the Company and
Mister Jay. Under the agreement, Imperial also provided
<PAGE>
NOTE 3 - NOTES PAYABLE (Cont'd)
i) Imperial Bank ("Imperial") (Cont'd)
overseas lines of credit to secure inventory purchases from foreign
suppliers which effectively reduced the available borrowings on the line of
credit.
In March 1994, Imperial was granted warrants to purchase 50,000 shares of
common stock of Play Co. at an exercise price of $5 per share. The Company has
not placed a value on the warrants which expire March 30, 1997. As of June 30,
1996, no warrants had been exercised by the bank.
In November 1995, Europe American Capital Corp. ("EACC"), an affiliate,
provided a $2,000,000 letter of credit which increased available borrowings
under the line of credit agreement from $3,500,000 to $5,500,000. In connection
therewith, Play Co. granted an option to EACC to purchase 350,000 shares of Play
Co.'s common stock at a price of 25 percent of the closing bid price for the
common stock on the last business day prior to exercise. Such options expired
during April 1996. Play Co. estimated the value of the option to be $224,000 and
recorded such amount as additional paid-in capital. For the three months ended
June 30, 1996, amortization of the value of the option aggregating to $28,000 is
included in interest expense and financing costs. The unamortized value of the
option, aggregating $151,200 at June 30, 1996, has been included in deferred
financing costs. The exercise period expired on April 16, 1996 and no options
have been exercised.
The line of credit agreement required compliance with certain loan
covenants and included a requirement that the balance be paid in full as of
December 31, 1995 and for a period of 30 days. Interest was payable monthly on
the line of credit which had an original maturity date of April 1, 1996.
As discussed below, on February 7, 1996, Play Co. obtained alternative
financing and the entire balance due under the bank line of credit was repaid
and the agreement was terminated.
ii) Congress Financial Corporation ("Congress")
On February 7, 1996, Play Co. borrowed, under an agreement with Congress,
approximately $2,243,000, which proceeds were used to repay the then outstanding
borrowings under the bank line of credit with Imperial. The financing agreement
provides for maximum borrowings up to $7,000,000 based upon 60% of eligible
inventory. Outstanding borrowings bear interest at 1.5% above the prime rate, as
defined. The agreement matures February 1, 1998 and can be renewed for one
additional year at the lender's option.
The agreement requires compliance with certain loan covenants, including
maintaining, at all times, adjusted net worth, as defined, of $500,000. At June
30, 1996, Play Co. was in
<PAGE>
NOTE 3 - NOTES PAYABLE (Cont'd)
ii) Congress Financial Corporation ("Congress") (Cont'd)
compliance with all such covenants.
The financing agreement is secured by substantially all assets of Play Co.,
is guaranteed by the Company and collaterized by a $2,000,000 letter of credit
provided by EACC. As consideration for the letter of credit provided by EACC,
Play Co. granted to EACC (i) an option to purchase up to an aggregate of
1,250,000 shares of Play Co.'s common stock at a purchase price of 25 percent of
the closing bid price for Play Co.'s common stock on the Last business day prior
to exercise, for a period of six months commencing February 7, 1996, and (ii) an
option to purchase up to an aggregate of 20,000,000 shares of Play Co.'s Series
E preferred stock at a purchase price of $1.00 per share during the period from
May 9, 1996 through May 8, 2001.
Play Co. estimated value of the option described in (i) above is
insignificant to the accompanying financial statements. Play Co. estimated the
value of the option described in (ii) above to be $234,000 and recorded such
amount as additional paid-in capital. For the three months ended June 30, 1996,
amortization of the value of the option aggregated $29,250 and is included in
interest expense and financing costs. The unamortized value of the option,
aggregating $188,813 at June 30, 1996, is classified as deferred financing
costs.
On January 30, 1996, pursuant to the requirements of the financing
agreement, the Company and Play Co. approved the exchange of the subsidiary note
receivable from Play Co. for one share of Play Co.'s Series D preferred stock.
