As filed with the Securities and Exchange Commission on July 25, 1997
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-----
PLAY CO. TOYS & ENTERTAINMENT CORP.
(Exact name of Small Business Issuer as specified in its Charter)
Delaware 2330 95-3024222
(State of (Primary standard industrial I.R.S. employer
Incorporation) classification code) identification No.
550 Rancheros Drive
San Marcos, California 92069
(Address and telephone number of Principal Offices)
Richard Brady, President
550 Rancheros Drive
San Marcos, California
(760) 471-4505
(Name, address and telephone number
of agent for service) Copies
To:
David S. Klarman, Esq. Eric Kloper, Esq.
Klarman & Associates 315 West 57th Street
2694 Bishop Drive Suite 8E
San Ramon, CA 94583 New York, NY 10019
(510) 830-8801 (212) 581-9278
(212) 830-8821 (fax) (212) 489-7451 (fax)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 933, check the
following box [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of a prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Title of each class Proposed maximum Proposed maximum Amount of
of securities Amount to be offering price aggregate registration
to be registered registered per Unit (1) Offering price(1) fee(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series E Preferred Stock,
$.01 par value 750,000 $4.00 $ 3,000,000 $ 1,034.40
- ------------------------------------------------------------------------------------------------------------------------------------
Series E Preferred Stock 1,500,000
Purchase Warrants .10 150,000 51.72
- ------------------------------------------------------------------------------------------------------------------------------------
Series E Preferred Stock, 1,500,000
$.01 par value(3) 5.00 7,500,000 2,586.00
- ------------------------------------------------------------------------------------------------------------------------------------
Series E Preferred Stock,
$.01 par value(4) 250,000 4.00 1,000,000 344.80
====================================================================================================================================
Series E Preferred Stock
Purchase Warrants(5) 500,000 .10 50,000 17.24
====================================================================================================================================
Series E Preferred Stock,
$.01 par value(6) 500,000 5.00 2,500,000 862.00
====================================================================================================================================
Totals........... $14,200,000 $4,896.16
====================================================================================================================================
</TABLE>
(1) Total estimated solely for the purpose of determining the registration
fee.
(2) Calculated pursuant to Rule 457(a) based on a bona fide estimate of the
maximum Offering price.
(3) Issuable upon exercise of the Warrants, together with such
indeterminate number of securities as may be issuable by reason of the
anti-dilution provisions contained therein.
(4) Shares of Series E Preferred Stock being offered by a certain "Selling
Securityholder" which may be sold from time to time, subject to a 90 day lock
up. See "Principal Securityholders."
(5) Represents Warrants being offered by the Selling Securityholder which
may be sold from time to time, subject to a 90 day lock up. See "Principal
Securityholders."
(6) Represents the resale of shares of Series E Stock issuable upon the
exercise of Warrants owned by the Selling Securityholder either (i) pursuant to
the Selling Securityholder's exercise of such Warrants and the resale of the
shares issued pursuant thereto; or (ii) pursuant to the exercise of the Warrants
by a purchaser thereof and the resale of the shares issued pursuant thereto,
together with such indeterminate number of securities as may be issuable by
reason of anti-dilution provisions contained therein.
-ii-
<PAGE>
Cross Reference Sheet Pursuant to Rule 404 (a)
Showing the Location In Prospectus of
Information Required by Items of Form SB-2
<TABLE>
<CAPTION>
<S> <C>
Item in Form SB-2 Prospectus Caption
1. Front of Registration
Statement and Outside Front
Cover Page of Prospectus Cover Page and Cover Page of Registration Statement
2. Inside Front and Outside
Back Cover Pages of
Prospectus Continued Cover Page, Table of Contents
3. Summary Information and Prospectus Summary, Risk Factors, Summary
Risk Factors Financial Information
4. Use of Proceeds Use of Proceeds
5. Determination of Offering
Price Cover Page, Underwriting, Risk Factors
6. Dilution Risk Factors
7. Selling Securityholders Not Applicable
8. Plan of Distribution Cover Page, Underwriting
9. Legal Proceedings Business
10. Directors, Executive Officers,
Promoters, and Certain Control
Persons Management
11. Security Ownership of
Certain Beneficial Owners Principal Securityholders
and Management
12. Description of Securities Description of Securities
-iii-
<PAGE>
13. Interest of Named Experts
and Counsel Legal Opinions, Experts
14. Disclosure of Commission Position Management and Item 24. Indemnification
on Securities Act Liabilities Officers and Directors
15. Organization Within Five Years Prospectus Summary, Business, Principal
Securityholders, Certain Relationships and Related
Transactions, Risk Factors
16. Description of Business Business
17. Management's Discussion
and Analysis or Plan of Operation Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property Business
19. Certain Relationships and Related
Transactions Certain Relationships and Related Transactions
20. Market for Common Equity Not Applicable
and Related Stockholder
Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements Business
with Accountants and Financial
Disclosure
</TABLE>
-iv-
<PAGE>
Preliminary prospectus subject to completion, dated July , 1997
PROSPECTUS
PLAY CO. TOYS & ENTERTAINMENT CORP.
750,000 Shares Series E Preferred Stock and 1,500,000 Warrants
250,000 Shares of Series E Preferred Stock and 500,000 Warrants
Offered by a Selling Securityholder
This Prospectus relates to an offering (the "Offering") of 750,000 shares
(the "Shares") of the Series E Preferred Stock, par value $.01 per share (the
"Series E Stock"), of Play Co. Toys & Entertainment Corp. (the "Company") and
1,500,000 redeemable Series E Stock purchase warrants (the "Warrants") being
sold by the Company through the Underwriter in this Offering. Each Warrant
entitles the holder thereof to purchase one share of Series E Preferred Stock at
a price of $5.00 for a period of four years commencing one year from the date
the Offering closes (the "Closing Date"). An additional 250,000 shares of Series
E Stock and 500,000 Warrants may be sold from time to time by a certain selling
securityholder (the Selling Securityholder"), subject to a 90 day lock up
agreement commencing on the Closing Date. The Company will not receive any of
the proceeds from the sale of any securities sold by the Selling Securityholder.
Each share of the Series E Stock is convertible, at the option of the holder,
two years from issuance, into six shares of the Company's Common Stock, par
value $0.01 per share. The Warrants are redeemable by the Company at any time,
commencing one year from the Closing Date, upon 30 days' prior notice, at a
redemption price of $.05 each, provided that the closing bid quotation of the
Series E Stock for at least 20 consecutive trading days, ending on the third day
prior to the date on which the Company gives notice, has been at least 170% of
the exercise price of the Warrants being redeemed. The Warrants will remain
exercisable during the 30 day notice period. The Series E Stock and the Warrants
(sometimes collectively referred to as the "Securities") offered hereby will be
separately tradable immediately upon issuance and may be purchased separately.
Investors will not be required to purchase shares of Series E Stock and Warrants
together or in any particular ratio.
The Securities offered hereby are being offered by the Underwriter on a
"best-efforts, all or none" basis during an initial period of 90 days, which may
be extended for an additional 90 days. Pending the sale of the Securities, all
proceeds from the sale of the Securities offered hereby will be deposited in a
non-interest bearing escrow account at Gotham Bank of New York. Unless all the
Securities are sold within 90 days from the date of this Prospectus (which
period may be extended for an additional 90 days by agreement of the Underwriter
and the Company), the Offering will terminate, and all funds will be returned
promptly to the subscribers by the escrow agent without deduction or interest.
During the 90 day selling period (and 90 day extension, if any), potential
purchasers will not have the opportunity to have their funds returned. See "Risk
Factors" and "Underwriting."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION TO INVESTORS.
SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================
Price to Discounts and Proceeds to
Public(1) Commission (1) the Company (2)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......... $4.00 $0.40 $3.60
- -----------------------------------------------------------------------------------------------------------------
Per Warrant....... $0.10 $0.01 $0.09
- -----------------------------------------------------------------------------------------------------------------
Total (3)........... $3,150,000 $315,000 $2,835,000
=================================================================================================================
</TABLE>
(1) All proceeds from subscriptions for the Securities will be deposited in
a non-interest bearing escrow account at Gotham Bank of New York. If all of the
Securities are not subscribed for within 90 days (which period may be extended
for an additional 90 days), all funds received promptly will be refunded, in
full, to subscribers, without interest or deduction, in accordance with an
escrow agreement with Gotham Bank of New York.
(2) Does not include additional compensation to be received by the
Underwriter, including (i) a non-accountable expense allowance equal to 3% of
the gross proceeds of the Offering and (ii) a right of first refusal with
respect to certain future financings for three years. The Company has also
agreed to indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Act"). See
"Underwriting."
(3) Before deduction of expenses of the Offering, all of which are payable
by the Company, estimated at $335,000, which includes the Underwriter's
non-accountable expense allowance as well as filing, legal, accounting,
printing, and other costs and expenses.
WEST AMERICA SECURITIES CORP.
The date of this Prospectus is _______________, 1997
<PAGE>
Prior to this Offering, there has been a limited public market for the
Company's Common Stock and no market for the Series E Stock and Warrants. The
Company's Common Stock is listed on the Nasdaq SmallCap Stock Market ("Nasdaq")
under the symbol "PLCO." There can be no assurance that any market will develop
or that if developed, such market will be sustained for any of the Company's
Securities for any period of time. The Company has applied for listing of the
shares of Series E Stock and Warrants on Nasdaq and on the Pacific Stock
Exchange under the symbols "______" and "____W," and "____" and "___ W,"
respectively, although no assurance can be given as to whether either such
listing will be obtained. Quotation on Nasdaq or listing on the Pacific Stock
Exchange does not imply that a meaningful sustained market for the Company's
Securities will develop or that if developed, such market will be sustained for
any period of time. In the absence of a listing on either Nasdaq or an exchange,
the Company's Securities will be available for trading in the over-the-counter
market on the OTC Bulletin Board. The offering price of the shares and the
offering price and exercise price of the Warrants have been determined in
negotiations between the Company and the Underwriter on an arbitrary basis and
bear no direct relationship to the assets, earnings, or any other recognized
criteria of value. The prices should in no event, however, be regarded as an
indication of any future market price of the Series E Stock or the Warrants or
shares of Series E Stock underlying same. See "Risk Factors."
The Securities are being offered by the Underwriter named herein, as
agent for the Company, subject to prior sale when, as, and if accepted by same
and subject to certain legal matters to be approved by counsel and to certain
other conditions. The Company and the Underwriter reserve the right to withdraw,
cancel, or modify the Offering and to reject any order in whole or in part.
ALL PAYMENT FOR THE SERIES E STOCK AND WARRANTS OFFERED HEREBY SHALL BE
MADE BY CHECK PAYABLE TO "GOTHAM BANK OF NEW YORK, AS ESCROW AGENT FOR PLAY CO.
TOYS & ENTERTAINMENT CORP."
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the shares of Series E Stock and Warrants to which this
Prospectus relates. As permitted by the rules and regulations of the Commission,
this Prospectus does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Securities offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, which may be copied and inspected at the Public
Reference Section of the Commission at its principal office at 450 Fifth Street,
N.W., Washington, D.C. 20549.
The Company's fiscal year end is March 31. The Company is subject to
the informational reporting requirements of the Exchange Act and in accordance
therewith files periodic reports, proxy statements, and other information with
the Commission. The Company distributes to its stockholders annual reports
containing audited financial statements, together with an opinion by its
independent certified public accountants. In addition, the Company may, in its
discretion, furnish quarterly reports to stockholders containing unaudited
financial information for the first three quarters of each year.
<PAGE>
PROSPECTUS SUMMARY
The following summary is intended to set forth certain pertinent facts
and highlights from material contained in the body of this Prospectus. The
summary is qualified in its entirety by the detailed information and financial
statements appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information in this Prospectus gives effect to the 1-for-3 reverse stock
split in July 1997.
Play Co. Toys & Entertainment Corp. ("the Company") was founded in
1974, at which time it operated one store under the name Play Co. Toys in
Escondido, California. The Company now operates seventeen stores - not including
the four stores which have been temporarily closed pending the earlier of the
holiday season or the Company's release from its lease obligations therefor -
throughout Southern California in the Los Angeles, Orange, San Diego, Riverside,
and San Bernadino Counties. Prior to its corporate restructuring in 1996 and its
acquisition of Toys International ("Toys") in January 1997, the Company, which
was a retailer of children's and adult toys, games, and hobby products, operated
stores which averaged approximately 10,000 square feet in size and were located
in highly trafficked strip shopping centers. These stores ("Company Originals")
sell traditional and promotional toys.
In the beginning of 1996, the Company redefined its corporate goals and
philosophy, changing its focus from the sale of solely promotional and
traditional toys to the sale of educational, new electronic interactive, and
specialty and collectible toys and items. In light of its new focus, during
fiscal 1997, the Company redesigned three of its Company Originals, opened a new
flagship store in Santa Clarita, and acquired three Toys stores. In conformance
with its new goals, the Company's new stores ("the Contemporaries") shall be
smaller (3,500 to 5,200 square feet in size) and shall operate in "exclusive"
highly trafficked malls rather than in strip shopping centers. The Company's
Toys stores and Contemporaries are expected to produce improved gross profits
since, in addition to carrying their historical inventory of lower margin
promotional toys, they shall sell educational and electronic interactive games
and toys, specialty products, and collector's toys, which generally carry higher
gross margins.
The Company proposes to redesign six Company Originals into
Contemporaries and open an additional nine locations by the end of fiscal 1999.
The Company estimates that four of the additional locations will be opened by
the end of calendar year 1997 and the remaining new locations will be opened by
the end of calendar year 1998. The Company excepts to have twenty-eight
locations by the end of fiscal 1999. In order to continue to adjust to consumer
preferences, the Company shall take a proactive approach by continuously
reviewing each individual store's sales history and prospects on an individual
basis to decide on the appropriate product mix.
The Company's executive offices are located at 550 Rancheros Drive, San
Marcos, California 92069; the Company's phone number is (760) 471-4505.
<PAGE>
The Offering (1)
Securities Offered (2): 750,000 shares of Series E Stock and 1,500,000
Warrants being offered by the Company. The Series
E Stock and Warrants offered hereby will be
separately tradable immediately upon issuance and
may be purchased separately. Investors will not be
required to purchase the shares of Series E Stock
and Warrants together or in any particular ratio.
Price per Share $4.00
Price per Warrant $ .10
Securities Outstanding
Prior to the Offering (3):
Series E Stock 3,450,570 shares
Common Stock 4,103,519 shares
Warrants 500,000
Securities Outstanding
After the Offering:
Series E Stock 4,200,570 shares
Common Stock 4,103,519 shares
Warrants 2,000,000
Use Of Proceeds: The net
proceeds of this Offering,
estimated at $2,500,000,
will be used to continue to
implement the Company's
re-direction, by opening
five additional stores,
redesigning six existing
stores to the Company's new
format and for working
capital.
See "Use of Proceeds."
Risk Factors An investment in the Securities offered hereby is
highly speculative and involves potentially
substantial dilution. The statements contained in this
Prospectus which are not historical facts contain
forward looking information with respect to plans,
projections, or future performances of the
Company, the occurrences of which involve certain
risks and uncertainties as detailed herein. See "Risk
Factors."
<PAGE>
NASDAQ Symbols(4) Common Stock.............PLCO
Series E Stock................
Warrants.....................PLCOW
Pacific Stock Exchange Symbols (4) Common Stock.............______
Series E Stock................______
Warrants.....................______
(1) Unless otherwise indicated, no effect is given in this Prospectus to
the issuance of (i) 1,500,000 shares of Series E Stock reserved for issuance
upon the exercise of the Warrants; (ii) the conversion of any shares of the
Series E Stock into Common Stock; and (iii) 50,000 shares of Common Stock
reserved for issuance under the Company's Stock Option Plan.
(2) Does not include an additional 250,000 shares of Series E Stock and
500,000 Warrants which may be sold from time to time by the Selling
Securityholder, subject to a 90 day lock up agreement. See "Principal
Securityholders."
(3) Includes 250,000 shares of the Series E Stock and 500,000 Warrants
purchased in June 1997 pursuant to a subscription agreement dated June 30, 1997.
(4) The Company's Common Stock is listed on Nasdaq, and the Company has
filed an application for quotation of the Series E Stock and Warrants on Nasdaq.
In addition, the Company has filed an application with the Pacific Stock
Exchange to have its Securities listed thereon. Quotation on Nasdaq and/or the
Pacific Stock Exchange does not imply that a meaningful, sustained market for
the Company's Securities has or will develop. In addition, continued inclusion
on Nasdaq and/or the Pacific Stock Exchange is subject to certain maintenance
criteria. The failure to meet these maintenance criteria in the future may
result in the discontinuance of the listing of the Company's Securities which
may have an adverse effect on the market for the Company's Securities. See "Risk
Factors."
<PAGE>
Summary Financial Data:
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31,
1994 1995 1996 1997
Balance Sheet Data:
<S> <C> <C> <C> <C>
Working Capital (deficiency) ........................ $ (102,132) $ 1,805,396 $ 46,589 $ (1,570,486)
Total Assets ........................................ 9,005,405 11,119,692 9,213,104 9,378,618
Total Current Liabilities ........................... 7,094,257 7,298,136 6,673,570 8,148,657
Long-term obligations ............................... 99,274 140,218 726,007 226,925
Redeemable preferred stock .......................... 929,380 242,275 87,680 --
Stockholders' equity ................................ 882,494 3,439,063 1,725,847 1,003,036
Common stock dividends .............................. -- -- -- --
Year Ended
March 31,
1994 1995 1996 1997
Operating Data:
Net sales ........................................... $ 21,756,847 $ 25,374,722 $ 21,230,853 $ 19,624,276
Cost of sales ....................................... 15,001,015 16,704,757 15,132,895 13,669,104
Gross Profit ........................................ ($) 8,669,965 6,755,832 6,097,958 5,955,172
(%) ............................... 34.16 31.05 28.72 30.34
Operating expenses .................................. 8,489,222 9,292,632 9,105,515 8,881,438
Net loss ............................................ 1,631,775 875,788 3,542,715 3,584,881
Loss per common share(1) ............................ (1.69) (0.87) (2.77) (1.29)
Average shares outstanding(1) ....................... 966,322 1,011,284 1,287,843 2,791,876
</TABLE>
(1) Adjusted for effects of 1-for-3 split of Common Stock in July 1997.
<PAGE>
RISK FACTORS
The Securities offered hereby are speculative and involve a high degree
of risk. In addition to the other information contained in this Prospectus, the
following factors regarding risks associated with the Company's Business and
risks related to the Offering should be carefully considered before purchasing
the Securities offered by this Prospectus. The purchase of Securities should not
be considered by anyone who cannot afford the risk of loss of his entire
investment. The statements contained in this Prospectus which are not historical
facts contain forward looking information with respect to plans, projections, or
future performances of the Company, the occurrences of which involve certain
risks and uncertainties as detailed herein. No assurance can be made that this
plan or projections will be realized or that if realized, such plan or
projections will produce the results anticipated by the Company.
1. Decline in Revenues; Continued Operating Losses; Working Capital
Deficit; and Retained Earnings Deficit. The Company's revenues for the years
ended March 31, 1995, 1996, and 1997 have steadily declined from $25,374,722 to
$21,230,853 to $19,624,276, respectively. The decrease in revenues has been
primarily the result of the general economic downturn in the Southern California
economy, increased competition, and the closing by the Company of non-profitable
stores. For the years ended March 31, 1995, 1996, and 1997, the Company incurred
net losses of $875,788, $3,542,715, and $3,584,881, respectively. There can be
no assurance that the Company's revenues or results of operations will not
decline further in the future, that the Company will not continue to have
losses, or that the Company will be able to continue funding such losses if they
continue. At March 31, 1997, the Company had a working capital deficiency of
$1,570,486, an accumulated deficit of $8,050,476, and stockholders' equity of
$1,003,036. The working capital deficiency and accumulated deficit could
adversely affect the Company's ability to conduct its operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
2. Markets for Products and Services; Change in Business Focus. In the
beginning of 1996, management of the Corporation realized the need for change in
its corporate focus. It found there was a large demand for educational and
promotional toys and collectibles and thus decided to change its business plan
to focus on these markets. To this end, the Corporation acquired three new store
leases through its purchase of substantially all of the assets of Toys, opened a
flagship store in Santa Clarita, California, and developed a new store design
and marketing format which provides an interactive setting together with a
retail operation. This new format includes the opening of new stores primarily
in malls instead of strip centers where most of the Corporation's current stores
are located. There can be no assurance that this new direction and marketing
focus will be successful or that the Company will have the funding to fully
implement its business plan. See "Business-Company Outlook."
3. Dependence on Supplier Credit; Decrease in Credit Lines. The Company
purchases approximately 95% of its products directly from manufacturers.
Approximately thirty (30%) percent of the Company's inventory is purchased
directly from five manufacturers. The Company typically purchases products from
its suppliers on credit arrangements provided by the manufacturers. Such credit
arrangements vary for reasons both within and without the control of
<PAGE>
the Company. Due to its poor financial condition and late payments on its
accounts payable, the Company's credit lines with toy manufacturers have been
decreased greatly which has caused a significant decrease in the Company's
inventory. There can be no assurance that the Company's credit lines or the
terms thereof will not be reduced further or terminated. The further reduction
of credit or the terms thereof or the termination of an existing credit line or
the loss of a major supplier or the deterioration of the Company's relationship
with a major supplier would have a material adverse effect on the Company's
business. See "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
4. Competition. The retail toy industry, in general, is extremely
competitive: large national and regional toy retailers as well as department
store chains sell toys. The educational and interactive toy and promotional and
specialty products market is also highly competitive. The Company is in direct
competition with local, regional, and national toy retailers which carry various
mixes of toys such as those carried by the Company's Contemporaries, though the
Company is not aware of any retailer which carries the exact same product mix as
the Company carries. The Company competes for the educational toy customer with
other specialty stores such as Disney Stores, Warner Bros. Stores, Imaginarium,
Learning Smith, Lake Shore, Zainy Brainy, and Noodle Kidoodle. In addition, with
respect to the Company's Originals and their product lines, the Company competes
with such retailers as Toys R Us and Kay Bee as well as department store chains
such as K-mart and Wal-Mart. Moreover, since the Company's prices with respect
to such product lines are in part based upon Toys R Us prices, the aggressive
pricing policy of Toys R Us has resulted in the Company's having reduced its
prices on many items, thereby reducing its profit margins. In addition, the toys
market is particularly characterized by large retailers and discounters with
intensive advertising and marketing campaigns and with deeply discounted pricing
of such products. In addition, the Company faces competition from hobby vendors
that market through 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. See "Business-Competition."
5. Narrow Profit Margins and Need to Control Expenses and Other Charges.
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 (i) purchase its products on favorable terms; (ii) obtain store
locations on favorable terms; (iii) retail a large volume and variety of
products efficiently; and (iv) provide quality support services. Moreover, small
increases in expenses or other charges to income could 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 maintain sufficient
control over expenses and other charges to increase profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
6. Limited Utility of Tax Loss Carryforwards. At March 31, 1997, the
Company had net operating loss carryforwards of approximately $8,000,000 and
$4,000,000 for federal and California purposes available to offset future
taxable income. Under Section 382 of the Internal Revenue Code of 1986, as
amended, utilization of prior net operating loss carryforwards is
<PAGE>
limited after an ownership change, as defined in Section 382, to an annual
amount equal to the value of a company's outstanding stock immediately before
the date of the ownership change multiplied by the federal long-term tax-exempt
rate. Due to the change in ownership in connection with the spin-off of the
Company by American Toys, Inc. ("American Toys," now known as U.S. Wireless
Corp.) to United Textiles & Toys Corp. ("UTTC," formerly known Mister Jay
Fashions International, Inc.), the Company is subject to limitations on the use
of its net operating loss carryforwards available as of March 31, 1997. In the
event a net operating loss is incurred in the year ending March 31, 1998, use of
such net operating loss carryforwards could also be limited as a result of this
Offering, grants of options under the 1994 Stock Option Plan, grants of options
under the Employee Stock Ownership Plan, and other events. In the event the
Company achieves profitable operations, any significant limitation on the
utilization of the net operating loss carryforward will have the effect of
increasing the Company's tax liability and reducing income and available cash
resources. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
7. Seasonality. The Company's business is highly seasonal with a large
portion of its revenues and profits being derived during the months of October
through December. Accordingly, the Company is required to obtain substantial
short-term borrowings during the first three quarters of the year to purchase
inventory and for capital and operating expenditures. Historically, these
borrowings have been repaid after the fourth quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business- Financing."
8. Reliance Upon Management. The Company is dependent upon the personal
efforts and abilities of Harold Rashbaum and Richard Brady the Company's
Chairman of the Board and President, respectively, neither of whom has an
employment agreement with the Company. The loss of the services of either Mr.
Rashbaum or Mr. Brady could adversely affect the business of the Company.
9. Need for Additional Financing. In order to continue its redirection and
refocus, the Company shall require additional funds to (i) open additional
stores; (ii) redesign existing stores; and (iii) finance continued losses during
this period. Although the Company believes that the proceeds of this Offering
will be sufficient to meet its anticipated cash requirements for the 12 months
subsequent to the closing of this Offering, there can be no assurance that it is
correct in such belief. If, for any reason, such estimates prove inaccurate, the
Company may seek additional financing via the sale of additional equity
securities in a future public or private transaction. There can be no assurance
that such financing indeed will be available. See "Business-Financing."
10. Potential Dilution. There are 3,450,570 shares of the Series E Stock
currently outstanding, none of which is convertible into shares of Common Stock
for two years from issuance. Notwithstanding the foregoing, the conversion of
the Series E Stock or the exercise of the Warrants will have the effect of
decreasing the net tangible book value per share of Common Stock. As of the date
of this Prospectus, there are 4,103,519 shares of Common Stock outstanding. For
the purposes of the discussion in this paragraph, all of the following figures
and
<PAGE>
calculations assume that (i) the 3,450,570 shares of Series E Stock are
converted into shares of Common Stock; (ii) no value is attributed to the
Warrants offered by the Company; and (iii) no options, Warrants, or other
convertible securities of the Company are exercised. The pro forma tangible net
book value as of the date of this Prospectus is $2,003,536, or approximately
$.49 per outstanding share of Common Stock ($2,003,536 / 4,103,519), or
approximately $.08 per share of Common Stock assuming additional shares of
Common Stock from the immediate conversion of the pro forma outstanding
3,450,570 shares of Series E Stock (3,450,570 / 6 + 4,103,519) which represents
an immediate dilution of $.41 per share of Common Stock on a pro forma basis.
After completion of the offering, the tangible net book value is estimated to
be $4,503,536, or approximately $1.10 per outstanding share of Common Stock
($4,503,536 / 4,103,519), or approximately $.15 per share of Common Stock
assuming immediate conversion of all 4,200,570 shares of Series E Stock then
outstanding (4,200,570 / 6 + 4,103,519) which represents an immediate dilution
of $.95 per share of Common Stock on an as adjusted basis.
11. Possible Future Dilution. The Company has authorized capital stock of
40,000,000 shares of Common Stock, par value $.01 per share. Inasmuch as the
Company may use authorized but unissued shares of Common Stock without
shareholder approval, there may be further dilution of the shareholders'
interests. The Company may additionally sell equity securities in a future
public offering or private transaction to raise additional capital. In addition,
the Company may, in the future, donate shares of its Common Stock to its ESOP
plan, which donation may dilute the interests of potential investors in this
Offering.
