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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number O-25030
PLAY CO. TOYS & ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
Delaware 95-3024222
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
550 Rancheros Drive
San Marcos, California 92069
(Address of principal executive offices) (Zip Code)
(619) 471-4505
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Common Stock Purchase Warrants
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if no disclosure of delinquent filers in response Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ].
The Registrant's revenues for its fiscal year ended March 31, 1996 were
$21,230,853.
The aggregate market value of the voting stock on July 12, 1996
(consisting of Common Stock, par value $.01 per share) held by non-affiliates
was approximately $2,469,551.80, based upon the average bid and asked prices for
such Common Stock on said date ($2.19), as reported by a market maker. On such
date, there were 3,863,530 shares of Registrant's Common Stock outstanding.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
History
Play Co. Toys & Entertainment Corp. (the "Company") was founded in
1974, with one store in Escondido, California by its founders Thomas Davidson
and Richard Brady, under the name Play Co. Toys. The Company currently has
seventeen (17) stores located across the Los Angeles, Orange, San Diego,
Riverside and San Bernadino counties of California. The Company's stores average
approximately 10,000 square feet in size and are located in strip shopping
centers and are serviced from a central 64,000 square foot distribution
facility. The Company is a retailer of children's and adult toys, games, and
hobby products. On average, the Company's stores offer over 15,000 items for
sale, including a wide selection of educational and specialty toys.
The Company was originally incorporated in the State of California in
1974, but changed its domicile to the State of Delaware on June 14, 1994. In
connection with such change of domicile to Delaware, each share of the Company's
common stock was exchanged for 50 shares of common stock of the Company
(Delaware). Such transaction is hereinafter referred to as the "Delaware
Reorganization" and all reference herein to shares of the Company's Common Stock
outstanding or per share information takes into account such transaction unless
otherwise noted.
Acquisition of Play Co.
The Company's majority stockholder, American Toys, Inc. ("American
Toys"), a Delaware corporation, acquired an aggregate of 2,142,850 shares of
Common Stock and 900,000 shares of the Company's Series C preferred stock on May
7, 1993 (the "Acquisition") by payment of the sum of $1,800,000 as follows: (i)
$900,000 was paid to the founders and sole shareholders of the Company in
exchange for 90% of the outstanding Common Stock as follows: $450,000 was paid
to Thomas Davidson for 1,071,450 shares; $175,000 was paid to Richard Brady for
416,650 shares; and $275,000 was paid to the Donald Welker Trust for 654,750
shares; and (ii) $900,000 was paid into the capital of the Company for 900,000
shares of a newly authorized Series C redeemable preferred stock (the "Series C
Preferred Stock"). The shares of Series C Preferred Stock were to pay cumulative
dividends at the rate of $.06 per share commencing February 1, 1994. The Company
had the right to put 300,000 of such Series C Preferred Shares to the Company at
a price of $1.00 per share plus all accrued but unpaid dividends on each of
February 1, 1994, 1995 and 1996. The shares of Series C Preferred Stock were
converted into 428,580 shares of Common Stock in January 1995. See "Certain
Relationships and Related Transactions."
In addition, as part of the Acquisition, the Company issued Messrs.
Davidson and Brady an aggregate of 250,000 shares of the Company's Series A
redeemable convertible preferred stock and issued Messrs. Davidson and Brady and
the Donald Welker Trust an aggregate of 704,166 shares of a Series B redeemable
preferred stock (the "Series B Preferred Stock") in exchange for an aggregate
2,524,250
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shares of the Company's common stock owned by such individuals as follows: (i)
Thomas Davidson exchanged 1,179,800 shares of the Common Stock for 187,500
shares of the Series A Preferred Stock and 248,207 shares of the Series B
Preferred Stock; (ii) Richard Brady exchanged 470,350 shares of Common Stock for
62,500 shares of the Series A Preferred Stock and 88,842 shares of the Series B
Preferred Stock; and (iii) the Donald Welker Trust exchanged 874,100 shares of
Common Stock for 367,117 shares of the Series B Preferred Stock.
Public Offering
On November 9, 1994, the Company consummated a public offering of
784,950 units (including the purchase of 84,750 units upon the exercise of the
underwriter's over-allotment), each unit comprising one share of Common Stock
and one Redeemable Common Stock Purchase Warrant to purchase one share of Common
Stock, at a purchase price of $5.00 per unit, through Hanover Sterling &
Company, Ltd. ("Hanover"). The Company received net proceeds of $2,895,613 from
the offering. The proceeds from the Company's offering have been apportioned as
follows (i) $450,000 was paid to American Toys, Inc., in order to decrease the
loan from American Toys, Inc. from $1,700,000 to $1,250,000, (ii) approximately
$225,000 was used to redeem 224,708 shares of the Series B Preferred Stock owned
by Messrs. Davidson and Brady, (iii) approximately $350,000 was used for the
costs associated with the opening of a new store in Whittier, California and the
balance was used for the Company's working capital needs.
Hanover Sterling & Co., Ltd., the underwriter of the Company's public
offering, was a dominant influence in the market for the Company's securities
until February 1995. In February 1995, the National Association of Securities
Dealers, Inc. (the "NASD") halted Hanover's market making operations due to
Hanover's inability to meet the NASD's net capital requirements, which requires
a broker/dealer to maintain certain levels of cash and other liquid assets in
order to meet its obligations. Hanover ceased all operations immediately after
losing its market making ability. It is believed by the Company that the
securities Hanover was making a market in were being shorted by a group of other
brokerage houses, which caused a decrease in Hanover's capital which inevitably
lead to its loss of market making activities. The market for the Company's
securities have been significantly affected and may continue to be affected by
the loss of Hanover's participation in the market. The loss of Hanover's market
making activities of the Company's securities has decreased significantly the
liquidity of an investment in such securities. Since Hanover was the Underwriter
of both Mister Jay Fashions International, Inc. ("Mister Jay") and American
Toys, both companies have seen the same decrease in the market for their
securities as well as a decrease in the liquidity of an investment in such
securities. Upon Hanover ceasing operations, its clearing firm, Adler Coleman,
filed for bankruptcy protection and all client accounts of Hanover were frozen
while SIPC, the insurance agency for Adler Coleman, sorted out all transactions.
As of the date hereof, all trades transacted during the last two weeks of
Hanover's operations are still being reviewed and some accounts are still
frozen.
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Recent Developments
On May 3, 1996, the Company held an annual meeting, at which time its
stockholders proposed approved (i) the election of three persons nominated by
the Board of Directors as Directors, (ii) the authorization of an amendment to
the Company's Certificate of Incorporation to effect a change of the name of the
Company from Play Co. Toys to Play Co. Toys & Entertainment Corp., (iii) the
authorization of an amendment to the Company's Certificate of Incorporation to
authorize one share of Preferred Stock, par value $.01 per share, as the "Series
D Preferred Stock" and (iv) the authorization of an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock to 410,000,000 shares and to authorize 20,000,000 shares of
Preferred Stock, par value $.01 per share, as the "Series E Preferred Stock".
All proposals were adopted by the stockholders and an amendment to the Company's
Certificate of Incorporation filed with the State of Delaware. The certificate
of amendment as filed, amended the name of the Company, authorized a share of
Series D Preferred Stock, authorized 1,000,000 shares of the Series E Preferred
Stock and increased the authorized shares of Common Stock to 30,000,000. As
shares of the Series E Preferred Stock are issued, additional shares may be
authorized from time to time.
In June 1996, American Toys, pursuant to the consent of its majority
shareholder, Mister Jay, authorized the spinoff of the shares of the Company's
common stock owned by American Toys to the shareholders of American Toys.
Additionally, American Toys authorized the conversion of its share of Series D
Preferred Stock into 1,157,028 shares of the Company's common stock based upon
the average closing bid price ($1.21) of the Company's shares for the period
from March 1, 1996 to May 31, 1996. The Company is amending its Certificate of
Incorporation to reflect the conversion provisions referenced to herein.
On March 18, 1996, EACC loaned an additional $500,000 to the Company
which was subordinated to the Congress Financing. In addition, EACC paid for
approximately $28,000 of the costs incurred to arrange the Congress Financing,
bringing the aggregate due to EACC to $528,000 as of March 31, 1996. Subsequent
to March 31, 1996, the $528,070 was converted into 528,000 shares of Series E
Preferred Stock. These shares of Series E Preferred Stock will be designated
Class I Series E Preferred Stock.
On June 30, 1996, in return for the issuance of 334,000 shares of
Series E Preferred Stock, EACC provided the Company with $334,000. These shares
of Series E Preferred Stock will be designated Class I Series E Preferred Stock.
On February 1, 1996, the Company entered into a Loan and Security
Agreement (the "Loan Agreement") with Congress Financial Corporation (Western)
("Congress") to replace its credit line with Imperial Bank. The Loan Agreement
provides the Company with a secured line of credit of up to 60% of the value of
all of its inventory, not to exceed $7,000,000 (the "Congress Financing"). The
Congress Financing is secured by the Company's assets and a $2,000,000 letter of
credit ("L/C") provided by Europe American Capital Corp. ("EACC") an affiliate
of Ilan Arbel, the Company's Chairman of the Board. Additionally, the Congress
Financing is guaranteed by American Toys and Mister Jay.
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In connection with the issuance of the L/C the Company on February 2,
1996 granted to EACC options (i) to purchase up to an aggregate of 1,250,000
shares of Common Stock of a purchase price of 25% of the closing bid price for
the Common Stock on the last business day prior to exercise, for a period of six
months from issuance and (ii) to purchase up to an aggregate of 20,000,000
shares of the Company's Series E Preferred Stock. The Company's estimated value
of the option described in (i) above is insignificant, which option was
terminated by EACC in June 1996. The Company estimated the value of the option
described in (ii) above to be $234,000 and recorded such amount as additional
paid-in-capital.
On February 2, 1996, Irwin Lampert and Richard Brady resigned as
members of the Company's Board of Directors. Mr. Brady continues as the
Company's Chief Executive Officer and President. Subsequently, the board
appointed Sheikhar Boodram, as a Director. Mr. Boodram is a Director of both
American Toys, the majority stockholder of the Company and Mister Jay, the
majority stockholder of American Toys.
In November 1995, Thomas Davidson resigned as President and as a
Director of the Company effective November 28, 1995. Richard Brady was appointed
Chief Executive Officer and President of the Company.
In August 1995, American Toys, entered into consulting agreements with
Harold Rashbaum and Citadel Commercial Corp., whereby Harold Rashbaum would
consult with American Toys and the Company in the areas of retailing and
marketing, and Citadel Commercial Corp. would consult with American Toys and the
Company in the areas of financial management, specifically trade credit and
banking. Pursuant to such agreements, American Toys issued to each consultant
30,000 shares of its Common Stock.
On October 18, 1995, prior to the Congress Financing, the Company
entered into an agreement (the "LOC Agreement") with EACC, pursuant to which
EACC agreed to provide to Imperial Bank a letter of credit terminating April 16,
1996, in the amount of $2,000,000 from Soginvest Bank, Switzerland, or such
other bank or financial institution. The letter of credit was required by
Imperial Bank in order for it to waive certain defaults as of September 1995,
under the Company's loan agreement with Imperial Bank and to increase the
Company's line of credit from $3,500,000 to $5,500,000. On November 3, 1995 the
letter of credit was issued and accepted by Imperial Bank at which time Imperial
Bank waived certain defaults under its loan agreement which were present as of
September 1995, and increased its line of credit to $5,500,000. Upon the
consummation of the Congress Financing the Imperial Bank line of credit was
repaid and terminated.
As compensation to EACC for the issuance of the $2,000,000 letter of
credit to Imperial Bank, the Company granted to EACC an option (the "Option") to
purchase 350,000 shares of Common Stock, at a price equal to 25% of the closing
bid price on the last business day prior to the date on which notice of the
exercise is given, until April 16, 1996, which option expired unexercised.
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Merchandising Strategy; Refocusing of Corporate Direction
The Company has recognized that there is a growing demand for
educational toys and entertainment. The Company has identified several small
chains that have embarked into the educational/entertainment marketplace. While
these store's operations will be used as role models for the Company's future
direction and growth plans, the Company feels the unfulfilled need in the
marketplace is a retail outlet that offers a combination of the traditional
name-brand, quality promotional toy items as well as educational toy offerings.
The Company will be designing future locations, as well as redesigning certain
of its existing locations, to include educational toys and interactive
facilities within the stores.
The Company is in the process of remodeling its Orange store to this
new format. It has plans to remodel two additional stores before year end 1996.
Currently, the Company is in lease negotiations for two additional sites to be
opened in the fall of 1996 under this new concept. The goal is to have five
stores operating under the new concept by year end 1996 and, through remodel and
new store openings, a total of thirteen by fiscal year end March 1998.
The Company is converting its Rialto location to an off price clearance
center. The Company feels that this under-performing location is demographically
better suited for this concept. Fewer markdowns should and will be taken at the
other locations as slower moving inventory will be transferred to the Rialto
location for faster turnover.
Traditionally, the Company's merchandising strategy was to offer what
it perceived to be an alternative, less intimidating environment than Toys R Us.
In particular, the Company stocks all of its items at eye level (as opposed to
other stores which stocks many items vertically), provides clerks to assist
customers and has a general policy of treating its customers with courtesy and
respect. Though the Company's focus as to its product lines may change, the
Company will continue to offer these services.
Though the Company is seeking to refocus its product lines and
strategies for the future, until its new strategy is tested, the majority of its
stores will continue to offer a broad in-stock selection of products at
competitive prices with an emphasis on customer service. The Company generally
prices its items to be competitive with Toys R Us, using Toys R Us prices as a
guideline. Such pricing adversely affected the Company's profits in fiscal 1994
and may continue to do so in the future. While the Company does not stock the
depth or breadth of selection of toys as Toys R Us, it does strive to stock all
basic categories of toys, as well as all television promoted items. The Company
also has a special order program for many items and offers this service free to
its' customers. The Company estimates it carries 50% of the toy items carried by
Toys R Us and that Toys R Us carries only 25% of the hobby items carried by the
Company. The Company does not compete with Toys R Us in the juvenile products or
clothing category.
The Company caters to value-conscious consumers who are attracted by
the brand name and quality merchandise offered by the Company at prices lower
than original retail prices. The Company offers its customers a competitive
refund policy, duplicate exchange policy and price matching, as additional
incentives to shop at the Company's stores.
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The Company's competitive refund policy is posted in each store and
provides full refunds to customers who return goods purchased at the Company,
provided such returns are accompanied by a receipt, original carton and all
component parts (with the exception of video games, which may only be returned
for a refund if unopened, or exchanged if opened). The Company will give a cash
refund to customers without a receipt under the same conditions as customers
returning goods with a receipt (although it will first offer a store credit),
provided that the Company stocks such goods, the customer fills out a store form
and the customer has identification.
The Company's duplicate exchange policy is posted in each store and
provides that each store will exchange any item stocked by the Company with
another item of equal or greater value, provided that the customer pays the
difference in value for a more expensive item.
The Company's price matching policy is posted in each store and
provides that each store will send the customer a rebate for the difference
between the Company store price of an item and the advertised price of the same
item, provided that the customer brings to the store a copy of the advertisement
with the lower price and that the customer purchases the item at the regular
Company price.