Accordingly, all principal and accrued interest then owed under the above notes
receivable, aggregating $1,399,044, was extinguished. In August 1996, this share
was exchanged for 1,157,028 shares of Play Co.'s common stock (see Note 6d).
NOTE 4 - MINORITY INTERESTS
In connection with the 90% acquisition of Play Co.'s common stock on May 7,
1993, the prior shareholders of Play Co. retained a (10%) ownership interest in
Play Co. During June 1994, Play Co. issued a total of 150,000 shares of its
common stock to two Directors and legal counsel. Such issuance of shares by Play
Co. reduced the Company's interest in Play Co. to 84.6%. In addition, on
November 9, 1994, Play Co. successfully completed its public offering and issued
784,950 shares of its $.01 par value common stock. The Company's ownership
percentage in Play Co. was therefore reduced to approximately 65%. Lastly,
between November 1994 and January 1995 the minority stockholders of Play Co.
converted their Series A preferred stock by Play Co.'s common stock, and in
January 1995 the Company converted its Series C preferred stock to 428,580
shares of Play Co.'s common stock thereby increasing its percentage ownership in
Play Co. to 67%. As of June 30, 1996, the minority interest balance on the
Company's books is $603,660 as a result of all of the above transactions and the
proportionate share of Play Co.'s losses. (See Note 5 below for additional
information.)
<PAGE>
NOTE 5 - CHANGE IN ACCOUNTING PRINCIPLE
During the quarter ended June 30, 1996, the Company changed its method of
accounting for the minority shareholders interest in Play Co. The Company
changed from one method of accounting which records the total amount of the net
proceeds received from Play Co.'s equity transactions as the minority interest
to a more generally accepted method which reflects the minority interest as a
percentage of the net assets of Play Co. The change in accounting for minority
interest is recorded as a cumulative effect of a change in accounting principle,
which had the effect of reducing minority interest by $2,413,973, increasing
additional-paid-in-capital by $2,873,408 and increasing the current quarter net
loss by $459,435. The consolidated financial statements have not been restated
to reflect this accounting change; however, pro forma information, as if the
change were made retroactively, is shown on the Consolidated Statements of
Operations.
NOTE 6 - STOCKHOLDERS' EQUITY
a) Acquisition of Play Co.
On May 7, 1993, the Company purchase 90% of the issued and outstanding
common stock from the sole stockholders of Play Co. for $900,000 and 100% or
900,000 shares of the Series C redeemable preferred stock for $900,000.
b) Initial public offering
On April 7, 1994 the Company successfully completed its public offering. As
a result, the Company sold 193,988 units which yielded net proceeds of
$3,144,083 after deducting underwriter selling expenses and expense allowance,
repayment of bridge loan and related accrued interest to the selling
stockholder, and the pre-payment of the first year's financial consulting
agreement with the underwriter. Simultaneously with the offering, the Company
has charged all deferred offering costs incurred to additional paid-in capital
which totaled $1,051,430.
c) Equity transaction of Play Co.
Effective May 9, 1996, Play Co.'s certificate of incorporation was amended,
as follows:
(i) Play Co.'s name was changed to Play Co. Toys & Entertainment Corp.
(ii) The number of shares of Play Co. common stock $.001 par value per
share authorized to be issued is 30,000,000 as of July 31, 1996.
(iii) The number of shares of $.001 par value preferred stock Play Co. is
authorized to issue is 2,469,445 of which 469,444 shares were designated, Series
B preferred stock, 1 share was designated Series D preferred stock and 2,000,000
shares were designated Series E preferred stock. The Series B preferred stock
has been redeemed.
<PAGE>
NOTE 6 - STOCKHOLDERS' EQUITY (Cont'd)
(c) Equity transaction of Play Co. (Cont'd)
The newly authorized common stock have identical rights to the previously
authorized common stock.