12. Dilutive Effect of Employee Stock Ownership Plan. In May 1994, the
Company adopted resolutions approving a 401(k) Employee Stock Ownership Plan
(the "Plan") which will cover 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
contributions 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 is contributed to by the employees of the
Company through payroll deductions. The Company does not 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 interests of persons who
acquire Securities in this Offering. The Company has not made any contributions
to the ESOP as of the date of this Prospectus.
13. Arbitrary Offering Price of Series E Stock and Exercise Price of
Warrants. The offering price of the Series E Stock and the exercise price of the
Warrants have been determined by the Company and the Underwriter on an arbitrary
basis and bear no relationship to assets, earnings, or any other recognized
criteria of value. There is no relationship between the offering price of the
Series E Stock or the exercise price of the Warrants to the Company's assets,
book value, or any other generally accepted criteria of value. Moreover, the
exercise price of the Warrants should not be viewed as any indication of the
future market price of the Series E Stock should any such market develop.
14. No Commitment to Purchase Shares of Series E Stock or Warrants. Under
the terms of this Offering, the Company is offering 750,000 shares of Series E
Stock and 1,500,000
<PAGE>
Warrants on a "best-efforts, all or none" basis during an initial period of 90
days, which period may be extended for an additional 90 days. No commitment
exists by anyone to purchase any of the shares of Series E Stock or Warrants
offered hereby. Consequently, there is no assurance that the Offering will be
sold. Subscribers' funds may be escrowed for as long as 180 days and then
returned without interest in the event the Offering is not sold, in which case
the Offering will be withdrawn. As a result, prospective purchasers of the
shares of Series Stock and Warrants will not have the use of any funds paid
during the subscription period.
15. Lack of Market for Securities. At present, there is a limited market
for the Company's Common Stock and no market for the Series E Stock or Warrants.
There is no assurance that a regular trading market will develop for any of the
Company's Securities at the conclusion of this Offering or that if one does
develop, such market will be sustained. Therefore, purchasers may be unable to
resell the Securities offered herein at or near their original offering price or
at any price. Furthermore, it is unlikely that a lending institution will accept
the Company's Securities as pledged collateral for loans even if a regular
trading market develops.
16. Broad Discretion in the Application of Proceeds. The Company's
management will have broad discretion regarding the use of proceeds of this
Offering, $945,000 or 37.8%, which proceeds have been allocated to working
capital. See "Use of Proceeds."
17. No Dividends and None Anticipated. The Company has not paid any
dividends; nor, because of its present financial status, does it have any
intention to issue any dividends in the future. The Company expects that it will
reinvest any profits in its business. See "Dividend Policy."
18. Future Sales of Stock by Stockholders. Of the Company's 4,103,519
outstanding shares of Common Stock as set forth above, 3,700,902 are "restricted
securities" as that term is defined under the Securities Act and in the future
may only be sold in compliance with Rule 144 promulgated under the Securities
Act or pursuant to an effective registration statement. All of the shares of
Series E Preferred Stock are restricted securities. A sale of shares by current
stockholders, whether pursuant to Rule 144 or otherwise, may have a depressing
effect upon the market price of the Common Stock or Series E Stock in any market
that continues to exist. To the extent that both or either Securities enter the
market, the value of the Common Stock or Series E Stock in the over-the-counter
market may be reduced. The Company sold 250,000 shares of the Series E Stock and
500,000 Warrants, for an aggregate of $550,000, in June 1997 to the Selling
Securityholder. These Securities have been registered for resale herein, subject
to a 90 day lock up agreement. See "Plan of Distribution for the Securities of
the Selling Securityholder." Pursuant to the subscription agreement, the Company
granted the purchaser a registration right which requires the Company to
register the resale of such Securities one time, commencing 90 days from the
consummation of this Offering; however, in order to reduce potential expenses to
the Company, the Company has agreed to register the Securities for resale in
this registration statement, subject to a 90 day lock up.
19. Possible delisting of Securities from Nasdaq System; Risks of Low
Priced Stocks. The Securities and Exchange Commission has approved rules
imposing more stringent criteria
<PAGE>
for listing of the Securities on the Nasdaq SmallCap Stock Market ("Nasdaq"). In
order to continue to be listed on Nasdaq, the Company will be required to
maintain (i) total assets of at least $2,000,000; (ii) total stockholders'
equity of $1,000,000; (iii) a minimum bid price of $1.00; (iv) one market maker;
(v) 300 stockholders; (vi) at least 100,000 shares in the public float; and
(vii) a minimum market value of $200,000 for the public float. In the event the
Company's Securities are delisted from Nasdaq, trading, if any, in the
Securities will thereafter be conducted in the over-the-counter market on the
OTC Bulletin Board.
20. Penny Stock Regulation. Broker-dealer practices in connection with
transactions in "penny stocks" are regulated by certain penny stock rules
adopted by the Securities and Exchange Commission. Penny stocks, generally, are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on Nasdaq,
provided that current price and volume information with respect to transactions
in such securities is provided by the exchange or system). The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document that
provides information about penny stocks and the risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in connection with the transaction, and monthly account statements
showing the market value of each penny stock held in the customer's account. In
addition, the penny stock rules generally require that prior to a transaction in
a penny stock, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to the penny stock rules. If the
Company's Securities become subject to the penny stock rules, investors in this
Offering may find it more difficult to sell their Securities.
21. Potential Adverse Effect of Redemption of Warrants. The Warrants are
redeemable by the Company at any time, commencing one year from the Closing
Date, upon 30 days' prior notice, at a redemption price of $.05 each, provided
that the closing bid quotation of the Series E Stock for at least 20 consecutive
trading days, ending on the third day prior to the date on which the Company
gives notice, has been at least 170% of the exercise price of the Warrants being
redeemed. The Warrants will remain exercisable during the 30 day notice period.
Redemption of the Warrants could cause the holders to exercise the Warrants and
pay the exercise price at a time when it may be disadvantageous for the holders
to do so, to sell the Warrants at the then current market price when they might
otherwise wish to continue to hold the Warrants, or to accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants at the time of redemption. The Company will not redeem the Warrants at
any time in which its registration statement is not current, so that investors
will be able to exercise their Warrants during the 30-day notice period in the
event of a Warrant redemption by the Company. See "Description of
Securities-Warrants."
22. Limited Experience of Underwriter. The Underwriter, West America
Securities Corp., was incorporated in December 1993. Prior to this Offering, the
Underwriter has not participated in any underwritings. Prospective purchasers of
the Series E Stock and Warrants offered hereby
<PAGE>
should consider the Underwriter's lack of experience in underwritten public
offerings. See "Underwriting."
23. Underwriter's Possible Ability to Dominate or Influence the Market for
the Securities. A significant number of the Securities offered in the Offering
may be sold to customers of the Underwriter. Such customers subsequently may
engage in transactions for the sale or purchase of the component Securities
through or with the Underwriter. Although they have no obligation to do so, the
Underwriter may exert a dominating influence on the market, if one develops, for
the Company's Securities. The price, liquidity, and price volatility of the
Company's Securities may be affected significantly by the degree, if any, of the
Underwriter's participation in such market. See "Underwriting."
24. Indemnification of Officers and Directors. As permitted under the
Delaware General Corporation Law, the Company's Certificate of Incorporation
provides for the indemnification and elimination of 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, shareholders 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. See "Management."
DIVIDEND POLICY
The Company has not paid cash dividends and intends to retain earnings, if
any, in the foreseeable future for use in its activities. Payment of cash
dividends on the Company's Common Stock in the future will be wholly dependent
upon the Company's earnings, financial condition, capital requirements, and
other factors deemed relevant by the Board of Directors. It is not likely that
cash dividends will be paid on the Company's Common Stock in the foreseeable
future.
<PAGE>
USE OF PROCEEDS
The net proceeds of this Offering, after deducting underwriting
commissions and expenses of the Offering estimated to be $335,000, will be
approximately $2,500,000. The net proceeds of this Offering are intended to be
used as follows:
<TABLE>
<CAPTION>
Percent of
Use of Proceeds Amount of Proceeds Net Proceeds
<S> <C> <C>
Redesigning 6 existing (1) $ 500,000 20.0%
stores
Opening 5 new stores (2) 1,000,000 40.0%
Relocating two stores (3) 55,000 2.2%
Working Capital (4) 945,000 37.8%
Total $2,500,000 100%
</TABLE>
(1) The Company shall redesign six of its existing Company Originals into
Contemporaries at an estimated cost of $80,000 per store. See "Business-Company
Outlook" and "Business-Merchandising Strategy; Refocusing of Corporate
Direction."
(2) The Company estimates the costs associated with leasing, constructing,
and furnishing each additional store at $200,000. The Company plans to open four
additional locations by the end of calendar year 1997 and an additional five
locations by the end of calendar year 1998. See "Business-Company Outlook."
(3) Estimated costs associated with the clean up and relocation upon
expiration of existing leases of two locations. See "Business-Properties."
(4) Funds apportioned to working capital may be used to fund the redesign
of Company Originals or the opening of additional store locations and to
purchase inventory. In addition, the Company may use the proceeds for general
corporate purposes, such as salaries or lease payments and other administrative
expenses. Currently, the Company's operations are not sufficient to enable it to
pay all of its administrative expenses. Any proceeds received from the exercise
of the Warrants, if any, shall be used for working capital as stated herein. The
Company does not anticipate using any of the proceeds of this Offering to merge
or acquire assets of another company and presently has no plans, commitments, or
agreements and is not currently involved in any discussions with regards to any
acquisition or merger. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company believes that the proceeds of this Offering, cash flow from
operations, and currently available financing sources will be sufficient to meet
its anticipated cash requirements for a period of 12 months following the
completion of this Offering. The Company does not expect that it will be
required to raise any additional capital within the next twelve months. If for
any reason such estimates prove inaccurate, the Company may be forced to seek
additional financing. There can be no assurance that in the event additional
financing is needed, it will be available to the Company, or that if available,
such financing will be on terms acceptable to the
<PAGE>
Company. The problems, expenses, and complications sometimes encountered by a
relatively small business, as well as changes in economic conditions, the
regulatory environment, or the Company's operations, may make shifts in the
allocation of funds necessary or desirable.
The Company presently has no agreement to enter into, nor does it
anticipate entering into, any agreement(s) to acquire any company or the assets
of any company. The Company has neither had any discussions nor entered into any
negotiations for such purposes.
Any additional proceeds received from the purchase of additional
Securities by the exercise of Warrants will be added to the Company's working
capital. No proceeds from this Offering will be paid to any Officer or Director
of the Company, to any Company affiliates or associates as reimbursement for
expenses of the Offering, or for any type of fee or remuneration, except that
the proceeds from this Offering may be used for general corporate expenses
including the payment of salaries in the event the Company's income from
operations does not meet its cash requirements.
Any of the Offering proceeds apportioned to working capital, while not
being used as described above, will be deposited in an interest-bearing bank or
money market accounts, short-term United States Government securities, or bank
certificates of deposit. There will not be any other type of investment made
with such proceeds.x
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1997 and as adjusted to give effect to the issuance and sale of the
Securities offered by the Company hereby, assuming that the Warrants have no
value.
<TABLE>
<CAPTION>
March 31, 1997
Actual Pro Forma(1) As Adjusted
<S> <C> <C> <C>
Total Liabilities $8,375,582 $8,375,582 $8,375,582
Stockholders' Equity:
Series E Preferred Stock, $.01 par value,
5,000,000 shares authorized
2,500,570 and 3,450,570 outstanding
actual, 4,200,570 issued and outstanding
as adjusted $2,500,570 $3,450,570 $5,831,570
Common Stock, $.001 par value,
40,000,000 shares authorized,
4,083,519 and 4,103,519 shares
issued and outstanding actual. $40,835 $41,035 $41,035
Additional Paid-in Capital $6,512,107 $6,562,407 $6,681,407
Accumulated deficit $(8,050,476) $(8,050,476) $(8,050,476)
Total Stockholders' Equity (deficit) $1,003,036 $2,003,536 $4,503,536
---------------------- -----------
Total Capitalization $9,378,618 $10,379,118 $12,879,118
</TABLE>
(1) The pro forma column gives effect to the issuance of 700,000 shares of
Series E Stock in exchange for $700,000 received since March 31, 1997
as advances on equity; 250,000 shares of Series E Stock and 500,000
Warrants purchased in June 1997 for an aggregate $550,000; and issuance
of 20,000 shares of Common Stock for legal services of $500 in June
1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
Prospectus.
Results of Operations
Statements contained in this Prospectus which are not historical facts
may be considered forward looking information with respect to plans,
projections, or future performance of the Company as defined under the Private
Securities Litigation Reform Act of 1995. These forward looking statements are
subject to risks and uncertainties which could cause actual results to differ
materially from those projected.
The Company's operations are substantially controlled by UTTC, the
Company's parent. UTTC currently owns approximately 59.3% of the issued and
outstanding shares of the Company's Common Stock.
For the year ended March 31, 1997 compared to the year ended March 31, 1996
The Company generated net sales of $19,624,276 in the year ended March
31, 1997 (also referred to as fiscal year 1997). This represented a decrease of
$1,606,577, or 7.6%, from net sales of $21,230,853 in the year ended March 31,
1996 (also referred to as fiscal year 1996). Approximately $485,150 of the
decline in sales is directly attributable to decreased sales of milk cap game
products. Milk cap game products represented a significant portion of the
Company's business mix in fiscal year 1995 and a lesser percentage (2.6%) of the
Company's sales in the 1996 fiscal year. Milk cap game products represented an
insignificant portion (.4%) of the Company's sales in fiscal year 1997.
The Company had 21 retail locations in the year ended March 31, 1997,
including 3 Toys International stores acquired on January 16, 1997. During the
year ended March 31, 1996, the Company operated 20 retail locations. The Company
closed four locations in fiscal year 1996. Same store sales decreased by 1.8% in
fiscal year 1997 compared to fiscal year 1996.
The Company posted a gross profit of $5,955,172 in the year ended March
31, 1997. While this represented a decrease of $142,786, or 2.3%, from the gross
profit of $6,097,958 in the year ended March 31, 1996, it actually represented
an improvement in the Company's gross margin from 28.7% in the 1996 fiscal year
to 30.3% in the 1997 fiscal year. This 1.6% gross margin improvement was largely
due to the implementation of the Company's ongoing plan to augment its
traditional product base of lower margin promotional toys with a mix of
educational and specialty toys, which generally produce better margins than
promotional toys.
Operating expenses in the year ended March 31, 1997 were $8,474,423.
This represented a $94,254, or 1.1%, improvement over the Company's operating
expenses of
<PAGE>
$8,568,677 in the year ended March 31, 1996. The primary reason for the
operating expense reduction was a decrease in payroll and payroll related
expenses of $73,833.
In the year ended March 31, 1996, the Company recorded costs of
$129,577 associated with the permanent closure of retail stores. No such costs
were recorded in the year ended March 31, 1997. Non-cash depreciation and
amortization expenses were constant at approximately $407,000 in both the 1997
and 1996 fiscal years.
The Company's operating loss improved from $3,007,557 in the 1996
fiscal year to $2,926,266 in the 1997 fiscal year. This represented an
improvement of $81,291, or 2.7%.
Interest expense totaled $658,615 for the year ended March 31, 1997.
This represented a $123,457, or 23.1%, increase over interest expense of
$535,158 in the year
ended March 31, 1996. The primary reason for the increased level of interest
expense was a higher level of borrowings in fiscal year 1997 than in fiscal year
1996.
During each of the years ended March 31, 1997 and 1996, the Company
recorded net income tax provisions consisting only of the current portion of the
minimum income taxes required by various jurisdictions including the States of
California and Delaware; such amounts were immaterial and are included in
operating expenses. 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, 1997 and 1996 and resulted in a net
zero dollar provision for deferred income taxes for each of the years ended
March 31, 1997 and 1996.
As a result of the above mentioned factors, the Company recorded a net
loss of $3,584,881 for the fiscal year ended March 31, 1997 and a net loss of
$3,542,715 recorded in the fiscal year ended March 31, 1996. In fiscal year
1996, the net loss applicable to common shares differed from the net loss by
$27,545, as a result of preferred stock dividends accrued in that year. The net
loss per common share for the 1997 fiscal year was $(1.29) compared to a net
loss per common share in the 1996 fiscal year of $(2.77). The loss per common
share decreased in the 1997 year compared to the prior year due to an increase
in the weighted average number of shares outstanding from 1,287,843 in fiscal
year 1996 to 2,791,876 in fiscal year 1997. All share and per share amounts
reflect the effects of the 1 for 3 reverse split of Common Stock.
Liquidity and Capital Resources
At March 31, 1997, the Company had a working capital deficit of
$(1,570,486) compared to a working capital position of $46,589 at March 31,
1996. The Company has generated operating losses for the past several years and
has historically financed those losses and its working capital requirements
through financing transactions, most recent from the exercise by Europe America
Capital Corporation ("EACC") of its option to purchase shares of the Company's
Series E Preferred Stock and from the additional financing provided by Congress
Financial Corporation (Western) ("Congress") due to the additional $1,000,000
letter of credit received from EACC. There can be no assurance that the Company
will be able to
<PAGE>
generate sufficient revenues or have sufficient controls over expenses and other
charges to achieve profitability.
For the year ended March 31, 1997, the Company used $2,275,962 of cash
in its operations compared to $1,176,172 used in operations in the year ended
March 31, 1996. The Company's net loss was approximately $3.5 million in both
years. The primary factor in the $1,099,790 difference in the amount of cash
consumed in operations between the two years was the generation of $1,673,284 of
cash from inventories in the 1996 fiscal year compared to $431,154 of cash
generated from inventories in the 1997 fiscal year.
The Company used $1,024,127 of cash in its investing activities during
the year ended March 31, 1997 compared to $322,523 in the year ended March 31,
1996. This increase was due to the addition of 3 new retail locations in the
Toys International acquisition (see below).
The Company generated $3,285,410 from its financing activities in the
year ended March 31, 1997 compared to the generation of $1,441,171 from
financing activities in the year ended March 31, 1996. The largest contribution
to the Company's financing activities in the 1997 fiscal year was the receipt of
$2,334,000 from the sale of preferred stock. Those proceeds were used for the
acquisition of Toys International and to finance the Company's operating losses.
As a result of the above factors, the Company had a net decrease in
cash of $14,679 in the year ended March 31, 1997 compared to a net decrease in
cash of $57,524 in the year ended March 31, 1996.
Management has begun to implement a plan to focus more of its attention
on the educational and specialty toy market in its existing and future retail
locations. Such a focus is believed to be necessary to differentiate the Company
from the larger mass retailers and discount chains that focus on the promotional
toy market. 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. The Company has redesigned certain of its retail
locations to include learning and activity centers within the stores as well as
entertainment facilities including wide screen televisions showing children's
videos. Management expects to continue this process of redesigning its retail
locations to this new format over the next two years.
In addition, educational toy sales are expected to achieve gross profit
margins of approximately 42%,on average, which is higher than the gross profit
of 28-32% historically achieved by the Company on sales of promotional toy
items. Management knows of no other toy retailer currently utilizing the concept
of combining educational and promotional toys to the scale anticipated by the
Company in any single retail outlet.
On January 16, 1997, the Company acquired certain inventories, the
assignment of three leases, store and corporate office fixtures, the corporate
name and logo, and certain prepaid items from a specialty toy chain, Toys
International, pursuant to an Asset Purchase
<PAGE>
Agreement. The aggregate purchase price for Toys International was $1,024,184,
of which $927,000 was allocated to inventory, $32,184 for certain prepaid
expenses and $65,000 for the balance of the assets. In addition, the Company
assumed a liability and paid $400,000 as additional rent to the landlord of one
of the new locations to reimburse for tenant improvements constructed by the
landlord for the previous owner of Toys International. As a result of the
acquisition, the Company was assigned the leases of the three retail locations
for the remaining terms of the leases which expire at various dates between
January 31, 1998 and January 31, 2004 as well as certain operating contracts.
The Company paid cash for all of the above amounts except for $265,000 which was
in the form of two non-interest bearing notes payable. One note carried a
principal balance of $200,000, which required eight quarterly installments of
$25,000 beginning April 16, 1997. The second note carried a principal balance of
$65,000, which required three monthly payments of $11,667 in February, May, and
June, 1997 and two payments of $15,000.
The three Toys International stores are located in up-scale shopping
malls in southern California. Each location carries specialty toy and
collectible items which typically command a higher gross margin than the
traditional promotional toy lines carried by the Company. The Toys International
locations also stock a number of promotional items which are also carried at the
Company's other locations but have historically been sold at a higher mark-up
than at the Company's stores. Management expects the operations of these three
locations will be enhanced by reducing the Toys International overhead expenses
and by obtaining purchase discounts on promotional merchandise that is sold in
the Toys International stores through the Company's purchasing power.
Management believes that the Toys International acquisition complements
its strategy of changing its business mix toward a higher percentage of
educational and specialty toys. In addition to its existing plan of converting
certain of its current locations to the redesigned format discussed above, the
Company plans to open a number of new locations in up-scale malls bearing the
Toys International name.
At March 31, 1997, the Company had an inventory financing line of
credit with Congress in connection with a Loan and Security Agreement ("Loan
Agreement") that was executed on February 1, 1996. The Loan Agreement provides
for maximum borrowings of $7,000,000 based on the "Cost Value of Eligible
Inventory," as defined in the Loan Agreement. The Loan Agreement also requires
the Company to maintain, at all times, a net worth of $500,000. The Loan
Agreement requires the payment of a quarterly service fee of $10,000. The line
of credit is secured by substantially all assets of the Company, is guaranteed
by UTTC, and is further collateralized by $3,000,000 in letters of credit
provided by EACC. Interest on outstanding balances is charged at prime plus
1.5%. The Loan Agreement matures February 1, 1998. The line was extendible at
the option of Congress for an additional year, which option has been terminated
by Congress, as Congress has stated that at this time it does not intend to
continue as the Company's financing arm. The Company is seeking other lenders.
As compensation for 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
<PAGE>
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, which option has expired; and (ii) to purchase up to an
aggregate of 20,000,000 shares of the Company's Series E Preferred Stock.
The Company purchases approximately 95% of its products directly from
manufacturers. Approximately 30% of the Company's 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
five major manufacturers mentioned above generally provide credit terms of 180+
days while other vendors offer credit terms of 30 to 120 days.
The toy industry is seasonal with approximately 45% to 49% of the
Company's annual sales occurring during the months of October through December.
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 plans to finance its program of remodeling its existing
stores to focus on the educational and specialty toy market and of opening new
stores under the Toys International name in up-scale shopping malls primarily
through lease financing.
The Company has prepared cash flow forecasts for the fiscal year ending
March 31, 1998. Management acknowledges that the Company will require additional
financing in addition to its letter of credit with Congress and from vendor
credit lines in order to meet its capital requirements for the fiscal year
ending March 31, 1998. In addition, the Company will require additional capital
to redesign current and future retail locations to incorporate its plans to
focus on the educational and specialty toy market. The Company has entered into
a letter of intent with West America Securities Corp. ("West"), a broker dealer,
to engage in an initial public offering for the Company's Series E Preferred
Shares. The letter of intent provides for an offering of approximately
$3,000,000. In the event Nasdaq or a stock exchange does not approve the listing
of the shares of the Series E Preferred Stock, the offering may not be
undertaken by West. Further, there can be no assurance that this offering will
be consummated. In addition, Mr. Ilan Arbel, President of UTTC and a former
Director of the Company, in a letter dated June 10, 1997, represented his
willingness to provide additional working capital to the Company, should such be
necessary, through September 30, 1998.
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.
<PAGE>
The toy and hobby retail industry faces a number of potentially adverse
business conditions including price and gross margin pressures and market
consolidation. 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 the liquidation or bankruptcy of many toy retailers throughout the United
States, including in 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's having reduced 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 achieve profitability.
New Accounting Pronouncement:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128 Earnings Per Share
("EPS"). SFAS No. 128 requires all companies to present "basic" EPS and, if they
have a complex capital structure, "diluted" EPS. Under SFAS No. 128, "basic" EPS
is computed by dividing income (adjusted for any preferred stock dividends) by
the weighted average number of common shares outstanding during the period.
"Diluted" EPS is computed by dividing income (adjusted for any preferred stock
or convertible stock dividends and any potential income or loss from convertible
securities) by the weighted average number of common shares outstanding during
the period plus the number of additional common shares that would have been
outstanding if any dilutive potential common stock had been issued. The issuance
of antidilutive potential common stock should not be considered in the
calculation. In addition, SFAS No. 128 requires certain additional disclosures
relating to EPS. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997. Thus, the Company expects to adopt the
provisions of this statement in fiscal year 1998. Management does not expect the
adoption of this pronouncement to have a significant impact on the Company's
financial statements.
MARKET FOR COMMON EQUITY
The Company's Common Stock is currently quoted on the Nasdaq SmallCap Stock
<PAGE>
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) Warrants(1) Units(2)
Calendar Period Low High Low High Low High
- --------------- --- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
1995
01/01/95 - 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
1996
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
07/01/96 - 09/30/96 3/4 2 1/2
10/01/96 - 12/31/96 1 1/8 1 3/8
1997
01/01/97 - 03/31/97 1 1 1/4
04/01/97 - 06/30/97 1 1/8 1 1/8
- ---------------------
</TABLE>
(1) The Common Stock and Warrants issued in the Company's initial public
offering in November 1994 started to trade separately on February 6, 1995. The
Warrants expired in February 1997.
(2) The Company's Units only traded from November 2, 1994 through February
6, 1995.
As of June 30, 1997, there were 260 holders of record of the Company's
Common Stock, although the Company believes that there are approximately 1,000
additional beneficial owners of shares of Common Stock held in street name. As
of June 30, 1997, the number of outstanding shares of the Company's Common Stock
was 4,103,519.
<PAGE>
BUSINESS
History
The Company was founded in 1974, at which time it operated one store under
the name Play Co. Toys in Escondido, California. The Company now operates
twenty-one stores throughout Southern California in the Los Angeles, Orange, San
Diego, Riverside, and San Bernadino Counties. This includes the four stores
which the Company has closed pending the earlier of (i) the return of same to
their respective landlords; or (ii) the November and December holiday season, at
which time the stores will be reopened temporarily. Prior to its corporate
restructuring in 1996 and its acquisition of Toys International ("Toys") in
January 1997, the Company, which was a retailer of children's and adult toys,
games, and hobby products, operated stores which averaged approximately 10,000
square feet in size and were located in highly trafficked strip shopping
centers. These stores ("the Company Originals") sell traditional and promotional
toys.
Company Outlook
In the beginning of 1996, the Company redefined its corporate goals and
philosophy, changing its focus from the sale of solely promotional and
traditional toys to the sale of educational, new electronic interactive, and
specialty and collectible toys and items. In light of its new focus, during
fiscal 1997, the Company redesigned three of its Company Originals, opened a new
flagship store in Santa Clarita, and acquired the three Toys stores. In
conformance with its new goals, the Company's new stores ("Contemporaries")
shall be smaller (3,500 to 5,200 square feet in size) and shall operate in
"exclusive" highly trafficked malls rather than in strip shopping centers. The
Company's Toys stores and Contemporaries are expected to produce higher gross
profits since, in addition to carrying their historical inventory of lower
margin promotional toys, they shall sell educational and electronic interactive
games and toys, specialty products, and collector's toys, which generally carry
higher gross margins.
The Company proposes to redesign six Company Originals into
Contemporaries and open an additional nine locations by the end of fiscal 1999.