Wholesale Operations
In June 1994, the Company began selling toy and hobby items on a
wholesale basis to military bases located in southern California. The Company
presently sells toys and hobby items on a wholesale basis to the following
military bases: Camp Pendleton Marine Corp. Recruit Depot; Miramar Naval Base;
Marine Base, Barstow, California; Marine Corp. Air Station, El Toro, California;
Marine Corp. Air Station at Yuma, Arizona and 29 Palms Marine Base in 29 Palms,
California. The Company has agreements with four of six military bases to which
it sells. These agreements provide that the Company sell to such purchasers
those items which are requested, on a wholesale basis and to give credits for
those items which are not sold. Though the gross profit on selling wholesale is
low, the costs to sell wholesale are minimal to the Company since it already has
inventory, trucks, and warehouse space. The Company intends to attempt to expand
its sales through additional wholesale sales of toy and hobby items to
additional military bases, although there can be no assurance that it will be
successful selling such items on a wholesale basis or in expanding its wholesale
sales from present levels. The plan to increase wholesale sales is intended to
augment the Company's retail operation. Wholesale sales to military bases
totalled approximately $911,400, or 4%, of sales for the year ended March 31,
1996 as compared to sales of approximately $801,300, or 3%, of sales for the
year ended March 31, 1995. The Company anticipates similar sales revenues for
the fiscal year ending March 31, 1997.
In March 1995, the Company entered into a joint venture agreement with
an individual, who is not an officer, director, associate or affiliate of the
Company, whereby the Company became the 40% owner of a limited liability company
managed by Thomas Davidson and such joint venture partner, called "Asher Playco,
LLC.", doing business under the name Retail Source Distributing. In January
1996, this joint-venture agreement was terminated.
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Plans for Expansion
Prior to fiscal 1994, the Company generated all of its revenues from
the retail sale of toy and hobby items through its retail locations. Starting in
June 1993, the Company has sought to expand its operations to sell toys on a
wholesale basis and to sell toys under its own name. In order to try and be
profitable, the Company has adopted a policy of closing non-profitable store
locations and only opening store locations which meet its site evaluation model.
Although the southern California economy has been depressed in recent years,
management believes that it can nonetheless open stores which can operate
profitably, by opening new stores pursuant to its site evaluation model and to
replace non-producing stores with new units. However, there can be no assurance
that management is correct in such belief. The Company is currently seeking
additional financing in order for it to expand its operations to include 35
locations within the next two years, using its site evaluation model. The
Company estimates that the costs of such expansion will be approximately
$5,000,000. The Company has not entered into any agreements to obtain such
financing and there can be no assurance that such financing will be available to
the Company or if available on terms acceptable to the Company. See "Description
of Business Merchandising Strategy."
Products
The Company carries most major brand name toy and hobby products. The
Company sells children's and adult toys, games, bicycles and other wheel goods,
sporting goods, puzzles, Nintendo and Sega electronic game systems and
cartridges for such game systems, cassettes and books. It offers over 15,000
items for sale, including a wide selection of educational and specialty toys and
a full line of over 5,000 hobby items, such as radio controlled cars, boats,
airplanes and helicopters and other wood and plastic modeling kits.
All shipments to stores are made by Company owned or leased vehicles.
Each store employs a store manager, an assistant manager and between 15 to 25
full and part-time other employees. Each of the Company's store managers reports
to the Company's director of operations and director of merchandising who in
turn report directly to the Company's executive officers.
The Company has recognized that there is a growing demand for
educational toys and entertainment. The Company has identified several small
chains that have embarked into the educational/entertainment marketplace. While
these store's operations will be used as role models for the Company's future
direction and growth plans, the Company feels the unfulfilled need in the
marketplace is a retail outlet that offers a combination of the traditional
name-brand, quality promotional toy items as well as educational toy offerings.
The Company will be designing future locations, as well as redesigning certain
of its existing locations, to include educational toys and interactive
facilities within the stores.
The Company is in the process of remodeling its Orange store to this
new format. It has plans to remodel two additional stores before year end 1996.
Currently, the Company is in lease negotiations for two additional sites to be
opened in the fall of 1996 under this new concept. The goal is to have five
stores operating under the new concept by year end 1996 and, through remodel and
new store openings, a total of thirteen by fiscal year end March 1998.
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Inventory
The Company purchases approximately 95% of its product directly from
manufacturers and ships the product to its stores from its distribution center.
Inventory and shipment of product is monitored by a computerized point-of-sale
system (the "System"). The System was installed during fiscal 1990 and 1991 at a
cost of approximately $1,000,000. The System is a sophisticated point-of-sale
scanning, inventory control, purchasing and warehouse system. The System allows
each store manager to monitor sales activity and inventory at each store.
The System 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
the System. Stores are generally restocked with product on a weekly basis,
although certain stores and certain items may be restocked at different
intervals. In addition, restocking of product is generally increased during the
fourth quarter holiday season, with some stores and some items being restocked
on a daily basis during such period.
Seasonality
The Company's business is highly seasonal, with the majority of its
sales and profits being generated in the fourth quarter of the calendar year,
particularly during the November and December holiday season. After the
introduction of educational products described herein, the Company anticipates
that majority of its sales will continue to be generated in the fourth quarter
of the calendar year, particularly in November and December. The Company
anticipates that sales in the remaining three quarters will increase as a result
of the new productline, however, there can be no assurances that the Company is
correct in such opinion.
Research and Development
The Company utilizes a site evaluation model based upon demographics
for site selection in opening new store locations. The site evaluation model was
originally developed in 1990 by National Decision Systems, Encinitas,
California, at a cost to the Company of approximately $10,000. The site
evaluation model is based upon approximately 400 census variables which were
originally derived from the variables surrounding the Company's then existing 18
stores. Whenever the Company contemplates opening a new store location, it
compares the demographic variables of the contemplated location against those of
its model. Positive factors and negative factors are given certain ratings and a
score is derived from such ratings. The strength of the score guides management
of the Company as to whether or not to proceed with the contemplated store
location.
Demographic variables which are examined by the site evaluation model
include the income level, number of children per household, age groups of such
children, number of wage earners per household, proximity of a Toys R Us store
and the percentage of home ownership within a one, three and five mile radius of
the contemplated store location.
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Typically, if a Toys R Us store is located within a proximity of three
(3) miles to the contemplated store location, such location is immediately
deemed undesirable. Although management of the Company is of the opinion that
its policy of not opening new stores within a three mile radius of a Toys R Us
store will not limit its potential store locations, there can be no assurance
that it is correct in such opinion. The Company management's opinion is based on
its understanding of Toys R Us' policy of generally not opening a new Toys R Us
store within a ten mile radius of an existing Toys R Us location. Such policy
has generally allowed the Company to open a new store in between Toys R Us
locations, with the knowledge that a new Toys R Us store will in all likelihood
not be opened within a three (3) mile radius of the new Company store, which is
consistent with the parameters of its site evaluation model.
The Company management is of the opinion that the site evaluation model
significantly increases the probability that a new store location will be
successful, although there can be no assurance that the Company management is
correct in such opinion.
Manufacturing of TKO Products
On May 27, 1994, the Company entered into a joint venture agreement
with Laiko International Co., Inc. for the distribution of the Company's TKO
product line items. Terms of agreement provide for the Company to provide the
product and the joint venture partner to provide the wrapping of the products
whereby both companies would share in the profits from the distribution of the
TKO product line. Joint venture net profits as defined in the agreement are
allocated whereby the first $1,750,000 in gross sales went allocated 75% to the
Company and 25% to the joint venture partner. Net profits on gross sales in
excess of $1,750,000 went 60% to the Company and 40% to the joint venture
partner.
As of March 31, 1995, the Company and the joint venture partner
mutually agreed to terminate the agreement. Total joint venture net profits
earned by the Company during the year ended March 31, 1995 totaled $81,345.
During the year ended March 31, 1994, the Company began the wholesale
distribution of its TKO product line items, which comprised products associated
with the milk bottle cap game. Wholesale sales of TKO items for the year ended
March 31, 1995 were approximated $2.8 million. At March 31, 1995, the Company
had accounts receivable from wholesale sales of TKO items totalling $622,100.
During the year ended March 31, 1996, demand for TKO products declined
substantially, such that the Company's wholesale sales totalled approximately
$569,000. Accounts receivable from wholesale sales at March 31, 1996 totalled
$35,273.
The milk cap game fad has lost much of its popularity since its
introduction to Southern California in 1994. Accordingly, management believes
that the milk bottle cap game pieces and accessories sold under the Company's
TKO trademark are approaching the end of their product life cycle.
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Trademarks
The Company has received a federal registration for the trademark "Play
Co. Toys", which trademark is utilized by the Company in connection with its
marketing and sales of toy and hobby items. In addition, the Company has applied
for a Federal registration for the trademark "TKO" although there can be no
assurance that same will be granted by the U.S. Patent and Trademark office.
Financing
On February 1, 1996, the Company entered into a Loan and Security
Agreement (the "Loan Agreement") with Congress Financial Corporation (Western)
("Congress") to replace its credit line with Imperial Bank. The Loan Agreement
provides the Company with a secured line of credit of up to 60% of the value of
all of its inventory, not to exceed $7,000,000 (the "Congress Financing"). The
Congress Financing is secured by the Company's assets and a $2,000,000 letter of
credit ("L/C") provided by Europe American Capital Corp. ("EACC") an affiliate
of Ilan Arbel, the Company's Chairman of the Board. Additionally, the Congress
Financing is guaranteed by American Toys and Mister Jay.
In connection with the issuance of the L/C, the Company on February 2,
1996 granted to EACC options (i) to purchase up to an aggregate of 1,250,000
shares of Common Stock of a purchase price of 25% of the closing bid price for
the Common Stock on the last business day prior to exercise, for a period of six
months from issuance and (ii) to purchase up to an aggregate of 20,000,000
shares of the Company's Series E Preferred Stock. The Company's estimated value
of the option described in (i) above is insignificant, which option was
terminated by EACC in June 1996. The Company estimated the value of the option
described in (ii) above to be $234,000 and recorded such amount as additional
paid-in-capital.
The Company relies on credit terms from manufacturers to purchase some
of its inventory. While 95% of accounts payable to vendors are current as at the
date of this document, there can be no assurance that the Company will be able
to keep such payables current in the future. Such credit arrangements vary for
reasons both within and without the control of the Company. When American Toys
acquired the Company in May 1993, certain credit lines and repayment terms from
vendors were reduced to approximately 50% of their pre-acquisition levels. The
Company's management has recently, through active negotiations with the toy
trade, been able to increase such credit lines to 80% of their pre-acquisition
levels.
The reduction of credit or the terms thereof, the termination of an
existing credit line, the loss of a major supplier or the deterioration of the
Company's relationship with a major supplier, any or all of such occurrences
would have a material adverse effect on the Company's business. In the event
that such payables become delinquent for any reason, the Company would be
required to purchase products on a cash basis from such manufacturers, which may
curtail the amount of product which the Company could order from such
manufacturers.
11
<PAGE>
<PAGE>
Competition
The toy and hobby products market is highly competitive. The Company is
in direct competition with local, regional and national toy retailers, including
Toys R Us, which is generally considered to be the dominant toy retailer in the
United States. Moreover, since the Company's prices are in part based upon Toys
R Us prices, the aggressive pricing policy of Toys R Us has resulted in the
Company lowering its prices on many items, thereby reducing the Company's
profits. In addition, the toy and hobby products market is particularly
characterized by large retailers and discounters with intensive advertising and
marketing campaigns and with deeply discounted pricing of such products. The
Company faces competition from hobby vendors that market through direct sales
forces and from distributors that rely on mail order and telemarketing. The
Company competes as to price, personnel, service, speed of delivery and breadth
of product line. Many of the Company's competitors have greater financial and
marketing resources than the Company. Both Toys R Us and Kay Bee dominate the
toy retail industry in southern California. Although the Company and Toys R Us
have both been engaged in the retail toy industry in southern California for
approximately twenty years, Toys R Us has increased its market share at a
significantly faster rate than the Company. The domination of Toys R Us and Kay
Bee and the weak southern California economy and the Company's policy of not
opening a Company store within three (3) miles of an existing Toys R Us store
may inhibit the Company's ability to compete effectively in the toy retail
industry or to establish new stores in favorable locations.
Competitors with respect to Learning Toys.
The Company feels the unfulfilled need in the marketplace is a retail
outlet that offers a combination of the traditional name-brand, quality
promotional toy items as well as educational toy offerings. Combining the
promotional and educational toy segments of the market into one retail location
is believed to be a unique concept that should prove to differentiate the
Company's stores from those of any of its larger or similar size competitors.
Management has not been unable to locate any other retailer currently using this
combined marketing concept.
The Company will compete for its educational toy customer with other
specialty stores such as Disney Stores, Warner Bros. Stores, Imaginarium,
Learning Smith, Lake Shore, Zanny Brainy and Noodle Kidoodle.
Employees
As of March 31, 1996, the Company employed approximately 54 full-time
persons and approximately 206 part-time persons. None of the employees of the
Company are represented by a union, and the Company considers employee relations
to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains approximately 3,500 square feet of executive
office space and 40,000 square feet of warehouse space at 550 Rancheros Drive,
San Marcos, California, at an annual cost of approximately $250,000. The Company
additionally maintains 18,000 square foot of warehouse space at an adjacent
warehouse at an annual cost of approximately $100,000. The 43,500 square foot
office and
12
<PAGE>
<PAGE>
warehouse lease expires on April 30, 2000. The office and warehouse are leased
from Tom Davidson and Richard Brady, the President and Vice-President of the
Company. The Company believes that such lease is on terms no more or less
favorable than it could obtain from an unaffiliated party. In addition, the
Company currently leases the following premises on the following terms for its
retail stores:
<TABLE>
<CAPTION>
EXPIRATION ANNUAL COST
STORE LOCATION SQ. FOOT OF LEASE OF LEASE
- -------------- -------- ---------- -----------
<S> <C> <C> <C>
Escondido 11,200 01/00 $100,080
- ---------
316 W. Mission Blvd
Escondido, CA 92025
Convoy 8,257 10/97 97,610
- ------
4531 Convoy
San Diego, CA 92111
Mission Viejo 7,800 01/01 84,840
- -------------
27690 B Santa Margarita
Mission Viejo, CA 92692
Chula Vista 8,250 12/99 84,150
- -----------
1193 Broadway
Chula Vista, CA 92011
El Cajon 10,030 05/00 118,080
- --------
327 N. Magnolia
El Cajon, CA 92020
Simi Valley 11,383 11/99 88,319
- -----------
1117 East Los Angeles
Ste. C
Simi Valley, CA 93065
Riverside 10,156 01/01 91,404
- ---------
3531 Riverside Plaza
Riverside, CA 92506
Encinitas 10,000 09/05 116,752
- ---------
280 N. El Camino Real
Encinitas, CA 92024
Orange 13,125 01/01 96,360
- ------
1349 E. Katella
Orange, CA 92513
</TABLE>
13
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Pasadena 9,800 12/98 96,000
- --------
885 Arroyo Parkway
Pasadena, CA 91105
San Dimas 8,780 11/00 102,694
- ---------
612 W. Arrow Highway
San Dimas, CA 91773
Rialto 10,600 10/02 78,000
- ------
578 W. Foothill Blvd
Rialto, CA 92376
Redlands 10,478 06/97 95,942
- --------
837 Tri-City Center
Redlands, CA 92373
Whittier 12,197 01/00 94,500
- --------
13231 E. Whittier Blvd
Whittier, CA 90602
Rancho Cucamonga 10,097 05/98 79,239
- ----------------
9950 W. Foothill Blvd
Rancho Cucamonga, CA 91730
Corona
- ------
1210 West Sixth Street 10,000 10/04 60,000
Corona, CA 91720
Woodland Hills 9,400 12/03 165,480
- --------------
19804 Ventura Blvd
Woodland Hills, CA 91364
- ------------------------
In addition to the above stores, the Company has opened other stores in
the past which have been closed for various reasons. The effect of closing each
of the stores has generally been positive, as most of such stores were operating
at a loss prior to closure. Although there are expense charges associated with
the closing of store locations, the effect of such charges is offset by the
savings realized from closing stores which operate at a loss. In addition, since
fixtures from closed stores are typically used in new store locations, the cost
of opening new locations is minimized. The following stores were closed by the
Company on the dates indicated for the reasons indicated below:
14
<PAGE>
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Store Location Date Closed Reason for Closing
- -------------- ----------- ------------------
<S> <C> <C>
1. Spring Valley January 1992 Lease expired
2. Puente Hills January 1992 Unprofitable
3. Morena Valley January 1993 Marginal location
4. Mira Mesa October 1991 Closed pursuant to lease
provision which allowed
termination of lease if
Toys R Us opened a store
5. Point Loma August 1991 Unprofitable
6. Corona April 1993 Found better location
7. Rialto June 1991 Reopened for Christmas
Season, 1991; Closed
January 1992; reopened
September 1992; currently
looking to end lease or
sublease and close
8. Anaheim January 1994 Lease ending - Unprofitable
9. Ontario June 1995 Unprofitable
10.El Toro January 1996 Lease expired
11.Oceanside January 1996 Lease expired
12.Lakewood February 1996 Lease expired
</TABLE>
Of the stores that remain open as of March 31, 1996, management is
aggressively working through subleasing or landlord agreement to close the San
Dimas, CA location, which does not produce an acceptable return on assets.