The holder of the Series D preferred stock is entitled to cumulative annual
dividends at the annual rate of 7% and the right to vote at all meetings of the
stockholders of Play Co., or consent in writing in lieu of voting, solely for
the election of Play Co.'s board of directors. The holder of the Series D
preferred stock is entitled to a preference on liquidation, dissolution or
winding up of Play Co., subordinate to the preference granted to the holders of
the Series B preferred stock.
The Series E preferred stock is non-voting is not redeemable by Play Co. or
the holders, and holders are entitled to cumulative dividends at $1.00 per
share. The Series E preferred stock is convertible into 20 fully paid and
nonassessable shares of Play Co.'s common stock at the holders' option and at
any time during the three year period commencing two years after the issuance of
the Series E preferred stock.
(iv) On June 30, 1996, in return for the issuance of 334,000 shares of
Series E Preferred Stock, EACC provided Play Co. with $334,000. These shares of
Series E Preferred Stock will be designated Class I Series E Preferred Stock.
(v) In April 1996, Play Co. converted $528,070 of debt consisting of a
$500,000 note payable and accrued expenses to EACC in exchange for 528,070
shares of Series E Preferred Stock. The Series E Preferred Stock is separated
into two classes. The Class I Series E Preferred Stock is convertible into 20
shares of Common Stock for each share of Series E Preferred Stock, at the
holder's option at any time commencing two years from the date of issuance of
the Series E Preferred Stock.
d) Spin off of Play Co.'s common stock
On June 1, 1996 the then majority stockholder of the Company, Mister Jay,
authorized and consented to the spin-off of the shares of common stock of Play
Co. owned by the Company to the stockholders of the Company there being certain
stockholders not eligible for the spin-off as of record date of August 15, 1996.
Presently, the Company owns 2,548,930 or approximately 67% of the outstanding
shares of common stock of Play Co.
Additionally, the Company, as majority stockholder of Play Co., authorized
the conversion of its 1 share of Series D Preferred Stock owned into 1,157,028
shares of Play Co.'s common stock, based on the average closing bid price
($1.21) of Play Co.'s shares for the period from March 1, 1996 to May 31, 1996.
<PAGE>
NOTE 6 - STOCKHOLDERS' EQUITY (Cont'd)
e) Issuance of shares
On June 28, 1996, EVC entered into an option to acquire 3,106,005 shares of
the Company's common stock for $1,800,000 or for an exchange for 400,000 shares
of common stock of Multimedia Concepts International, Inc., ("Multimedia") which
shares shall not be subject to the distribution. Multimedia is a Delaware
Corporation which shares are quoted on the NASDAQ SmallCap Stock Market.
Accordingly, during June 1996 EVC exercised its option and acquired 3,106,005
shares in exchange for 400,000 shares of common stock of Multimedia.
f) Reverse stock split
Pursuant to a special meeting of the shareholders on May 31, 1996, the
Company effected as of April 17,1996 a 1 for 4 reverse stock split. The
consolidated financial statements give retroactive effect for a one for four
reverse stock split.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
a) Operating leases Retail Stores and Warehouse (Play Co.)
Play Co. leases its retail store properties and various equipment under
noncancellable operating lease agreements which expire through September 2005
and require various minimum annual rentals. Several of the leases provide for
renewal options to extend the leases for additional five or ten-year periods.
Certain store leases also require the 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 three months ended June 30, 1996 and 1995, Play Co., incurred
rental expenses under all operating leases of approximately $612,644 and
$664,989, respectively.
During the three months ended June 30, 1996 and 1995, Play Co. sub-leased
portions of its warehouse building under noncancelable operating leases.
Sub-lease income during the three months ended June 30, 1996 and 1995 was
approximately $32,297 and $21,074, respectively.