Four of the addition locations shall be opened by the end of calendar year ended
1997. The remaining new locations shall be opened by the end of calendar 1998.
The Company anticipates having twenty-eight locations by the end of 1999. In
order to continue to adjust to consumer preferences, the Company shall take a
proactive approach by continuously reviewing each individual store's sales
history and prospects on an individual basis to decide on the appropriate
product mix.
Acquisition of Toys International
In January 1997, the Company acquired substantially all of the assets
of Toys. The acquisition, in principal, included the assignment to the Company
of the three store leases held by Toys and all of Toys' inventory. In order to
ensure a smooth transition in operations, the President of Toys, Mr. Gayle
Hoepner, continued on as a consultant to the Company for a period of ninety
days. The funding for the purchase of the stores was obtained through the
exercise by
<PAGE>
Europe America Capital Corporation ("EACC") of its option to purchase 1,200,000
shares of the Company's Series E Preferred Stock. These shares were issued to an
assignee of EACC. The funding obtained from the exercise was $1,200,000. See
"Business-Financing."
Merchandising Strategy; Refocusing of Corporate Direction
Traditionally, the Company's merchandising strategy was to offer an
alternative, less intimidating environment than that provided by Toys R Us, a
competitor of the Company. In particular, the Company stocks all of its items at
eye level (not vertically, as other stores often do), provides clerks to assist
customers, and implements a policy of treating its customers with courtesy and
respect. The Company has augmented its product lines in its Contemporaries and
will continue to provide these quality services to its patrons at all of its
stores.
As discussed herein, in the beginning of 1996, management of the
Company realized the inherent value in, and thus the demand for, a retail outlet
which provides a combination of (i) educational, new electronic interactive, and
specialty and collectible toys and items; and (ii) traditional and promotional
toys. Accordingly, it refocused its corporate objectives and changed its
business plan to emphasize the marketing and sale of such goods. To achieve its
goals, the Company developed a new store design and marketing format which
provides an interactive setting together with a retail operation. This format
and design will form the foundation for the Company's future direction and
growth plans, thereby allowing the Company to meet the demand mentioned above.
The Company has thus far (i) remodeled three Company Originals as Contemporaries
during fiscal year 1997; and (ii) opened its first Contemporary as its flagship
store in Santa Clarita, California. By the end of calendar year 1997, the
Company intends to open four Contemporaries in upscale malls rather than in
strip centers where most of the Company's Company Originals are located. By the
end of fiscal 1999, the Company expects to have opened nine new stores and to
have redesigned six Company Originals as Contemporaries, thereby continuing the
implementation of the Company's redirection and new business plan. The Company
shall periodically review each individual store's sales history and prospects on
an
individual basis to decide on the appropriate product mix. The Company views its
new corporate goals with excitement and shall continue to refocus its product
lines and strategies for the future. Presently, the majority of its stores,
Company Originals, will continue to offer a broad in-stock selection of products
at competitive prices and with an emphasis on customer service. The Company
generally prices its promotional items to be competitive with Toys R Us, using
Toys R Us prices as a guideline. While the Company does not stock the depth or
breadth of selection of toys for its Company Originals, as Toys R Us does, the
Company does strive to stock all basic categories of toys and all television
promotional items. The Company also offers a special order program for many
items and offers this service free to its customers.Wholesale Operations Since
June 1994, the Company has sold toy and hobby items on a wholesale basis to
<PAGE>
military bases located in Southern California. The Company presently sells
toys and hobby items on a wholesale basis to the following military bases: (i)
Camp Pendleton Marine Corp. Recruit Depot; (ii) Miramar Naval Base; (iii) Marine
Base, Barstow, California; (iv) Marine Corp. Air Station, El Toro, California;
(v) Marine Corp. Air Station at Yuma, Arizona; and (vi) 29 Palms Marine Base in
29 Palms, California. With four of six military bases to which it sells, the
Company has agreements which provide that the Company shall sell to such
purchasers, on a wholesale basis, those items requested and shall give credit
for those items which are not sold and are returned to the Company. Though the
profit margin obtained from selling wholesale is low, the costs incurred in
selling wholesale are minimal since the Company 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 in selling such
items on a wholesale basis or in expanding its wholesale sales from present
levels. The plan to increase wholesale sales is solely intended to augment the
Company's retail operation. Wholesale sales to military bases totaled
approximately $619,000, or 3% of sales, for the year ended March 31, 1997 as
compared to $911,400, or 4% of sales, for the year ended March 31, 1996.Products
The Company Originals sell children's and adult toys, games, bicycles,
and other wheel goods, sporting goods, puzzles, Nintendo, and Sega electronic
game systems and cartridges for such game systems, cassettes, and books. They
offer over 15,000 items for sale. The Contemporaries and two of the Toys stores
also sell some of these toys and in addition, sell educational toys, Beanie
Babies, Steiff and North America Bears, Small World toys, LBG trains, CD-ROMs,
electronic software games, and Learning Curve products. The third Toys store,
Tutti Animali, is a unique store which sells only stuffed animals.
Inventory
Until recently, the Company's stores were serviced from two adjacent
distribution facilities (one 43,000 square feet in size, the other 18,000 square
feet in size) encompassing an aggregate of approximately 61,000 square feet.
However, as of April 15, 1997, the Company returned 12,800 feet of the 18,000
square foot warehouse space to the landlord. The Company continues to purchase
approximately 95% of its products directly from manufacturers and ships the
products to its stores from its distribution center. Inventory and shipment of
products continues to be monitored by a computerized point-of-sale system which
was installed during fiscal years 1990 and 1991 at an approximate cost to the
Company of $1,000,000. The point-of-sale system is a sophisticated scanning,
inventory control, purchasing, and warehouse system which allows each store
manager to monitor sales activity and inventory at each store. It monitors sales
at all store locations and automatically notifies the warehouse and shipping
department each time stock of a particular item is low or out, depending upon
the item and the instructions
<PAGE>
programmed into it. The Company's stores generally are restocked with products
on a weekly basis, although certain stores and certain items may be restocked at
different intervals. In addition, restocking of products is generally increased
during the fourth calendar, during the November and December holiday season:
some stores and some items are restocked on a daily basis during such period.
All shipments to stores are made by Company owned or leased vehicles.
Each store employs a store manager, an assistant manager, and between fifteen to
twenty-five full time and part time employees. Each of 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.
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. Even after the
introduction of educational products described herein, the Company anticipates
that the majority of its sales will continue to be generated in the fourth
quarter of the calendar year, particularly in November and December. While the
Company anticipates that sales in the remaining three quarters will increase as
a result of its refocus and the opening of three Contemporaries, the remodeling
of three Company Originals, and the acquisition of three Toys stores, there can
nonetheless be no assurance that the Company is correct in such opinion.
Research and Development
In determining the appropriate site at which to open new store
locations, the Company utilizes a site evaluation model based upon demographics.
The model was originally developed in 1990 by National Decision Systems,
Encinitas, California, at a cost to the Company of approximately $10,000. It is
based upon approximately 400 census variables which were originally derived from
the variables surrounding the Company's then existing eighteen stores. Whenever
the Company contemplates opening a store, it compares the demographic variables
of the contemplated location against those of its model. (This model is not used
for Toys stores.) Positive factors and negative factors are given certain
ratings, and a score is derived from such ratings. The strength of the score
guides management of 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 income level, number of children per household, age groups of such
children, number of wage earners per household, proximity of other toy stores,
and the percentage of home ownership within a one, three, and five mile radius
of the contemplated store location.
The Company continues its practice of typically not opening stores
within a three mile radius of a Toys R Us store. Management's policy is based on
its understanding of Toys R Us' policy of not opening a new Toys R Us store
within a ten mile radius of an existing Toys R Us
<PAGE>
location. Such policy generally has allowed the Company to open new stores in
between Toys R Us locations, with the assurance that a new Toys R Us store, in
all likelihood, would not be opened within a three mile radius of any The
Company stores. This policy is consistent with the parameters of its site
evaluation model, and management believes that reliance on the model
significantly increases the probability that a new store will be successful.
There can be no assurance, however, that management is correct in such opinion.
Trademarks
In 1976, the Company 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 applied
for, and was granted in 1994, a federal registration for the trademark "TKO."
Included in the purchase of Toys was its Toys International and Tutti Animali
trademarks.
Financing
On February 1, 1996, the Company entered into a Loan and Security
Agreement ("the Loan Agreement") with Congress to replace its then existing
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 all of the Company's assets and a $2,000,000 letter of credit ("L/C")
provided by EACC, an affiliate of Ilan Arbel, a former Director of the Company.
The Congress Financing is also guaranteed by UTTC, the majority stockholder of
the Company.
In connection with the issuance of the L/C, on February 2, 1996, the
Company granted to EACC options (i) to purchase an aggregate of 1,250,000 shares
of Common Stock at a purchase price of 25% of the closing bid price for the
Common Stock on the last business day prior to exercise, for a period of six
months from issuance (this option expired unexercised); and (ii) to purchase an
aggregate of 20,000,000 shares of the Company's Series E Preferred Stock. To
date, EACC has exercised its option and purchased an aggregate of 2,862,070
shares of the Series E Preferred Stock of which 2,500,570 shares are presently
outstanding after the conversion of an aggregate of 361,500 of such shares into
Common Stock. In addition, in March 1997, EACC issued an additional $1,000,000
L/C to Congress in order for the Company to obtain additional financing from
Congress. In April and May 1997, Europe America Capital Foundation ("EACF"),
European Ventures Corp. ("EVC"), and Vermongenstreuhand G,H,M,B provided an
additional aggregate amount of $700,000 to the Company as an advance against
equity, for which 700,000 shares of the Series E Stock has been issued.
The Company relies on credit terms from manufacturers to purchase
nearly all of its inventory. While 90% of accounts payable to vendors are
current as of the date of this document, there can be no assurance that the
Company will be able to keep such payables current in the future. Such credit
arrangements vary for reasons both within and outside the control of the
Company.
<PAGE>
Competition
The toy and hobby products market is highly competitive. Though the
Company's Contemporary and Toys stores, unlike other toy stores, offer a
combination of promotional, traditional, educational, new electronic
interactive, specialty, and collectible toys and items, the Company remains in
direct competition with local, regional, and national toy retailers, including
Toys R Us (considered to be the dominant toy retailer in the United States) with
respect to its traditional toy items. In order to combat the competition, the
Company's Contemporary and Toys stores offer specialty items such as Beanie
Babies and Steiff and North American bears, etc. 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's lowering its prices on many items, thereby
reducing the Company's profits.
The toy and hobby products market is particularly characterized by
large retailers and discounters with intensive advertising and marketing
campaigns and with deeply discounted pricing of such products. 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 retail toy industry in
Southern California. Although both the Company and Toys R Us have been in the
retail toy industry in Southern California for approximately twenty years, Toys
R Us has increased its market share at a significantly faster rate than the
Company. The domination of Toys R Us and Kay Bee, the weak Southern California
economy, and the Company's policy of not opening Company Originals and
Contemporaries within three miles of an existing Toys R Us store may inhibit the
Company's ability to compete effectively in the retail toy industry or to
establish new stores in favorable locations.
The Company feels that the unfulfilled need in the marketplace is a
retail outlet which offers a combination of the traditional, name-brand, quality
promotional toy items and educational, electronic interactive, and collector's
items and products. Combining the promotional and educational toy segments of
the market into one retail location is believed to be a unique concept that
should prove to differentiate the Company's stores from those of any of its
larger or similar size competitors. Management has been unable to locate any
other retailer currently using this combined marketing concept. The Company
competes for the educational toy customer with other specialty stores such as
Disney Stores, Warner Bros. Stores, Imaginarium, Learning Smith, Lake Shore,
Zainy Brainy, and Noodle Kidoodle.
Employees
As of March 31, 1997, the Company has one executive office,
approximately 70 full time employees, and approximately 280 part time employees.
None of the employees of the Company is represented by a union, and the Company
considers employee relations to be good.
Properties
<PAGE>
The Company maintains approximately 3,500 square feet of executive
office space and until recently, the Company's stores were serviced from two
adjacent distribution facilities (one 43,000 square feet in size, the other
18,000 square feet in size), encompassing an aggregate of approximately 61,000
square feet, at 550 Rancheros Drive, San Marcos, California. As of April 15,
1997, however, the Company returned 12,800 feet of the 18,000 square foot
warehouse space to the landlord. The combined 51,700 square foot office and
warehouse space are leased at an approximate annual cost of $281,000, the lease
expiring on April 30, 2000. The office and warehouse are leased from a company
owned in part by Richard Brady, the President and a Director of the Company. The
Company believes that the lease is on terms no more or less favorable than terms
it might otherwise have negotiated with an unaffiliated party. In addition, the
Company currently leases the following premises on the following terms for its
retail stores:
<TABLE>
<CAPTION>
SIZE LEASE
STORE LOCATIONS (IN SQ. FEET) EXPIRATION ANNUAL COST
<S> <C> <C> <C>
Escondido (1) 11,200 01/00 $120,096
- ----------
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 05/00 127,881
- --------
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 (1) 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
<PAGE>
Orange 13,125 01/01 96,360
- ------
1349 E. Katella
Orange, CA 92513
Pasadena 9,800 12/98 96,000
- --------
885 Arroyo Parkway
Pasadena, CA 91105
San Dimas (1) 8,780 03/01 108,136
- ---------
612 W. Arrow Highway
San Dimas, CA 91773
Rialto 10,600 11/03 78,000
- ------
578 W. Foothill Blvd.
Rialto, CA 92376
Redlands 10,478 06/97 95,942
- --------
837 Tri-City Center
Redlands, CA 92373
Whittier (1) 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
Santa Clarita 12,000 08/06 108,000
- -------------
19232 Soledad Canyon Rd.
Santa Clarita, CA 91351
South Coast Plaza 5,183 01/04 159,377
- -----------------
Toys International
3333 Bristol Street, Suite 1030
Costa Mesa, CA 92626
<PAGE>
Century City 3,869 01/98 133,481
- ------------
Toys International
Building B, 1st level
10250 Santa Monica Blvd.
Los Angeles, CA 90067
Crystal Court 1,220 01/99 5% of sales
- -------------
Tutti Animali
333 Bear Street
Costa Mesa, CA 92626
- ----------------
</TABLE>
1) Between March and May 1997, the Company temporarily closed four stores,
all of which will be reopened for the November and December holiday
season unless the Company can come to terms with their landlords to
return the locations. The Company is attempting to locate suitable
replacement tenants to assume the leases for these stores. See
"Business-Legal Proceedings."
In addition to the above stores, the Company previously operated
several Company Originals which were closed for various reasons. The effect of
closing the stores generally has been positive, as most of them 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.
In April 1997, the Company signed a lease to open a new store in
Clairemont, California. This facility should open during the 3rd calendar
quarter of 1997. Since March 1997, the Company also has closed, temporarily,
until the November and December holiday season, four stores. These stores were
closed because they did not generate revenues as anticipated; they were not
permanently closed, however, because the leases therefor are of considerable
duration and cannot be broken without significant potential hardship (legal
and/or financial) to the Company. The Company is searching for suitable
replacement tenants to assume the Company's lease obligations for these stores.
See "Business-Legal Proceedings."
In addition, the Company is now 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.
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, except for the litigation matters involving three of the four stores
the Company has temporarily closed. No Director, Officer, or affiliate of the
Company, nor any associate of same, is a party to, or has a material interest
in, any proceeding adverse to the Company.
<PAGE>
From March 1997 through May 1997, the Company temporarily closed four of its
locations due to non-profitable operations. The Company is seeking to sublease
such locations or return the locations to the landlords pursuant to a
settlement; however, in the event that the Company is unable to obtain
subleases, it may reopen the stores for the holiday season in October. In June
1997, the landlords for three of the four locations filed lawsuits against the
Company seeking, in one of the suits, the full value of the lease payments for
the terms of the lease. The Company is preparing answers to these lawsuits and
intends to defend against the actions unless resolutions between the parties
thereto can be reached. Management expects that these actions will be settled
before trial without there being a material effect on the Company's operations.
MANAGEMENT
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>
Harold Rashbaum 70 Chairman of the Board
Richard Brady 45 Chief Executive Officer, President,
and Director
James Frakes 40 Chief Financial Officer and Secretary
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. Each Director is elected for a period of one year at an annual meeting
of the Company's shareholders and serves until his successor is duly elected.
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
<PAGE>
shareholders for damages caused by breaches of said Directors' fiduciary duties.
As a result of such provision, stockholders may be unable to recover damages
against then Directors for actions which constitute negligence or gross
negligence or are in violation of their fiduciary duties. This provision in the
Company's Certificate of Incorporation may reduce the likelihood of derivative,
and other types of shareholder, litigation against Directors.
Harold Rashbaum was appointed Chairman of the Board of Directors on
September 10, 1996. He has been the President, Chief Executive Officer, and a
Director of Hollywood Productions, Inc. ("Hollywood") since January 1997. From
May 1996 to January 1997, Mr. Rashbaum served as Secretary and Treasurer of
Hollywood and the President of Breaking Waves, Inc., a subsidiary of Hollywood.
Also since May 1996, Mr. Rashbaum has served as the Secretary, Treasurer, and a
Director of D.L. Productions, Inc. ("DLP"). He became President of DLP in
January 1997. Since February 1996, Mr. Rashbaum has also been the President and
a Director of H.B.R. Consultant Sales Corp. ("HBR"), of which his wife is the
sole stockholder. Mr. Rashbaum was a consultant to the Company from July 1995 to
September 10, 1996. Prior thereto from February 1992 to June 1995, Mr. Rashbaum
was a consultant to 47th Street Photo, Inc., an electronics retailer. Mr.
Rashbaum held this position at the request of the bankruptcy court during the
time 47th Street Photo, Inc. was in Chapter 11. From January 1991 to February
1992, Mr. Rashbaum was a consultant for National Wholesale Liquidators, Inc., a
major retailer of household goods and housewares.
Richard Brady is a co-founder of the Company and has acted as the Company's
Chief Executive Officer and President since December 1995. Mr. Brady was the
Executive Vice President, Secretary, and a Director from the Company's inception
in 1974 until December 1996. He was reelected Director of the Company in May
1997.
James Frakes was elected Chief Financial Officer and Secretary of the
Company in June 1997 and July 1997, respectively. Prior thereto, from June 1990
to March 1997, Mr. Frakes was Chief Financial Officer of Urethane Technologies,
Inc. ("UTI") and two of its subsidiaries, Polymer Development Laboratories, Inc.
("PDL") and BMC Acquisition, Inc. These were specialty chemical companies which
focused on the polyurethane segment of the plastics industry. Mr. Frakes was
also Vice President and a Director of UTI during this period. In March 1997,
three unsecured creditors of PDL filed a petition for the involuntary bankruptcy
of PDL. This matter is pending before the United States Bankruptcy Court,
Central District of California. In 1989, Mr. Frakes and his wife purchased JLJ
Enterprises d/b/a TME Travel ("JLJ"), a travel agency which provided services
primarily for the business community. Mr. Frakes was the Vice President, Chief
Financial Officer, and a Director of JLJ; his wife was the President and a
Director. In November 1992, Mr. Frakes and his wife sold JLJ. From 1985 to 1990,
Mr. Frakes was a manager for Berkeley International Capital Corporation, an
investment banking firm specializing in later stage venture capital and
leveraged buyout transactions. In 1980, Mr. Frakes obtained a Masters in
Business Administration from University of Southern California. He obtained his
Bachelor of Arts degree in history from Stanford University from which he
graduated with honors in 1978.
Sheikhar Boodram was appointed as a Director of the Company on February
2, 1996.
<PAGE>
Mr. Boodram was a Director of American Toys from May 1993 until July 1996.
Since September 1992, Mr. Boodram has been the Vice President and a Director of
UTTC. From October 1991 to September 1992, Mr. Boodram was employed as a
designer with UTTC. Mr. Boodram has been the President and Secretary of
Multimedia Concepts International, Inc. since June 12, 1995. He 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.
Executive Compensation
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
or paid by the Company during the years ended March 31, 1997, 1996, and 1995 to
each of the named Executive Officers of the Company.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
(a) (b) (c) (d) (e)
Name and Principal Other Annual
Position Year Salary($) Bonus($)(1) Compensation($)
<S> <C> <C> <C> <C>
Richard Brady 1997 108,000 - 6,179(2)
Chief Executive Officer, 1996 117,230 - 7,979(2)
President and Director 1995 120,000 - 7,829(2)
----------------------
</TABLE>
(1) No bonuses were paid during the periods herein stated.
(2) Includes an automobile allowance of $4,800 for 1997 and $6,600 for 1996
and 1995, and the payment of life insurance premiums of $1,379, $1,379, and
$1,888 for 1997, 1996, and 1995, respectively.
1994 Stock Option Plan
In 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 50,000 (reflects 3 for 1
reverse split) shares of Common Stock may be granted from time to time to key
employees, Officers, Directors, advisors, and independent consultants to the
Company and its subsidiaries. The Company has granted to James Frakes, Chief
Financial Officer, pursuant to his hire, options to purchase 30,000 shares of
Common Stock at an exercise price of $3.25 per share, vesting at the rate of
10,000 shares per annum for the year ending July 1998, 1999, and 2000.
The Board of Directors is charged with administration of the Plan and
is generally empowered to interpret the Plan, prescribe rules and regulations
relating thereto, determine the
<PAGE>
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 (not less than one year)
determined by the Board. Options may be exercised only while the original
grantee has a relationship with the Company or at the sole discretion of the
Board, within ninety days after the original grantee's termination. 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
month period following such retirement. Options may be exercised up to
thirty-six months after the death or total and permanent disability of an
Optionee. In the event of certain basic changes in the Company, including a
change in control of the Company as defined in the Plan, in the discretion of
the Board, each option may become fully and immediately exercisable. ISOs are
not transferable other than by will or by the laws of descent and distribution.
Options may be exercised during the holder's lifetime only by the holder or his
guardian or legal representative.
Options granted pursuant to the Plan may be designated as ISOs with the
attendant tax benefits provided therefor pursuant to Sections 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 ESOP Plan") which covers substantially all
employees of the Company. The ESOP Plan was filed on July 14, 1995 with the
Internal Revenue Service and includes provisions for both employee stock
ownership and a 401(k) Plan. The ESOP Plan allows contributions only by the
Company: these can be made annually at the discretion of the Company's Board of
Directors. The ESOP Plan has been designed to invest primarily in the Company's
stock. The 401(k) portion of the ESOP 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 Plan may result
in an expense, resulting in a reduction in earnings, and may dilute the
ownership interests of persons who currently own securities of the Company.
<PAGE>
PRINCIPAL SECURITYHOLDERS
The following table sets forth certain information as of June 10, 1997
based upon information obtained by the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of 5% or more of the outstanding shares of Common Stock;
(ii) each Officer and Director; and (iii) all Officers and Directors as a group.
Except to the extent indicated in the footnotes to the table, each of the
individuals listed below possesses sole voting power with respect to the shares
of Common Stock listed opposite his name.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Name and Address Shares of Shares of % of Common % of Series E Stock (1)
of Beneficial Owner Series E Stock Common Stock outstanding
Stock outstanding (1)
Prior to After
Offering Offering
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Harold Rashbaum
c/o Play Co. Toys & -- -- -- -- --
Entertainment Corp.
550 Rancheros Drive
San Marcos, CA
- ----------------------------------------------------------------------------------------------------------------------------------
Richard Brady
c/o Play Co. Toys & -- 25,587 * -- --
Entertainment Corp.
550 Rancheros Drive
San Marcos, CA
- ----------------------------------------------------------------------------------------------------------------------------------
Sheikhar Boodram
c/o Play Co. Toys & -- -- -- -- --
Entertainment Corp.
550 Rancheros Drive
San Marcos, CA
- ----------------------------------------------------------------------------------------------------------------------------------
United Textiles &
Toys Corporation 225,000 2,419,581(2) 59.3 6.5 5.4
448 West 16th Street
New York, NY 10011
- ----------------------------------------------------------------------------------------------------------------------------------
Multimedia Concepts
International, Inc. 808,070 --(3) --(3) 23.4 19.2
448 West 16th Street
New York, NY 10011
- ----------------------------------------------------------------------------------------------------------------------------------
Europe American
Capital Foundation 1,172,500 --(4) --(4) 34.0 27.9
Box 47
Tortola, BVI
- ----------------------------------------------------------------------------------------------------------------------------------
Volcano Trading
Limited 750,000(5) --(6) --(6) 19.0 16.0
Via Cantonale, #16
Lugano Switzerland
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
* Less than 1%
(1) Does not include the shares of Common Stock issuable upon the
conversion of (i) 3,450,570 shares of the Series E Stock outstanding prior to
the Offering or (ii) 4,200,570 shares of Series E Stock outstanding after the
Offering.
(2) Does not include 1,350,000 shares of Common Stock issuable upon the
exercise of 225,000 shares of the Series E Stock. Includes 578,742 shares issued
to UTTC in connection with the August 1996 distribution of the Company's shares
by American Toys in August 1996.
(footnotes from previous page)
(3) Does not include 4,818,420 shares of Common Stock issuable upon the
exercise of 803,070 shares of the Series E Stock. (4) Does not include 7,035,000
shares of Common Stock issuable upon the exercise of 1,172,500 shares of the
Series E Stock. (5) Includes 500,000 shares of the Series E Stock issuable upon
the exercise of 500,000 Warrants. See "Plan of Distribution for the Securities
of the Selling Securityholder." (6) Does not include 1,500,000 shares of Common
Stock issuable upon the exercise of 250,000 shares of the Series E Stock.
Plan of Distribution for the Securities of the Selling Securityholder
This Prospectus also covers the offering of 250,000 shares of Series E
Stock and 500,000 Warrants and the shares of Series E Stock issuable upon the
exercise of Warrants, owned by one securityholder, Volcano Trading Limited. This
Prospectus shall be delivered by said Selling Securityholder upon the sale of
any securities by said holder. These shares of Series E Stock and Warrants are
not being sold through the Underwriter in this Offering. The shares of Series E
Stock, the Warrants, and the shares of Series E Stock issuable upon the exercise
of such Warrants may be sold from time to time by the Selling Securityholder,
subject to a 90 day lock up agreement commencing on the Closing Date. Sales of
such Securities or even the potential of such sales at any time may have an
adverse effect on the market prices of the Securities offered hereby. See "Risk
Factors."
The sale of the Securities by the Selling Securityholder may be
effected from time to time in negotiated transactions, at fixed prices which may
be changed, and at market prices prevailing at the time of sale, or in a
combination thereof. The Selling Securityholder may effect such transactions by
selling directly to purchasers or to or through broker-dealers which may act as
agents or principals, including in a block trade transaction in which the broker
or dealer will attempt to sell the Securities as agent but may position and
resell a portion of the block as principal to facilitate the transactions or
purchases by a broker or dealer as principal and resale by such broker or dealer
for its own account pursuant to this Prospectus, or in ordinary brokerage
transactions and transactions in which the broker solicits purchasers. In
effecting sales, brokers or dealers engaged by the Selling Securityholder may
arrange for other brokers or dealers to participate. Such broker-dealers may
receive compensation in the form of discounts,
<PAGE>
concessions, or commissions from the Selling Securityholder and/or the
purchasers of the Securities, as applicable, for which such broker-dealers may
act as agents or to whom they sell as principal, or both (which compensation as
to a particular broker-dealer might be in excess of customary commissions). The
Selling Securityholder and any broker-dealers that act in connection with the
sale of the shares of Series E Stock and/or by the Selling Securityholder might
be deemed to be "underwriters" within the meaning of Section 2(11) of the Act.
In that connection, the Company has agreed to indemnify the Selling
Securityholder and the Selling Securityholder has agreed to indemnify the
Company, against certain civil liabilities including liabilities under the Act.