Management is confident that they will be successful in closing the San Dimas
location with minimal cost. Previously, management was considering closing the
Rialto location as well. However, this location has been re-evaluated and
management believes this location can operate successfully as an off price
clearance center. In June 1995, the Company recorded an expense of approximately
$219,500 for the closure of the Ontario location. Such amount represented the
then net present value of the remaining payments under the lease obligation
which was to expire September 2002. However, in April 1996, management
negotiated a settlement with the landlord which will require the Company to pay
the landlord an aggregate $85,000 in six equal quarterly installments. As a
result, the Company recorded an adjustment to decrease the original $219,500
recorded in June 1995 to the settlement amount of $85,000 as of March 31, 1996.
15
<PAGE>
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware
of any threatened litigation that would have a material adverse effect on its
business. No director, officer or affiliate of the Company, or any associate of
any of them, is a party to or has a material interest in any proceeding adverse
to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 3, 1996, the Company held its annual meeting, at which time it
proposed to its stockholders (i) the election of the three persons nominated by
the Board of Directors as Directors, (ii) the authorization of an amendment to
the Company's Certificate of Incorporation to effect a change of the name of the
Company from Play Co. Toys to Play Co. Toys & Entertainment Corp., (iii) the
authorization of an amendment to the Company's Certificate of Incorporation to
authorize one share of Preferred Stock, par value $.01 per share, as the "Series
D Preferred Stock" and (iv) the authorization of an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock to 410,000,000 shares and to authorize 20,000,000 shares of
Preferred Stock, par value $.01 per share, as the "Series E Preferred Stock".
All proposals were adopted by the shareholders and an amendment to the Company's
Certificate of Incorporation filed with the State of Delaware. The certificate
of amendment amended the name of the Company, authorized a share of Series D
Preferred Stock, authorized 1,000,000 shares of the Series E Preferred Stock and
increased the authorized shares of Common Stock to 30,000,000. Additional shares
of the Series E Preferred Stock may be authorized from time to time as well as
additional shares of Common Stock issuable upon conversion of the Series E
Preferred Stock.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Warrants are currently quoted on the
Nasdaq SmallCap Stock Market. The following table sets forth representative high
and low closing bid quotes as reported by a market maker, during the periods
stated below. Bid quotations reflect prices between dealers, do not include
resale mark-ups, mark-downs or other fees or commissions, and do not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Common Stock(1) Public Warrants(1) Units(2)
Calendar Period Low High Low High Low High
- --------------- --- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
11/02/94 - 12/31/94 21 1/4 21 1/4
01/01/94 - 02/06/95 11 1/2 21 1/4
02/06/95 - 03/31/95 3 3/4 13 1/4 1 1/8 7 1/2
04/01/95 - 06/30/95 2 1/8 7 5/8 3/16 2 3/16
07/01/95 - 09/30/95 2 1/8 3 1/2 1/8 5/8
10/01/95 - 12/31/95 1 1/2 3 3/8 1/8 3/8
01/01/96 - 03/31/96 7/8 2 3/8 1/8 1/4
04/01/96 - 06/30/96 1 1/8 3 1/8 1/4
</TABLE>
- -------------------
(1) The Common Stock and Warrants started to trade separately on February 6,
1995.
(2) The Company's Units only traded from November 2, 1994 through February 6,
1995.
16
<PAGE>
<PAGE>
Each Warrant entitles the holders thereof to purchase one share of the
Company's Common Stock at an exercise price of $7.00 per share, respectively,
until February 6, 1997. The Warrants and the underlying shares of Common Stock
are in registered form, pursuant to the terms of a Warrant agreement between the
Company and Continental Stock Transfer & Trust Company, as warrant agent, so
that the holders of the Warrants will receive upon their exercise and payment
therefor, registered shares of Common Stock. The Company's registration
statement is not current, therefore, the Warrants are not currently exercisable.
As of March 31, 1996, there were 45 holders of record of the Company's
Common Stock, although the Company believes that there are approximately 900
additional beneficial owners of shares of Common Stock held in street name. As
of March 31, 1996, the number of shares of Common Stock outstanding of the
Company was 3,863,530.
Hanover Sterling & Co., Ltd. ("Hanover"), the underwriter of the
Company's public offering, was a dominant influence in the market for the
Company's securities until February 1995. In February 1995, the National
Association of Securities Dealers, Inc. (the "NASD") halted Hanover's market
making operations due to Hanover's inability to meet the NASD's net capital
requirements, which requires a broker/dealer to maintain certain levels of cash
and other liquid assets in order to meet its obligations. Hanover ceased all
operations immediately after losing its market making ability. It is believed by
the Company that the securities Hanover was making a market in were being
shorted by a group of other brokerage houses, which caused a decrease in
Hanover's capital which inevitably lead to its loss of market making activities.
The market for the Company's securities have been significantly affected and may
continue to be affected by the loss of Hanover's participation in the market.
The loss of Hanover's market making activities of the Company's securities has
decreased significantly the liquidity of an investment in such securities. Since
Hanover was the Underwriter of both Mister Jay Fashions International, Inc.
("Mister Jay") and American Toys, both companies have seen the same decrease in
the market for their securities as well as a decrease in the liquidity of an
investment in such securities. Upon Hanover ceasing operations, its clearing
firm, Adler Coleman, filed for bankruptcy protection and all client accounts of
Hanover were frozen while SIPC, the insurance agency for Adler Coleman, sorted
out all transactions. As of the date hereof, all trades transacted during the
last two weeks of Hanover's operations are still being reviewed and certain
accounts are still frozen.
17
<PAGE>
<PAGE>
PART II
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>
March 31,
-----------------------------------------------------
1993 1994 1995 1996
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficiency) $ 1,031,894 $ (102,132) $ 1,805,396 $ 46,589
Total assets 9,894,458 9,005,405 11,119,692 9,104,353
Total current liabilities 6,885,819 7,094,257 7,298,136 6,564,819
Long-term obligations 464,990 99,274 140,218 726,007
Redeemable preferred stock -- 929,380 242,275 87,680
Stockholders' equity 2,543,649 882,494 3,439,063 1,725,847
Common stock dividends -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
Year Ended
March 31,
-----------------------------------------------------
1993 1994 1995 1996
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Data (1):
Net sales $22,783,463 $21,756,847 $25,374,722 $21,230,853
Cost of sales 14,966,783 15,001,015 16,704,757 15,132,895
Operating expenses 7,812,822 8,489,222 9,292,632 9,007,938
Net income (loss) (92,978) (1,631,775) (875,788) (3,542,715)
Income (loss) per common
share (0.02) (0.60) (0.31) (0.92)
Average shares outstanding 5,055,200 2,898,967 3,033,851 3,863,530
</TABLE>
- ---------------------
Results of Operations
The Company's operations are substantially controlled by Mr. Ilan Arbel
and members of his family who have beneficial ownership of approximately 63% of
the common stock of American Toys, the Company's parent. American Toys currently
owns approximately 66% of the issued and outstanding shares of the Company's
Common Stock. In addition, Mr. Arbel and his family have beneficial ownership of
approximately 70% of the common stock of Mister Jay, the parent company of
American Toys. In addition, Mister Jay owned a "Special Warrant" which was
exercisable through March 28, 1996 to insure that Mr. Arbel, through Mister Jay,
maintained voting control of American Toys and, therefore, the Company. This
Special Warrant has expired.
18
<PAGE>
<PAGE>
For the year ended March 31, 1996 compared to the year ended March 31, 1995
Sales for the year ended March 31, 1996 decreased to $21,230,853 from
$25,374,722 for the year ended March 31, 1995; a decrease of $4,143,869 or
16.33%. The most significant individual component of this decrease, representing
approximately $3,416,400 is the decreased wholesale and retail sales of milk cap
game products. Combined wholesale and retail sales of milk cap game products
totaled approximately $4,064,000 for the year ended March 31, 1995 but only
approximately $647,600 for the year ended March 31, 1996 due to the passing fad
nature of the products. Additionally, net retail store sales decreased
approximately $1,968,500, or 9.11%, from approximately $21,610,000 for the year
ended March 31, 1995 to approximately $19,642,400 for the year ended March 31,
1996. The Company operated as many as twenty (20) retail locations during the
year ended March 31, 1996 but, due to the closure of one of its locations in
June 1995 and three (3) of its locations in January and February 1996, ended the
year with sixteen (16) operating retail locations. The Company operated eighteen
(18) retail locations throughout the year ended March 31, 1995. Wholesale sales
of non-milk cap game products, sold primarily to military bases, totaled
approximately $911,400 for the year ended March 31, 1996 representing an
increase of approximately $110,100, or 13.74% over the non-milk cap game
military base wholesale sales of approximately $801,300 for the year ended March
31, 1995.
Gross profit for the year ended March 31, 1996 decreased to 28.72% from
34,16% for the year ended March 31, 1995. The decrease was a result of the
decreased wholesale, as well as retail sales of milk cap game products and
accessories which were sold at substantially higher gross margins. Sales of milk
cap game products during fiscal 1995 resulted in a gross profit margin of 42.18%
on the sales volume generated, which represented 16.02% of the total net sales
for the year ended March 31, 1995. In contrast, sales of milk cap game products
during fiscal 1996 resulted in a gross profit margin of 13.35% on the sales
volume generated, which represented 3.05% of the total net sales for the year
ended March 31, 1996. No product was sold during the year ended March 31, 1996
which was able to generate the volume of sales and level of gross profit
required to mitigate the effects of the decline in the milk cap game business.
Operating expenses, including depreciation and amortization, as well as
common stock issued for compensation in 1995, decreased to $9,007,938 (or 42.43%
of net sales) from $9,292,632 (or 36.61% of sales). The decrease of $284,694 or
3.06%, is primarily attributable to there being no charge to operations for
common stock issued for compensation for the year ended March 31, 1996 as
compared to the $249,000 charged to operations for the year ended March 31,
1995. Further, operating expenses decreased by management's efforts to reduce
controllable variable expenses, such as payroll and related benefits, equipment
leasing and warehousing costs, particularly in the last quarter of the fiscal
year ended March 31, 1996, which were partially offset by the increased
operating costs relative to the opening of two additional retail locations
during the six months ended December 31, 1995. Management expects the effects of
these cost savings, along with the expected operating expense savings from the
closure of three retail locations in January and February 1996 to have a
positive effect on operations during the 1997 fiscal year. While operating
expenses for 1996 decreased $284,694 from the prior year in dollars,
19
<PAGE>
<PAGE>
operating expenses increased as a percentage of sales which is attributable to
the 16.33% decline in sales when compared to the relatively similar level of
operating expense in 1996 and 1995, which include certain relatively fixed
components such as rent and minimum payroll requirements. Such fixed costs are
not subject to adjustment or change relative to fluctuations in sales volumes.
During the three month period ended June 30, 1995, the Company recorded
additional rental charge of approximately $219,500 as the cost of closing a
retail location located in Ontario, California in June 1995. The charge
represented a discounted cash flow calculation based on the remaining payments
due on the lease which was due to expire September 2002. However, in April 1996,
management negotiated a settlement with the landlord which will require the
Company to pay the landlord an aggregate $85,000 in six equal quarterly
installments. As a result, the Company recorded an adjustment to decrease the
original $219,500 recorded in June 1995 to the settlement amount of $85,000 as
of March 31, 1996. The Ontario location had sales of $108,733 and $790,962 for
the year ended March 31, 1996 and 1995 and generated a loss from operations of
$112,668 for the year ended March 31, 1996 and income from operations of $20,987
for the year ended March 31, 1995 before allocation of overhead and the accrual
of the lease settlement cost discussed above. The net settlement amount of
$85,000 is included in costs associated with closure of retail stores for the
year ended March 31, 1996.
Interest and financing costs totaled $535,158 for the year ended March
31, 1996 as compared to $334,466 for the year ended March 31, 1996; an increase
of $136,391 or 40.78%. The increase for fiscal 1996 includes financing costs of
$52,725, which were incurred to arrange financing with lenders other than
Congress Financial Corporation, as well as the amortization of the costs
incurred to arrange the Loan and Security Agreement with Congress Financial
Corporation. No such costs were incurred during the year ended March 31, 1995.
The net interest expense of $380,485 for the year ended March 31, 1996 was
$46,019, or 13.76% higher than that incurred for fiscal 1995 due to higher
average outstanding borrowings during the year, increases in the prime rate
during the year and the maintenance of outstanding borrowings during January
1996 where the Company's prior borrowing arrangement with Imperial Bank required
a thirty (30) day clearing period where no balances were outstanding. Costs
incurred to obtain the new Loan and Security Agreement with Congress Financial
Corporation totaled $197,545, as discussed below. The Company also capitalized
an approximate $458,000 in loan financing costs relative to options to acquire
Company securities granted to EACC, as discussed below. Such costs were
capitalized by the Company and are being amortized to expense over the two year
term of the loan agreement.