At March 31, 1996, the aggregate future minimum lease payments (receipts)
due under these noncancelable leases are as follows:
<PAGE>
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Cont'd)
a) Operating leases (Cont'd)
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Year ending March 31, Operating leases Operating sub-leases
1997 $ 2,147,688 $ (65,920)
1998 $ 2,040,028 $ (67,066)
1999 $ 1,859,454 $ (65,937)
2000 $ 1,714,907 $ (67,153)
2001 $ 819,617 ------
Thereafter $ 1,595,198 ------
---------- ------
Total minimum lease
payments (receipts) $10,176,892 $(266,076)
=========== ==========
</TABLE>
b) Dependence on suppliers
Approximately thirty (30%) percent of Play Co.'s inventory is purchased
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 or the
deterioration of Play Co.'s relationship with a major supplier would have a
material adverse effect on the Company's business.
c) Seasonality
Play Co.'s business is highly seasonal with a large portion of its revenues and
profits being derived during the months November and December. Accordingly, in
order for Play Co. to operate it must obtain substantial short-term borrowings
from a bank during the first three quarters of each fiscal year to purchase
inventory and for capital and operating expenditures. Historically, Play Co. has
been able to obtain such financing and these borrowings have been repaid after
the fourth quarter of its fiscal year.
d) 401(k) employee stock ownership plan
During August 1994, Play Co. adopted a 401(k) Employee Stock Ownership Plan
("the Plan") which covers substantially all employees of Play Co. The Plan
includes provisions for both an Employee Stock Ownership Plan ("ESOP") and a
401(k) Plan.
The ESOP allows only contributions by Play Co. which can be made annually
at the discretion of
Play Co.'s Board of Directors. The ESOP is designed to invest primarily in
Play Co.'s stock. The 401(k) portion of the Plan is contributed to by the
employees of Play Co., through payroll deductions. Play Co. makes no matching
contributions to the 401(k).
<PAGE>
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Cont'd)
e) 1994 Stock Option Plan
In June 1994, Play Co. adopted the 1994 Stock Option Plan ("the Plan")
which provides options to purchase an aggregate of not more than 150,000 shares
of common stock as may be granted from time to time by Play Co.'s Board of
Directors. Concurrent with the adoption of the Plan, an option to purchase
10,000 shares of common stock at $2.10 per share was granted to Play Co.'s
Secretary/Treasurer. As of June 30, 1996, no options to purchase common stock
had been granted.
f) Employment Agreement
On June 1, 1996, the Company's prior President and current Vice-President
entered into a 5 year employment agreement. Pursuant to the employment
agreement, the President shall not receive any monetary compensation during the
term. As consideration, the Company's President was granted options pursuant to
the five year employment agreement to purchase 1,000,000 shares at $1.00 for
five years and 2,250,000 shares at $1.33 exercisable until December 31, 1996.
During July 1996, the Company's President exercised his options to purchase
1,000,000 shares at $1.00 in full.
NOTE 8 - RELATED PARTY TRANSACTIONS
a) Office and warehouse lease of Play Co.
Play Co. leases its main office and warehouse from a partnership, one
partner of which is the President of Play Co. and the other the former President
of Play Co. The total rent expense under this lease for the three months ended
June 30, 1996 and 1995 amounted to $56,979. The lease expires in April 2000.
b) Sub-lease (Play Co.)
During the three months ended June 30, 1996 and 1995 sub-lease rental
income included $26,367 and $21,074, respectively from a sub-lease with an
entity in which the minority stockholders and employees of Play Co. have an
ownership interest.
c) Due from stockholders
The Company advanced funds to Mister Jay, the Company's majority
stockholder and Transatlantic, a stockholder and entity under the common control
of the Company's former President . These advances are unsecured and
non-interest bearing. At June 30, 1996 such amounts due from Mister Jay and
Transatlantic amounted to $211,473.
d) Due to affiliate
During March 1996, EACC loaned $500,000 to Play Co. and incurred costs
related to the Congress financing agreement as discussed in Note 3(ii) totaling
$28,070. In addition, an affiliate of the NOTE 8 - RELATED PARTY TRANSACTIONS
(Cont'd)
<PAGE>
d) Due to affiliate (Cont'd)
Company's former President advanced the Company $51,500 as of June 30,
1996.