At the time a particular offer of its Securities is made by or on
behalf of the Selling Securityholder, to the extent required, a prospectus
supplement will be distributed which will set forth the number of shares of
Series E Stock and/or Warrants being offered and the terms of the Offering,
including the name or names of any underwriters, dealers, or agents; the
purchase price paid by any underwriter for shares purchased from the Selling
Securityholder; any discounts, commissions, or concessions allowed or reallowed
or paid to dealers; and the proposed selling price to the public.
Under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder, any person engaged in a
distribution of Company's Securities offered by this Prospectus may not
simultaneously engage in market-making activities with respect to such Company
securities during the applicable "cooling off" period (nine days) prior to the
commencement of such distribution. In addition, and without limiting the
foregoing, the Selling Securityholder will be subject to applicable provisions
of the Exchange Act and rules and regulations thereunder, including without
limitation, Rules 10b-6 and 10b-7, in connection with transactions in such
securities, which provisions may limit the timing of purchases and sales of
Company securities by the Selling Securityholder.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 30, 1996, pursuant to the requirements of the Company's Loan
Agreement with Congress, American Toys, the then majority stockholder of the
Company, converted all $1,400,000 of debt owed by the Company to it into equity.
In exchange for the debt, American Toys agreed to receive from the Company one
share of Series D Preferred Stock with the right to elect 2/3 of the Company's
Board of Directors upon stockholder approval. In August 1996, the one share of
Series D Preferred Stock was converted into 1,157,028 shares of the Company's
Common Stock based on the initial amount of the debt divided by the average
price of the shares for a 90 day period prior to the conversion. This was
performed in order for American Toys to spin such shares off to its stockholders
and divest itself of its interest in the Company.
In February 1996, pursuant to the terms of the Congress Financing, EACC
delivered to Congress a $2,000,000 L/C. The Congress Financing is also
guaranteed by UTTC, the majority stockholder of the Company. See "Business -
Financing" and "Principal Securityholders."
From October 1996 to June 1997, EACC exercised its option and purchased an
aggregate
<PAGE>
of 3,562,070 shares of the Series E Class I Preferred Stock, of which 361,500
shares were converted into shares of Common Stock. The proceeds of the funds
received for such investments have enabled the Company to acquire substantially
all of the assets of Toys, to finance the opening of a Contemporary in Santa
Clarita, California, to redesign three other store locations, and for general
working capital.
In March 1997, EACC issued an additional $1,000,000 L/C to Congress as
security. This L/C has enabled the Company to receive additional advances of up
to $1,000,000 from Congress. EACC has not received any compensation for the
issuance of this L/C.
DESCRIPTION OF SECURITIES
The Company's authorized capitalization consists of 45,000,000 shares
of capital stock. The Company is authorized to issue 40,000,000 shares of Common
Stock, par value $.01 per share and 5,000,000 shares of the Series E Stock, par
value $.01 per share. As of June 30, 1997, there were 4,103,519 shares of Common
Stock and 3,450,570 shares of Series E Stock issued and outstanding, all of
which were fully paid and non-assessable. The following summary description of
the Common Stock, Series E Stock, and Warrants is qualified in its entirety by
reference to the Company's Articles of Incorporation and all amendments thereto.
Common Stock
Holders of Common Stock are entitled to one vote for each share held.
There are no preemptive, subscription, conversion, or redemption rights
pertaining to the Common Stock. Holders of shares of Common Stock are entitled
to receive such dividends as may be declared by the Board of Directors out of
assets legally available therefor and to share ratably in the assets of the
Company available upon liquidation. See "Certain Relationships and Related
Transactions."
The holders of shares of Common Stock do not have the right to cumulate
their votes in the election of Directors and accordingly, the holders of more
than 50% of all the shares outstanding can elect all of the Directors. Remaining
stockholders will not be able to elect any Directors.
Warrants
The Warrants and the underlying shares of Series E Stock will be in
registered form, pursuant to the terms of a warrant agreement (the "Warrant
Agreement") between the Company and Continental Stock Transfer & Trust Company,
as "Warrant Agent," so that the holders of Warrants will receive, upon exercise,
registered shares of Series E Stock. The following statements are summaries of
certain provisions of the Warrant Agreement, copies of which may be examined at
the principal corporate offices of the Warrant Agent and a form of which is
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part. The following statements are subject to the detailed provisions of the
Warrant Agreement.
<PAGE>
Each Warrant entitles the holder thereof to purchase one share of
Series E Stock at a price of $5.00 for a period of four years commencing one
year from the Closing Date. Unexercised Warrants will automatically expire at
the end of such four year period. Although the Company has no current intention
of reducing the exercise price or extending the exercise period of the Warrants,
it is possible that either or both of such changes may be effected by resolution
of the Board of Directors in the future. In the event that the exercise price of
the Warrants is reduced, or the exercise period of the Warrants is extended, the
Company will be required to have a post-effective amendment filed and declared
effective before the Warrants could be exercised.
From and after the date of this Prospectus, Warrants may be sold,
transferred, or assigned either together with or separately from the shares of
Series E Stock being sold.
The Warrants are redeemable by the Company at any time, commencing one
year from the Closing Date, upon 30 days' prior notice, at a redemption price of
$.05 each, provided that the closing bid quotation of the Series E Stock for at
least 20 consecutive trading days, ending on the third day prior to the date on
which the Company gives notice, has been at least 170% of the exercise price of
the Warrants being redeemed. The Warrants will remain exercisable during the 30
day notice period. In the event that the Company decides to redeem the Warrants,
it will notify all Warrantholders thereof by mail and will additionally publish
a Notice of Redemption in the Wall Street Journal as to the date of redemption.
Redemption of the Warrants could cause the holders to exercise the Warrants and
pay the exercise price at a time when it may be disadvantageous for the holders
to do so, to sell the Warrants at the then current market price when they might
otherwise wish to continue to hold the Warrants, or to accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants at the time of redemption. The Company will not redeem the Warrants at
any time in which its registration statement is not current, enabling investors
to exercise their Warrants during the 30 day notice period in the event of a
warrant redemption by the Company.
The exercise price and the number of shares or other securities
purchasable upon exercise of any Warrants are subject to adjustment upon the
occurrence of certain events, including the issuance of shares of Series E Stock
as a dividend and any recapitalization, reclassification, or split-up or reverse
split of the Series E Stock. No adjustment in the exercise price will be
required to be made with respect to the Warrants until cumulative adjustments
amount to $0.01 or more per Warrant; however, any such adjustment not required
to be made at any given time due to such exception will be carried forward and
taken into account in any subsequent adjustment.
In the event of any reclassification, capital reorganization, or other
similar change of outstanding Series E Stock, any consolidation or merger
involving the Company (other than a consolidation or merger which does not
result in any reclassification, capital reorganization or other similar change
in the outstanding Series E Stock), or a sale or conveyance to another
corporation of the property of the Company as, or substantially as, an entirety,
each Warrant will thereupon become exercisable only for the kind and number of
shares of stock or other securities, assets, or cash to which a holder of the
number of shares of Series E Stock purchasable (at the time of such
reclassification, reorganization, consolidation, merger or sale) upon exercise
of such
<PAGE>
Warrant would have been entitled upon such reclassification, reorganization,
consolidation, merger, or sale. In the case of a cash merger of the Company into
another corporation or any other cash transaction of the type mentioned above,
the effect of these provisions would be that the holder of a Warrant would
thereafter be limited to exercising such Warrant at the exercise price in effect
at such time for the amount of cash per share that a Warrant holder would have
received had such holder exercised such Warrant and received shares of Series E
Stock immediately prior to the effective date of such cash merger or
transaction. Depending upon the terms of such cash merger or transaction, the
aggregate amount of cash so received could be more or less than the exercise
price of the Warrant.
The Warrant Agreement contains provisions permitting the Company and
the Warrant Agent to supplement the Warrant Agreement in order to cure any
ambiguity, to correct any provision contained therein which may be defective or
inconsistent with any other provisions therein, or to make other provisions
which the Company and the Warrant Agent may deem necessary or desirable and
which do not adversely affect the interests of the Warrantholders.
Warrantholders, by virtue of their ownership of Warrants alone, have no right to
vote on matters submitted to the Company's stockholders and have no right to
receive dividends. The holders of Warrants also are not entitled to share in the
Company's assets in the event of dissolution, liquidation or winding up.
In order for a Warrantholder to be able to exercise his Warrant, the
Company must have a current Registration Statement on file with the Securities
and Exchange Commission and, unless otherwise exempt, the State Securities
Commission of the State in which the Warrantholder resides. Accordingly, the
Company would be required to file post-effective amendments to its Registration
Statement when subsequent events require such amendments in order to continue
the registration of the Common Stock underlying the Warrants. Although the
Company has undertaken and intends to keep its Registration Statement current,
there can be no assurance that the Company will keep its Registration Statement
current and, if for any reason it is not kept current, the Warrants will not be
exercisable and will lose all value. The Company's Transfer Agent has also been
appointed as its Warrant Agent responsible for all record keeping and
administrative functions in connection with the Warrants.
Series E Preferred Stock
The Company has designated 5,000,000 shares of preferred stock as the
Series E Preferred Stock (the "Series E Stock"). Pursuant to the Company's
Annual Meeting in May 1996, the Company's stockholders approved the
authorization of up to an aggregate of 20,000,000 shares of a class of preferred
stock designated as the Series E Preferred Stock. Management sought this
approval in connection with the Congress financing transaction. See
"Business-Financing." Management advised the stockholders that it would increase
the authorized number of shares of the Series E Stock pursuant to EACC's desire
to exercise its option. Initially, the Series E Stock was convertible into 20
shares of the Company's Common Stock two years from issuance. It carried a $1.00
annual dividend and liquidation preference.
Pursuant to an Information Statement mailed to the stockholders in June
1996, the
<PAGE>
Company amended the rights and preferences of the Series E Stock to designate
two classes, the "Series E Class I" and the "Series E Class II," the difference
being the Series E Class I would be convertible immediately, and the Series E
Class II would remain convertible two years from issuance. Management's decision
to change the conversion feature with respect to the Series E Class I shares was
based on its immediate need for financing. EACC agreed to exercise its option
and purchase shares of the Series E Stock if the shares were immediately
convertible. The Company needed the financing in order to effect its business
plan and to support its continued losses.
The Company held a special meeting of its stockholders on June 30, 1997
to vote on certain changes to the terms and conditions of the Series E Stock, in
accordance with a letter of intent entered into by West America Securities
Corp., in order to raise additional capital. Management has addressed its needs
with EACC, and EACC has agreed to terminate its option to purchase shares of the
Series E Stock as of the effective date of an initial public offering of the
Company's securities. Prior thereto, EACC will only exercise its option to the
extent the Company needs additional funding for operations prior to an offering.
EACC will continue to maintain the $2,000,000 and $1,000,000 letters of credit
issued in February 1996 and April 1997, respectively. In addition, EACC and its
assigns have agreed to convert their shares of the Series E Class I Preferred
Stock to Series E Class II Preferred Stock inclusive of a two year lock up and a
waiver of all dividend rights, including those which may have accrued.
Also as a result of the special meeting, the conversion ratio of the
Series E Stock was decreased from twenty to one to six to one. In addition, the
Company requested that the stockholders approve an offering of up to an
aggregate of 1,000,000 shares of the Series E Stock. Pursuant to the special
meeting, the Company's certificate of incorporation was amended to change the
terms of the Series E Stock as follows: the Series E Stock is (i) convertible
into 6 shares of Common Stock any time two years from issuance; (ii) there is a
$1.00 liquidation preference; and (iii) there are no dividend or voting rights.
The Series E Stock is not redeemable by the Company but is subject to certain
anti-dilution provisions in the case of any recapitalization, merger, or
acquisition. Of the 3,450,570 shares outstanding prior to the Offering, the
holder of 250,000 shares has received piggyback registration rights commencing
90 days from the effective date of this Offering.
Transfer Agent and Warrant Agent.
The Company's transfer agent for its Series E Stock, Common Stock, and
Warrants and the Company's Warrant Agent is Continental Stock Transfer & Trust
Company.
UNDERWRITING
West America Securities Corp. (the "Underwriter") has agreed, subject
to the terms and conditions of an Underwriting Agreement, to act as the
exclusive agent for the Company to sell on a "best efforts, all or none" basis
750,000 shares of Series E Stock and 1,500,000 Warrants offered hereby. The
Underwriter has made no commitment to purchase any or all of the shares of
Series E Stock or Warrants. It has agreed only to use its best efforts to find
purchasers for the
<PAGE>
shares of Common Stock within a period of 90 days from the date of this
Prospectus, subject to extension for an additional period of 90 days on mutual
consent of the Company and the Underwriter.
All proceeds from subscriptions will be deposited promptly into a
non-interest bearing account with Gotham Bank of New York, as escrow agent,
pursuant to an escrow agreement between the Company, the Underwriter, and such
escrow agent. Funds will be transmitted to the escrow agent for deposit in the
escrow account no later than noon of the business day following receipt. All
checks must be mad payable to "Gotham Bank of New York, as escrow agent for Play
Co. Toys & Entertainment Corp." In the event the 750,000 shares of Series E
Stock and 1,500,000 Warrants are not sold within the 90 day initial offering
period and the 90 day extension period described above, funds will be refunded
promptly to subscribers in full without deduction therefrom or interest thereon.
During the 90 day offering period and any extension, no subscriber will be
entitled to a refund of any subscription, and no funds will be released from
escrow until completion or termination of the Offering. There are none, nor will
there be any, arrangements between the Company and the Underwriter whereby
shares of Series E Stock or Warrants will be reserved for sales to persons
associated or affiliated with management of the Company or its affiliated
persons, although such persons may purchase shares of Series E Stock or Warrants
in order to assure the completion of this Offering.
The Underwriter has advised the Company that it proposes to offer the
Securities to the public at the public offering price set forth on the cover
page of this Prospectus. The Underwriter may allow to certain dealers who are
members of the National Association of Securities Dealers, Inc. ("NASD")
concessions, not in excess of $.___ per share and $_____ per Warrant.
Prior to this Offering, there has been no public market for the Series
E Stock or the Warrants. Accordingly, the offering or exercise price of the
Securities being offered hereby is determined, in large part, by negotiations
between the Company and the Underwriter on an arbitrary basis and bears no
direct relationship to the assets, earnings, or any other recognized criteria of
value. Factors considered in determining such prices, in addition to prevailing
market conditions, included the history of and the business prospects for the
Company and an assessment of the net worth and financial condition of the
Company, as well as such other factors as were deemed relevant, including an
evaluation of management, as an indication of any future market price of the
Common Stock, Series E Stock, or the Warrants.
Neither the Company nor any of its Officers, Directors, affiliates, or
associates will recommend, encourage, or advise investors to open brokerage
accounts with any broker-dealer that is obtained to make a market in the
Company's Securities. Furthermore, no promoter or anyone acting at the direction
of the Company's Officers, Directors, affiliates, associates, or promoters will
engage in such activities.
The Company has agreed to pay to the Underwriter $.12 per share and
$.003 per Warrant sold, or a total of $94,500, for the Underwriter's expenses on
a non-accountable basis, none of which expenses have been advanced to date. The
Underwriter's expenses in excess of the non-
<PAGE>
accountable expense allowance, if any, will be borne by the Underwriter. To the
extent that the expenses of the Underwriter are less than the non-accountable
expense allowance, such excess may be deemed to be additional compensation to
the Underwriter. The Company is required to pay the cost of qualifying and
registering the Securities being sold under federal and certain state securities
laws, together with any other legal and accounting fees, printing, and other
costs in connection with the Offering.
Except as otherwise described herein, the Company has agreed not to
issue equity securities for a period of two (2) years from the date hereof
without the prior consent of the Underwriter.
Although the Underwriting Agreement will provide that the Underwriter
may designate for election one person to the Company's Board of Directors, the
Underwriter has advised the Company that it has not selected such individual and
has no immediate plans to do so. If the Underwriter elects not to assert such
right, then it may designate one person to attend all Board of Directors
meetings as an observer. In the event that such an individual is designated,
such individual shall receive reimbursement of expenses for attending the
meetings of the Board of Directors.
The Underwriter was incorporated in December 1993. Prior to this
Offering, the Underwriter has not participated as a selling group member in any
underwritings and has not participated as a sole or co-manager in any public
offerings. Prospective purchasers of the Common Stock and Warrants offered
hereby should consider the Underwriter's lack of experience in being a manager
of an underwritten public offering.
The Company has granted to the Underwriter a right of first refusal for
three years following the date of this Prospectus to act as underwriter for
subsequent public or private offerings of the Company's securities by the
Company or such shareholders.
The Company has agreed not to offer, sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock, Warrants or any other
capital stock of the Company or shares or securities convertible or exercisable
into capital stock of the Company for a period of 24-months following the
closing of the Offering without the prior written consent of the Underwriter.
The Company has agreed to indemnify the Underwriter against liabilities
incurred by the Underwriter by reason of misstatements or omissions to state
material facts in connection with the statements made in this Prospectus and the
Registration Statement of which it forms a part other than such misstatements or
omissions contained in material provided by the Underwriter to the Company
specifically for inclusion therein. The Underwriter, in turn, has agreed to
indemnify the Company against liabilities incurred by the Company by reason of
misstatements or omissions to state material facts in connection with statements
made in the Registration Statement and Prospectus based on information furnished
by the Underwriter.
The foregoing does not purport to be a complete statement of the terms
and conditions of the Agreement, copies of which are filed at the offices of the
Company and Underwriter and may
<PAGE>
be examined there during regular business hours.
LEGAL OPINIONS
Legal matters relating to the shares of Series E Stock and Warrants
offered hereby will be passed on for the Company by its counsel, Klarman &
Associates, San Ramon, California. In June 1997, the Company issued to Klarman &
Associates 20,000 shares of Common Stock for legal fees of $500. Certain legal
matters shall be passed on for the Underwriter by its counsel, Eric Kloper,
Esq., New York, New York. Eric Kloper has performed per diem work for Klarman &
Associates, as of counsel, including work on four actions concerning the
Company.
EXPERTS
The financial statements of the Company as of and for the years ended
March 31, 1997 and 1996 have been audited by Haskell & White, Independent
Certified Public Accountants, to the extent and for the period set forth in
their report appearing elsewhere herein and are included in reliance upon such
report given upon the authority of that firm as experts in giving said reports.
CHANGES IN THE COMPANY'S CERTIFYING ACCOUNTANTS
The following information is provided with respect to the Company's
changes in certifying accountants during the Company's most recent fiscal year
as set forth in the Company's report on Form 8-K and Form 8-K/A dated February
20, 1997. On February 20, 1997, the Company engaged Haskell & White, Certified
Public Accountants, as its new independent accountants to audit the Company's
financial statements for the year ending March 31, 1997, replacing BDO Seidman,
LLP as auditors of the Company. Prior to engaging Haskell & White, such
accounting firm was not consulted on any matters relative to the application of
accounting principles on specified transactions or in any matter that was the
subject of a disagreement between the Company and its former accountants. During
the past year, Haskell & White has provided services of a general financial
consulting nature to the Company and has performed agreed upon procedures in the
due diligence process related to the January 1997 acquisition of substantially
all the assets of Toys.
In December 1996, Haskell & White was engaged by American Toys, the
former parent company, to re-audit the financial statement of American Toys for
the year ended March 31, 1996. In so doing, Haskell & White re-audited the
financial statement of the Company for the year ended March 31, 1996 and
therefore provided an audit report for the comparative financial statements for
the years ended March 31, 1997 and 1996.
The change in accountants was not due to any discrepancies or
disagreements between the Company and BDO Seidman, LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. This was confirmed by BDO Seidman LLP in a letter addressed
to the Securities and Exchange Commission filed as an exhibit to the
aforementioned Form 8-K/A. The Company's Board of Directors (which has no audit
or
<PAGE>
similar committee) approved the dismissal of BDO Seidman LLP. The former
accountants' reports on the Company's financial statements for the years ended
March 31, 1995 and 1996 did not contain any adverse opinions or disclaimers of
opinion; nor were they qualified or modified as to uncertainty, audit scope or
accounting principles as required by Item 304 (a)(3) of Regulation S-B
promulgated under the Securities Act of 1933, as amended.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act of
1933, as amended, with respect to the Shares and Warrants to which this
Prospectus relates. As permitted by the rules and regulations of the Commission,
this Prospectus does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Shares and Warrants offered hereby, reference is made to the Registration
Statement, including the exhibits thereto, which may be copied and inspected,
without change, at the Public Reference Section of the Commission at its
principal office at 450 Fifth Street, N.W., Washington, D.C. and at the
Commission's regional offices at 1801 California Street, Suite 4800, Denver,
Colorado 80202-2648 and 7 World Trade Center, Suite 1300, New York, NY 10048.
Copies of such material also may be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, NW, Washington, DC 20549, upon payment of
certain fees prescribed by the Commission. Electronic registration statements
made through the Electronic Data Gathering, Analysis and Retrieval system are
publicly available through the Commission's Web site (http://www.sec.gove).
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
TABLE OF CONTENTS
MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants F-1
Balance Sheets F-2
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-8
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Play Co. Toys & Entertainment Corp.
We have audited the accompanying balance sheets of Play Co. Toys and
Entertainment Corp. (a subsidiary of United Textiles & Toys Corp.) as of March
31, 1997 and 1996 and the related statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 and Entertainment
Corp. at March 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the two years in the period ended March 31, 1997 in conformity
with generally accepted accounting principles.
HASKELL & WHITE
Certified Public Accountants
Newport Beach, California May 13, 1997, except for Note 15 b) which is as
of June 10, 1997, the last paragraph of Note 9 which is as of June 20, 1997, and
Notes 15 c) and d) which are as of June 30, 1997
F - 1
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
BALANCE SHEETS
ASSETS (Note 5)
<TABLE>
<CAPTION>
March 31,
1997 1996
Current
<S> <C> <C>
Cash ...................................... $ 177,722 $ 192,401
Accounts receivable (Note 2) .............. 60,206 35,273
Merchandise inventories ................... 6,092,930 6,259,084
Other current assets ...................... 247,313 233,401
---------- ----------
Total current assets ......... 6,578,171 6,720,159
Property and equipment, net of accumulated
depreciation and amortization of $2,828,913
and $2,457,813, respectively (Note 3) ..... 2,475,650 1,858,538
Deposits and other assets (Notes 4 and 5) ...... 324,797 634,407
---------- ----------
$9,378,618 $9,213,104
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31,
1997 1996
Current
<S> <C> <C>
Bank overdraft ............................................................ $ 135,325 $ 108,751
Borrowings under financing agreement (Note 5) ............................. 4,438,875 3,403,025
Accounts payable .......................................................... 3,123,851 2,878,183
Accrued expenses and other liabilities .................................... 308,940 283,611
Current portion of notes payable (Note 7) ................................. 141,666 --
----------- -----------
Total current liabilities .................................... 8,148,657 6,673,570
Notes payable, net of current portion (Note 7) ................................. 100,000 --
Due to affiliate (Note 8) ...................................................... -- 528,070
Deferred rent liability (Note 9) ............................................... 126,925 197,937
----------- -----------
Total liabilities ............................................ 8,375,582 7,399,577
----------- -----------
Redeemable preferred stock (Note 13)
Series B preferred stock, $.01 par, 81,579 and 244,736 shares authorized
and outstanding, full liquidation value
of $81,579 .............................................................. -- 87,680
----------- -----------
Commitments and contingencies (Notes 4, 5, 8, 10, 11 and 13)
Stockholders' (deficit) equity (Notes 13 and 15) Series D preferred stock, $.01
par, 1 share authorized and
outstanding, full liquidation value of $1,400,000 (Note 13) -- 1,399,044
Series E preferred stock, $1 par, 5,000,000 shares
authorized; 2,500,570 shares outstanding, full liquidation
value at $2,500,600 ..................................................... 2,500,570 --
Common stock, $.01 par value, 40,000,000 shares
authorized; 4,083,519 and 1,287,843 shares outstanding .................. 40,835 12,878
Additional paid-in capital ................................................ 6,512,107 4,779,520
Accumulated deficit ....................................................... (8,050,476) (4,465,595)
----------- -----------
Total stockholders' equity ................................... 1,003,036 1,725,847
----------- -----------
$ 9,378,618 $ 9,213,104
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
March 31,
1997 1996
<S> <C> <C>
Net sales (Note 2) ............................ $ 19,624,276 $ 21,230,853
Cost of sales ................................. 13,669,104 15,132,895
------------ ------------
Gross profit ................ 5,955,172 6,097,958
------------ ------------
Operating expenses:
Operating expenses (Notes 11 and 12) ..... 8,474,423 8,568,677
Depreciation and amortization ............ 407,015 407,261
Costs associated with permanent closure of
retail stores (Note 9) ................. -- 129,577
------------ ------------
Total operating expenses .... 8,881,438 9,105,515
------------ ------------
Operating loss ................................ (2,926,266) (3,007,557)
Interest expense (Notes 4 and 5) .............. 658,615 535,158
------------ ------------
Net loss ...................................... $ (3,584,881) $ (3,542,715)
============ ============
Net loss applicable to common shares .......... $ (3,584,881) $ (3,570,260)
============ ============
Net loss per common share ..................... $ (1.29) $ (2.77)
============ ============
Weighted average number of common shares and
share equivalents outstanding .............. 2,791,876 1,287,843
============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
Additional Redeemable Preferred Stock
Common Stock Paid-in Series B
Shares Amount Capital Shares Amount
<S> <C> <C> <C> <C> <C>
Balance, April 1, 1995 ................1,287,843 $12,878 $4,349,065 244,736 $242,275
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 ......... -- -- -- (163,157) (163,157)
Payment of accrued dividends .......... -- -- -- -- (18,983)
Accrued dividends on redeemable
preferred stock .................... -- -- (9,153) -- 9,153
Accretion of discount on redeem-
able preferred stock ............... -- -- (18,392) -- 18,392
Net loss for the year ................. -- -- -- -- --
----------- ----------- --------- ----------- ----------
Balance, March 31, 1996 ...............1,287,843 12,878 4,779,520 81,579 87,680
Redemption of preferred stock ......... -- -- -- (81,579) (81,579)
Payment of accrued dividends .......... -- -- -- -- (6,101)
Conversion of due to affiliate and
related accrued interest to Series
E preferred stock .................. -- -- -- -- --
Issuance of Series E preferred
stock for cash ..................... -- -- -- -- --
Conversion of Series E preferred
stock to common ....................2,410,000 24,100 337,400 -- --
Conversion of Series D preferred
stock to common ....................385,676 3,857 1,395,187 -- --
Net loss for the year ................. -- -- -- -- --
Balance, March 31, 1997 ...............4,083,519 $40,835 $6,512,107 -- $--
</TABLE>
<TABLE>
<CAPTION>
Preferred Stock
Series D Series E Accumulated
Shares Amount Shares Amount Deficit
<S> <C> <C> <C> <C> <C>
Balance, April 1, 1995 ................-- $ -- -- $ -- $(922,880)
Issuance of common stock options ......-- -- -- -- --
Conversion of stockholders' notes
payable and related accrued interest
to Series D preferred stock ........1 1,399,044 -- -- --
Redemption of preferred stock .........-- -- -- -- --
Payment of accrued dividends ..........-- -- -- -- --
Accrued dividends on redeemable
preferred stock ....................-- -- -- -- --
Accretion of discount on redeem-
able preferred stock ...............-- -- -- -- --
Net loss for the year .................-- -- -- -- (3,542,715)
Balance, March 31, 1996 ...............1 1,399,044 -- -- (4,465,595)
Redemption of preferred stock .........-- -- -- -- --
Payment of accrued dividends ..........-- -- -- -- --
Conversion of due to affiliate and
related accrued interest to Series
E preferred stock ..................-- -- 528,070 528,070 --
Issuance of Series E preferred
stock for cash .....................-- -- 2,334,000 2,334,000 --
Conversion of Series E preferred
stock to common ....................-- -- (361,500) (361,500) --
Conversion of Series D preferred
stock to common ....................(1) (1,399,044) -- -- --
Net loss for the year .................-- -- -- -- (3,584,881)
Balance, March 31, 1997 ...............4,083,519 $40,835 $6,512,107 -- $ --
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
STATEMENTS OF CASH FLOWS
(Note 14)
<TABLE>
<CAPTION>
March 31,
1997 1996
Cash flows from operating activities:
<S> <C> <C>
Net loss ...................................... $(3,584,881) $(3,542,715)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization ............. 407,015 407,261
Amortization of common stock options ...... 214,743 64,300
Deferred rent ............................. (71,012) 57,719
Increase (decrease) from changes in:
Accounts receivable ....................... (24,933) 586,827
Merchandise inventories ................... 431,154 1,673,284
Other current assets ...................... (13,912) (52,099)
Deposits and other assets ................. 94,867 (49,986)
Accounts payable .......................... 245,668 (380,817)
Accrued expenses and other liabilities .... 25,329 60,054
----------- -----------
Cash used for operating activities (2,275,962) (1,176,172)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment ........... (1,024,127) (340,311)
Amounts due from stockholder .................. -- 17,788
Cash used for investing activities (1,024,127) (322,523)
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
STATEMENTS OF CASH FLOWS (CONTINUED)
(Note 14)
<TABLE>
<CAPTION>
March 31,
1997 1996
Cash flows from financing activities:
<S> <C> <C>
Change in bank overdraft ......................... $ 26,574 $ 108,751
Borrowings under bank lines of credit ............ -- 1,092,361
Repayments under bank line of credit ............. -- (3,466,852)
Borrowings under financing agreement ............. 22,404,385 5,637,392
Repayments under financing agreement ............. (21,368,535) (2,234,367)
Payments on capital lease obligations ............ -- (42,045)
Repayment of notes payable ....................... (23,334) --
Due to affiliate ................................. -- 528,070
Redemption of preferred stock .................... (81,579) (163,157)
Payment of dividends on preferred stock .......... (6,101) (18,982)
Proceeds from issuance of preferred stock ........ 2,334,000 --
------------ ------------
Cash provided by financing activities 3,285,410 1,441,171
------------ ------------
Net decrease in cash .................................. (14,679) (57,524)
Cash, beginning of year ............................... 192,401 249,925
------------ ------------
Net cash, end of year ................................. $ 177,722 $ 192,401
============ ============
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
1. Summary of Accounting Policies
Business Organization and Revenue Recognition
Play Co. Toys & Entertainment Corp. (the "Company") is a Delaware
corporation that owns and operates retail stores which sell toys,
games, hobby and craft merchandise. The Company had twenty-one (21)
retail stores located within Southern California at March 31, 1997. In
the beginning of 1996, the Company began to change its focus to include
the sale of educational, new electronic interactive, specialty and
collectible toys and items.