In January 1996, the Company closed two of its retail locations, El
Toro and Oceanside, California and another one in Lakewood, California during
February 1996. The three (3) retail locations had combined sales of
approximately $2,959,000 and $4,003,200 for the fiscal years ended March 31,
1996 and 1995. These locations generated combined losses from operations of
$196,218 and $299,739, before allocation of corporate overhead, for the fiscal
years ended March 31, 1996 and 1995. Costs incurred in connection with the
closure of these locations were not significant. No such amounts were incurred
for the year ended March 31, 1995.
20
<PAGE>
<PAGE>
During each of the years ended March 31, 1996 and 1995, the Company
recorded net income tax provisions consisting only of the current portion of the
minimum income taxes required by the State of California. Changes in deferred
taxes were offset dollar for dollar by adjustments to the Company's valuation
allowance which has reduced its net deferred tax assets to zero as of March 31,
1996 and 1995 and resulted in a net zero dollar provision for deferred income
taxes for each of the years ended March 31, 1996 and 1995.
Management is evaluating a plan to focus more of its attention on the
educational toy market in its existing and future retail locations. Such a focus
is believed to be necessary to strengthen the Company's niche market in an
industry that is faced with fierce competition from larger mass retailers and
discount chains. In addition, Management believes the educational toy market to
be one that is less seasonal in nature from the promotional toy market in which
the Company is currently operating. Management is redesigning certain of its
current and future retail locations to include learning activity centers within
the stores as well as entertainment facilities including wide screen
televisions. Management expects to implement the combined educational and
promotional toy retail concept in at least one retail location, the currently
operating retail location in Orange, California, during the first or second
quarter of the fiscal year ending March 31, 1997. Management knows of no other
toy retailer currently utilizing the concept of combing educational and
promotional toys to the scale anticipated by the Company in any single retail
outlet.
Liquidity and Capital Resources
For the year ended March 31, 1996, the Company used cash of $1,176,172
for operations as compared to cash used for operations of $2,285,351 in the
prior year. The decreased use of cash in 1996 was the result of generating
$586,827 from accounts receivable and $1,673,284 from inventories in 1996 as
compared to using $622,100 and $1,342,756 to increase accounts receivable and
inventories during 1995. Cash used for investing activities totaled $322,523 for
the year ended March 31, 1996 as compared to $321,855 in the prior year. The
significant portion of cash used in investing activities was used to acquire
property an equipment in each year. For the year ended March 31, 1996, the
Company generated $1,332,420 in cash from financing activities as compared to
generating $2,738,629 in cash in the prior year. In fiscal 1996, the primary
sources of cash from financing resulted from net increases under borrowing
arrangements of $986,489 and advances from EACC of $528,070 which, subsequent to
March 31, 1996, was converted to 528,000 shares of Series E Preferred Stock,
both of which were offset by the redemption of shares of Series B Preferred
Stock in the amount of $163,157. The primary sources of cash from financing in
fiscal 1995 included net proceeds from the Company's initial public offering of
$3,021,613, increases in net borrowing under financing arrangements of $242,377,
both of which were offset by the redemption of shares of Series B Preferred
Stock in the amounts of $459,430.
At March 31, 1996, the Company had net working capital of $46,589. At
March 31, 1996, the Company has an inventory financing line of credit with
Congress Financial Corporation ("Congress") in connection with a Loan and
Security Agreement ("Loan Agreement") that was executed on February 1, 1996. Of
the initial proceeds drawn from the Loan Agreement in February 7, 1996,
approximately
21
<PAGE>
<PAGE>
$2,243,000 was used to repay the final loan balance outstanding to the Company's
former lender, Imperial Bank ("Imperial"). The new 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 Loan Agreement also requires
the Company to maintain, at all times, a net worth of $500,000. The Company
incurred a closing fee of $70,000 as well as legal fees of approximately
$123,000 in connection with obtaining the Loan Agreement. The Loan Agreement
requires the payment of a quarterly service fee of $8,750, is secured by
substantially all assets of the Company, is guaranteed by American Toys, Inc.,
and is further collaterized by a $2,000,000 letter of credit provided in
February 1996 by Europe American Capital Corp. ("EACC"), an affiliate of the
chairman of the Board. Interest on outstanding balances is charged at prime plus
1.5%. The Loan Agreement matures February 1, 1998, but can be extended for an
additional year at Congress' option. In connection with the issuance of the
letter of credit, the Company granted to EACC options (i) to purchase up to an
aggregate of 1,250,000 shares of the Company's Common Stock at a purchase price
of 25% of the closing bid price for the Common Stock on the last business day
prior to exercise, for a period of six months from the date of issuance and (ii)
to purchase up to an aggregate of 20,000,000 shares of the Company's newly
authorized Series E Preferred Stock which rank senior to the Series D Preferred
Stock. The Company's estimated value of the option described in (i) above is
insignificant. The Company estimated the value of the option described in (ii)
above to be $234,000 and recorded such amount as additional paid-in-capital and
loan financing costs included in other assets. Of this amount, $19,500 was
amortized through March 31, 1996 and included in interest expense.
During the year ended March 31, 1996, the Company recorded an
additional $224,000 of loan financing costs (other assets) and additional
paid-in capital. Such amount represented the Company's estimate of the value of
options granted to EACC in November 1995 to acquire 350,000 shares of the
Company'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. The options, which
expired unexercised on April 16, 1996, was granted to EACC who provided a
$2,000,000 letter of credit which secured increased borrowings from $3,500,000
to $5,500,000 under the Imperial Bank line of credit agreement. Of this amount,
$44,800 was amortized through March 31, 1996 and included in interest expense.
The Company is amortizing the total $458,000 value of the options
granted to EACC through the end of the term of the letter of credit provided
which currently expires in January 1998.
On January 30, 1996, pursuant to the requirements of the Loan
Agreement, the Board of Directors of American Toys approved the conversion of
$1,350,000 in notes payable to American Toys, plus accrued interest of $49,044,
an aggregate of $1,399,044, into one (1) share of newly authorized Series D
Preferred Stock with a $.01 par value. The Series D Preferred Stock provides for
cumulative dividends at 7% and allows the holder, American Toys, Inc., voting
rights to elect 2/3 of the Board of Directors.
On March 18, 1996, EACC loaned an additional $500,000 to the Company
which was subordinated to the Loan Agreement. In addition, EACC paid for
approximately $28,070 of the costs incurred to arrange the Loan Arrangement,
bringing the aggregate due to EACC to $528,070 as of March 31, 1996. Subsequent
to March 31, 1996, EACC elected to convert this amount into equity of the
Company, specifically into 528,000 shares of the newly authorized Series E
Preferred Stock.
22
<PAGE>
<PAGE>
On April 3, 1995 and March 4, 1996, the Company paid $138,299 and
$43,840 to redeem a portion of the 244,736 shares of Series B Preferred Stock
outstanding as of March 31, 1995. At March 31, 1996, the Company had a remaining
redemption liability of $87,680, which was paid during April 1996, fully
retiring the obligation.
The Company purchases approximately 95% of its products directly from
manufactures. Approximately 30% of the Company's inventory purchases are made
directly from five (5) manufacturers. The Company typically purchases products
from its supplies on credit arrangements provided by the manufacturers. The five
major manufacturers mentioned above generally provide credit terms of 180+ days
while other vendors offer credit terms of 30 to 120 days.
Due to the significant seasonality of the toy industry, approximately
45% to 49% of the Company's annual sales are generated during the months of
October through December of each year. As a result, sources of funds to repay
amounts due under inventory finance arrangements with financial institutions and
manufacturers are typically generated from sales during the peak selling season.
The Company has prepared cash flow forecasts for the fiscal year ending
March 31, 1997 which management believes, together with available financial
institution and manufacturer credit lines will be sufficient to meet its capital
requirements for the fiscal year ending March 31, 1997. However, the Company may
require additional capital to redesign current and future retail locations to
incorporate its plans to focus on the educational toy market as well as to meet
short-term cash flow needs that arise during the year. In that regard, Mr. Ilan
Arbel has represented his willingness and ability to provide additional working
capital to the Company should such be necessary, through September 1997.
New Accounting Standards
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long- Lived Assets and Long-Lived Assets to be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company is in the process of analyzing the impact of this
statement and does not believe that it will have a material impact on the
Company's financial position or results of operations. The Company anticipates
adopting the provisions of the statement for fiscal year 1997.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," established financial accounting and reporting
standards for stock-based employee compensation plans and certain other
transactions involving the issuance of stock. The Company is in the process of
analyzing the impact of this statement and anticipates adopting the provisions
of the statement for fiscal year 1997.
23
<PAGE>
<PAGE>
Trends Affecting Liquidity, Capital Resources and Operations
The Company's sales efforts are focused primarily on a defined
geographic segment, consisting of individuals in the southern California area.
The Company's future financial performance will depend upon continued demand for
toys and hobby items by individuals in southern California, general economic
conditions within such geographic market area, the Company's ability to choose
locations for new stores, the Company's ability to purchase product at favorable
prices on favorable terms as well as the effects of increased competition and
changes in consumer preferences.
The toy and hobby retail industry faces a number of potentially adverse
business conditions including price and gross margin pressures and market
consolidation and domination. The domination of the toy industry by Toys R Us
has resulted in increased price competition among various toy retailers and
declining gross margins for such retailers. Moreover, the domination of Toys R
Us has resulted in liquidation or bankruptcy of many toy retailers through the
United States, including the southern California market. There can be no
assurance that the Company's business strategy will enable it to compete
effectively in the toy industry.
Management currently knows of no trends reasonably expected to have a
material impact upon the Company's operations or liquidity in the foreseeable
future. The Company's operating history has been characterized by narrow profit
margins and, accordingly, the Company's earnings will depend significantly on
its ability to purchase its product on favorable terms, to obtain store
locations on favorable terms, retail a large volume and variety of products
efficiently and to provide quality support services. The Company's prices are,
in part, based on market surveys of its competitors' prices, primarily those of
Toys R Us. As a result, aggressive pricing policies, such as those used by Toys
R Us, have resulted in the Company reducing its retail prices on many items,
thereby reducing the available profit margin. Moreover, increases in expenses or
other charges to income may have a material adverse effect on the Company's
results of operations. There can be no assurance that the Company will be able
to generate sufficient revenues or have sufficient controls over expenses and
other charges to increase profitability.
The Company's common stock is currently traded on the Nasdaq SmallCap
Stock Market which requires the Company to maintain total assets of at least
$2,000,000, stockholders' equity of $1,000,000, and a minimum bid price of
$1.00. If the Company's results of operations from future periods cause the
Company to be in a position where it is unable to satisfy these criteria, its
securities will be subject to being delisted and trading, if any, would
thereafter be conducted in the over-the-counter market and quoted on the OTC
Bulletin Board. Consequently, an investor may find it more difficult to dispose
of or obtain accurate quotations as to the price of the Company's securities.
Such an event of delisting may also have a negative impact on the Company's
ability to raise additional equity or debt financing.
Immediately after the Christmas season, the Company begins purchasing
inventory which has been depleted as a result. Thus, although significant
reductions in accounts payable are made in January, accounts payable and
inventory levels are expected to immediately increase as a result of new
inventory purchases.
24
<PAGE>
<PAGE>
As of March 31, 1996, the Company has net operating loss ("NOL")
carryforwards of approximately $5,000,000 and $3,000,000 for federal and
California income tax purposes. The federal NOLS are available to offset future
taxable income through March 31, 2011 while the California NOLS are available
through March 31, 2001. Such NOLS could have a positive effect on the Company's
cash flow in future profitable years resulting from reduced income tax
liabilities. At March 31, 1996, a 100% valuation allowance has been provided on
the net deferred income tax assets since the Company can not determine that such
are "more likely than not" to be realized.
Inflation and Seasonality
During the past few years, inflation in the United States has been
relatively stable. In management's opinion, this is expected to continue for the
foreseeable future. However, should the American economy again experience double
digit inflation rates, as was the case in the past, the impact on prices could
adversely affect the Company's operations.
The Company's business is highly seasonal with a large portion of its
revenues and profits being derived during the months of November and December.
Accordingly, the Company is required to obtain substantial short-term borrowing
during the first three quarters of the calendar year in order to purchase
inventory and to finance capital and operational expenditures. The Company's
past history of negative cash flows during the fiscal year are a result of its
seasonal business nature. The Company's cash flows are negative for most months
prior to the Christmas season. Thus, the Company's negative cash flow for all
months except November and December are being serviced via the Company's banking
and special credit terms with vendors.
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
25
<PAGE>
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
The directors of the Company are elected annually by the shareholders
and the officers are appointed annually by the Board of Directors. Vacancies on
the Board of Directors may be filled by the remaining directors. Each director
and officer will hold office until the next annual meeting of shareholders, or
until his successor is elected and qualified. The executive officers and
directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Ilan Arbel 42 Chairman of the Board of Directors
Richard Brady 44 Chief Executive Officer and President
Angela Burnett 44 Secretary and Chief Financial Officer
Alan Berkun 36 Director
Sheikhar Boodram 34 Director
</TABLE>
All Directors hold office until the next annual meeting of stockholders
or until their successors are duly elected and qualified. Officers are elected
annually by, and serve at the discretion of the Board of Directors. There are no
family relationships between or among any Officers or Directors of the Company.
The Company granted to Hanover Sterling & Company, Ltd., the Underwriter of the
Company's initial public offering, the right to nominate one individual for
election to the Company's Board of Directors. Since Hanover ceased operations in
February 1995, this right is no longer outstanding.
Ilan Arbel has been the Chairman of the Board of Directors of the
Company since June 1994 and a Director of the Company since May 1993. Mr. Arbel
has been the President, Chief Executive Officer and a Director of American Toys,
Inc. since its inception in February 1993. In July 1993, Mr. Arbel resigned as
President of American Toys upon the election of Irwin Lampert as his
replacement. Upon Mr. Lampert's resignation on March 7, 1995, Mr. Arbel was
re-elected President of American Toys. Mr. Arbel has been President, Chief
Executive Officer, a Director and an affiliate of Mister Jay Fashions
International, Inc. since 1991. Since August 1995, Mr. Arbel has been a Director
of Multimedia Concepts International, Inc. From 1989 to present, Mr. Arbel has
been the sole Officer and Director of TransAtlantic Commerce 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, with B.A. degrees in
Economics, Business and Finance.
26
<PAGE>
<PAGE>
Richard Brady is a co-founder of the Company and has acted as its
Executive Vice-President, Secretary and a Director since its inception in 1974.
In June 1994, Mr. Brady became assistant Secretary upon the election of Angela
Burnett as Secretary. In December 1995, Mr. Brady was appointed Chief Executive
Officer and President to the Company.
Angela Burnett has been the Treasurer of the Company since 1992 and the
Secretary of the Company since June 1994. In December 1995, Ms. Burnett was
appointed Chief Financial Officer and Secretary. Ms. Burnett has been employed
at the Company since 1985, where she was initially employed as the data entry
employee in charge of inventory control, becoming Assistant Controller of the
Company in 1988.
Sheikhar Boodram was appointed as a Director of the Company on February
2, 1996. Mr. Boodram has been a Director of American Toys, Inc. since May 1993.