During April 1996, EACC exercised its options and acquired 528,070 shares
of Play Co.'s Series E preferred stock by converting advances amounting to
$528,070.
f) Employment agreement
On July 31, 1996, the Company entered into an employment agreement with Dr.
Oliver Hilsenrath whereby Dr. Hilsenrath became the Company's President and
Chief Executive Officer. As consideration, the President will receive a salary
of $160,000 per annum and was granted options pursuant to the five year
employment agreement to purchase 1,500,000 shares at $2.00 per share. On June 1,
1996, the Company's former President and current Vice-President entered into a 5
year employment agreement. Pursuant to the employment agreement, the
Vice-President shall not receive any monetary compensation during the term. As
consideration, the Company's Vice-President was granted options pursuant to the
five year employment agreement to purchase 1,000,000 shares at $1.00 for five
years and 2,250,000 shares at $1.33 exercisable until December 31, 1996. During
July 1996, the Company's Vice-President exercised his options to purchase
1,000,000 shares at $1.00 in full.
NOTE 9 - SUBSEQUENT EVENTS
a) Acquisitions
i) On July 10, 1996 the Company entered into a stock purchase agreement
which agreement consummated on July 31, 1996, to acquire 51% of the outstanding
shares of common stock of Labyrinth Communication Technology Group, Inc.
("Labyrinth"), whereby it purchased 20% of the shares for $2,000,000 from
Labyrinth and exchanged 2,250,000 of its common shares for 310,000 shares of
Labyrinth held by one of its stockholders. Upon consummation of this acquisition
the founding shareholder of Labyrinth became the President and Chief Executive
Officer of the Company. Labyrinth is a development stage company which is
engaging in the research and development of wireless communications technology.
Accordingly, on July 31, 1996 the Company paid Labyrinth $2,000,000 for 20% of
Labyrinth's shares and issued 2,250,000 of its common shares for 310,000 shares
or 31% of Labyrinth's outstanding shares, aggregating 51%.
ii) On July 10, 1996 the Company entered into an agreement to acquire 51%
of the outstanding common shares of Mantra Technologies, Inc. ("Mantra") and an
option to purchase the remaining 49% of the outstanding common shares for
$500,000. Pursuant to the terms of the agreement, the Company has the right to
acquire the remaining 49% of the outstanding shares of common stock in exchange
for an aggregate of 1,000,000 shares of its common stock. In order for the
Company to
<PAGE>
NOTE 9 - SUBSEQUENT EVENTS (Cont'd)
a) Acquisitions (Cont'd)
exercise its options, the closing bid price of its common stock must have
been $5.00 for the previous 30 trading days prior to the date of exercise.
Mantra is a development stage company which is developing an advanced user
interface for the Internet and other data bases. Accordingly, on July 31, 1996
the Company paid $500,000 for 51% of the outstanding shares of Mantra.
b) Private Placement Offering
On July 10, 1996 the Company commenced an offering of its shares of common
stock in a private placement offering consisting of 600,000 shares of common
stock for gross proceeds of $1,500,000. On July 31, 1996 the private placement
was completed whereby 600,000 shares were sold for $1,500,000.
c) Form S-8 Registration Statement
On July 23, 1996, pursuant to a Form S-8 Registration Statement filed with
Securities and Exchange Commission, the Company registered 3,250,000 common
shares underlying options to issue common stock of the Company to the Company's
former President and current Vice-President. Of the 3,250,000 options, 1,000,000
options are exercisable at $1.00 each for a period of five (5) years. The
remaining 2,250,000 options are exercisable at $1.33 each until December 31,
1996. On July 31, 1996, the Company's President exercised his option to purchase
1,000,000 shares at $1.00 in full.
d) Cancellation of Stock Subscription Receivable
On July 15, 1996, the Company and it's previous majority stockholder,
Mister Jay, mutually agreed to cancel the stock subscription receivable note
along with the related accrued interest totaling $582,083. Such note was issued
on October 27, 1995 for the exercise of a special warrant issued to Mister Jay.
e) Promissory Note
On July 1, 1996, the Company received a five (5) year promissory note
amounting to $110,606 representing advances made by the Company to its previous
majority stockholder, Mister Jay. Such note bears interest at 8% per annum.