On May 7, 1993 the Company became a subsidiary of American Toys, Inc.,
(now known as U.S. Wireless Corporation) ("American Toys") when
American Toys acquired 90% of the then outstanding shares of common
stock directly from the original stockholders (Note 13). 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 13) and is therefore subject to the
accounting and reporting requirements of the SEC.
In August 1996, the Company became a subsidiary of United Textiles &
Toys Corp. ("United Textiles"), formerly known as Mister Jay Fashions
International ("Mister Jay"), when United Textiles acquired
approximately 57% of the then outstanding shares of common stock
directly from American Toys (Note 13). When American Toys spun-off its
investment in the Company to American Toys' stockholders, United
Textiles was a majority stockholder of American Toys at the record date
for the spin-off.
Merchandise Inventories
Merchandise inventories are stated at the lower of cost (first-in,
first-out method -"FIFO") or market.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and
amortization are provided using the straight-line method over the
estimated useful lives (3 - 15 years) of the related assets. Leasehold
improvements are amortized over the lesser of the related lease terms
or the estimated useful lives of the improvements. Maintenance and
repairs are charged to operations as incurred.
Store Opening and Closing Costs
Costs incurred to open a new retail location such as advertising,
training expenses and salaries of newly hired employees are expensed as
incurred and improvements to leased facilities are capitalized. Upon
permanently closing a retail location, the costs to relocate fixtures,
terminate employees and other related costs are expensed as incurred.
F-8
<PAGE>
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 uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Deferred income taxes are recognized based
on the differences between financial statement and income tax bases of
assets and liabilities using enacted rates in effect for the year in
which the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce the deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities, including the effect of
change in the valuation allowance, if any.
Net Loss Per Share
Net loss per share has been computed by dividing net loss, 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 B preferred
stock aggregated zero and $27,545 for the years ended March 31, 1997
and 1996.
Additionally, share and per share amounts have been retroactively
adjusted for the effects of the one-for-three reverse stock split
approved by the Company's stockholders at a special meeting on June 30,
1997 (Note 15).
Statements of Cash Flows
For purpose of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, consisting
of accounts receivable, accounts payable, and borrowings, approximates
their fair value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and disclosure of contingent assets
and liabilities at the date of the financial statements.
Actual amounts could differ from those estimates.
F-22
<PAGE>
Reclassifications
Certain 1996 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.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of," requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company adopted SFAS 121
effective April 1, 1996. There was no impact of such adoption on the
Company's financial condition and results of operations.
Stock-Based Compensation
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
adopted SFAS 123 effective April 1, 1996. There was no impact of such
adoption on the Company's financial condition and results of
operations.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, Earnings Per Share ("EPS"). SFAS No. 128 requires
all companies to present "basic" EPS and, if they have a complex
capital structure, "diluted" EPS. Under SFAS No. 128, "basic" EPS is
computed by dividing income (adjusted for any preferred stock
dividends) by the weighted average number of common shares outstanding
during the period. "Diluted" EPS is computed by dividing income
(adjusted for any preferred stock or convertible stock dividends and
any potential income or loss from convertible securities) by the
weighted average number of common shares outstanding during the period
plus the number of additional common shares that would have been
outstanding if any dilutive potential common stock had been issued. The
issuance of antidilutive potential common stock should not be
considered in the calculation. In addition, SFAS No. 128 requires
certain additional disclosures relating to EPS. SFAS No. 128 is
effective for financial statements issued for periods ending after
December 15, 1997. Thus, the Company expects to adopt the provisions of
this statement in fiscal year 1998.
2. TKO Product Line
During the year ended March 31, 1995, the Company began wholesale
distribution of its TKO product line items. Wholesale sales of TKO
items for the year ended March 31, 1997 and 1996 approximated $202,000
and $570,000, respectively. At March 31,
F-22
<PAGE>
1997 and 1996, the Company had accounts receivable from wholesale sales
of TKO items totaling $17,747 and $35,273, 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.
3. Property and Equipment
Property and equipment consisted of the following:
March 31,
1997 1996
Furniture, fixtures and equipment $3,231,161 $2,918,621
Leasehold improvements 1,220,246 542,785
Computerized inventory management system 468,210 484,074
Signs 280,034 265,959
Vehicles 104,912 104,912
5,304,563 4,316,351
Accumulated depreciation and amortization (2,828,913) (2,457,813)
$2,475,650 $1,858,538
4. Bank Line of Credit
In November 1995, European American Capital Corp. ("EACC"), an
affiliate, provided a $2,000,000 letter of credit for financing
purposes in connection with a bank line of credit agreement. In
connection therewith, the Company granted an option to purchase 350,000
shares of common stock. The Company estimated the value of the option
to be $224,000 and recorded such amount as additional paid-in capital.
For the years ended March 31, 1997 and 1996, amortization of the value
of the option aggregated $97,740 and $44,800, respectively and is
included in interest expense. The unamortized value of the option at
March 31, 1997 and 1996 was $81,460 and $179,200 and is included in
other assets. The exercise period expired on April 16, 1996 and no
options were exercised.
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.
The letter of credit was transferred as collateral under the new
financing arrangement (Note 5).
5. Financing Agreement
On February 7, 1996, the Company borrowed, under an agreement
with a financing
F-22
<PAGE>
company, approximately $2,243,000, which proceeds were used to repay
the then outstanding borrowings under the bank line of credit agreement
(Note 4). The financing agreement provides for maximum borrowings up to
$7,000,000 based upon a percentage of the cost value of eligible
inventory, as defined. Outstanding borrowings bear interest at 1.5%
above the prime rate, as defined (the prime rate at March 31, 1997 was
8.5%). The agreement matures February 1, 1998.
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, 1997, the Company was in compliance with this financial
covenant.
The financing agreement is secured by substantially all assets of the
Company, is guaranteed by United Textiles and collateralized by a
$2,000,000 letter of credit provided by EACC. In connection with the
letter of credit provided by EACC, 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,
such option having expired, and (ii) an option to purchase up to an
aggregate of 20,000,000 shares of the Company's Series E preferred
stock (Note 13) 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 years ended March
31, 1997 and 1996, amortization of the value of the option aggregated
$117,000 and $19,500, respectively, and is included in interest
expense. The unamortized value of the option aggregates $97,500 at
March 31, 1997 and $214,500 at March 31, 1996, and is included in other
assets.
In March 1997, the agreement was amended during the year to allow the
Company to execute a Note payable to the stockholder of Toys
International Inc. for $265,000 (Notes 6 and 7). The financing company
continues to hold a senior interest in the assets of the Company. In
addition, United Textiles was substituted for American Toys as the
guarantor due to the spin-off of the Play Co. ownership. Further, the
agreement was amended to increase the borrowing ratios on inventory and
increase special loan advances provided EACC issue an additional letter
of credit in the amount of $1,000,000 which was provided in March 1997.
As such, at March 31, 1997, the agreement is collateralized by letters
of credit aggregating $3,000,000.
6. Asset Purchase Agreement
On January 16, 1997 the board of directors of the Company approved the
purchase of the assets and assumption of certain existing liabilities
of Toys International. Toys International is a high-end retailer of
toys which operated three mall locations in Southern California. As
part of the purchase agreement, the Company obtained the rights to the
Toys International and Tutti Animali operating name trademarks and also
assumed the existing leases at the three locations. The total purchase
price was $1,024,184 which consisted mainly of inventory and certain
prepaid expenses and deposits. The purchase price was paid in the form
of a cash payment of $759,184 in
F-22
<PAGE>
January 1997 and the execution of two promissory Notes aggregating
$265,000 (Note 7).
7. Notes Payable
<TABLE>
<CAPTION>
March 31,
<S> <C> <C>
1997 1996
Note payable to stockholder of Toys International, non-interest
bearing, guaranteed by United Textiles, payable in five installments
ranging from $11,667 to $15,000 through maturity, on June 16, 1997.
Note is subordinate to the financing
agreement with a financial institution (Note 5). $41,666 $-
Note payable to stockholder of Toys International non-interest bearing,
guaranteed by United Textiles, payable in quarterly installments of
$25,000 through maturity, on January 16, 1999. Note is subordinate to
the financing agreement
with a financial institution (Note 5). 200,000 -
Total long-term debt 241,666 -
Less current portion (141,666) -
Long-term debt $ 100,000 $-
</TABLE>
Future obligations under these promissory Notes as of March 31, 1997
are as follows:
Year
March 31 Amount
1998 $141,666
1999 100,000
$ 241,666
8. Due to Affiliate
During March 1996, EACC loaned $500,000 to the Company and incurred
costs related to the financing agreement (Note 5) totaling $28,070. On
June 3, 1996, EACC exercised options to acquire 528,070 shares of the
Company's Series E preferred stock (Notes 5 and 13) 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 $528,070.
9. Costs Associated with Closure of Retail Stores
F-22
<PAGE>
During the year ended March 31, 1996, the Company permanently closed
four of its retail stores which were not meeting the objectives of the
Company. The costs associated with the permanent closure of these
stores, which included the write-off of leasehold improvements, were
accrued as of March 31, 1996. During the year ended March 31, 1996,
those stores generated sales of approximately $3,069,000 and operating
losses of approximately $309,000 before allocation of certain corporate
charges, interest and income taxes.
As a result of the Company permanently closing one of its retail
locations in June 1995, the Company recorded an expense during the year
ended March 31, 1996 of $85,000 as a settlement with the landlord for
the early termination of the lease. The settlement required six
quarterly installments of $14,167 through August 1, 1997, of which
$28,332 was outstanding at March 31, 1997 and is included in accrued
expenses and other liabilities in the accompanying balance sheet.
In March, April, and May 1997, the Company vacated four locations with
the intent of temporarily closing the stores and reopening the
locations during the Christmas 1997 peak season. The Company may
consider temporarily closing the stores again thereafter. In the
meantime, the Company and certain of the landlords are attempting to
find suitable sub-tenants to occupy the locations and to assume the
lease responsibilities.
In June 1997, landlords for three of the four locations filed lawsuits
against the Company to collect unpaid rent on the stores, which has
been accrued to date by the Company; as well as rental obligations due
on the balance of the lease terms. Management expects that these suits
will ultimately be settled with the landlords without a material effect
on the financial statements.
10. 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,
1997 1996
<S> <C> <C>
Inventories $ (183,192) $ (57,883)
AMT tax credits (23,260) (23,260)
Accrued expenses (15,119) (17,816)
--------------- ----------------
Current portion of net deferred income
tax (assets) liabilities (221,571) (98,959)
--------------- ----------------
Depreciation and amortization 150,857 246,185
Net operating loss carryforwards (3,142,710) (1,958,123)
Deferred rent liability (50,945) (79,447)
--------------- ----------------
Long-term portion of net deferred
income tax (assets) liabilities (3,042,798) (1,791,385)
--------------- ----------------
Total net deferred income tax (assets) liabilities (3,264,369) (1,890,344)
Valuation allowance 3,264,369 1,890,344
Net deferred income taxes $ - $ -
</TABLE>
At March 31, 1997, 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.
The reconciliation of income taxes computed at the federal statutory
tax rate to income taxes at the effective income tax rate in the
statements of operations is as follows:
<TABLE>
<CAPTION>
March 31,
1997 1996
<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
Change in valuation allowance 33.9 31.9
Effective income tax rate - % -%
</TABLE>
At March 31, 1997, the Company has net operating loss (NOL)
carryforwards of approximately $8,000,000 for federal purposes and
approximately $4,000,000 for state purposes. The federal NOLs are
available to offset future taxable income and expire at various dates
through March 31, 2012 while the state NOLs are available and expire at
various dates through March 31, 2002.
A portion of the NOLs described above are subject to provisions of the
Internal Revenue Code 382 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 transactions described in Note 13. Further changes
in common and preferred stock ownership during the year ended March 31,
1997 have also potentially limited the use of NOLs. The effect of such
limitation has yet to be determined. NOLs could be further limited upon
the exercise of outstanding stock options or an initial public offering
of preferred stock (Note 15).
11. Commitments and Contingencies
1994 Stock Option Plan
In June 1994, the Company adopted the 1994 Stock Option Plan (the
"Plan") which
F-22
<PAGE>
provides for options to purchase an aggregate of not more than 50,000
post-reverse split 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 3,334 post-reverse split
shares of common stock at $6.30 per share; as adjusted for the
one-for-three reverse split (Note 15) was granted to the Company's
Secretary/Treasurer. As of March 31, 1997, no options to purchase
common stock had been exercised.
401(k) Employee Stock Ownership Plan
In August 1994, 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, 1997, 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).
Operating Leases
The Company leases its retail store properties under 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, 1997 and 1996, the Company incurred
rental expense under all operating leases of $2,681,728 and $2,841,215,
respectively. Contingent rent expense was insignificant during the
years ended March 31, 1997 and 1996.
During the years ended March 31, 1997 and 1996, 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 ended March 31, 1997 and 1996 was $134,093 and $93,822 (Note
12).
At March 31, 1997 the aggregate future minimum lease payments
(receipts) due under these noncancelable leases are as follows:
<TABLE>
<CAPTION>
Year Ending Operating Operating
March 31, Leases Sub-Leases
<S> <C> <C> <C>
1998 $ 2,099,491 $ (67,066)
1999 1,776,806 (65,937)
2000 1,641,013 (67,153)
2001 1,014,003 -
2002 774,325 -
Thereafter 1,968,345 -
Total minimum lease payments (receipts) $ 9,273,983 $ (200,156)
</TABLE>
Dependence on Suppliers
Approximately thirty-one percent (31%) of the Company's 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 from suppliers and reduce
outstanding borrowings from its lender during the fourth quarter of its
fiscal year.
Joint Venture
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. Profits,
losses and distributions of the LLC were to be allocated pursuant to
the above percentage interests. 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 totaling $800.
The Company made purchases from the LLC at five percent above the LLC's
cost which aggregated approximately $263,000 during the year ended
March 31, 1996. Due to termination of this venture in December 1995,
such agreement had no impact on the Company's operations for the year
ended March 31, 1997.
12. Related Party Transactions
F-22
<PAGE>
Office and Warehouse Lease
The Company leases an office and warehouse building from a partnership
of which one of the partners is a Company officer, stockholder and
director. Rent expense under this lease for the years ended March 31,
1997 and 1996 totaled $227,546 and $227,916, respectively. The lease
expires in April 2000.
Sub-lease
During the years ended March 31, 1997 and 1996, sub-lease rental income
included $68,173 and $54,422, from an entity in which stockholders and
employees of the Company have an ownership interest.
Consulting Agreement
During the year ended March 31, 1997 the Company entered into a
consulting agreement with the stockholder of Toys International. The
term of the agreement commenced on January 16, 1997, expired on April
16, 1997 and called for three monthly payments of $10,000 each.
Expenses related to the agreement totaled $6,666 for the year ended
March 31, 1997.
Board of Director Fees
The Company made payments aggregating $7,000 to the chairman of the
board of directors for various consulting services during the year
ended March 31, 1997.
13. Equity Transactions
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 as of March 31, 1996, 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.
In April 1996, EACC exercised options to acquire 528,070 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.
F-22
<PAGE>
On June 30, 1996 the Company issued 334,000 shares of the Series E
Class I preferred stock to EACC at a rate of $1.00 per share for total
cash considerations of $334,000.
The shares were then transferred to United Textiles.
On August 8, 1996 the Company amended its Certificate of Incorporation
upon approval by the board of directors to allow the Series D preferred
stock to be convertible into 385,676 post-reverse split shares (Note
15) of the Company's common stock. In addition, the Company increased
the number of authorized shares of common stock to 40,000,000. The
newly authorized common stock has identical rights to the previously
authorized common stock. Further, the Company authorized the issuance
of Series E preferred stock to be issued in two separate classes of
1,900,000 shares, designated Series E Class I and 100,000 shares
designated Series E Class II. The Series E preferred stock is
non-voting and provides for cumulative dividends to holders at $1.00
per share. The dividends are payable within 90 days of each year
anniversary of issuance and may only be declared by the board of
directors out of legally available funds. The board of directors has
not declared any dividends at March 31, 1997 and the annual anniversary
date of any issuance has not occurred. The holders of the Series E
preferred stock have the option of converting each share held into
twenty (20) of the Company's common stock. 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. See Note 15 for discussion of
additional subsequent changes to the Company's common and preferred
stock capital structure.
On August 11, 1996, American Toys converted its share of preferred
Series D stock into 385,676 post-reverse split shares (Note 15) of the
Company's common stock. At this time, American Toys owned 1,235,319
post-reverse split shares (Note 15) of the common stock of the Company
which were spun-off to the majority stockholder of American Toys,
United Textiles. As a result, United Textiles became the majority
stockholder of the Company.
In August 1996, the 334,000 Series E Class I preferred stock held by
United Textiles was converted into 2,226,667 post-reverse split shares
(Note 15) of the Company's common stock. In addition, in February 1997,
EACC converted 27,500 shares of the Series E Class I preferred stock
into 183,333 post-reverse split shares (Note 15) of the Company's
common stock all of which were transferred to two unaffiliated
companies.
In October 1996, EACC exercised options to acquire 500,000 and 300,000
shares of Series E Class I preferred stock. In January 1997, EACC
exercised options to acquire an additional 1,200,000 shares of Series E
Class I preferred stock. All options were exercised at $1.00 per share.
On February 7, 1997, the Company amended its certificate of
incorporation to increase the authorized Series E preferred stock from
2,000,000 to 4,000,000 shares of which 3,900,000 are designated Series
E Class I preferred stock and 100,000 shares are designated Series E
Class II preferred stock. See Note 15 for discussion of additional
F-22
<PAGE>
subsequent changes to the Company's common and preferred stock
capital structure.
14. Supplemental Cash Flow Information
Cash paid for income taxes and interest was as follows:
Years Ended March 31,
1997 1996
Interest paid $ 443,875 $ 464,832
Income taxes $ 800 $ 800
For the year ended March 31, 1997, non-cash financing activities
include the extinguishment of balance due to affiliate aggregating
$528,070 in exchange for 528,070 shares of Series E Class I preferred
stock (Note 5), the conversion on 1 share of Series D preferred stock
for 385,676 post-reverse split shares (Note 15) of common stock (Note
13) and the conversion of 361,500 shares of Series E Class I preferred
stock for 2,410,000 post-reverse split shares (Note 15) of common
stock. In addition, the Company incurred $265,000 in Notes payable to
the stockholder of Toys International as a result of the asset purchase
which consisted mainly of inventory.
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 13) and the issuance of common stock options
aggregating $458,000 (Notes 4 and 5).
15. Subsequent Events
a) Termination of Warehouse Lease
In April 1997, the Company negotiated a settlement with a landlord for
an excess warehouse facility, whereby the Company was released from the
lease obligation for a settlement of $60,000. This early lease
termination will result in annual savings of approximately $235,000
based on the original scheduled lease term through April 2000.
b) Additional Financing
On various dates subsequent to March 31, 1997, affiliates of the
majority stockholder of United Textiles advanced amounts aggregating
$700,000 to the Company. Such advances have been represented by the
providers to be advances against the future issuance of equity
securities, the exact form and number of shares of which is yet to be
determined. The providers of such funds have further represented that
such advances are not a loan and the Company has no obligation to repay
such funds.
Additionally, the individual, beneficial, majority stockholder of
United Textiles has represented his intent and ability to provide
additional working capital to the Company, should such be necessary,
through September 1998.
F-22
<PAGE>
c) Changes in Capital Structure
On June 30, 1997, a special meeting of the Company's stockholders was
held. The issues approved by the stockholders had the following effect
on the Company's capital structure.
A one-for-three reverse split of the Company's common stock.
Effects of such reverse split have been retroactively
adjusted to share and per share amounts in the financial
statements.
The elimination of Class I and Class II designation for Series E
preferred stock. There were previously no shares of Series E
Class I preferred stock outstanding.
1 The elimination of the dividend provisions on the Series E
preferred stock.
1 The reduction of the ratio for Series E preferred stock
conversion to shares of common stock from 20 to 1 to a ratio
of 6 to 1.
1 An increase in the number of authorized shares of Series E
preferred stock to 5,000,000 and stockholder authorization
for the issuance of up to 1,000,000 shares of the Company's
Series E preferred stock by the Company for sale in an
Initial Public Offering.
The above issues affecting the Series E preferred stock were effected
by filing an amendment to the Company's certificate of incorporation.
As of June 30, 1997, the Company has submitted a proposal to the Nasdaq
stock market for its review describing the proposed transactions in
items 2 to 5 above and has requested Nasdaq to consider approving the
trading of the Company's Series E preferred stock in the event that an
offering is consummated.
d) Proposed Public Offering
As of June 30, 1997, the Company has engaged an underwriter to assist
with a public offering of securities. The Company plans to offer
750,000 shares of Series E preferred stock for an anticipated price of
$4.00 per share. In addition, the Company plans to offer 1,500,000
redeemable Series E stock purchase warrants which entitles the holder
to purchase one share of Series E preferred stock at a price of $5.00
for a period of four years. The Company anticipates that the proposed
public offering will generate net proceeds of approximately $2,500,000
after underwriting commissions, discounts and other offering expenses
and before the exercise of any of the redeemable warrants.
Management expects to utilize the net proceeds to acquire the
necessary fixtures to open five additional retail locations; for
retrofitting six existing stores; for relocation of two stores upon
expiration of existing leases; and for general working capital needs.
F-22
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN 750,000 SHARES OF SERIES
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE E PREFERRED STOCK AND
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN 1,500,000 WARRANTS AND 250,000
THIS PROSPECTUS IN CONNECTION WITH THE OFFERING SHARES AND 500,000 WARRANTS
CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH BY A SELLING SECURITYHOLDER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER PLAY CO. TOYS &
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF ENTERTAINMENT CORP
THE SECURITIES OFFERED HEREBY IN ANY STATE TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
DOES NOT IMPLY THAT THE INFORMATION STATED IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
--------------------
TABLE OF CONTENTS
July , 1997
PROSPECTUS SUMMARY............................................
RISK FACTORS..................................................
DIVIDEND POLICY...............................................
USE OF PROCEEDS...............................................
CAPITALIZATION................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF WEST AMERICA SECURITIES CORP.
OPERATIONS...................................................
MARKET FOR COMMON EQUITY......................................
BUSINESS......................................................
MANAGEMENT....................................................
PRINCIPAL SECURITYHOLDERS.....................................
PLAN OF DISTRIBUTION FOR THE SECURITIES OF....................
THE SELLING SECURITYHOLDER....................................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................
DESCRIPTION OF
SECURITIES ...................................................
UNDERWRITING..................................................
LEGAL OPINIONS................................................
EXPERTS.......................................................
CHANGE IN COMPANY'S CERTIFYING ACCOUNTANTS....................
AVAILABLE INFORMATION.........................................
INDEX TO FINANCIAL STATEMENTS.............................F-0
</TABLE>
UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
48
<PAGE>
II-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
As permitted under the Delaware General Business Law, the Company's
Certificate of Incorporation and By-Laws provide for indemnification of a
Director or Officer under certain circumstances against reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of an action brought against him by reason of his being a Director
or Officer. In addition, the Company's charter documents provide for the
elimination of Directors' liability to the Company or its stockholders for
monetary damages except in certain instances of bad faith, intentional
misconduct, a knowing violation of law, or illegal personal gain.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to Directors, Officers,
and controlling persons of the Company pursuant to any charter, provision,
by-law, contract, arrangement, statute, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a Director, Officer, or controlling person of the Company in the
successful defense of any such action, suit, or proceeding) is asserted by such
Director, Officer, or controlling person of the Company in connection with the
Securities being registered pursuant to this Registration Statement, the Company
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication by such
court of such issue.
Item 25. Other Expenses of Issuance and Distribution.
Registration Fee .................... $ 4,896.16
NASD Filing Fee ..................... 1,920.00
NASDAQ SmallCap Market Fee .......... 10,000.00
Pacific Stock Exchange .............. 20,000.00
Printing and Engraving .............. 40,000.00
Legal Fees and Expenses ............. 100,000.00
Accounting Fee and Expenses ......... 25,000.00
Transfer Agent and Warrant Agent Fees 2,000.00
State Filing Fees and Blue
Sky Expenses ...................... 33,000.00
Underwriter's non-accountable
expense allowance ................. 94,500.00
Miscellaneous ....................... 3,683.84
-----------
Total ............................... $335,000.00 (1)
(1) Estimated.