From September 1992 to present, Mr. Boodram has been employed as Vice-President
and a Director of Mister Jay Fashions International, Inc. From October 1991 to
September 1992, Mr. Boodram was employed as a designer with Mister Jay Fashions
International, Inc. Mr. Boodram has been the President and Secretary of
Multimedia Concepts International, Inc. since June 12, 1995. Mr. Boodram is the
sole Officer and Director of American Eagle Industries Corp. and Match II, Inc.
From 1979 until October 1991, Mr. Boodram was the production manager for Lady
Helene Sophisticates, Ltd., a manufacturer of ladies garments which ceased
operations in 1991.
Alan Berkun has been a Director of the Company since July 1993. Mr.
Berkun has also been a Director of American Toys since July 1993. Mr. Berkun has
been a Director of Multimedia Concepts International, Inc., since June 1995. For
more than the past five years, Mr. Berkun has been employed by Russo Securities
as its general counsel. Mr. Berkun was licensed as an NASD Series 7 Registered
Representative with Russo Securities from October 1991 through November 1991 and
June 1989 through October 1989. Mr. Berkun's Series 7 license lapsed in December
1993, however, subsequently, Mr. Berkun received a waiver from the NASD and
renewal of his Series 7 status. Presently, Mr. Berkun is the sole Officer,
Director and stockholder of Emme Corp., d/b/a Marlowe & Company, a registered
NASD broker/dealer. Mr. Berkun is an attorney licensed in the State of New York.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors and persons who beneficially own more
than ten percent of a registered class of the Company's equity securities to
file reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission ("SEC"). Officers, directors and greater than
ten percent beneficial owners also are required by rules promulgated by the SEC
to furnish the Company with copies of all Section 16(a) forms they file. Based
solely upon requests for information of the Company's officers, directors and
greater than 10% shareholders, during fiscal 1995, the Company has been informed
that all officers, directors or greater than 10% shareholders have stated that
they have filed such reports as is required pursuant to Section 16(a) during the
1995 fiscal year. The Company has no basis to believe that any required filing
by any of the above indicated individuals has not been made.
27
<PAGE>
<PAGE>
Each Director is elected for a period of one-year at an annual meeting
of the Company's shareholders and will serve until his successors are duly
elected. The Company's officers serve at the discretion of the Board of
Directors.
As permitted under the Delaware 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 for breaches of their
fiduciary duty as directors. As a result of the inclusion of such provision,
stockholders may be unable to recover damages against directors for actions
taken by them which constitute negligence or gross negligence or that are in
violation of their fiduciary duties. The inclusion of this provision in the
Company's Certificate of Incorporation may reduce the likelihood of derivative
litigation against directors and other types of shareholder litigation.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
to, earned by, paid by the Company during the years ended March 31, 1996, 1995
and 1994 to each of the named executive officers of the Company.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
---------------------
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Name and Principal Other Annual
Position Year Salary($) Bonus($)(1) Compensation($)
- ------------------ ---- --------- ----------- ---------------
Richard Brady 1996 117,230 -- 7,979(2)
Chief Executive Officer, 1995 120,000 -- 7,829(2)
President and Director 1994 114,450 -- 7,229(2)
Thomas Davidson 1996(3) 79,203 -- 5,793(4)
President and Director 1995 120,000 -- 8,690(4)
1994 120,000 -- 8,090(4)
</TABLE>
- -----------------------
(1) No bonuses were paid during the periods herein stated.
(2) Includes an automobile allowance of $6,600 for 1996, 1995 and 1994,
respectively, and the payment of life insurance premiums of $1,379, $1,888,
and $629, for 1996, 1995 and 1994, respectively.
(3) Mr. Davidson resigned as both the President and as a Director effective
November 28, 1995.
(4) Includes automobile allowance of $4,800, $7,200 and $6,600 for 1996, 1995
and 1994, respectively, and the payment of life insurance premiums of $993,
$1,489 and $2,090 for 1996, 1995 and 1994, respectively.
28
<PAGE>
<PAGE>
Employment Agreements
In May 1993 the Company entered into three year employment agreement with
Richard Brady, the Chief Executive Officer and President of the Company. The
employment agreement provides for an annual salary of $120,000. In addition, the
employment agreement provides for an automobile allowance and an annual bonus of
2% of the earnings of the Company before depreciation, interest and taxes
("EBDIT"), provided the Company earns a minimum EBDIT of $750,000 for the fiscal
year ended March 31, 1994 and $900,000 for the fiscal year ended March 31, 1995.
The Company also pays for $500,000 of life insurance for Mr. Brady. No bonuses
were earned for either of the years ended March 31, 1996, 1995 or 1994.
The Company has no plans to issue additional securities to its management,
promoters or their affiliates or associates other than through the Company's
stock option plan.
1994 Stock Option Plan
During 1994, the Company adopted the Company's 1994 Stock Option Plan (the
"Plan"). The Board believes that the Plan is desirable to attract and retain
executives and other key employees of outstanding ability. Under the Plan,
options to purchase an aggregate of not more than 150,000 shares of Common Stock
may be granted from time to time to key employees, officers, directors, advisors
and independent consultants to the Company and its subsidiaries. As of March 31,
1995, 10,000 options have been granted to Angela Burnett, which options are
exercisable at $2.10 per share. No other options have been granted to any other
party.
The Board of Directors is charged with administration of the Plan, the Board
is generally empowered to interpret the Plan, prescribe rules and regulations
relating thereto, determine the terms of the option agreements, amend them with
the consent of the optionee, determine the employees to whom options are to be
granted, and determine the number of shares subject to each option and the
exercise price thereof. The per share exercise price for incentive stock options
("ISOs") will not be less than 100% of the fair market value of a share of the
Common Stock on the date the option is granted (110% of fair market value on the
date of grant of an ISO if the optionee owns more than 10% of the Common Stock
of the Company).
Options will be exercisable for a term determined by the Board which will
not be less than one year. Options may be exercised only while the original
grantee has a relationship with the Company or a subsidiary of the Company which
confers eligibility to be granted options or up to ninety (90) days after
termination at the sole discretion of the Board. In the event of termination due
to retirement, the Optionee, with the consent of the Board, shall have the right
to exercise his option at any time during the thirty-six (36) month period after
such retirement. Options may be exercised up to thirty-six (36) months after
death or total and permanent disability. In the event of certain basic changes
in the Company, including a change in control of the Company (as defined in the
Plan) in the discretion of the Board, each option may become fully and
immediately exercisable. ISOs are not transferable other than
29
<PAGE>
<PAGE>
by will or the laws of descent and distribution. Options may be exercised during
the holder's lifetime only by the holder, his or her guardian or legal
representative.
Options granted pursuant to the Plan may be designated as ISOs, with the
attendant tax benefits provided under Section 421 and 422A of the Internal
Revenue Code of 1986. Accordingly, the Plan provides that the aggregate fair
market value (determined at the time an ISO is granted) of the Common Stock
subject to ISOs exercisable for the first time by an employee during any
calendar year (under all plans of the Company and its subsidiaries) may not
exceed $100,000. The Board may modify, suspend or terminate the Plan; provided,
however, that certain material modifications affecting the Plan must be approved
by the shareholders, and any change in the Plan that may adversely affect an
optionee's rights under an option previously granted under the Plan requires the
consent of the optionee.
1994 401(k) Employee Stock Option Plan ("ESOP")
In May 1994, the Company adopted corporate resolutions approving a 401(k)
Employee Stock Ownership Plan (the "Plan") which Plan covers substantially all
employees of the Company. The Plan was filed on July 14, 1995 with the Internal
Revenue Service, which Plan includes provisions for both an Employee Stock
Ownership Plan ("ESOP") and a 401(k) Plan. The ESOP will allow only
contributions by the Company, which can be made annually at the discretion of
the Company's Board of Directors. The ESOP has been designed to invest primarily
in the Company's stock. The 401(k) portion of the Plan will be contributed to by
the employees of the Company through payroll deductions. The Company does not
intend to match contributions to the 401(k). Contributions to the ESOP may
result in an expense, resulting in a reduction in earnings, and may dilute the
ownership interest of persons who currently own securities of the Company. On
January 26, 1995, Messrs. Brady and Davidson and American Toys contributed an
aggregate of 40,000 shares of the Company's Common Stock to the Plan.
30
<PAGE>
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information at June 27, 1996 based
upon information obtained by the persons named below, with respect to the
beneficial ownership of common shares by (i) each person known by the Company to
be the owner of 5% or more of the outstanding common shares; (ii) by each
officer and director; (iii) and by all officers and directors as a group.
<TABLE>
<CAPTION>
Number of Percentage
Name Shares Owned
- ---- --------- ----------
<S> <C> <C>
American Toys, Inc.(1) 2,548,930 66.0%
448 West 16th Street
New York, New York
Ilan Arbel(1) 2,548,930 66.0%
c/o American Toys, Inc.
448 West 16th Street
New York, New York
Richard Brady 125,662 3.3%
c/o Play Co. Toys
550 Rancheros Drive
San Marcos, CA 92069
Alan Berkun 50,000 1.3%
83 Arnold Ct.
East Rockaway, New York
Angela Burnett(2) 10,000 .3%
c/o Play Co. Toys
550 Rancheros Drive
San Marcos, CA 92069
Sheikhar Boodram -- --
c/o Play Co. Toys
550 Rancheros Drive
San Marcos, CA 92069
Officers and Directors
as a Group (5 persons)(1)-(2) 2,734,592 70.9%
--------- ----
</TABLE>
- ----------------------------
31
<PAGE>
<PAGE>
(notes continued from the previous page)
(1) Ilan Arbel is the Chief Executive Officer and a Director of American Toys
and may be deemed an indirect beneficial owner of a majority of the issued
and outstanding common stock of American Toys (through his family's
ownership of Mister Jay Fashions International, Inc.), notwithstanding that
Mr. Arbel disclaims any beneficial ownership of such shares which are owned
or controlled by his family. Accordingly, Mr. Arbel will be able to
exercise control over the shares of Common Stock owned by American Toys.
(2) Includes an option to purchase 10,000 shares of Common Stock at a price of
$2.10 per share granted in June 1994, which option has vested and is
exercisable.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1994, the Company applied to the California Corporation
Department to change its domicile from California, where it was incorporated in
1973, to Delaware, through a merger with a newly formed Delaware corporation
(the "Delaware Reorganization"). Each share of outstanding Common Stock was
exchanged for 50 shares of common stock of the Company (Delaware) in connection
with the Delaware Reorganization.
In June 1994, Irwin Lampert and Alan Berkun each acquired 50,000 shares
of the Common Stock for total consideration of $500 each. For financial
statement purposes, these shares were valued at 50% of the November 1994 initial
public offering price, or $250,000, as these are unregistered shares. The
difference between the valuation and cash received, $249,000, has been charged
to operations for the year ended March 31, 1995. Also in June 1994, Lampert &
Lampert were issued 50,000 shares of the Common Stock.
On November 9, 1994, the Company redeemed an aggregate of 224,708
shares of Series B preferred stock owned by Messrs. Davidson and Brady
aggregating $224,708, from the proceeds of the Company's initial public
offering.
As of January 10, 1995, the Series C Preferred Stock was converted into
428,580 shares of the Common Stock. During January 1995, effective February 1,
1995, the Donald Welker Trust gave notice to the Company to put 122,368 shares
of its Series B Preferred Stock to the Company as well as accrued dividends
thereon, aggregating $137,000. On April 3, 1995, the Company redeemed the
122,368 shares of Series B preferred stock at the redemption price of $122,368
and paid dividends on the Series B stock aggregating $15,931.
On October 18, 1995, prior to the Congress Financing, the Company
entered into the LOC Agreement with EACC, pursuant to which EACC agreed to
provide to Imperial Bank a letter of credit terminating April 16, 1996, in the
amount of $2,000,000 to Imperial Bank. Upon the consummation of the Congress
Financing the Imperial Bank line of credit was repaid and terminated. See
"Recent Developments."
In February 1996, the Welker Trust gave notice to the Company to put
the remaining 122,368 shares of its Series B Preferred Stock to the Company as
well as accrued dividends thereon, aggregating $9,152.88. Pursuant to an oral
agreement between the Company and the Welker Trust, the Company
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<PAGE>
<PAGE>
shall redeem 122,368 shares plus accrued interest thereon, pursuant to a payment
schedule. The Company shall pay $43,840.30 to the Welker Trust on each of March
1, 1996, April 1, 1996 and May 1, 1996.
On January 30, 1996, pursuant to the requirements of the Loan Agreement
with Congress, American Toys, the majority stockholder of the Company, converted
all $1,400,000 of debt owed by the Company into equity. In exchange for the
debt, American Toys received from the Company one share of preferred stock, with
the right to vote elect 2/3 of the Company's Board of Directors, subject
stockholder approval, which approval has been obtained. The conversion of debt
into equity increases the Company's stockholders' equity and reduces total
liabilities, thereby reducing the Company's debt to equity ratio.
In February 1996, pursuant to the terms of the Congress Financing, EACC
delivered to Congress a $2,000,000 letter of credit. EACC is an affiliate of
Ilan Arbel, the Company's Chairman of the Board. The Congress Financing is also
guaranteed by American Toys, the majority stockholder of the Company. In
connection with the issuance of the L/C the Company granted to EACC options,
subject to stockholder approval, (i) to purchase up to an aggregate of 1,250,000
shares of Common Stock of a purchase price of 25% of the closing bid price for
the Common Stock on the last business day prior to exercise, for a period of six
months from issuance and (ii) to purchase up to an aggregate of 20,000,000
shares of the Company's preferred stock, designated as the "Series E Preferred
Stock". No options have been exercised pursuant to items (i) or (ii). The
Company's estimated value of the option described in (i) above is insignificant.
The Company estimated the value of the option described in (ii) above to be
$234,000 and recorded such amount as additional paid-in-capital.
On March 18, 1996, EACC loaned an additional $500,000 to the Company
which was subordinated to the Congress Financing. In addition, EACC paid for
approximately $28,000 of the costs incurred to arrange the Congress Financing,
bringing the aggregate due to EACC to $528,000 as of March 31, 1996. Subsequent
to March 31, 1996, the $528,070 was converted into 528,000 shares of Series E
Preferred Stock. These shares of Series E Preferred Stock will be designated
Class I Series E Preferred Stock.
On June 30, 1996, in return for the issuance of 334,000 shares of
Series E Preferred Stock, EACC provided the Company with $334,000. These shares
of Series E Preferred Stock will be designated Class I Series E Preferred Stock.
33
<PAGE>
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements of the Company are included as Part II,
Item 8:
Index to Financial Statements F-1
Report of Independent Certified Public Accountants F-2
Balance Sheets F-3
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Summary of Accounting Policies F-9
Notes to Financial Statements F-12
(b) During the last quarter, the Company has not filed any reports on Form 8-K.
(c) All exhibits except those designated with an asterisk (*), which exhibits
are filed herewith, have previously been filed with the Commission in connection
with the Company's Registration Statement on Form SB-2 dated November 2, 1994
under file No. 33-81940-NY, and, pursuant to 17 C.F.R. ss.230.411, are
incorporated by reference herein.
<TABLE>
<S> <C>
1.1 - Form of Underwriting Agreement.
1.2 - Form of Selected Dealers Agreement.
3.1 - Certificate of Incorporation of the Company filed June 15, 1994.