Interest is payable semi-annually with principal due at the end of the note.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company was organized in February, 1993. The results of operations for
the three months ended June 30, 1996 and 1995 relate mainly to the Company's
subsidiary, Play Co. Toys ("Play Co") since the Company itself does not generate
any operating revenue or had any material operations independent of those of
Play Co.
RESULTS OF OPERATIONS
American Toys, Inc. ("American Toys or the Company")
Three months ended June 30, 1996 compared to three months ended June 30, 1995
For the three months ended June 30, 1996 and 1995, American Toys incurred
total expenses amounting to $23,636 and $103,242 respectively. For the three
months ended June 30, 1996, the total expenses amounting to $23,636 was related
to professional fees, filing fees and general corporate expenses. For the three
months ended June 30, 1995, of the total expenses amounting to $103,242, $49,500
were incurred as a result of the issuance of common stock to the Company's Chief
Executive Officer and a Director as consideration for services provided in
connection with the Company's operations. The remaining costs for such period
related to professional, filing fees, and other general corporate expenses.
Play Co.
Three months ended June 30, 1996 compared to three months ended June 30,
1995
Sales for the three months ended June 30, 1996 decreased to $3,184,903 form
$4,138,313. This represents a decrease of $953,410 or approximately 23%.
Approximately $442,000 of the decrease in sales is directly attributable to the
decreased sales of Milk Cap game products and the reduction of one retail store
location. Additionally, retail store sales for the three months ended June 30,
1996 decreased by approximately 14.5% from the sales level achieved for the
three months ended June 30, 1995. The Company operated 17 and 18 retail
locations during the three month period ended June 30, 1996 and June 1995,
respectively. Wholesale sales of non-milk cap game products decreased slightly
to $152,853 for the three month period ended June 30, 1996 from $153,622 for the
three month period ended June 30, 1995.
Gross profit decreased slightly to 32.44% for the three months ended June
30, 1996 from 32.46% for the three months ended June 30, 1995.
Operating expenses decreased to $1,837,372 (or 57.69% of net sales) from
$2,400,866 (or 58.02% of net sales). Such decrease of approximately $563,494 or
23.47%, is primarily attributable to decreased payroll expense due to the
re-organizing of personnel and decreased supplies and expenses required for the
milk-cap game program.
Interest and financing expense for the three month period ended June 30,
1996 increased to $179,174 from $85,509 for the three month period ended March
31, 1996. The $179,174 of interest for the three month period ending June 30,
1996 includes $91,858 incurred on borrowings on the Company's line of credit and
$53,686 of amortization of financing costs incurred to obtain the line of credit
arrangement.
<PAGE>
Liquidity and Capital Resources
At June 30, 1996 the Company had a working capital deficit of $320,425.
On February 1, 1996, the Company entered into a "Loan and Security
Agreement" (the "Loan Agreement") with Congress Financial Corporation
("Congress"). Funds drawn on February 7, on the loan agreement of $2,000,000
were used to repay the amounts due under a previous line of credit arrangement
with Imperial Bank, effectively terminating that borrowing arrangement. The Loan
Agreement provides for maximum borrowings of $7,000,000 based on the "Cost Value
of Eligible Inventory" as defined in the Loan Agreement. The only material
financial covenant in the Loan Agreement is the requirement that the Company
maintain at all times an adjusted net worth of not less than $500,000. The Loan
Agreement requires the payment of a quarterly service fee of $8,750, is secured
by substantially all assets of the Company and is further collaterized by the
$2,000,000 letter of credit originally provided for the benefit of Imperial
Bank. Interest on outstanding balances is charged at prime plus 1.5%. The Loan
Agreement matures February 1, 1998. Congress can extend the Loan Agreement for
an additional year at its option. The balance outstanding under the Loan
Agreement totaled $4,256,793 as of June 30, 1996.