F-8
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
The sales of securities of the Company described below were exempt from
registration under the Act, in reliance upon the exemption afforded by Section
4(2) of the Act for transactions not involving a public offering. All
certificates evidencing such sales bear an appropriate restrictive legend.
In August 1996, the one share of Series D Preferred Stock was converted
into 1,157,028 shares of the Company's Common Stock based on the initial amount
of the debt divided by the average price of the shares for a 90 day period prior
to the conversion. This was performed in order for American Toys to spin such
shares off to its stockholders and divest itself of its interest in the Company.
From October 1996 to June 1997, EACC exercised its option and purchased
an aggregate of 3,562,070 shares of the Series E Class I Preferred Stock, of
which 361,500 shares were converted into shares of Common Stock..
In June 1997, the Company issued 20,000 shares of Common Stock to
Klarman & Associates for legal fees of $500.
In July 1997, for proceeds of $550,000, the Company issued 250,000
shares of the Series E Stock and 500,000 Warrants in a private transaction.
Item 27. Exhibits.
All exhibits, except those designated with an asterisk (*), which are
filed herewith, previously have been filed with the Commission either in
connection with the Company's Registration Statement on Form SB-2, dated
November 2, 1994, under file No. 33-81940-NY ("Initial SB-2"), or pursuant to
the referenced Exchange Act report and pursuant to 17 C.F.R. ss.230.411 and are
incorporated by reference herein.
<TABLE>
<CAPTION>
<S> <C>
1.1* - Form of Underwriting Agreement.
3.1 - Certificate of Incorporation of the Company dated June 15, 1995 (Incorporated
by reference into herein from Initial SB-2).
3.2* - Amendment to Certificate of Incorporation of the Company, filed July 2, 1997.
3.3 - By-Laws of the Company (Incorporated by reference into herein from Initial SB-
2).
4.1 - Specimen Common Stock Certificate (Incorporated by
reference herein from the Initial SB-2).
4.2 - Specimen Warrant Certificate.
4.3 - Specimen Series E Preferred Stock Certificate.
4.4 - ESOP Plan (incorporated by reference herein from the
Initial SB-2).
4.5 - Form of Warrant Agreement between the Company, the
Underwriter and Continental Stock Transfer & Trust
Company.
<PAGE>
5.0 - Opinion of Klarman & Associates
10.22 - Lease Agreement for Store-Escondido (incorporated by reference herein from
the Initial SB-2).
10.23 - Lease Agreement for Store-Convoy (incorporated by reference herein from the
Initial SB-2).
10.26 - Lease Agreement for Store-Chula Vista (incorporated by reference herein from
the Initial SB-2).
10.27 - Lease Agreement for Store-El Cajon (incorporated by reference herein from the
Initial SB-2).
10.29 - Lease Agreement for Store-Simi Valley (incorporated by reference herein from
the Initial SB-2).
10.30 - Lease Agreement for Store-Encinitas (incorporated by reference herein from the
Initial SB-2).
10.31 - Lease Agreement for Store-San Dimas (incorporated by reference herein from
the Initial SB-2).
10.33 - Lease Agreement for Store-Rialto (incorporated by reference herein from the
Initial SB-2).
10.34 - Lease Agreement for Store-Redlands (incorporated by reference herein from the
Initial SB-2).
10.35 - Lease Agreement for Store-Rancho Cucamonga (incorporated by reference
herein from the Initial SB-2).
10.36 - Lease Agreement for Store-Woodland Hills (incorporated by reference herein
from the Initial SB-2).
10.37 - Lease Agreement for Warehouse-Executive Offices (incorporated by reference
herein from the Initial SB-2).
10.38 - Lease Agreement for Store-Pasadena (incorporated by reference herein from the
Initial SB-2).
10.38(a) - Lease Agreement for Store-Whittier (incorporated by reference herein from the
Initial SB-2).
10.41 - The Company Incentive Stock Option Plan (incorporated by reference herein
from the Initial SB-2).
10.43 - Lease Agreement for Store-Lakewood (incorporated by reference herein from
the Initial SB-2).
10.44 - Lease Agreement for Store-Corona Plaza (incorporated by reference herein from
the Initial SB-2).
10.50 - Extension of Warehouse Lease (incorporated by reference herein from the Initial
SB-2).
10.65 - Direct delivery Purchase Agreement between the
Company and Camp Pendleton (incorporated by reference
herein from the Initial SB-2).
10.66 - Direct delivery Purchase Agreement between the
Company and MCRD, San Diego (incorporated by
reference herein from the Initial SB-2).
10.75 - Asset Purchase Agreement for the purchase of Toys International
(incorporated by reference herein to exhibit 10.75 of the Company's
10-QSB for the period ended December 31, 1995 filed with the
Commission.
10.76 - Lease Agreement for Store-Riverside International (incorporated by
F-8
<PAGE>
reference herein to exhibit 10.76 of the Company's
10-KSB for the year ended March 31,1997, filed with
the Commission).
10.77 - Lease Agreement for Store-Santa Clarita International (incorporated by
reference herein to exhibit 10.77 of the Company's 10-KSB for the year
ended March 31, 1997, filed with the Commission).
10.78 - Lease Agreement for Store - South Coast Plaza International
(incorporated by reference herein to exhibit 10.78 of the Company's
10-KSB for the year ended March 31,1997, filed with the Commission).
10.79 - Lease Agreement for Store - Century City International (incorporated by
reference herein to exhibit 10.79 of the Company's 10-KSB for the year
ended March 31, 1997, filed with the Commission).
10.80 - Lease Agreement for Store - Crystal Court International (incorporated by
reference herein to exhibit 10.80 of the Company's 10-KSB for the year
ended March 31, 1997, filed with the Commission).
10.81 - Lease Agreement for Store - Orange County (incorporated by reference
herein to exhibit (i)
of the Company's 10-QSB/A-1 for the period ended September 30, 1995 filed with the Commission).
10.82 - Loan and Security Agreement with by and between Congress Financial
Corporation (Western) as Lender and Play Co. Toys as Borrower dated
February 1, 1996 (incorporated by reference herein to exhibit (i) of the
Company's 10-QSB for the period ended December 31,
1995).
10.82(a)* - Amendment No. 4 to Loan and Security Agreement with Congress.
10.83 - Stock Purchase Option Agreement with Europe America Capital
Corporation for Series E Preferred Stock (incorporated by reference
herein to exhibit (ii) of the Company's 10-QSB for the period ended
December 31, 1995).
10.84 - Stock Purchase Option Agreement with Europe America Capital
Corporation for Common Stock (incorporated by reference herein to
exhibit (iii) of the Company's 10-QSB for the period ended December
31,1995).
10.85 - Lease Agreement for Store - Mission Viejo (incorporated by reference
herein to exhibit (iv) of the Company's 10-QSB for the period ended
December 31, 1995).
10.86* - Subscription Agreement between the Company and Volcano Trading
Limited dated June 30, 1997.
16.01 - Letter from BDO Seidman, LLP (incorporated by reference herein to
Form 8-K dated February 20, 1997).
23.01* - Consent of Haskell & White
23.02 - Consent of Klarman & Associates, is contained in their opinion filed as exhibit
5.0 to this Registration Statement.
</TABLE>
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
Post-Effective
F-8
<PAGE>
Amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent Post-Effective
Amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement, including but
not limited to any addition or deletion of a managing Underwriter.
(2) That, for the purpose of determining any liability under the Act, each
such Post-Effective Amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of Post-Effective Amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) That, for the purpose of determining any liability under the Act, each
such Post-Effective Amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, Officers, and controlling persons of the Company,
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a Director, Officer, or controlling person of the Company in the
successful defense of any action, suit, or proceeding) is asserted by such
Director, Officer, or controlling person in connection with the Securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue by such court. See Item 24.
F-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
the Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in New York, New York on the 21st day of July, 1997.
PLAY CO. TOYS & ENTERTAINMENT CORP.
By: \s\ Richard Brady
Richard Brady,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933 as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
\s\ Harold Rashbaum Chairman of the Board 07/21/97
Harold Rashbaum Date
\s\ Richard Brady Chief Executive Officer, 07/21/97
Richard Brady President and Director Date
\s\ James B. Frakes Chief Financial Officer 07/21/97
James B. Frakes and Secretary Date
\s\ Sheikhar Boodram Director 07/21/97
Sheikhar Boodram Date
</TABLE>
Exhibit 1.1
Form of Underwriting Agreement
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
750,000 Shares of Series E Preferred Stock
and
1,500,000 Redeemable Series E Preferred Stock Purchase Warrants
UNDERWRITING AGREEMENT
_____________ ___, 1997
West America Securities Corp.
4510 E. Thousand Oaks Blvd.
Suite 100
West Lake Village, CA 91362
Dear Sirs:
PLAY CO. TOYS & ENTERTAINMENT CORP., a Delaware corporation (the "Company")
hereby confirms the agreement made with respect to the retention of West America
Securities Corp. (the "Underwriter") as the exclusive agent of the Company to
publicly offer and sell, pursuant to the terms of this Underwriting Agreement
(the "Agreement"), an aggregate of 750,000 shares of Series E Preferred Stock,
$.001 par value per share (the "Series E Preferred Stock"), and 1,500,000
redeemable Series E Preferred Stock purchase warrants (the "Warrants," and
collectively with the Series E Preferred Stock, the "Securities") of the Company
on a "best efforts, all or none" basis. The offering of the Securities
contemplated hereby may sometimes be referred to as the "Offering."
1. Description of the Securities.
(a) The Warrants.
Each Warrant entitles the holder thereof to purchase one share of
Series E Preferred Stock at a price of $5.00 for a period of four years
commencing one year from the date the Offering closes (the "Closing Date"),
subject to prior redemption by the Company. The shares of Series E Preferred
Stock issuable upon the exercise of the Warrants are hereinafter referred to as
the "Warrant Shares."
The Warrants are redeemable by the Company at any time, commencing one
year from the Closing Date, upon 30 days' prior notice, at a redemption price of
$.05 each, provided that the closing bid quotation of the Series E Stock for at
least 20 consecutive trading days, ending on the third day prior to the date on
which the Company gives notice, has been at least 170% of the exercise price of
the Warrants being redeemed. The Warrants will remain exercisable during the 30
day notice period.
(b) Underwriter's Warrants. Intentionally left blank.
<PAGE>
2. Representations and Warranties of the Company.
The Company represents and warrants to the Underwriter that:
(a) The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form SB-2 (File No. 333- ), including
any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Securities under the Securities Act of 1933 (the "Act"). The
Company will file further amendments to said registration statement in the form
to be delivered to you and will not, before the registration statement becomes
effective, file any other amendment thereto to which you shall have objected in
writing after having been furnished with a copy thereof. Except as the context
may otherwise require, such registration statement, as amended, on file with the
Commission at the time the registration statement becomes effective (including
the prospectus, financial statements, exhibits and all other documents filed as
a part thereof or incorporated therein), is hereinafter called the "Registration
Statement", and the prospectus, in the form filed with the Commission pursuant
to Rule 424(b) of the General Rules and Regulations of the Commission under the
Act (the "Regulations") or, if no such filing is made, the definitive prospectus
used in the Offering, is hereinafter called the "Prospectus". The Company has
delivered to you copies of each Preliminary Prospectus as filed with the
Commission and has consented to the use of such copies for purposes permitted by
the Act.
(b) The Commission has not issued any orders preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all material respects with the requirements of the
Act and has not included any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, subject to the provisions set forth below and except as such
untrue statement or omission has been cured in the a subsequent preliminary
prospectus or in the final prospectus.
(c) When the Registration Statement becomes effective under
the Act and at all times subsequent thereto including the Closing Date
(hereinafter defined) and for such longer periods as in the opinion of counsel
for the Underwriter, a Prospectus is required to be delivered in connection with
the sale of the Securities by the Underwriter, the Registration Statement and
Prospectus, and any amendment thereof or supplement thereto, will contain all
material statements which are required to be stated therein in accordance with
the Act and the Regulations, and will in all material respects conform to the
requirements of the Act and the Regulations, and neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, will
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
provided, however, that this representation and warranty does not apply to
statements or omissions made in reliance upon and in conformity with written
information furnished to the Company by you, for use in connection with the
preparation of the Registration Statement or Prospectus, or in any amendment
thereof or supplement thereto. It is understood that the statements set forth
under the heading "Underwriting" in the Prospectus with respect to (i) the
amounts of the selling concession; (ii) the identity of counsel to the
Underwriter under the heading "Legal Matters"; and (iii) the information
concerning the NASD affiliation of the Underwriter constitute for purposes of
this Section the only information furnished in writing by or on behalf of the
Underwriter for inclusion in the Registration Statement and Prospectus, as the
case may be.
<PAGE>
(d) The Company and each of its subsidiaries (each a
"Subsidiary") are, and at the Closing Date will be, corporations duly organized,
validly existing and in good standing under the laws of the jurisdiction of
their incorporation. The Company and each of its Subsidiaries are duly qualified
or licensed and in good standing as foreign corporations in each jurisdiction in
which their ownership or leasing of any properties or the character of their
operations requires such qualification or licensing, except those jurisdictions
in which the failure to so qualify would not have a material adverse effect. The
Company and each of its Subsidiaries have all requisite corporate powers and
authority, and, except as set forth in the Registration Statement, the Company
and each of its Subsidiaries and their employees' have all material and
necessary authorizations, approvals, orders, licenses, certificates and permits
of and from all governmental regulatory officials and bodies to own or lease
their properties and conduct their businesses as described in the Prospectus,
and the Company and each of its Subsidiaries are doing business and have been
doing business during the period described in the Registration Statement in
compliance with all such material authorizations, approvals, orders, licenses,
certificates and permits and all material federal, state and local laws, rules
and regulations concerning the businesses in which the Company or its
Subsidiaries are engaged. The disclosures in the Registration Statement
concerning the effects of federal, state and local regulation on the Company's
or its Subsidiaries' businesses as currently conducted and as contemplated are
correct in all material respects and do not omit to state a material fact. The
Company has all corporate power and authority to enter into this Agreement and
carry out the provisions and conditions hereof, and all consents,
authorizations, approvals and orders required in connection therewith have been
obtained or will have been obtained prior to the Closing Date.
(e) This Agreement has been duly and validly authorized and executed by the
Company. The Securities (including the Series E Preferred Stock and the
Warrants), the Warrant Shares have been duly authorized (and, in the case of the
Series E Preferred Stock and the Warrant Shares, have been duly reserved for
issuance) and, when issued and paid for in accordance with this Agreement (and,
in the case of the Warrant Shares, upon exercise of the Warrants and payment to
the Company of the exercise price therefor), the Series E Preferred Stock and
Warrant Shares will be validly issued, fully paid and non-assessable; the Series
E Preferred Stock, Warrants and Warrant Shares are not and will not be subject
to the preemptive rights of any stockholder of the Company and conform and at
all times up to and including their issuance will conform in all material
respects to all statements with regard thereto contained in the Registration
Statement and Prospectus; and all corporate action required to be taken for the
authorization, issuance and sale of the Series E Preferred Stock, Warrants and
Warrant Shares has been taken, and this Agreement constitutes a valid and
binding obligation of the Company, enforceable in accordance with its terms, to
issue and sell, upon exercise in accordance with the terms thereof, the number
and kind of securities called for thereby.
(f) The consummation of the transactions contemplated by this
Agreement and the fulfillment of the terms hereof will not result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
the Certificate of Incorporation, as amended, or Bylaws of the Company or any of
its Subsidiaries or of any evidence of indebtedness, lease, contract or other
agreement or instrument to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries or any of their
properties is bound, or under any applicable law, rule, regulation, judgment,
order or decree of any government, professional advisory body, administrative
agency or court, domestic or foreign, having jurisdiction over the Company or
any of its Subsidiaries or their properties, or result in the creation or
imposition of any lien, charge or encumbrance upon any of the properties or
assets of the Company or any of its Subsidiaries; and no consent, approval,
authorization or order of any court or governmental or other regulatory agency
or body is required for the consummation by the Company or any of its
Subsidiaries of the transactions on their part herein contemplated, except such
as may be required under the Act or under state securities or blue sky laws,
except where a breach, violation or failure to obtain such consent would not
have a material adverse effect upon the business or operation of the Company or
its Subsidiaries.
<PAGE>
(g) Subsequent to the date hereof, and prior to the Closing
Date the Company will not issue or acquire any equity securities except that the
Company may make short-term investments as contemplated in the "Use of Proceeds"
section of the Prospectus. Except as described in the Registration Statement,
the Company does not have, and at the Closing Date will not have, outstanding
any options to purchase or rights or warrants to subscribe for, or any
securities or obligations convertible into, or any contracts or commitments to
issue or sell shares of its Preferred Stock, Series E Preferred Stock or any
such options, warrants, convertible securities or obligations.
(h) The financial statements and notes thereto included in the
Registration Statement and the Prospectus fairly present the financial position
and the results of operations of the Company at the respective dates and for the
respective periods to which they apply; and such financial statements have been
prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved.
(i) Except as set forth in the Registration Statement, the
Company and each Subsidiary are not, and at the Closing Date will not be, in
violation or breach of, or default in, the due performance and observance of any
term, covenant or condition of any indenture, mortgage, deed of trust, note,
loan or credit agreement, or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or instrument to which the
Company or any of its Subsidiaries are a party or by which the Company or any of
its Subsidiaries may be bound or to which any of the property or assets of the
Company or any of its Subsidiaries are subject, which violations, breaches,
default or defaults, singularly or in the aggregate, would have a material
adverse effect on the Company or any of its Subsidiaries. The Company and each
of its Subsidiaries have not and will not have taken any action in material
violation of the provisions of the Certificate of Incorporation, as amended, or
the Bylaws of the Company or its Subsidiaries or any statute or any order, rule
or regulation of any court or regulatory authority or governmental body having
jurisdiction over or application to the Company or its Subsidiaries, their
businesses or properties.
(j) The Company and each of its Subsidiaries have, and at the Closing Date
will have, good and marketable title to all properties and assets described in
the Prospectus as owned by them, free and clear of all liens, charges,
encumbrances, claims, security interests, restrictions and defects of any
material nature whatsoever, except such as are described or referred to in the
Prospectus and liens for taxes not yet due and payable. All of the material
leases and subleases under which the Company or any of its Subsidiaries are the
lessor or sublessor of properties or assets or under which the Company or any of
its Subsidiaries hold properties or assets as lessee as described in the
Prospectus are, and will on the Closing Date be, in full force and effect, and
except as described in the Prospectus, the Company and its Subsidiaries are not
and will not be in default in respect to any of the terms or provisions of any
of such leases or subleases (which would have a material adverse effect on the
business, business prospects or operations of the Company or any of its
Subsidiaries taken as a whole), and no claim has been asserted by anyone adverse
to rights of the Company or any of its Subsidiaries as lessor, sublessor, lessee
or sublessee under any of the leases or subleases mentioned above, or affecting
or questioning the right of the Company or any of its Subsidiaries to continue
possession of the leased or subleased premises or assets under any such lease or
sublease except as described or referred to in the Prospectus, and the Company
and each of its Subsidiaries owns or leases all such properties as are necessary
to its operations as now conducted and, except as otherwise stated in the
Prospectus, as proposed to be conducted set forth in the Prospectus (which would
have a material adverse effect on the business, business prospects or operations
of the Company or any of its Subsidiaries taken as a whole).
<PAGE>
(k) The authorized, issued and outstanding capital stock of
the Company as of , 1997 and as of the date of the Prospectus is as set forth in
the Prospectus under "Capitalization"; the shares of issued and outstanding
capital stock of the Company set forth thereunder have been duly authorized,
validly issued and are fully paid and non-assessable; except as set forth in the
Prospectus, no options, warrants or other rights to purchase, agreements or
other obligations to issue, or agreements or other rights to convert any
obligation into, any shares of capital stock of the Company have been granted or
entered into by the Company; and the Series E Preferred Stock, the Warrants and
all such options and warrants conform in all material respects, to all
statements relating thereto contained in the Registration Statement and
Prospectus.
(l) Except as described in the Prospectus, the Company does
not own or control any capital stock or securities of, or have any proprietary
interest in, or otherwise participate in any other corporation, partnership,
joint venture, firm, association or business organization; provided, however,
that this provision shall not be applicable to the investment, if any, of the
net proceeds from the sale of the Securities sold by the Company in certificates
of deposits, savings deposits, short-term obligations of the United States
Government, money market instruments or other short-term investments.
(m) Haskell & White LLP who has given its report on certain
financial statements filed and to be filed with the Commission as a part of the
Registration Statement, which are incorporated in the Prospectus, are with
respect to the Company, independent public accountants as required by the Act
and the Rules and Regulations.
(n) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
(i) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money; or (ii) entered into any transaction other than
in the ordinary course of business; or (iii) declared or paid any dividend or
made any other distribution on or in respect to its capital stock.
(o) There is no litigation or governmental proceeding pending
or to the knowledge of the Company or any Subsidiary threatened against, or
involving the properties or business of the Company or any Subsidiary which
might materially adversely affect the value, assets or the operation of the
properties or the business of the Company or any Subsidiary, except as referred
to in the Prospectus. Further, except as referred to in the Prospectus, there
are no pending actions, suits or proceedings related to environmental matters or
related to discrimination on the basis of age, sex, religion or race, nor is the
Company or any Subsidiary charged with or, to its knowledge, under investigation
with respect to any violation of any statutes or regulations of any regulatory
authority having jurisdiction over its business or operations, and no labor
disturbances by the employees of the Company or any Subsidiary exist or, to the
knowledge of the Company or any Subsidiary, have been threatened.
(p) The Company has, and at the Closing Date will have, filed
all necessary federal, state and foreign income and franchise tax returns or has
requested extensions thereof (except in any case where the failure to so file
would not have a material adverse effect on the Company), and has paid all taxes
which it believes in good faith were required to be paid by it except for any
such tax that currently is being contested in good faith or as described in the
Prospectus.
<PAGE>
(q) The Company has not at any time (i) made any contribution
to any candidate for political office, or failed to disclose fully any such
contribution, in violation of law, or (ii) made any payment to any state,
federal, foreign governmental or professional regulatory agency, officer or
official or other person charged with similar public, quasi-public or
professional regulatory duties, other than payments or contributions required or
allowed by applicable law.
(r) Except as set forth in the Registration Statement, to the
knowledge of the Company, neither the Company nor any of officer, director,
employee or agent of the Company has made any payment or transfer of any funds
or assets of the Company or conferred any personal benefit by use of the
Company's assets or received any funds, assets or personal benefit in violation
of any law, rule or regulation, which is required to be stated in the
Registration Statement or necessary to make the statements therein not
misleading.
(s) On the Closing Date all transfer or other taxes, if any
(other than income tax) which are required to be paid, and are due and payable,
in connection with the sale and transfer of the Securities by the Company to the
Underwriters will have been fully paid or provided for by the Company as the
case may be, and all laws imposing such taxes will have been fully complied with
in all material respects.
(t) There are no contracts or other documents of the Company
which are of a character required to be described in the Registration Statement
or Prospectus or filed as exhibits to the Registration Statement which have not
been so described or filed.
(u) The Company will apply the net proceeds from the sale of
the Securities sold by it for the purposes and in the manner set forth in the
Registration Statement and Prospectus under the heading "Use of Proceeds."
(v) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (1) transactions are
executed in accordance with management's general or specified authorizations;
(2) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (3) access to assets is permitted only in
accordance with management's general or specific authorizations; and (4) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(w) Except as set forth in the Prospectus, no holder of any
securities of the Company has the right to require registration of any
securities because of the filing or effectiveness of the Registration Statement.
(x) The Company has not taken and at the Closing Date will not
have taken, directly or indirectly, any action designed to cause or result in,
or which has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of the Series E Preferred Stock
or the Warrants to facilitate the sale or resale of such securities.
(y) To the Company's knowledge, there are no claims for
services in the nature of a finder's origination fee with respect to the sale of
the Securities hereunder, except as set forth in the Prospectus.
(z) Other than the right of first refusal granted by the
Company to the Underwriter (as set forth in Section 3(aa) hereof), no right of
first refusal exists with respect to any sale of securities by the Company.
(aa) No statement, representation, warranty or covenant made
by the Company in this Agreement or made in any certificate or document required
by this Agreement to be delivered to Underwriter was, when made, or as of the
Closing Date or as of the Option Closing Date will be materially inaccurate,
untrue or incorrect.
<PAGE>
3. Covenants of the Company.
The Company covenants and agrees that:
(a) It will deliver to the Underwriter, without charge, two
conformed copies of each Registration Statement and of each amendment or
supplement thereto, including all financial statements and exhibits.
(b) The Company has delivered to the Underwriter, and each of
the Selected Dealers (as hereinafter defined) without charge, as many copies as
have been requested of each Preliminary Prospectus heretofore filed with the
Commission in accordance with and pursuant to the Commission's Rule 430 under
the Act and will deliver to the Underwriter and to others whose names and
addresses are furnished by the Underwriter or a Selected Dealer, without charge,
on the Effective Date, and thereafter from time to time during such reasonable
period as you may request if, in the opinion of counsel for the Underwriter, the
Prospectus is required by law to be delivered in connection with sales by the
Underwriter or a dealer, as many copies of the Prospectus (and, in the event of
any amendment of or supplement to the Prospectus, of such amended or
supplemented Prospectus) as the Underwriter may request for the purposes
contemplated by the Act. The Company will take all necessary actions to furnish
to whomever directed by the Underwriter, when and as requested by the
Underwriter, all necessary documents, exhibits, information, applications,
instruments and papers as may be reasonably required or, in the opinion of
counsel to the Underwriter desirable, in order to permit or facilitate the sale
of the Securities.
(c) The Company has authorized the Underwriter to use, and
make available for use by prospective dealers, the Preliminary Prospectus, and
authorizes the Underwriter, all dealers selected by you in connection with the
distribution of the Securities (the "Selected Dealers") to be purchased by the
Underwriter and all dealers to whom any of such Securities may be sold by the
Underwriter or by any Selected Dealer, to use the Prospectus, as from time to
time amended or supplemented, in connection with the sale of the Securities in
accordance with the applicable provisions of the Act, the applicable Regulations
and applicable state law, until completion of the distribution of the Securities
and for such longer period as you may request if the Prospectus is required
under the Act, the applicable Regulations or applicable state law to be
delivered in connection with sales of the Securities by the Underwriter or the
Selected Dealers.
(d) The Company will use its best efforts to cause the
Registration Statement to become effective and will notify the Underwriter
immediately, and confirm the notice in writing: (i) when the Registration
Statement or any post-effective amendment thereto becomes effective; (ii) of the
issuance by the Commission of any stop order or of the initiation, or to the
best of the Company's knowledge, the threatening, of any proceedings for that
purpose; (iii) the suspension of the qualification of the Securities and the
Underwriter's Warrants, or underlying securities, for offering or sale in any
jurisdiction or of the initiating, or to the best of the Company's knowledge the
threatening, of any proceeding for that purpose; and (iv) of the receipt of any
comments from the Commission. If the Commission shall enter a stop order at any
time, the Company will make every reasonable effort to obtain the lifting of
such order at the earliest possible moment.
(e) During the time when a prospectus is required to be
delivered under the Act, the Company will comply with all requirements imposed
upon it by the Act and the Securities Exchange Act of 1934 (the "Exchange Act"),
as now and hereafter amended and by the Regulations, as from time to time in
force, as necessary to permit the continuance of sales of or dealings in the
Securities in accordance with the provisions hereof and the Prospectus. If at
any time when a prospectus relating to the Securities is required to be
delivered under the Act, any event shall have occurred as a result of which, in
<PAGE>
the opinion of counsel for the Company or counsel for the Underwriter, the
Prospectus as then amended or supplemented includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will notify you
promptly and prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act and will furnish to you
copies thereof.