3.2 - By-Laws of the Company.
3.3 - Specimen Common Stock Certificate.
3.4 - Letter waiving redemption right and Put Option on Series C Preferred Stock.
4.1 - Specimen Redeemable Warrant Certificate.
4.2 - Form of Warrant Agreement between the Company and Hanover Sterling &
Company, Ltd.
4.3 - Form of Redeemable Warrant Agreement between the Company and Continental
Stock Transfer & Trust Company.
4.4 - ESOP Plan.
5.0 - Opinion of Lampert & Lampert.
10.1 - Reserved.
10.2 - Reserved.
10.3 - Mergers and Acquisitions Agreement
10.4 - Consulting Agreement
</TABLE>
34
<PAGE>
<PAGE>
<TABLE>
<S> <C>
10.5 - Security Agreement from Play Co. to Amex Financial Services
10.6 - Promissory Note from Play Co. to Amex Financial Services
10.7 - Warrant Agreement from Play Co. to Amex Financial Services
10.8 - Guarantee from Michael Warren to Amex Financial Services
10.9 - Guarantee from Mister Jay to Amex Financial Services
10.10 - Guarantee from the Company to Amex Financial Services
10.11 - Stock Purchase Agreement between Play Co. and American Toys
10.12 - Stockholders' Agreement between Play Co. shareholders
10.13 - Put Agreement between Play Co. and Tom Davidson
10.14 - Put Agreement between Play Co. and Richard Brady
10.15 - Call Agreement between Play Co. and Tom Davidson
10.16 - Call Agreement between Play Co. and Richard Brady
10.17 - Non-Competition Agreement between Play Co. and Tom Davidson
10.18 - Non-Competition Agreement between Play Co. and Rich Brady
10.19 - Non-Competition Agreement between Play Co. and Don Welker
10.20 - Reserved
10.21 - Reserved
10.22 - Lease Agreement for Store-Escondido
10.23 - Lease Agreement for Store-Convoy
10.24 - Lease Agreement for Store-Oceanside
10.25 - Lease Agreement for Store-El Toro
10.26 - Lease Agreement for Store-Chula Vista
10.27 - Lease Agreement for Store-El Cajon
10.28 - Lease Agreement for Store-Ontario
10.29 - Lease Agreement for Store-Simi Valley
10.30 - Lease Agreement for Store-Encinitas
10.31 - Lease Agreement for Store-San Dimas
10.32 - Lease Agreement for Store-Anaheim
10.33 - Lease Agreement for Store-Rialto
10.34 - Lease Agreement for Store-Redlands
10.35 - Lease Agreement for Store-Rancho Cucamonga
10.36 - Lease Agreement for Store-Woodland Hills
10.37 - Lease Agreement for Warehouse-Executive Offices
10.38 - Lease Agreement for Store-Pasadena
10.39 - Lease Agreement for Store-Whittier
10.40 - Employment Agreement of Thomas Davidson
10.41 - Employment Agreement of Richard Brady
10.42 - The Company Incentive Stock Option Plan
10.43 - Agreement between the American Toys and Play Co.
terminating Put Option and redemption of Series C preferred
shares
10.44 - Lease Agreement for Store-Lakewood
10.45 - Lease Agreement for Store-Corona Plaza
10.46 - Note from the Company to American Toys
10.47 - Loan Agreement, Subordination Agreement, Security Agreement and Note for
Imperial Bank Loan dated August 24, 1993
10.47(a) - Line of credit with Imperial Bank dated March 31, 1995.
</TABLE>
35
<PAGE>
<PAGE>
<TABLE>
<S> <C>
10.48 - Agreement with Michael Warren
10.49 - Warren Compensation Agreement
10.50 - Reserved
10.51 - Extension of Warehouse Lease
10.52 - Exercise of Put Option
10.53 - Promissory Note for $250,000 from the Company to American Toys
10.54 - Waiver of Loan Covenants by Imperial Bank
10.54(a) - Waiver of Loan Covenants by Imperial Bank dated June 13, 1994 and March 31,
1995
10.55 - Credit from Europe American Capital Corp.
10.56 - Credit from Europe American Capital Corp.
10.57 - American Toys to toy trade.
10.58 - Agreement with Laiko International Co., Inc.
10.59 - Employment Agreement of Irwin Lampert
10.60 - Note from the Company to American Toys in the amount of $1,250,000 dated
February 28, 1994
10.61 - Note for the Company to American Toys in the amount of $200,000 dated May 10,
1994
10.62 - Note from the Company to American Toys in the amount of $150,000 dated
July 1, 1994
10.63 - Note for the Company to American Toys in the amount of $100,000 dated
August 9, 1994
10.64 - Note from Richard L. Brady to American Toys in the amount of $50,000 dated
April 1, 1994
10.65 - Note from Thomas M. Davidson to American Toys in the amount of $50,000 dated
April 1, 1994
10.66 - Direct delivery Purchase Agreement between the Company and Camp Pendleton
10.67 - Director delivery Purchase Agreement between the Company and MCRD, San
Diego.
10.68 - Waiver of the Company's right to call shares of Messrs. Brady and Davidson.
10.69 - Extension of line of credit with Imperial Bank dated December 31, 1994.
10.70 - Lease extension - El Toro Store
10.71 - Joint Venture Agreement for Asher Playco, LLC.
10.71(a) - Termination of Joint Venture Agreement for Asher Playco, LLC.
10.72 - Waiver dated June 29, 1995 from Imperial Bank
10.73 - Letter dated May 24, 1995 from TransAtlantic Commerce Corp. to the Company.
10.74 - Agreement with Congress Financial.
</TABLE>
36
<PAGE>
<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 15th day of July, 1996.
PLAY CO. TOYS & ENTERTAINMENT CORP.
By: \s\ Richard Brady
------------------------------
Richard Brady, Chief Executive
Officer and President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<S> <C> <C>
\s\ Ilan Arbel Chairman of 07/15/96
- ------------------------ Board of Directors Date
Ilan Arbel
\s\ Richard Brady Chief Executive Officer 07/15/96
- ------------------------ and President Date
Richard Brady
\s\ Sheikhar Boodram Director 07/15/96
- ------------------------ Date
Sheikhar Boodram
\s\ Angela Burnett Chief Financial Officer 07/15/96
- ------------------------ and Secretary Date
Angela Burnett
\s\ Alan Berkun Director 07/15/96
- ------------------------ Date
Alan Berkun
</TABLE>
37
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants............................................... F-2
Balance Sheets at March 31, 1996 and 1995........................................................ F-3
Statements of Operations for the years ended March 31, 1996 and 1995............................. F-5
Statements of Stockholders' Equity for the years ended March 31, 1996
and 1995...................................................................................... F-6
Statements of Cash Flows for the years ended March 31, 1996 and 1995............................. F-7
Summary of Accounting Policies................................................................... F-9
Notes to Financial Statements.................................................................... F-12
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Play Co. Toys & Entertainment Corp. (formerly Play Co. Toys)
San Marcos, California
We have audited the accompanying balance sheets of Play Co. Toys, see note 14,
(a subsidiary of American Toys, Inc.) as of March 31, 1996 and 1995, and the
related statements of operations, stockholders' equity, and cash flows for each
of the two years in the period ended March 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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 Play Co. Toys at March 31, 1996
and 1995, and the results of its operations and its cash flows for each of the
two years in the period ended March 31, 1996 in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
Costa Mesa, California
May 15, 1996
F-2
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------------
ASSETS (NOTES 3 AND 4)
CURRENT
<S> <C> <C>
Cash $ 83,650 $ 249,925
Accounts receivable (Note 1) 35,273 622,100
Merchandise inventories 6,259,084 7,932,368
Amounts due from stockholder (Note 11) - 17,788
Other current assets 233,401 281,351
- --------------------------------------------------------------------------------------------------------------------
Total current assets 6,611,408 9,103,532
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and
amortization (Note 2) 1,858,538 1,925,488
DEPOSITS AND OTHER ASSETS (NOTES 3 AND 4) 634,407 90,672
- --------------------------------------------------------------------------------------------------------------------
$9,104,353 $11,119,692
- --------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial statements.
</TABLE>
F-3
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
<S> <C> <C>
Borrowings under bank line of credit (Note 3) $ - $ 2,374,491
Borrowings under financing agreement (Note 4) 3,403,025 -
Accounts payable 2,878,183 3,259,000
Accrued expenses and other liabilities (Note 8) 283,611 272,600
Current portion of capital lease obligations (Note 5) - 42,045
Stockholders notes payable (Note 6) - 1,350,000
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,564,819 7,298,136
DUE TO AFFILIATE (NOTE 7) 528,070 -
DEFERRED RENT LIABILITY (NOTE 8) 197,937 140,218
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 7,290,826 7,438,354
- --------------------------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED STOCK (NOTE 12)
Series B preferred stock, $.01 par, 81,579 and
244,736 shares authorized and outstanding, full
liquidation value of $81,579 87,680 242,275
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 3, 4, 9, 10 AND 12)
- --------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (NOTES 12 AND 14)
Series D preferred stock, $.01 par, 1 share
authorized and outstanding, full liquidation
value of $1,400,000 (Note 6) 1,399,044 -
Common stock, $.01 par value, 10,000,000 shares
authorized; 3,863,530 shares outstanding 38,635 38,635
Additional paid-in capital 4,753,763 4,323,308
Accumulated deficit (4,465,595) (922,880)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,725,847 3,439,063
- --------------------------------------------------------------------------------------------------------------------
$9,104,353 $11,119,692
- --------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial statements.
</TABLE>
F-4
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES (NOTE 1) $21,230,853 $25,374,722
- --------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of sales 15,132,895 16,704,757
Operating expenses (Note 11) 8,600,677 8,693,482
Depreciation and amortization 407,261 350,150
Common stock issued for compensation - 249,000
Interest expense (Notes 3 and 4) 535,158 334,466
Costs associated with closure
of retail stores (Note 8) 129,577 -
- --------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 24,805,568 26,331,855
- --------------------------------------------------------------------------------------------------------------------
OTHER INCOME (NOTE 10) 32,000 81,345
- --------------------------------------------------------------------------------------------------------------------
NET LOSS $(3,542,715) $ (875,788)
- --------------------------------------------------------------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON SHARES $(3,570,260) $ (939,214)
- --------------------------------------------------------------------------------------------------------------------
NET LOSS PER COMMON SHARE $ (.92) $ (.31)
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND SHARE EQUIVALENTS OUTSTANDING 3,863,530 3,033,851
- --------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial statements.
</TABLE>
F-5
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
----------------------------- Paid-in
Shares Amount Capital
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, April 1, 1994 2,380,950 $23,810 $ 5,776
Issuance of common stock for services 150,000 1,500 373,500
Issuance of common stock, net of offering costs 784,950 7,849 2,887,764
Conversion of Series A preferred stock to common 119,050 1,190 223,280
Conversion of Series C preferred stock to common 428,580 4,286 895,714
Sale of warrants to underwriter - - 700
Redemption of preferred stock - - -
Payment of accrued dividends - - -
Accrued dividends on redeemable preferred stock - - (28,985)
Accretion of discount on redeemable preferred stock - - (34,441)
Net loss for the year - - -
- --------------------------------------------------------------------------------------------------------------------
BALANCE, March 31, 1995 3,863,530 38,635 4,323,308
- --------------------------------------------------------------------------------------------------------------------
Issuance of common stock options - - 458,000
Conversion of stockholders' notes payable and related
accrued interest to series D preferred stock - - -
Redemption of preferred stock - - -
Payment of accrued dividends - - -
Accrued dividends on redeemable preferred stock - - (9,153)
Accretion of discount on redeemable preferred stock - - (18,392)
Net loss for the year - - -
- --------------------------------------------------------------------------------------------------------------------
BALANCE, March 31, 1996 3,863,530 $38,635 $4,753,763
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Redeemable Preferred Stock Preferred Stock
Series A Series B Series C Series D
- ----------------------- -------------------- ---------------------- --------------------- Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Deficit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
250,000 $ 230,936 704,166 $ 698,444 900,000 $ 900,000 - $ - $ (47,092)
- - - - - - - - -
- - - - - - - - -
(250,000) (224,470) - - - - - - -
- - - - (900,000) (900,000) - - -
- - - - - - - - -
- - (459,430) (459,430) - - - - -
- (22,684) - (43,947) - - - - -
- 7,521 - 21,464 - - - - -
- 8,697 - 25,744 - - - - -
- - - - - - - - (875,788)
- --------------------------------------------------------------------------------------------------------------------
- - 244,736 242,275 - - - - (922,880)
- --------------------------------------------------------------------------------------------------------------------
- - - - - - - - -
- - - - - - 1 1,399,044 -
- - (163,157) (163,157) - - - - -
- - - (18,983) - - - - -
- - - 9,153 - - - - -
- - - 18,392 - - - - -
- - - - - - - - (3,542,715)
- --------------------------------------------------------------------------------------------------------------------
- $ - 81,579 $ 87,680 - $ - 1 $1,399,044 $(4,465,595)
- --------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial statements.
</TABLE>
F-6
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH (NOTE 13)
YEAR ENDED MARCH 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(3,542,715) $ (875,788)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 407,261 350,150
Amortization of the value of
common stock options 64,300 -
Common stock issued for compensation - 249,000
Deferred rent 57,719 83,431
Increase (decrease) from changes in:
Accounts receivable 586,827 (622,100)
Merchandise inventories 1,673,284 (1,342,756)
Other current assets (52,099) (58,086)
Deposits and other assets (49,986) 11,783
Accounts payable (380,817) (50,402)
Accrued expenses and other liabilities 60,054 (30,583)
- --------------------------------------------------------------------------------------------------------------------
Cash used for operating activities (1,176,172) (2,285,351)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (340,311) (364,813)
Amounts due from stockholder 17,788 42,958
- --------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (322,523) (321,855)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH (NOTE 13)
YEAR ENDED MARCH 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under bank lines of credit 1,092,361 3,703,140
Repayments under bank line of credit (3,466,852) (3,365,081)
Borrowings under financing agreement 5,637,392 -
Repayments under financing agreement (2,234,367) -
Payments on capital lease obligations (42,045) (95,682)
Proceeds from issuance of stockholder notes - 450,000
Repayment of stockholder notes - (450,000)
Due to affiliate 528,070 -
Redemption of preferred stock (163,157) (459,430)
Payment of dividends on preferred stock (18,982) (66,631)
Proceeds from issuance of common stock,
net of offering costs - 3,021,613
Proceeds from issuance of warrants to underwriter - 700
- --------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 1,332,420 2,738,629
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (166,275) 131,423
Cash, beginning of year 249,925 118,502
- --------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 83,650 $ 249,925
- --------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial statements.
</TABLE>
F-8
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
SUMMARY OF ACCOUNTING POLICIES
NATURE OF Play Co. Toys (the "Company"), as of June 1994 (Note 12),
BUSINESS AND is a Delaware corporation that owns and operates retail
REVENUE stores which sell toys, games, hobby and craft
RECOGNITION merchandise. Subsequent to March 31, 1996, the name of the
Company was changed to Play Co. Toys & Entertainment Corp.
(Note 14). The Company had sixteen retail stores located
within Southern California at March 31, 1996.