Sources of funds to repay obligations as described above, are typically
generated from sales during the peak selling season from October to December of
each year.
Approximately 45 to 49% of the Company's annual sales are generated during
the months of October through December due to the significant seasonality of the
toy industry. Vendors generally extend terms during the balance of the year.
Vendors are generally repaid in December and January of each year, at a time
when inventory levels are significantly reduced.
The Company believes that its cash on hand, together with its new credit
facility, will be sufficient to meet its working capital needs during fiscal
year ended March 31, 1997.
Change in Accounting Principle
During the quarter ended June 30, 1996, the Company changed its method of
accounting for the minority shareholders interest in Play Co. The Company
changed form one method of accounting which records the total amount of the net
proceeds received from Play Co.'s equity transactions as the minority interest
to a more generally accepted method which reflects the minority interest as a
percentage of the net assets of Play Co. The change in accounting for minority
interest is recorded as a cumulative effect of a change in accounting principle,
which had the effect of reducing minority interest by $2,413,973, increasing
additional-paid-in-capital by $2,873,408 and increasing the current quarter net
loss by $459,435.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings:
None
ITEM 2 - Changes in Securities:
Pursuant to a special meeting of the shareholders on May 31, 1996, the
Company effected as of April 17, 1996, a 1 for 4 reverse stock split.
ITEM 3 - Defaults Upon Senior Securities:
None
ITEM 4 - Submission of Matters to a Vote of Security Holders:
None
ITEM 5 - Other Information:
None
ITEM 6 - Exhibits and Reports on Form 8-K:
a. The Company filed a Report on Form 8-K on July 24, 1996 which is
attached hereto as an exhibit.
b. Index to Exhibits on Page 21
<PAGE>
American Toys, Inc.
Index to Exhibits
Exhibit Number Description Page No.
18 Letter on Change in 23
Accounting Principle
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 16, 1996
American Toys, Inc.
By: \s\ Dr. Oliver Hilsenrath
Dr. Oliver Hilsenrath,
Chief Executive Officer,
President and Director
By: \s\ Dr. Oliver Hilsenrath
Dr. Oliver Hilsenrath,
Chief Executive Officer,
President and Director
<PAGE>
Exhibit 18
January 23, 1997
U.S. Wireless Corporation
(Formerly known as American Toys, Inc.)
2694 Bishop Drive-Suite 213
San Ramon, CA 94583
Dear Sirs/Madams:
At your request, we have read the description included in your Form 10-QSB/A for
the quarter ended June 30, 1996, of the facts relating to your change in
accounting for minority interest to a more generally accepted method that
reflects the minority interest in Play Co. Toys & Entertainment Corp. as a
percentage of that entity's net assets. We believe, on the basis of the facts so
set forth and other information furnished to us by appropriate officials of the
Company, that the accounting change described in your Form 10-QSB/A is to an
alternative accounting principle that is preferable under the circumstances.
We have not audited any consolidated financial statements of U.S. Wireless
Corporation and its consolidated subsidiaries as of any date or for any period.
Therefore, we are unable to express, and we do not express, an opinion on the
facts set forth in the above-mentioned Form 10-QSB/A, on the related information
furnished to us by officials of the Company, or on the financial position,
results of operations, or cash flows of U.S. Wireless Corporation and its
consolidated subsidiaries as of any date or for any period.
Very truly yours,
HASKELL & WHITE
Certified Public Accountants
<PAGE>