(f) The Company will endeavor in good faith, in cooperation with you, at or
prior to the time the Registration Statement becomes effective, to qualify the
Securities for offering and sale under the securities laws or blue sky laws of
such jurisdictions as you may reasonably designate. In each jurisdiction where
such qualification shall be effected, the Company will, unless you agree that
such action is not at the time necessary or advisable, file and make such
statements or reports at such times as are or may reasonably be required by the
laws of such jurisdiction.
(g) The Company will make generally available to its security
holders, as soon as practicable, but in no event later than the first day of the
fifteenth full calendar month following the Effective Date of the Registration
Statement, an earnings statement of the Company, which will be in reasonable
detail but which need not be audited, covering a period of at least twelve
months beginning after the Effective Date of the Registration Statement, which
earnings statements shall satisfy the requirements of Section 11(a) of the Act
and the Regulations as then in effect. The Company may discharge this obligation
in accordance with Rule 158 of the Regulations.
(h) During the period of five years commencing on the
Effective Date of the Registration Statement, the Company will furnish to its
stockholders an annual report (including financial statements audited by its
independent public accountants), in reasonable detail, and, at its expense,
furnish each of the Underwriters (i) within 90 days after the end of each fiscal
year, or as soon thereafter as is practicable, of the Company, a consolidated
balance sheet of the Company and its consolidated subsidiaries and a separate
balance sheet of each subsidiary of the Company the accounts of which are not
included in such consolidated balance sheet as of the end of such fiscal year,
and consolidated statements of operations, stockholders' equity and cash flows
of the Company and its consolidated subsidiaries and separate statements of
operations, stockholders' equity and cash flows of each of the subsidiaries of
the Company the accounts of which are not included in such consolidated
statements, for the fiscal year then ended all in reasonable detail and all
certified by independent accountants (within the meaning of the Act and the
Regulations), (ii) within 45 days after the end of each of the first three
fiscal quarters of each fiscal year, similar balance sheets as of the end of
such fiscal quarter and similar statements of operations, stockholders' equity
and cash flows for the fiscal quarter then ended, all in reasonable detail, and
subject to year end adjustment, all certified by the Company's principal
financial officer or the Company's principal accounting officer as having been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis, (iii) as soon as available, each report furnished to or
filed with the Commission or any securities exchange and each report and
financial statement furnished to the Company's shareholders generally and (iv)
as soon as available, such other material as the Underwriter may from time to
time reasonably request regarding the financial condition and operations of the
Company.
(i) For a period of eighteen months from the Closing Date, the
Company, at its expense, shall cause its regularly engaged independent certified
public accountants to review (but not audit), the Company's financial statements
for each of the first three quarters prior to the announcement of quarterly
financial information, the filing of the Company's 10-Q quarterly report and the
mailing of quarterly financial information to stockholders.
<PAGE>
(j) Intentionally left blank.
(k) The Company will deliver to you prior to filing, any
amendment or supplement to the Registration Statement or Prospectus proposed to
be filed after the Effective Date of the Registration Statement and will not
file any such amendment or supplement to which you shall reasonably object after
being furnished such copy.
(l) During the period of 120 days commencing on the date
hereof, the Company will not at any time take, directly or indirectly, any
action designed to, or which will constitute or which might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Securities to facilitate the sale or resale of any of the Securities.
(m) The Company will apply the net proceeds from the Offering
received by it in the manner set forth under "Use of Proceeds" in the
Prospectus.
(n) Counsel for the Company, the Company's accountants, and the officers
and directors of the Company will, respectively, furnish the opinions, the
letters and the certificates referred to in subsections of Paragraph 10 hereof,
and, in the event that the Company shall file any amendment to the Registration
Statement relating to the offering of the Securities or any amendment or
supplement to the Prospectus relating to the offering of the Securities
subsequent to the Effective Date of the Registration Statement, such counsel,
such accountants, such officers and directors, respectively, will, at the time
of such filing or at such subsequent time as you shall specify, so long as
securities being registered by such amendment or supplement are being
underwritten by the Underwriter, furnish to you such opinions, letters and
certificates, each dated the date of its delivery, of the same nature as the
opinions, the letters and the certificates referred to in said Paragraph 10, as
you may reasonably request, or, if any such opinion or letter or certificate
cannot be furnished by reason of the fact that such counsel or such accountants
or any such officer or director believes that the same would be inaccurate, such
counsel or such accountants or such officer or director will furnish an accurate
opinion or letter or certificate with respect to the same subject matter.
(o) The Company will comply with all of the provisions of any undertakings
contained in the Registration Statement in all material respects.
(p) The Company will reserve and keep available for issuance that maximum
number of its authorized but unissued shares of Series E Preferred Stock which
are issuable upon exercise of the Warrants and issuable upon exercise of the
Underwriter's Warrants (including the underlying securities) outstanding from
time to time.
(q) Following the Effective Date and from time to time thereafter, so long
as the Warrants are outstanding, the Company will timely prepare and file at its
sole cost and expense one or more post-effective amendments to the Registration
Statement or a new registration statement as required by law as will permit
Warrant holders to be furnished with a current prospectus in the event Warrants
are exercised, and to use its best efforts and due diligence to have same be
declared effective. The Company will deliver a draft of each such post-effective
amendment or new registration statement to the Underwriter at least ten days
prior to the filing of such post-effective amendment or registration statement.
(r) Following the Effective Date and from time to time thereafter so long
as any of the Warrants remain outstanding, the Company will timely deliver and
supply to its warrant agent sufficient copies of the Company's current
Prospectus, as will enable such Warrant Agent to deliver a copy of such
Prospectus to any Warrant or other holder where such Prospectus delivery is by
law required to be made.
<PAGE>
(s) So long as any of the Warrants remain outstanding, the Company shall
continue to employ the services of a firm of independent certified public
accountants reasonably acceptable to the Underwriter in connection with the
preparation of the financial statements to be included in any registration
statement to be filed by the Company hereunder, or any amendment or supplement
thereto (it being understood that Haskell & White LLP is acceptable to the
Underwriter). During the same period, the Company shall employ the services of a
law firm(s) acceptable to the Underwriter (it being understood that Klarman &
Associates is acceptable) in connection with all legal work of the Company,
including the preparation of a registration statement to be filed by the Company
hereunder, or any amendment or supplement thereto.
(t) So long as any of the Warrants remain outstanding, the Company shall
continue to appoint a Warrant Agent for the Warrants, who shall be reasonably
acceptable to the Underwriter.
(u) The Company agrees that it will, upon the Closing Date, for a period of
no less than three (3) years, engage a designee of the Underwriter as an advisor
(the "Advisor") to its Board of Directors where such Advisor shall attend
meetings of the Board, receive all notices and other correspondence and
communications sent by the Company to members of its Board of Directors and
shall be entitled to receive compensation therefor equal to the entitlement of
all non-employee directors. Such Advisor shall also be entitled to receive
reimbursement for all reasonable costs incurred in attending such meetings
including, but not limited to, food, lodging, and transportation. The Company
further agrees that during said three (3) year period, it shall schedule no less
than four (4) formal and "in person" meetings of its Board of Directors in each
such year and thirty (30) days advance notice of such meetings shall be given to
the Advisor. Further, during such three (3) year period, the Company shall give
notice to the Underwriter with respect to any proposed acquisitions, mergers,
reorganizations or other similar transactions. In lieu of the Underwriter's
right to designate an Advisor, the Underwriter shall have the right during such
three-year period, in its sole discretion, to designate one person for election
as a Director of the Company and the Company will utilize its best efforts to
obtain the election of such person who shall be entitled to receive the same
compensation, expense reimbursements and other benefits set forth above.
The Company agrees to indemnify and hold the Underwriter and such
Advisor or Director harmless against any and all claims, actions, damages, costs
and expenses, and judgments arising solely out of the attendance and
participation of your designee at any such meeting described herein. In the
event the Company maintains a liability insurance policy affording coverage for
the acts of its of officers and directors, it agrees, if possible, to include
the Underwriter's designee as an insured under such policy.
(v) Intentionally Left Blank.
(w) The Company's Series E Preferred Stock and Warrants shall
be listed on the Nasdaq SmallCap Market ("Nasdaq"), or on a stock exchange, not
later than the Closing Date. Prior to the Closing Date, the Company will make
all filings required, including registration under the Exchange Act, to obtain
the listing of the Series E Preferred Stock and Warrants on Nasdaq and any such
exchange, and will effect and use its best efforts to maintain such listings
(unless the Company is acquired) for at least five years from the date of this
Agreement.
(x) The Company will apply for listing in Standard and Poors
Corporation Reports or Moodys OTC Guide and shall use its best efforts to have
the Company included in such publications for at least five years from the
Closing Date.
<PAGE>
(y) Intentionally Left Blank.
(z) Except for the issuance of shares of capital stock by the
Company in connection with a dividend, recapitalization, reorganization or
similar transactions or as result of the exercise of warrants or options
disclosed in or issued or granted pursuant to plans disclosed in the
Registration Statement, the Company shall not, for a period of twenty-four (24)
months following the Closing Date, directly or indirectly, offer, sell, issue or
transfer any shares of its capital stock, or any security exchangeable or
exercisable for, or convertible into, shares of the capital stock or register
any of its capital stock (under any form of registration statement, including
Form S-8), without the prior written consent of the Representative. Options
granted pursuant to plans must be exercisable at the fair market value on the
date of grant.
(aa) During the three-year period from the Effective Date, the
Underwriter shall have a right of first refusal to act as underwriter or agent
of any and all public or private offerings of the securities of the Company, or
any successor to or subsidiary of the Company or any other entity in which the
Company has an equity interest (collectively referred to herein as the
"Company"), by the Company or any secondary offering of the Company's securities
by any of its officers, directors and 5% or greater stockholders ("Principal
Stockholders"). The Company has caused such Principal Stockholders to deliver to
the Underwriter on or before the date of this Agreement, an agreement to this
effect, as it relates to any proposed secondary offering by such Principal
Stockholders, in form and substance satisfactory to the Underwriter and to
counsel for the Underwriter.
(bb) Intentionally Left Blank.
(cc) The Company will use its best efforts to obtain, as soon
after the Closing Date as is reasonably possible, liability insurance covering
its officers and directors.
(dd) The Company agrees that any conflict of interest arising
between a member of the Company's Board of Directors and the Company in
connection with such Director's dealing with, or obligations to, the Company,
shall be resolved by a vote of the majority of the independent members of the
Board of Directors.
(ee) The Company agrees that it will employ the services of a
financial public relations firm acceptable to the Underwriter for a period of at
least twelve months following the Effective Date.
4. Appointment of Agent to Sell the Securities.
(a) Subject to the terms and conditions of this Agreement, and upon the
basis of the representations, warranties, and agreements herein contained, the
Company hereby appoints the Underwriter as its
<PAGE>
exclusive agent for a period of 90 days from the Effective Date, subject to
an extension by mutual agreement of the Company and the Underwriter for an
additional period not to exceed 90 days (the "Offering Period"), to sell the
Securities, and the Underwriter, on the basis of the representations and
warranties of the Company herein, accepts such appointment and agrees to use its
best efforts on an "all or none" basis to find purchasers for the Securities.
The price at which the Underwriter shall sell the Securities to the public as
agent for the Company, shall be $4.00 per share of Series E Preferred Stock and
$.10 per Warrant, less an underwriting discount of ten percent (10%) of the
offering price for each security. The Underwriter may allow a concession not
exceeding $ per share of ------- Common Stock and $ per Warrant to selected
dealers who are members of the National Association of Securities ------ Dealer,
Inc. ("NASD"), and to certain foreign dealers, but all such sales by selected
dealers shall be made by the Company, acting through the Underwriter as agent,
and not for the account of the Underwriter.
(b) Provided that all of the Securities offered hereby are
sold and paid for, the Company agrees to pay the Underwriter for its expenses a
non-accountable expense allowance equal to 3% of the gross proceeds of the
offering, subject to the provisions of Paragraph 9 herein.
(c) It is a condition of this Agreement that the Underwriter
shall use its best efforts to sell the Securities on behalf of the Company, that
any and all funds received from such sale, without any deduction therefrom
whatsoever, including, but not limited to, any underwriting commission or any
dealer concession or otherwise, shall be forthwith deposited into an escrow
account with Gotham Bank of New York, as Escrow Agent, pursuant to the terms of
an Escrow Agreement entered into by and among the Company, the Underwriter and
the Escrow Agent. In the event all of the Securities offered hereby are not sold
within the Offering Period, all funds will be promptly refunded to the
subscribes in full, without deduction therefrom or interest thereon.
Certificates will be issued to purchasers only if the proceeds from all of the
Securities offered hereby are released from escrow to the Company. Until such
time as the funds have been released and the certificates delivered to the
purchasers thereof, such purchasers, if any, will be deemed subscribers and not
stockholders. The funds in escrow will be held for the benefit of those
subscribers until released to the Company and will not be subject to creditors
of the Company or utilized for the expenses of this Offering. When certificates
for the Securities are to be issued in the name of a participating dealer for
the benefit of its customer, the Escrow Agent may hold such funds with the
dealer reflected as the subscriber.
5. Delivery and Payment.
(a) In the event all of the Securities offered hereby are sold
during the Offering Period, delivery of the Certificates representing the shares
of Series E Preferred Stock and Warrants against payment therefor shall take
place at the offices of West America Securities Corp., (or at such other place
as may be designated by agreement between you and the Company), at 10:00 a.m.,
New York time, on such date after the Offering has been completed as the
Underwriter shall designate, on at least five (5) full business days' prior
written notice, such time and date of payment and delivery of the Securities
being herein called the "Closing Date."
(b) The Company will make the certificates for the shares of
Series E Preferred Stock and Warrants sold hereunder available to the
Underwriter for checking at least two full business days prior to the Closing
Date at the offices of the Company's transfer agent. The certificates shall be
in such names and denominations as you may request, at least two full business
days prior to the Closing Date.
<PAGE>
(c) The cost of original issue tax stamps, if any, in
connection with the issuance and delivery of the Securities by the Company to
the Underwriter shall be borne by the Company. The Company will pay and hold the
Underwriter, and any subsequent holder of the Securities, harmless from any and
all liabilities with respect to or resulting from any failure or delay in paying
federal and state stamp taxes, if any, which may be payable or determined to be
payable in connection with the original issuance or sale to the Underwriter of
the Securities or any portions thereof.
6. Offering of Securities on Behalf of the Company.
It is understood that the Underwriter proposes to offer the Securities to
the public solely as agent for the Company, upon the terms and conditions set
forth in the Registration Statement. The Underwriter shall commence making such
offer as agent for the Company on the Effective Date, or as soon thereafter as
the Underwriter deems advisable.
7. Warrant Solicitation Fee.
The Company agrees to pay to the Underwriter a fee of five percent (5%)
of the aggregate exercise price of the Warrants if: (i) the market price of the
Series E Preferred Stock is greater than the exercise price of the Warrants on
the date of exercise; (ii) the exercise of the Warrants are solicited by a
member of the NASD; (iii) the Warrants are not held in a discretionary account;
(iv) the disclosure of compensation arrangements was made both at the tie of the
Offering and at the time of the exercise of the Warrant; and (v) the
solicitation of the Warrant is not in violation of Regulation M promulgated
under the Exchange Act. The Company agrees not to solicit the exercise of any
Warrants other than through the Underwriter and will not authorize any other
dealer to engage in such solicitation without the prior written consent of the
Underwriter which will not be unreasonably withheld. The Warrant solicitation
fee will not be paid in a non-solicited transaction. No Warrant solicitation by
the Underwriter will occur prior to one year from the Effective Date.
8. Representations and Warranties of the Underwriter.
The Underwriter represents and warrants to the Company that:
(a) The Underwriter is a member in good standing of the
National Association of Securities Dealers, Inc., and has complied with all NASD
requirements concerning net capital and compensation to be received in
connection with the Offering.
(b) To the Underwriter's knowledge, there are no claims for
services in the nature of a finder's origination fee with respect to the sale of
the Securities hereunder to which the Company is, or may become, obligated to
pay.
9. Payment of Expenses.
(a) Whether or not this Agreement becomes effective or the
sale of the Securities by the Company is completed, the Company will pay and
bear all costs, fees, taxes and expenses incident to and in connection with: (i)
the issuance, offer, sale and delivery of the Securities, including all expenses
and fees incident to the preparation, printing, filing and mailing (including
the payment of postage with respect to such mailing) of the Registration
Statement (including all exhibits thereto), each Preliminary Prospectus, the
Prospectus, and amendments and post- effective amendments thereof and
supplements thereto, and this Agreement and related documents, Preliminary and
Final Blue Sky Memoranda, including the cost of preparing and copying all copies
thereof in quantities deemed necessary by the Underwriter; (ii) the costs of
preparing and printing all "Tombstone" and other appropriate advertisements;
(iii) the printing, engraving, issuance and delivery of the Series E Preferred
Stock, Warrants, Warrant Shares, Underwriter's Warrants and the securities
underlying the Underwriter's Warrant, including any transfer or other taxes
payable thereon in connection with the original issuance thereof; (iv) the
qualification of the Series E Preferred Stock and Warrants under the state or
foreign securities or "Blue Sky" laws selected by the Underwriter and the
Company, and disbursements and reasonable fees of counsel for the Underwriter in
connection therewith plus the filing fees for such states; (v) the preparation
of a secondary trading memorandum; (vi) fees and disbursements of counsel and
accountants for the Company; (vii) other expenses and disbursements incurred on
behalf of the Company (viii) the filing fees payable to the Commission and the
National Association of Securities Dealers, Inc. ("NASD"); and (ix) any listing
of the Series E Preferred Stock and Warrants on a securities exchange or on
NASDAQ.
<PAGE>
(b) In addition to the expenses to be paid and borne by the Company
referred to in Paragraph 9(a) above, the Company shall reimburse you at the
Closing Date for expenses incurred by you in connection with the Offering (for
which you need not make any accounting), in the amount of 3% of the price to the
public of the Securities sold in the Offering. This 3% non-accountable expense
allowance shall cover the fees of your legal counsel, but shall not include any
expenses for which the Company is responsible under Paragraph 9(a) above,
including the reasonable fees and disbursements of your legal counsel with
respect to Blue Sky matters. As of the date hereof, no funds have been advanced
by the Company to the Underwriter with respect to such non-accountable expense
allowance.
(c) In the event that the Company does not or cannot, for any
reason whatsoever other than a default by the Underwriters, expeditiously
proceed with the Offering, or if any of the representations, warranties or
covenants contained in this Agreement are not materially correct or cannot be
complied with by the Company, or business prospects or obligations of the
Company are adversely affected and the Company does not commence or continue
with the Offering at any time or terminates the proposed transaction prior to
the Closing Date, the Company shall not be responsible to reimburse the
Underwriter for any out-of-pocket expenses in connection with the Underwriting.
10. Conditions of Underwriter's Obligations.
The obligations of the Underwriter to consummate the transactions
contemplated by this Agreement shall be subject to the continuing accuracy of
the representations and warranties of the Company contained herein as of the
date hereof and as of the Closing Date, the accuracy of the statements of the
Company and its officers and directors made pursuant to the provisions hereof,
and to the performance by the Company of its covenants and agreements hereunder
and under each certificate, opinion and document contemplated hereunder and to
the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., New York time, on the date following the date of this
Agreement, or such later date and time as shall be consented to in writing by
you and, on or prior to the Closing Date, no stop order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Securities under the securities laws of any jurisdiction shall have been
issued and no proceedings for that purpose shall have been instituted or shall
be pending or to your knowledge or the knowledge of the Company, shall be
contemplated by the Commission or any such authorities of any jurisdiction and
any request on the part of the Commission or any such authorities for additional
information shall have been complied with to the reasonable satisfaction of the
Commission or such authorities and counsel to the Underwriter and after the date
hereof no amendment or supplement shall have been filed to the Registration
Statement or Prospectus without your prior consent.
(b) The Registration Statement or the Prospectus or any
amendment thereof or supplement thereto shall not contain an untrue statement of
a fact which is material, or omit to state a fact which is material and is
required to be stated therein or is necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(c) Between the time of the execution and delivery of this
Agreement and the Closing Date, there shall be no litigation instituted against
the Company or any of its officers or directors and between such dates there
shall be no proceeding instituted or, to the Company's knowledge, threatened
against the Company or any of its officers or directors before or by any
federal, state or county commission, regulatory body, administrative agency or
other governmental body, domestic or foreign, in which litigation or proceeding
an unfavorable ruling, decision or finding would have a material adverse effect
on the Company or its business, business prospects or properties, or have a
material adverse effect on the financial condition or results of operation of
the Company.
<PAGE>
(d) Each of the representations and warranties of the Company
contained herein and each certificate and document contemplated under this
Agreement to be delivered to you shall be true and correct at the Closing Date
as if made at the Closing Date, and all covenants and agreements contained
herein and in each such certificate and document to be performed on the part of
the Company, and all conditions contained herein and in each such certificate
and document to be fulfilled or complied with by the Company at or prior to the
Closing Date shall be fulfilled or complied with.
(e) At the Closing Date, you shall have received the opinion
of Klarman & Associates, counsel to the Company, dated as of such Closing Date,
addressed to the Underwriter and in form and substance satisfactory to counsel
to the Underwriter, to the effect that:
(i) The Company and each of its Subsidiaries are corporations
duly organized, validly existing and in good standing under the laws
of the jurisdiction of their incorporation with full corporate power
and authority, and all licenses, permits, certifications,
registrations, approvals, consents and franchises to own or lease and
operate their properties and to conduct their businesses as described
in the Registration Statement. The Company and each of its
Subsidiaries are duly qualified to do business as foreign corporations
and are in good standing in all jurisdictions wherein such
qualification is necessary and failure so to qualify could have a
material adverse effect on the financial condition, results of
operations, business or properties of the Company and each of its
Subsidiaries;
(ii) The Company has full corporate power and authority to
execute, deliver and perform the Underwriting Agreement and the
Warrant Agreement and to consummate the transactions contemplated
thereby. The execution, delivery and performance of the Underwriting
Agreement and the Warrant Agreement by the Company, the consummation
by the Company of the transactions therein contemplated and the
compliance by the Company with the terms of the Underwriting Agreement
and the Warrant Agreement have been duly authorized by all necessary
corporate action, and each of the Underwriting Agreement and the
Warrant Agreement have been duly executed and delivered by the
Company. Each of the Underwriting Agreement and the Warrant Agreement
is a valid and binding obligation of the Company, enforceable in
accordance with their respective terms, subject, as to enforcement of
remedies, to applicable bankruptcy, insolvency, reorganization,
moratorium and other laws affecting the rights of creditors generally
and the discretion of courts in granting equitable remedies and except
that enforceability of the indemnification provisions and the
contribution provisions set forth in the Underwriting Agreement may be
limited by the federal securities laws or public policy underlying
such laws;
(iii) The execution, delivery and performance of the Underwriting
Agreement and the Warrant Agreement by the Company, the consummation
by the Company of the transactions therein contemplated and the
compliance by the Company with the terms of the Underwriting Agreement
and the Warrant Agreement do not, and will not, with or without the
giving of notice or the lapse of time, or both, (A) result in a
violation of the Certificate of Incorporation, as the same may be
amended, or Bylaws of the Company or any of its Subsidiaries, (B) to
the best of our knowledge, result in a breach of, or conflict with,
any terms or provisions of or constitute a default under, or result in
the modification or termination of, or result in the creation or
imposition of any lien, security interest, charge or encumbrance upon
any of the properties or assets of the Company or any of its
<PAGE>
Subsidiaries pursuant to, any indenture, mortgage, note, contract,
commitment or other material agreement or instrument to which the
Company or any of its Subsidiaries are a party or by which the Company
or any of its Subsidiaries or any of their properties or assets are or
may be bound or affected, except where any of the foregoing would not
result in a material adverse effect upon the Company's or any
Subsidiaries business or operations; (C) to the best of our knowledge,
violate any existing applicable law, rule or regulation or judgment,
order or decree known to us of any governmental agency or court,
domestic or foreign, having jurisdiction over the Company or any of
its Subsidiaries or any of their properties or businesses; or (D) to
the best of our knowledge, have any effect on any permit,
certification, registration, approval, consent, license or franchise
necessary for the Company or any of its Subsidiaries to own or lease
and operate their properties and to conduct their business or the
ability of the Company or any of its Subsidiaries to make use thereof;
(iv) To the best of our knowledge, no authorization, approval,
consent, order, registration, license or permit of any court or
governmental agency or body (other than under the Act, the Regulations
and applicable state securities or Blue Sky laws) is required for the
valid authorization, issuance, sale and delivery of the Securities,
the Series E Preferred Stock, the Warrants and the Warrant Shares, and
the consummation by the Company of the transactions contemplated by
the Underwriting Agreement and the Warrant Agreement or the
Underwriter's Warrants;
(v) The Registration Statement was declared effective under the
Act on , 1997; to the best of our knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued, and
no proceedings for that purpose have been instituted or are pending,
threatened or contemplated under the Act or applicable state
securities laws;
(vi) The Registration Statement and the Prospectus, as of the
Effective Date (except for the financial statements and other
financial data included therein or omitted therefrom, as to which we
express no opinion), comply as to form in all material respects with
the requirements of the Act and Regulations and the conditions for use
of a registration statement on Form SB-2 have been satisfied by the
Company;
(vii) The description in the Registration Statement and the
Prospectus of statutes, regulations, contracts and other documents
have been reviewed by us, and, based upon such review, are accurate in
all material respects and present fairly the information required to
be disclosed, and to the best of our knowledge, there are no material
statutes or regulations, or, to the best of our knowledge, material
contracts or documents, of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement, which are not so described or filed as
required.
To the best of our knowledge, none of the material provisions of
the contracts or instruments described above violates any existing
applicable law, rule or regulation or judgment, order or decree known
to us of any United States governmental agency or court having
jurisdiction over the Company or any of its assets or businesses;
<PAGE>
(viii) The outstanding Series E Preferred Stock and Warrants have
been duly authorized and validly issued. The outstanding Series E
Preferred Stock is fully paid an nonassessable. To the best of our
knowledge, none of the outstanding Series E Preferred Stock has been
issued in violation of the preemptive rights of any stockholder of the
Company. None of the holders of the outstanding Series E Preferred
Stock is subject to personal liability solely by reason of being such
a holder. The authorized Series E Preferred Stock conforms to the
description thereof contained in the Registration Statement and
Prospectus. To the best of our knowledge, except as set forth in the
Prospectus, no holders of any of the Company's securities has any
rights, "demand," "piggyback" or otherwise, to have such securities
registered under the Act;
(ix) The issuance and sale of the Securities, the Series E
Preferred Stock, the Warrants, the Warrant Shares and the
Underwriter's Warrants have been duly authorized and when issued will
be validly issued, fully paid and non-assessable, and the holders
thereof will not be subject to personal liability solely by reason of
being such holders. Neither the Securities, nor the Series E Preferred
Stock are subject to preemptive rights of any stockholder of the
Company. The certificates representing the Securities are in proper
legal form;
(x) The issuance and sale of the Warrant Shares have been duly
authorized and, when paid for, issued and delivered pursuant to the
terms of the Warrants, the Warrant Shares will constitute the valid
and binding obligations of the Company, enforceable in accordance with
their terms, to issue and sell the Warrants and the Warrant Shares.