Additionally, during the year ended March 31, 1995, the
Company began wholesale distribution of its TKO product
line items throughout the United States. The TKO product
line consists of milk cap game pieces and accessories
(Note 1).
On May 7, 1993 the Company became a subsidiary of American
Toys, Inc. when American Toys, Inc. acquired 90% of the
then outstanding shares of common stock directly from the
original stockholders (Note 11). Accounting practices
prescribed by the Securities and Exchange Commission (SEC)
normally require "push-down" accounting to revalue the
Company's assets at the time of the acquisition. The
effects of such were immaterial.
In November 1994, the Company completed an initial public
offering of common stock and warrants (Note 12) and is
therefore subject to the accounting and reporting
requirements of the SEC.
MERCHANDISE Merchandise inventories are stated at the lower of cost
INVENTORIES (first-in, first-out method - "FIFO") or market.
PROPERTY AND Property and equipment is recorded at cost. Depreciation
EQUIPMENT 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.
F-9
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
SUMMARY OF ACCOUNTING POLICIES
STORE OPENING Costs incurred to open a new retail location such as
AND CLOSING COST advertising, training expenses and salaries of newly hired
employees are expensed as incurred and improvements to
leased facilities are capitalized. Upon closing a retail
location, the costs to relocate fixtures, terminate
employees and other related costs are expensed as
incurred. In addition, the unamortized balance of any
abandoned leasehold improvements are expensed. If
significant, the remaining payments due under lease
agreements are discounted to present value and recorded as
an expense and a liability to the extent such are not
offset by rental income generated through existing
sub-leases of the property.
INCOME TAXES The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes." Deferred income taxes
have been provided for the net effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the
amounts used for income tax purposes.
NET LOSS Net loss per share has been computed by dividing net loss,
PER SHARE after reduction for preferred stock dividends and the
accretion of the discount on redeemable preferred stock,
by the weighted average number of common shares and common
share equivalents outstanding during each period.
Outstanding stock options were considered to be
anti-dilutive. Dividends accrued and accretion recorded on
the Series A and Series B preferred stock aggregated
$27,545 and $63,426 for the years ended March 31, 1996 and
1995.
Additionally, share and per share amounts have been
retroactively adjusted for the effects of the
fifty-for-one stock split of the Company's common stock
resulting from re-incorporation in the State of Delaware
(Note 12). The net loss per share figures have also been
calculated assuming the 150,000 shares issued by the
Company in June 1994 (Note 12) were outstanding as of
April 1, 1994 in accordance with the SEC's provisions of
Staff Accounting Bulletin No. 83.
F-10
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
SUMMARY OF ACCOUNTING POLICIES
STATEMENTS For purpose of the statements of cash flows, the Company
OF CASH FLOWS considers all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents.
FAIR VALUE OF The carrying amount of the Company's financial
FINANCIAL instruments, consisting of accounts receivable, accounts
INSTRUMENTS payable, and borrowings, approximates their fair value.
USE OF The preparation of financial statements in conformity with
ESTIMATES 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.
RECLASSIFICATIONS Certain 1995 amounts have been reclassified to conform to
current year presentation. The reclassifications have no
effect upon the Company's financial position or results of
operations as previously reported.
NEW ACCOUNTING Statement of Financial Accounting Standards No. 121,
STANDARDS "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 is in the process of analyzing the impact of
this statement and does not believe that it will have a
material impact on the Company's financial position or
results of operations. The Company anticipates adopting
the provisions of the statement for fiscal year 1997.
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," established
financial accounting and reporting standards for
stock-based employee compensation plans and certain other
transactions involving the issuance of stock. The Company
is in the process of analyzing the impact of this
statement and anticipates adopting the provisions of the
statement for fiscal year 1997.
F-11
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
1. TKO PRODUCT During the year ended March 31, 1995, the Company began
LINE wholesale distribution of its TKO product line items.
Wholesale sales of TKO items for the year ended March 31,
1996 and 1995 approximated $570,000 and $2,800,000,
respectively. At March 31, 1996 and 1995, the Company had
accounts receivable from wholesale sales of TKO items
totalling $35,273 and $622,100, respectively.
The milk cap game (principal product of the TKO product
line) has lost its popularity since its introduction to
Southern California in 1994. Accordingly, milk cap game
pieces and accessories sold under the Company's TKO
trademark have reached the end of their product life
cycle. Management anticipates that future sales of the
Company's TKO product line items will be insignificant.
2. PROPERTY AND Property and equipment consisted of the following:
EQUIPMENT
<TABLE>
<CAPTION>
March 31, 1996 1995
--------------------------------------------------------------------------------------------
<S> <C> <C>
Furniture, fixtures
and equipment $ 2,918,621 $2,694,734
Leasehold improvements 542,785 636,247
Computerized inventory
management system 484,074 649,173
Signs 265,959 242,944
Vehicles 104,912 104,912
--------------------------------------------------------------------------------------------
4,316,351 4,328,010
Accumulated depreciation
and amortization (2,457,813) (2,402,522)
--------------------------------------------------------------------------------------------
$ 1,858,538 $ 1,925,488
--------------------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
3. BANK LINE OF Through February 7, 1996, the Company had a borrowing
CREDIT agreement with a bank which provided for a $5,500,000 line
of credit secured by substantially all assets of the
Company. The agreement, as amended, advanced funds with
interest at 1.5% above the bank's prime lending rate and
was guaranteed by American Toys, Inc. and Mister Jay
Fashions International, Inc., the parent company of
American Toys, Inc. Under the agreement, the bank also
provided 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, the bank was granted warrants to purchase
50,000 shares of common stock of the Company 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
March 31, 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, the Company granted an option to EACC to
purchase 350,000 shares of the Company'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.
The Company estimated the value of the option to be
$224,000 and recorded such amount as additional paid-in
capital. For the year ended March 31, 1996, amortization
of the value of the option aggregated $44,800 and is
included in interest expense. The unamortized value of the
option, aggregating $179,200 at March 31, 1996, is
included in other assets. The exercise period expired on
April 16, 1996 and no options had 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 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 in Note 4, on February 7, 1996, the Company
obtained alternative financing and the entire balance due
under the bank line of credit was repaid and the agreement
was terminated.
F-13
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
4. FINANCING On February 7, 1996, the Company borrowed, under an
AGREEMENT agreement with a financing company, approximately
$2,243,000, which proceeds were used to repay the then
outstanding borrowings under the bank line of credit
agreement (Note 3). The financing agreement provides for
maximum borrowings up to $7,000,000 based upon a
percentage of the cost value of eligible inventory, as
defined. Outstanding borrowings bear interest at 1.5%
above the prime rate, as defined. The agreement matures
February 1, 1998 and can be renewed for one additional
year at the lender's option.
The agreement includes a financial covenant requiring the
Company to maintain, at all times, adjusted net worth, as
defined, of $500,000. At March 31, 1996, the Company was
in compliance with this financial covenant.
The financing agreement is secured by substantially all
assets of the Company, is guaranteed by American Toys,
Inc. and collateralized by a $2,000,000 letter of credit
provided by EACC. In connection with the letter of credit
provided by EACC, the Company granted to EACC (i) an
option to purchase up to an aggregate of 1,250,000 shares
of the Company's common stock at a purchase price of 25
percent of the closing bid price for the Company'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 the Company's Series E preferred stock (Note 14)
at a purchase price of $1.00 per share during the period
from May 9, 1996 through January 30, 1998. The Company's
estimated value of the option described in (i) above is
insignificant to the accompanying financial statements.
The Company 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 year ended March 31,
1996, amortization of the value of the option aggregated
$19,500 and is included in interest expense. The
unamortized value of the option, aggregating $214,500 at
March 31, 1996, is included in other assets.
Subsequent to March 31, 1996, EACC exercised options to
acquire 528,000 shares of the Company's Series E preferred
stock. In connection therewith, the amount due to
affiliate, aggregating $528,070 at March 31, 1996, was
extinguished (Note 7).
As a requirement to obtaining financing under the above
agreement, American Toys, Inc. and the Company approved
the exchange of certain stockholders notes payable for
Series D preferred stock as discussed in Note 6.
F-14
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
4. FINANCE Additionally, the individual, beneficial, majority
AGREEMENT stockholder of American Toys, Inc. and Mister Jay Fashions
(CONTINUED) International, Inc. has represented his intent and ability
to provide additional working capital to the Company,
should such be necessary, through September 1997.
5. CAPITAL LEASE Obligations under capital lease arrangements are as
follows:
<TABLE>
<CAPTION>
March 31, 1996 1995
------------------------------------------------------------------------------------------------
<S> <C> <C>
Capitalized lease obligations,
discounted at rates varying from
10.35% to 13.04%, due in monthly
installments of approximately
$10,800, including interest,
expiring at various dates through
December 1995 $ - $ 42,045
------------------------------------------------------------------------------------------------
Total - 42,045
Current portion - (42,045)
------------------------------------------------------------------------------------------------
$ - -
------------------------------------------------------------------------------------------------
6. STOCKHOLDERS
NOTES PAYABLE
</TABLE>
<TABLE>
<CAPTION>
March 31, 1996 1995
------------------------------------------------------------------------------------------------
<S> <C> <C>
Unsecured notes payable to
corporate stockholder with
interest at 6%, due on demand.
Notes were subordinated to the
line of credit agreement with a
bank (Note 3) $ - $1,250,000
Unsecured notes payable to minority
individual stockholders with
interest at 8% payable annually
at January 31, due on demand.
Notes were subordinated to the
line of credit agreement with a
bank (Note 3) - 100,000
------------------------------------------------------------------------------------------------
$ - $1,350,000
------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
6. STOCKHOLDERS On January 30, 1996, pursuant to the requirements of the
NOTES PAYABLE financing agreement (Note 4), American Toys, Inc. and the
(CONTINUED) Company approved the exchange of the above stockholders
notes payable for one share of the Company's Series D
preferred stock (Note 14). Accordingly, all principal and
accrued interest then owing under the above notes payable,
aggregating $1,399,044, was extinguished.
Interest accrued during the year ended March 31, 1996 on
the notes payable to the corporate stockholder,
aggregating $17,788, was offset against the amount due
from the corporate stockholder. Additional interest
accrued during the year ended March 31, 1996 on the notes
payable to the corporate stockholder was extinguished in
the exchange for Series D preferred stock, as discussed in
the preceding paragraph.
Interest accrued as of March 31, 1995 on the notes payable
to the corporate stockholder totaled $93,825 and was
offset against the amount due from the corporate
stockholder at March 31, 1995 (Note 11).
7. DUE TO During March 1996, EACC loaned $500,000 to the Company and
AFFILIATE incurred costs related to the financing agreement (Note 4)
totalling $28,070. Subsequent to March 31, 1996, EACC
exercised options to acquire 528,000 shares of the
Company's Series E preferred stock (Notes 4 and 14) and
the amount due to affiliate, aggregating $528,070 at March
31, 1996, was extinguished. This transaction resulted in
an increase in the Company's stockholders' equity of
$528,000 subsequent to March 31, 1996.
F-16
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
8. COSTS During the year ended March 31, 1996, the Company closed
ASSOCIATED four of its retail stores which were not meeting the
WITH CLOSURE objectives of the Company. The costs associated with the
OF RETAIL closure of these stores, which included the write-off of
STORES leasehold improvements, were accrued as of March 31, 1996.
During the year ended March 31, 1996, those stores
generated sales of approximately $3,069,000 and operating
losses of approximately $309,000 before allocation of
certain corporate charges, interest and income taxes.
As a result of the Company closing one of its retail
locations in June 1995, the Company recorded an expense of
approximately $219,500 in the quarter ended June 30, 1995.
Such expense represented the then discounted value of the
remaining lease payments under the lease obligation which
was to expire September 2002.
During May 1996, the Company and the above mentioned
lessor reached an agreement whereby the existing lease
agreement was terminated and the Company's remaining lease
obligation at March 31, 1996 approximated $85,000. Six
quarterly installments of $14,167 are due through August
1, 1997. Installments due during the year ended March 31,
1997 aggregate $56,668 and such amount has been provided
for in accrued expenses and other liabilities in the
accompanying March 31, 1996 balance sheet. Installments
due subsequent to March 31, 1997 aggregate $28,332 and
such amount is included in deferred rent liability in the
accompanying March 31, 1996 balance sheet.
F-17
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
9. INCOME TAXES Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax
effects of significant items comprising the Company's net
deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
March 31, 1996 1995
----------------------------------------------------------------------------------------------
<S> <C> <C>
Inventories $ (57,883) $ 109,848
AMT tax credits (23,260) (23,260)
Accrued expenses (17,816) (25,678)
----------------------------------------------------------------------------------------------
Current portion of net deferred income
tax (assets) liabilities (98,959) 60,910
----------------------------------------------------------------------------------------------
Depreciation and amortization 246,185 284,135
Net operating loss carryforwards (1,958,123) (793,940)
Common stock issued for compensation - (99,944)
Deferred rent liability (79,447) (56,281)
Other items - (9,626)
----------------------------------------------------------------------------------------------
Long-term portion of net deferred income
tax (assets) liabilities (1,791,385) (675,656)
----------------------------------------------------------------------------------------------
Total net deferred income tax (assets)
liabilities (1,890,344) (614,746)
----------------------------------------------------------------------------------------------
Valuation allowance 1,890,344 614,746
----------------------------------------------------------------------------------------------
Net deferred income taxes $ - $ -
----------------------------------------------------------------------------------------------
</TABLE>
At March 31, 1996, 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-18
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
9. INCOME TAXES The reconciliation of income taxes computed at the federal
(CONTINUED) statutory tax rate to income taxes at the effective income
tax rate in the statements of operations is as follows:
<TABLE>
<CAPTION>
Year ended March 31, 1996 1995
----------------------------------------------------------------------------------------------
<S> <C> <C>
Federal statutory income tax (benefit) rate (34.0)% (34.0)%
State income taxes, net of federal benefit 0.1 0.1
Non deductible expenses 2.0 3.7
Net operating loss carryforwards with
no current benefit 31.9 30.2
----------------------------------------------------------------------------------------------
Effective income tax rate - % -%
----------------------------------------------------------------------------------------------
</TABLE>
At March 31, 1996, the Company has net operating loss
(NOL) carryforwards of approximately $5 million and $3
million for federal and state purposes, respectively. The
federal NOLs are available to offset future taxable income
through March 31, 2011 while the state NOLs are available
through March 31, 2001.
A portion of the NOLs described above are subject to
provisions of the Tax Reform Act of 1986 which limits use
of net operating loss carryforwards when changes of
ownership of more than 50% occur during a three year
testing period. During the year ended March 31, 1994, the
Company's ownership changed by more than 50% as a result
of the common and preferred stock transaction described in
Note 12. As a result, annual utilization of the available
federal and state NOLs is limited to approximately
$118,000.
F-19
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
10. COMMITMENTS 1994 STOCK OPTION PLAN
AND
CONTINGENCIES In June 1994, the Company adopted the 1994 Stock Option
Plan ("the Plan") which provides for options to purchase
an aggregate of not more than 150,000 shares of common
stock as may be granted from time to time by the Company'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 the Company's
Secretary/Treasurer. As of March 31, 1996, no options to
purchase common stock had been exercised.
401(K) EMPLOYEE STOCK OWNERSHIP PLAN
In August 1994, the Company adopted a 401(k) Employee
Stock Ownership Plan ("the Plan") which covers
substantially all employees of the Company. The Plan
includes provisions for both an Employee Stock Ownership
Plan ("ESOP") and a 401(k) Plan.
The ESOP allows only contributions by the Company which
can be made annually at the discretion of the Company's
Board of Directors. The ESOP is designed to invest
primarily in the Company's stock. As of March 31, 1996,
there had been no transactions with regards to the ESOP.
The 401(k) portion of the Plan is contributed to by the
employees of the Company through payroll deductions. The
Company makes no matching contributions to the 401(k).
F-20
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
10. COMMITMENTS OPERATING LEASES
AND
CONTINGENCIES The Company leases its retail store properties under
(CONTINUED) noncancelable 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 years ended March 31, 1996 and 1995, the
Company incurred rental expense under all operating leases
of $2,841,215 and $2,574,150. Contingent rent expense was
insignificant during the years ended March 31, 1996 and
1995.
During the years ended March 31, 1996 and 1995, the
Company sub-leased portions of its warehouse building and
a portion of one of its retail locations under
noncancelable operating leases. Sub-lease income during
the years ending March 31, 1996 and 1995 was $93,822 and
$121,880 (Note 11).
At March 31, 1996 the aggregate future minimum lease
payments (receipts) due under these noncancelable leases
are as follows:
<TABLE>
<CAPTION>
Operating
Year Ending Leases Operating
March 31, (Note 11) Sub-Leases
-----------------------------------------------------------------------------------
<S> <C> <C>
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>
F-21
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
10. COMMITMENTS DEPENDENCE ON SUPPLIERS
AND
CONTINGENCIES Approximately thirty percent (30%) of the Company's
(CONTINUED) inventory purchases are made directly from five (5)
manufacturers. The Company 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 the
Company's relationship with a major supplier could have a
material adverse effect on the Company's business.
SEASONALITY
The Company'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 the Company to operate, it must obtain substantial
short-term borrowings from lenders and the Company's
suppliers during the first three quarters of each fiscal
year to purchase inventory and for operating expenditures.
Historically, the Company has been able to obtain such
credit arrangements and substantially repay the amounts
borrowed during the fourth quarter of its fiscal year.
JOINT VENTURES
On March 14, 1995, the Company entered into an agreement
(the "Agreement"), with an individual to form a Limited
Liability Company (the "LLC") to engage in the
distribution of toy products. The Company had a forty
percent interest in the LLC and the individual a sixty
percent interest. Profits, losses and distributions of the
LLC were to be allocated pursuant to the above percentage
interests.
The Agreement called for certain costs to be assumed by
the Company and the individual and not to be considered
costs or expenses of the LLC. Items to be assumed by the
Company consisted primarily of costs to warehouse and
distribute the toy products including all related labor,
equipment, insurance, and supplies. Items to be assumed by
the individual consisted primarily of a working capital
credit line for purchases and a sales force.
F-22
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
10. COMMITMENTS The Company could make purchases from the LLC at five
AND percent above the LLC's cost. During the year ended March
CONTINGENCIES 31, 1996, the Company made purchases from the LLC
(CONTINUED) approximating $263,000.
On December 31, 1995, the Company and the individual
entered into a termination agreement whereby the Company
withdrew from the LLC. In connection therewith, the
Company received an aggregate of $32,000 representing the
Company's share of net profits earned by the LLC through
December 31, 1995, and return of the Company's initial
investment in the LLC totalling $800. The LLC's operations
from its inception, March 14, 1995, through March 31, 1995
were insignificant.
On May 27, 1994, the Company entered into a joint venture
for the distribution of the Company's TKO product line
items. Terms of the agreement provided for the Company and
the joint venture partner to share in the profits from the
distribution of the TKO product line. Joint venture net
profits, as defined in the agreement, on the first
$1,750,000 in gross sales were allocated 75% to the
Company and 25% to the joint venture partner. Net profits
on gross sales in excess of $1,750,000 were to be
allocated 60% to the Company and 40% to the joint venture
partner.
As of March 31, 1995, the Company and the joint venture
partner mutually agreed to terminate the agreement. Total
joint venture net profits earned by the Company during the
year ended March 31, 1995 totaled $81,345.
11. RELATED PARTY AMOUNTS DUE FROM STOCKHOLDER
TRANSACTIONS
At March 31, 1996, and 1995, $0 and $17,788 was owed to
the Company for net costs incurred on behalf of the
Company's parent (Note 6).
OFFICE AND WAREHOUSE LEASE
The Company leases an office and warehouse building from a
partnership whose partners are also Company officers and
stockholders. Rent expense under this lease for each of
the years ended March 31, 1996 and 1995 totalled $227,916.
The lease expires in April 2000.
SUB-LEASE
During the years ended March 31, 1996 and 1995, sub-lease
rental income included $54,422 and $47,470, from an entity
in which stockholders and employees of the Company have an
ownership interest.
F-23
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
12. EQUITY On May 7, 1993, immediately prior to the acquisition
TRANSACTIONS described below, stockholders of the Company converted
2,524,250 shares of common stock into 250,000 Series A
preferred shares and 704,166 Series B preferred shares.
Also on May 7, 1993, American Toys, Inc. acquired 900,000
Series C preferred shares for $900,000 and paid an
additional $900,000 directly to the three original
shareholders for 90% of the common stock outstanding after
the conversion of shares of common stock to preferred
stock noted above.
On April 1, 1994 the Company redeemed an aggregate 234,722
shares of Series B preferred stock at the Redemption Price
of $234,722 and paid dividends on the Series A and B
preferred stock aggregating $44,625. Concurrent with
completion of the Company's initial public offering on
November 9, 1994, discussed below, the Company redeemed an
aggregate 224,708 shares of Series B preferred stock at
the redemption price of $224,708 and paid dividends on the
Series A and B preferred stock totalling $22,006. On April
3, 1995, the Company redeemed an aggregate 122,368 shares
of Series B preferred stock at the redemption price of
$122,368 and paid dividends on the Series B preferred
stock aggregating $15,931. On March 4, 1996, the Company
redeemed an aggregate 40,789 shares of Series B preferred
stock at the redemption price of $40,789 and paid
dividends on the Series B preferred stock aggregating
$3,052.
All unpaid dividends due on the Series A and Series B
preferred stock, aggregating $6,101 and $13,958 as of
March 31, 1996 and 1995, have been accrued and are
reflected in the respective preferred stock balances in
the accompanying balance sheets.
In April 1996, the Company redeemed all remaining
outstanding shares of Series B preferred stock,
aggregating 81,579, at the redemption price of $81,579 and
paid dividends on the Series B preferred stock aggregating
$6,101.
F-24
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
12. EQUITY
TRANSACTIONS
(CONTINUED)
On June 14, 1994, a new entity was incorporated in
Delaware as Play Co. Toys ("Play Co. Delaware"). The
pre-existing California corporation ("Play Co.
California") was then merged into Play Co. Delaware as
follows:
(a) Play Co. Delaware is authorized to issue 10,000,000
shares of common stock with a par value of $.01 per
share and 1,619,444 shares of preferred stock with no
par value. The preferred stock is issued in series
with authorized shares as follows: Series A, 250,000
shares; Series B, 469,444 shares; and Series C,
900,000 shares. The authorized common and preferred
stock for Play Co. Delaware have identical rights to
the previously authorized common and preferred stock
of Play Co. California except that the new class of
Series C preferred stock has no redemption features
or dividend rights and is convertible into 428,580
shares of common stock at the option of the holder
prior to January 2, 1995. The holders of Series A,
Series B, and Series C preferred shares are entitled
to a preference on liquidation, dissolution or
winding up of the Company. Holders of the preferred
stock are to be paid an amount equal to the
redemption price prior to any distributions to
holders of shares of common stock. Should the
Company's assets be insufficient to pay the holders
of the preferred stock, the holders of the preferred
stock shall share ratably in any distribution of
assets.
(b) Each issued and outstanding share of Play Co.
California common stock was exchanged for fifty (50)
shares of Play Co. Delaware common stock. Each issued
and outstanding share of Play Co. California Series
A, B and C preferred stock was exchanged for one
share of Play Co. Delaware Series A, B and C
preferred stock.
F-25
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
12. EQUITY In June 1994, the Company issued 150,000 shares of common
TRANSACTIONS stock. Of these shares, 50,000 were issued to each of two
(CONTINUED) officer/directors of the Company for an aggregate $1,000.
Such shares were assigned a value equal to fifty percent
(50%) of the then proposed public offering price. As a
result, the Company recorded compensation expense of
$249,000 (100,000 shares at $2.50 per share less $1,000).
The remaining 50,000 shares were issued to the Company's
legal counsel in lieu of legal services. These shares were
also assigned a value equal to fifty percent (50%) of the
proposed public offering price. Accordingly, the Company
recorded $125,000 (50,000 shares at $2.50 per share) as
costs of its initial public offering discussed below. For
the statement of cash flows for the year ended March 31,
1995, $125,000 has been deducted from initial public
offering costs as this amount represents a non-cash charge
(Note 13).
On November 9, 1994, the Company completed its initial
public offering of securities whereby the Company sold
784,950 units at $5.00 per unit, each of which comprises
one share of the Company's $.01 par value common stock and
one redeemable warrant to purchase one share of the
Company's common stock at a purchase price of $7.00. The
Company received net proceeds of $2,895,613 after
deducting underwriting commissions, discounts and other
offering expenses of $1,029,137.
The above mentioned warrants can be exercised during the
twenty-four month period ending February 6, 1997. No
warrants were exercised during the years ended March 31,
1996 and 1995.
See Notes 3 and 4 regarding the issuance of other warrants
and options.
In connection with completion of the Company's initial
public offering, the Company sold to the underwriter, for
$700, five year warrants (the "Underwriter's Warrants") to
purchase from the Company an aggregate of 70,000 units.
Each unit comprises one share of the Company's $.01 par
value common stock and one redeemable warrant to purchase
one share of the Company's common stock at a purchase
price of $7.00. The Underwriter's Warrants are exercisable
at a price of $7.25 per unit for a four year period
commencing November 2, 1995. No underwriter warrants were
exercised during the year ended March 31, 1996.
Concurrent with completion of the Company's initial public
offering, all of the 250,000 shares of Series A preferred
stock outstanding were converted into 119,050 shares of
the Company's common stock.
F-26
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
12. EQUITY The Company entered into various consulting agreements
TRANSACTIONS with the underwriter and granted the underwriter a right
(CONTINUED) of first refusal to act as underwriter or agent for any
public or private offering of the securities of the
Company, or any successor or subsidiary of the Company
made during the five year period following the date of the
prospectus. The underwriter's ability to render services
in accordance with the agreements and the Company's
obligation to compensate the underwriter for services
provided is uncertain. In February, 1995, the National
Association of Securities Dealers, Inc. (the "NASD")
halted the underwriter's market making operations due to
the underwriter's inability to meet the NASD's net capital
requirements, which requires a broker/dealer to maintain
certain levels of cash and other liquid assets in order to
meet its obligations. The underwriter ceased all
operations after losing its market making ability. The
market for the Company's securities has been significantly
affected and may continue to be affected by the loss of
the underwriter's participation in the market.
Additionally, the loss of the underwriter's market making
activities has decreased significantly the liquidity of an
investment in such securities.
In January 1995, all of the shares of Series C preferred
stock were converted into 428,580 shares of the Company's
common stock.
13. SUPPLEMENTAL Cash paid for income taxes and interest was as follows:
CASH FLOW
INFORMATION
<TABLE>
<CAPTION>
Year ended March 31, 1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C>
Interest paid $464,832 $218,922
-----------------------------------------------------------------------------------
Income taxes $ 800 $ 800
-----------------------------------------------------------------------------------
</TABLE>
For the year ended March 31, 1996, non-cash financing
activities include the extinguishment of stockholders
notes payable and related accrued interest, aggregating
$1,399,044, in exchange for one share of Series D
preferred stock (Note 6) and the issuance of common stock
options aggregating $458,000 (Notes 3 and 4).
For the year ended March 31, 1995, non-cash financing
activities include the issuance of 150,000 shares of
common stock for compensation and services ($375,000) and
the conversion of Series A and Series C preferred stock to
119,050 and 428,580 shares of common stock (Note 12).
F-27
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
14. SUBSEQUENT Effective May 9, 1996, the Company's certificate of
EVENTS incorporation was amended, as follows, reflecting changes
authorized and approved by a majority of the Company's
common stockholders:
(a) The Company's name was changed to Play Co. Toys &
Entertainment Corp.
(b) The number of shares of $.01 par value common stock
the Company is authorized to issue is 30,000,000.
(c) The number of shares of $.01 par value preferred
stock the Company is authorized to issue is 1,469,445
of which 469,444 shares were designated, Series B
preferred stock representing shares of Series B
preferred stock previously authorized and issued and
for which 81,579 shares were outstanding at March 31,
1996 (Note 12), 1 share was designated, Series D
preferred stock and 1,000,000 shares were designated,
Series E preferred stock.
The newly authorized common stock has 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
the Company, or consent in writing in lieu of voting,
solely for the election of the Company's board of
directors. The holder of the Series D preferred stock
shall vote as a separate class and shall have the sole
right to vote for, or consent in writing in lieu of
voting, and elect two-thirds (2/3) of the directors of the
Company. Such directors shall be known as the "Preferred
Directors" and the Series D preferred stockholder shall
have the sole right to remove any Preferred Directors with
or without cause, at any time, and to fill all vacancies
of Preferred Directors.
The Series D preferred stock is not redeemable by the
Company or the holder.
The holder of the Series D preferred stock is entitled to
a preference on liquidation, dissolution or winding up of
the Company, subordinate to the preference granted to the
holders of the Series B preferred stock discussed above.
The holder of the Series D preferred stock shall be
entitled to be paid an amount in cash equal to $1,400,000
prior to any distributions to the holders of shares of
Series E preferred and common stock. Should the
F-28
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
PLAY CO. TOYS
(A SUBSIDIARY OF AMERICAN TOYS, INC.)
NOTES TO FINANCIAL STATEMENTS
14. SUBSEQUENT Company's assets be insufficient to pay the holder of the
EVENTS Series D preferred stock, the holder of the Series D
(CONTINUED) preferred stock shall share ratably, in any distributions,
with any other equivalent securities of the Company that
may be established by the Company's board of directors.
The Series E preferred stock is non-voting, is not
redeemable by the Company 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 the Company's common stock, at
the holder's option, and at any time during the three year
period commencing two years after the issuance of the
Series E preferred stock.
The holders of the Series E preferred stock are entitled
to a preference on liquidation, dissolution or winding up
of the Company, subordinate to the preferences granted to
the holders of the Series B and Series D preferred stock
discussed above. The holders of the Series E preferred
stock shall be entitled to be paid an amount in cash equal
to $1.00 per share prior to any distributions to the
holders of shares of common stock. Should the Company's
assets be insufficient to pay the holders of the Series E
preferred stock, the holders of the Series E preferred
stock shall share ratably, in any distributions, with any
other equivalent securities of the Company that may be
established by the Company's board of directors.
F-29
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as ss.