All corporate action required to be taken for the authorization,
issuance and sale of the securities has been duly, validly and
sufficiently taken. The Series E Preferred Stock and the Warrants have
been duly authorized by the Company to be offered in the form of the
Securities. The Warrants and the Warrant Shares conform to the
descriptions thereof contained in the Registration Statement and
Prospectus;
(xi) The Underwriter has acquired good title to the Securities,
free and clear of all liens, encumbrances, equities, security
interests and claims, provided that the Underwriter are bona fide
purchasers as defined in '8-302 of the Uniform Commercial Code;
(xii) To the best of our knowledge, there are no claims, actions,
suits, proceedings, arbitrations, investigations or inquiries before
any governmental agency, court or tribunal, foreign or domestic, or
before any private arbitration tribunal, pending or threatened against
the Company or any of its Subsidiaries or involving their properties
or businesses, other than as described in the Prospectus, such
description being accurate, and other than litigation incident to the
kind of business conducted by the Company or any of its Subsidiaries
which, individually and in the aggregate, is not material, and, except
as otherwise disclosed in the Prospectus and the Registration
Statement, the Company and its Subsidiaries have complied with all
federal and state laws, statutes and regulations concerning its
business;
(xiii) We have participated in reviews and discussions in
connection with the preparation of the Registration Statement and the
Prospectus. Although we are not passing upon and do not assume
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement, no facts came to
our attention which lead us to believe that (A) the Registration
Statement (except as to the financial statements and other financial
data contained therein, as to which we express no opinion), on the
Effective Date,
<PAGE>
contained any untrue statement of a material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading, or
that (B) the Prospectus (except as to the financial statements and
other financial data contained therein, as to which we express no
opinion) contains any untrue statement or a material fact or omits to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(f) Intentionally Left Blank.
(g) On or prior to the Closing Date, counsel for the
Underwriter shall have been furnished such documents, certificates and opinions
as they may reasonably require for the purpose of enabling them to review the
matters referred to in subparagraphs (e) and (f) of this Paragraph 10, or in
order to evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained.
(h) Prior to the Closing Date:
(i) There shall have been no material adverse change in the
condition or prospects or the business activities, financial or
otherwise, of the Company from the latest dates as of which such
condition is set forth in the Registration Statement and Prospectus;
(ii) There shall have been no transaction, outside the ordinary
course of business, entered into by the Company from the latest date
as of which the financial condition of the Company is set forth in the
Registration Statement and Prospectus which is material to the
Company, which is either (x) required to be disclosed in the
Prospectus or Registration Statement and is not so disclosed, or (y)
likely to have material adverse effect on the Company's business or
financial condition;
(iii) The Company shall not be in default under any material
provision of any instrument relating to any outstanding indebtedness,
except as described in the Prospectus;
(iv) No material amount of the assets of the Company shall have
been pledged, mortgaged or otherwise encumbered, except as set forth
in the Registration Statement and Prospectus;
(v) No action, suit or proceeding, at law or in equity, shall
have been pending or to its knowledge threatened against the Company
or affecting any of its properties or businesses before or by any
court or federal or state commission, board or other administrative
agency wherein an unfavorable decision, ruling or finding would
materially and adversely affect the business, operations, prospects or
financial condition or income of the Company, taken as a whole, except
as set forth in the Registration Statement and Prospectus; and
(vi) No stop order shall have been issued under the Act and no
proceedings therefor shall have been initiated or, to the Company's
knowledge, threatened by the Commission.
(vii) Each of the representations and warranties of the Company
contained in this Agreement and in each certificate and document
contemplated under this Agreement to be delivered to you was, when
originally made and is at the time such certificate is dated, true and
correct.
<PAGE>
(i) Concurrently with the execution and delivery of this Agreement and at
the Closing Date, you shall have received a certificate of the Company signed by
the Chief Executive Officer of the Company and the principal financial officer
of the Company, dated as of the Closing Date, to the effect that the conditions
set forth in subparagraph (h) above have been satisfied and that, as of the
Closing Date, the representations and warranties of the Company set forth in
Paragraph 2 herein and the statements in the Registration Statement and
Prospectus were and are true and correct. Any certificate signed by any of
officer of the Company and delivered to you or for counsel for the Underwriter
shall be deemed a representation and warranty by the Company to the Underwriter
as to the statements made therein.
(j) At the time this Agreement is executed, and at the Closing Date, you
shall have received a letter, addressed to the Underwriter and in form and
substance satisfactory in all respects to you and counsel for the Underwriter,
and including estimates of the Company's revenues and results of operations for
the period ending at the and of the month immediately preceding the Effective
Date and results of the comparable period during the prior fiscal year, from
Haskell & White LLP, dated as of the date of this Agreement and as of the
Closing Date.
(k) All proceedings taken in connection with the
authorization, issuance or sale of the Series E Preferred Stock, Warrants and
Warrant Shares as herein contemplated shall be satisfactory in form and
substance to you and to counsel to the Underwriter, and the Underwriter shall
have received from such counsel an opinion, dated as the Closing Date with
respect to such of these proceedings as you may reasonably require.
(l) The Company shall have furnished to you such certificates,
additional to those specifically mentioned herein, as you may have reasonably
requested in a timely manner as to the accuracy and completeness, at the Closing
Date, of any statement in the Registration Statement or the Prospectus, as to
the accuracy, at the Closing Date, of the representations and warranties of the
Company herein and in each certificate and document contemplated under this
Agreement to be delivered to you, as to the performance by the Company of its
obligations hereunder and under each such certificate and document or as to the
fulfillment of the conditions concurrent and precedent to your obligations
hereunder.
(m) On the Closing Date there shall have been duly tendered to
you for your account the appropriate number of shares of Series E Preferred
Stock and Warrants constituting the Securities.
11. Indemnification and Contribution.
(a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless the Underwriter and each person, if any,
who controls the Underwriter ("controlling person") within the meaning of either
Section 15 of the Act or Section 20 of the Exchange Act, against any and all
losses, liabilities, claims, damages, actions and expenses or liability, joint
or several, whatsoever (including but not limited to any and all expense
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), joint or
several, to which it or such controlling persons may become subject under the
Act, the Exchange Act or under any other statute or at common law or otherwise
or under the laws of foreign countries, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any Preliminary Prospectus or the Prospectus (as from
time to time amended and supplemented); in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
the Warrant Shares of the Company issued or issuable upon exercise of the
Warrants, or Underwriter' Warrant Shares upon exercise of the Underwriter'
Warrants; or in any application or other document or written communication (in
this Paragraph 10 collectively called "application") executed by the Company or
<PAGE>
based upon written information furnished by the Company filed in any
jurisdiction in order to qualify the Series E Preferred Stock, Warrants, Warrant
Shares, Underwriter's Warrants and Underwriter's Warrant Shares (including the
Shares issuable upon exercise of the Warrants underlying the Underwriter's
Warrants) under the securities laws thereof or filed with the Commission or any
securities exchange; or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements therein
not misleading (in the case of the Prospectus, in the light of the circumstances
under which they were made), unless such statement or omission was made in
reliance upon or in conformity with written information furnished to the Company
with respect to the Underwriter by or on behalf of the Underwriter expressly for
use in any Preliminary Prospectus, the Registration Statement or Prospectus, or
any amendment or supplement thereof, or in application, as the case may be.
Notwithstanding the foregoing, the Company shall have no liability under this
Paragraph 11(a) if any such untrue statement or omission made in a Preliminary
Prospectus, is cured in the Prospectus and the Underwriter failed to deliver to
the person or persons alleging the liability upon which indemnification is being
sought, at or prior to the written confirmation of such sale, a copy of the
Prospectus. This indemnity will be in addition to any liability which the
Company may otherwise have.
(b) The Underwriter agrees to indemnify and hold harmless the Company and
each of the officers and directors of the Company who have signed the
Registration Statement and each other person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, to the same extent as the foregoing indemnity from the Company to the
Underwriter in Paragraph 11(a), but only with respect to any untrue statement or
alleged untrue statement of any material fact contained in or any omission or
alleged omission to state a material fact required to be stated in any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereof or necessary to make the statements therein not
misleading or in any application made solely in reliance upon, and in conformity
with, written information furnished to the Company by you specifically expressly
for use in the preparation of such Preliminary Prospectus, the Registration
Statement or Prospectus directly relating to the transactions effected by the
Underwriter in connection with this Offering. This indemnity agreement will be
in addition to any liability which the Underwriter may otherwise have.
Notwithstanding the foregoing, the Underwriter shall have no liability under
this Paragraph 11(b) if any such untrue statement or omission made in a
Preliminary Prospectus is cured in the Prospectus, and the Prospectus is
delivered to the person or persons alleging the liability upon which
indemnification is being sought.
(c) If any action is brought against any indemnified party
(the "Indemnitee") in respect of which indemnity may be sought against another
party pursuant to the foregoing (the "Indemnitor"), the Indemnitor shall assume
the defense of the action, including the employment and fees of counsel
(reasonably satisfactory to the Indemnitee) and payment of expenses. Any
Indemnitee shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
Indemnitee unless the employment of such counsel shall have been authorized in
writing by the Indemnitor in connection with the defense of such action. If the
Indemnitor shall have employed counsel to have charge of the defense or shall
previously have assumed the defense of any such action or claim, the Indemnitor
shall not thereafter be liable to any Indemnitee in investigating, preparing or
defending any such action or claim. Each Indemnitee shall promptly notify the
Indemnitor of the commencement of any litigation or proceedings against the
Indemnitee in connection with the issue and sale of the Series E Preferred
Stock, Warrants and Warrants Shares or in connection with the Registration
Statement or Prospectus.
(d) In order to provide for just and equitable contribution
under the Act in any case in which: (i) the Underwriter makes a claim for
indemnification pursuant to Paragraph 11 hereof, but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the time to appeal has expired or the last right of appeal has been denied)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Paragraph 11 provides for indemnification of such case; or (ii)
contribution under the Act may be required on the part of the Underwriter in
circumstances for which indemnification is provided under this Paragraph 11,
then, and in each such case, the Company and the Underwriter shall contribute to
<PAGE>
the aggregate losses, claims, damages or liabilities to which they may be
subject (after any contribution from others) in such proportion so that the
Underwriter is responsible for the portion represented by dividing the total
compensation received by the Underwriter herein by the total purchase price of
all Securities sold in the public offering and the Company is responsible for
the remaining portion; provided, that in any such case, no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11 (f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
The foregoing contribution agreement shall in no way affect the
contribution liabilities of any persons having liability under Section 11 of the
Act other than the Company and the Underwriter. As used in this Paragraph 11,
the term "Underwriter" includes any officer, director, or other person who
controls the Underwriter within the meaning of Section 15 of the Act, and the
word "Company" includes any of officer, director or person who controls the
Company within the meaning of Section 15 of the Act. If the full amount of the
contribution specified in this paragraph is not permitted by law, then the
Underwriter and each person who controls the Underwriter shall be entitled to
contribution from the Company to the full extent permitted by law. No
contribution shall be requested with regard to the settlement of any matter from
any party who did not consent to the settlement.
(e) Within fifteen (15) days after receipt by any party to
this Agreement (or its representative) of notice of the commencement of any
action, suit or proceeding, such party will, if a claim for contribution in
respect thereof is made against another party (the "contributing party"), notify
the contributing party of the commencement thereof, but the omission so to
notify the contributing party will not relieve it from any liability it may have
to any other party other than for contribution hereunder.
In case any such action, suit or proceeding is brought against any party,
and such party notifies a contributing party or his or its representative of the
commencement thereof within the aforesaid fifteen (15) days, the contributing
party will be entitled to participate therein with the notifying party and any
other contributing party similarly notified. Any such contributing party shall
not be liable to any party seeking contribution on account of any settlement of
any claim, action or proceeding effected by such party seeking contribution
without the written consent of such contributing party. The indemnification
provisions contained in this Paragraph 11 are in addition to any other rights or
remedies which either party hereto may have with respect to the other or
hereunder.
12. Representations Warranties Agreements to Survive Delivery.
The respective indemnity and contribution agreements by the Underwriter
and the Company contained in Paragraph 11 hereof, and the covenants,
representations and warranties of the Company and the Underwriter set forth in
this Agreement, shall remain operative and in full force and effect regardless
of (i) any investigation made by the Underwriter or on its behalf or by or on
behalf of any person who controls the Underwriter, or by the Company or any
controlling person of the Company or any director or any of officer of the
Company, (ii) acceptance of any of the Securities and payment therefor, or (iii)
any termination of this Agreement, and shall survive the delivery of the
Securities and any successor of the Underwriter or the Company, or of any person
who controls you or the Company or any other indemnified party, as the case may
be, shall be entitled to the benefit of such respective indemnity and
contribution agreements. The respective indemnity and contribution agreements by
the Underwriter and the Company contained in this Paragraph 12 shall be in
addition to any liability which the Underwriter and the Company may otherwise
have.
<PAGE>
13. Effective Date of This Agreement and Termination Thereof.
(a) This Agreement shall become effective at 10:00 A.M., New
York time, on the first full business day following the day on which you and the
Company receive notification that the Registration Statement became effective.
(b) This Agreement may be terminated by the Underwriter by
notifying the Company at any time on or before the Closing Date, if any domestic
or international event or act or occurrence has materially disrupted, or in your
opinion will in the immediate future materially disrupt, securities markets; or
if trading on the New York Stock Exchange, the American Stock Exchange, or in
the over-the-counter market shall have been suspended, or minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required on the over-the-counter market by the NASD
or NASDAQ, an exchange, or by order of the Commission or any other governmental
authority having jurisdiction; or if a moratorium in foreign exchange trading by
major international banks or persons has been declared; or if the Company shall
have sustained a loss material or substantial to the Company taken as a whole by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act which, whether or not such loss shall have been insured, will,
in your opinion, make it inadvisable to proceed with the delivery of the
Securities; or if there shall have been a material adverse change in the
conditions of the securities market in general, as in your reasonable judgment
would make it inadvisable to proceed with the offering, sale and delivery of the
Securities; or if there shall have been a material adverse change in the
financial or securities markets, particularly in the over-the-counter market, in
the United States having occurred since the date of this Agreement.
(c) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Paragraph 12, the
Company shall be notified promptly by you by telephone or facsimile, confirmed
by letter.
(d) If this Agreement shall not become effective by reason of
an election of the Representative pursuant to this Paragraph 13 or if this
Agreement shall not be carried out within the time specified herein by reason of
any failure on the part of the Company to perform any undertaking, or to satisfy
any condition of this Agreement by it to be performed or satisfied, the sole
liability of the Company to the Underwriter, shall be pursuant to Paragraph 8
herein.
Notwithstanding any contrary provision contained in this Agreement, any
election hereunder or any termination of this Agreement, and whether or not this
Agreement is otherwise carried out, the provisions of Paragraph 9 and 11 hereof
shall not be in any way affected by such election or termination or failure to
carry out the terms of this Agreement or any part hereof.
<PAGE>
14. Notices.
All communications hereunder, except as herein otherwise specifically
provided, shall be in writing and, if sent to the Underwriter, shall be mailed,
delivered or telegraphed and confirmed to the Underwriter at 4510 E. Thousand
Oaks Blvd., Suite 100, West Village 91362, attention: Robert Kay, with a copy
thereof to Eric Kloper, Esq., 315 West 57th Street New York, NY 10019, and, if
sent to the Company, shall be mailed, delivered or telegraphed and confirmed to
the Company at 550 Rancheros Drive, San Marcos, CA 92069, Attention: Richard
Brady, President, with a copy thereof to Klarman & Associates, 2694 Bishop
Drive, San Ramon, CA 94583, attention: David Klarman, Esq.
15. Parties.
This Agreement shall inure solely to the benefit of and shall be
binding upon, the Underwriter, the Company and the controlling persons,
directors and officers referred to in Paragraph 11 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
16. Construction.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York and shall supersede any
agreement or understanding, oral or in writing, express or implied, between the
Company and you relating to the sale of any of the Securities.
17. Jurisdiction and Venue.
The Company agrees that the courts of the State of New York shall have
jurisdiction over any litigation arising from this Agreement, and venue shall be
proper in the Southern District of New York.
18. Counterparts.
This agreement may be executed in counterparts.
If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
Play Co. Toys & Entertainment Corp.
By: ____________________________
Richard Brady, President
Accepted as of the date first above written:
West America Securities Corp.
By: _____________________________
Robert Kay, President
<PAGE>
Exhibit 3.2
Amendment to Certificate of Incorporation of the Company, filed July 2, 1997
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION
OF PLAY CO. TOYS & ENTERTAINMENT CORP.
Under Section 242 of the Delaware Corporation Law:
The undersigned, for the purpose of amending the Certificate of
Incorporation of Play Co. Toys & Entertainment Corp., does hereby certify and
set forth:
FIRST:
The name of the Corporation is PLAY CO. TOYS & ENTERTAINMENT CORP.
SECOND:
The Certificate of Incorporation was filed by the Department of State
on June 15, 1994.
THIRD:
The amendment to the Certificate of Incorporation of the Corporation
effected by this Certificate of Amendment is to (i) eliminate the
classifications of the Series E Preferred Stock as the Series E Class I and
Series E Class II (ii) increase the authorized number of shares of the Series E
Preferred Stock to 5,000,000 shares (iii) eliminate the dividend on the Series E
Preferred Stock (iv) decrease the conversion ratio of the Series E Preferred
Stock from 20 to 1 to 6 to one and (v) maintain the conversion feature of the
Series E Preferred Stock to require a two year holding period prior to the
holder having the right to convert. The Certificate of Incorporation of this
Corporation is amended by changing "Article FOURTH", so that, as amended, said
Article shall read as follows:
FOURTH:
A. Authorized Capital Stock. The total number of shares of all classes of
capital stock which this Corporation shall have authority to issue is FORTY-FIVE
MILLION (45,000,000) share consisting of FORTY MILLION (40,000,000) shares of
Common Stock, par value $.01 per share (hereinafter, the "Common Stock"), and
FIVE MILLION (5,000,000) shares of Preferred Stock, par value $.01 per share
(hereinafter, the "Preferred Stock"), designated, "Series E Preferred Stock",
the relative rights, preferences and limitations of which are as set forth in
sub- paragraph (B) of this Article FOURTH.
B. Series E Preferred Stock.
(i) Designation. The designation of this series of Preferred Stock, par
value $.01 per share, shall be the "Series E Preferred Stock". The number of
shares of Series E Preferred Stock authorized hereby shall be 5,000,000 shares.
(ii) Rank. The Series E Preferred Stock shall, with respect to rights on
liquidation, winding up and dissolution, rank (a) junior to any other Senior
Securities established by the Board of Directors and, if required by Section
vii, approved by the affirmative vote of the holders of a majority of the shares
of the Series E Preferred Stock, the terms of which shall specifically provide
that such series shall rank prior to the Series E Preferred Stock, (b) on a
parity with any other Parity Securities established by the Board of Directors,
the terms of which shall specifically provide that such series shall rank on a
parity with the Series E Preferred Stock, and (c) prior to any other Junior
Securities of the Corporation.
(iii) Dividends.
The Series E Preferred Stock shall not have any right to dividends.
<PAGE>
(iv) Liquidation Preference.
(a) In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Corporation, the holders of shares of Series
E Preferred Stock then outstanding shall be entitled to be paid out of the
assets of the Corporation available for distribution to its stockholders an
amount in cash equal to $1.00 per share for each share outstanding, before any
payment shall be made or any assets distributed to the holders of any of the
Junior Securities, provided, however, that the holder of the outstanding shares
of the Series E Preferred Stock shall not be entitled to receive such
liquidation payment until the liquidation payments on all outstanding shares of
Senior Securities, if any, shall have been paid in full. If the assets of the
Corporation are not sufficient to pay in full the liquidation payments payable
to the holders of the outstanding shares of the Series E Preferred Stock or any
other Parity Securities, then the holders of all such shares shall share ratably
in such distribution of assets in accordance with the amount which would be
payable on such distribution if the amounts to which the holders of the
outstanding shares of Series E Preferred Stock and the holders of outstanding
shares of such other Parity Securities are entitled were paid in full.
(b) For the purposes of this Article FOURTH, neither the voluntary sale,
conveyance, lease, exchange or transfer (for cash, shares of stock, securities
or their consideration) of all or substantially all the property or assets of
the Corporation or the consolidation or merger of the Corporation with one or
more other corporations shall be deemed to be a liquidation, dissolution or
winding up, voluntary or involuntary, unless such voluntary sale, conveyance,
lease, exchange or transfer shall be in connection with a dissolution or winding
up of the business of the Corporation.
(v) Redemption. The shares of Series E Preferred Stock is not redeemable by
the Corporation.
(vi) Conversion.
(a) Subject to and upon compliance with the provisions of this Section
(vi), the holder of a share of Series E Preferred Stock designated shall have
the right, at such holder's option, terminating five years from issuance, to
convert such share into 6 fully paid and non-assessable shares of Common Stock
of the Corporation. A holder of the Series E Preferred Stock shall have the
right to convert such share, at such holder's option, at any time commencing two
years from issuance.
(b)(i) In order to exercise the conversion privilege, the holders of each
share of Series E Preferred Stock to be converted shall surrender the
certificate representing such share at the office of the transfer agent for the
Series E Preferred Stock, appointed for such purpose by the Corporation, with
the Notice of Election to Convert on the back of said certificate completed and
signed. Unless the shares of Common Stock issuable on conversion are to be
issued in the same name in which such share of Series E Preferred Stock is
registered, each share surrendered for conversion shall be accompanied by
instruments of transfer, in form satisfactory to the Corporation, duly executed
by the holder of such holder's duly authorized attorney and an amount sufficient
to pay any transfer or similar tax.
(ii) As promptly as practicable after the surrender of the certificates for
shares of Series E Preferred Stock as aforesaid, the Corporation shall issue and
shall deliver at such office to such holder, or on his written order, a
certificate or certificates for the number of full shares of Common Stock
issuable upon the conversion of such shares in accordance with the provisions of
this Section (iv).
<PAGE>
(iii) Each conversion shall be deemed to have been effected immediately
prior to the close of business on the date on which the certificates for shares
of Series E Preferred Stock shall have been surrendered and such notice received
by the Corporation as aforesaid, and the person or persons in whose name or
names any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares represented thereby at such time on such date,
unless the stock transfer books of the Corporation shall be closed on that date,
in which event such person or persons shall be deemed to have become such holder
or holders of record at the close of business on the next succeeding day on
which such stock transfer books are open, and such notice received by the
Corporation. All shares of Common Stock delivered upon conversion of the Series
E Preferred Stock will upon delivery be duly and validly issued and fully paid
and non-assessable, free of all liens and charges and not subject to any
preemptive rights.
(d) The Corporation covenants that it will at all times reserve and keep
available, free from preemptive rights, out of the aggregate of its authorized
but unissued shares of Common Stock or its issued shares of Common Stock held in
its treasury, or both, for the purposes of effecting conversions of the Series E
Preferred Stock, the full number of shares of Common Stock deliverable upon the
conversion of all outstanding shares of Series E Preferred Stock not theretofore
converted. For purposes of this subsection (d), the number of shares of Common
Stock which shall be deliverable upon the conversion of all outstanding shares
of Series E Preferred Stock shall be computed as if at the time of computation
of all such outstanding share were held by a single holder.
(vii) Voting Rights. The holders of record of shares of the Series E
Preferred Stock shall not be entitled to any voting rights except as hereinafter
provided in this Section (vii)(a) or as otherwise provided by law.
(a) So long as any shares of the Series E Preferred Stock are outstanding,
the Corporation will not, without the affirmative vote or consent of the holders
of at least a majority of the outstanding shares of the Series E Preferred
Stock, voting as a class, to vote to amend the Corporation's Certificate of
Incorporation to (i) increase or decrease the aggregate number of authorized
shares of the Series E Preferred Stock, (ii) increase or decrease the par value
of the Series E Preferred Stock or (iii) alter the preferences, powers or rights
of the Series E Preferred Stock so as to affect them adversely.
(b) In exercising the voting rights set forth in this Section vii, each
share of Series E Preferred Stock shall have one vote per share.
C. Common Stock.
(i) Dividends. Subject to the liquidation rights of the Series E Preferred
Stock, the holders of Common Stock shall be entitled to share equally all
dividends declared and paid by the Corporation.
(ii) Voting. The holders of record of Common Stock shall have one vote, on
all matters upon which stockholders of the Corporation may vote, for each share
of the Common Stock held by them.
(iii) Dissolution, Liquidation, Etc. In the event of the dissolution,
liquidation or winding up of the affairs of the Corporation, after payment or
provision for payment of the debts and other liabilities of the Corporation and
after the payment to the holders of the Preferred Stock as provided for in this
Certificate of Incorporation, the remaining assets of the Corporation shall be
distributed to the holders of Common Stock.
FIFTH:
<PAGE>
The amendment to the Articles of Incorporation of the Corporation set forth
above was adopted at a Special Meeting of the Corporation's stockholders on the
__th day of June, 1997.
IN WITNESS WHEROF, the undersigned President of this Corporation has
executed this Certificate of Amendment on this __th day of June, 1997.
PLAY CO. TOYS & ENTERTAINMENT CORP.
----------------------
Richard Brady, President
----------------------
Angela Burnett, Secretary
<PAGE>
Exhibit 4.5
Form of Warrant Agreement between the Company, the Underwriter
and Continental Stock Transfer & Trust Company
<PAGE>
Exhibit 10.82(a)
Amendment No. 4 to Loan and Security Agreement with Congress
<PAGE>
FOURTH AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
THIS FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Amendment"),
dated as of July ____, 1997, is entered into by and between CONGRESS FINANCIAL
CORPORATION (WESTERN), a California corporation ("Lender"), with a place of
business at 225 South Lake Avenue, Suite 1000, Pasadena, California 91101, and
PLAY CO. TOYS & ENTERTAINMENT CORP., a Delaware corporation (formerly known as
"Play Co. Toys") ("Borrower"), with its chief executive office located at 550
Rancheros Drive, San Marcos, California 92069.
RECITALS
Borrower and Lender have previously entered into that certain Loan and
Security Agreement dated as of February 1, 1996, as amended by that certain
First Amendment to Loan and Security Agreement dated as of August 16, 1996, that
certain Second Amendment to Loan and Security Agreement dated as of January 16,
1997, and that certain Third Amendment to Loan and Security Agreement dated as
of March 12, 1997 (collectively, the "Loan Agreement"), pursuant to which Lender
has made certain loans and financial accommodations available to Borrower. Terms
used herein without definition shall have the meanings ascribed to them in the
Loan Agreement.
Borrower has requested Lender to amend the Loan Agreement to (i)
eliminate the separate advance rates against Eligible Toys International
Inventory for Revolving Loans and (ii) confirm that the Loan Agreement shall not
be extended past February 2, 1998.
Lender is willing to further amend the Loan Agreement under the terms
and conditions set forth in this Amendment. Borrower is entering into this
Amendment with the understanding and agreement that, except as specifically
provided herein, none of the Lender's rights or remedies as set forth in the
Loan Agreement is being waived or modified by the terms of this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
Amendment to Definitions of the Loan Agreement.
The definition of "Eligible Toys International Inventory" is hereby
deleted in its entirety from Section 1 of the Loan Agreement.
<PAGE>
(b) The following definition is hereby inserted in Section 1 of
the Loan Agreement in proper alphabetical order:
"Termination Date" shall have the meaning set forth in Section 12.1(a)
hereof."
Amendment to Credit facilities Provision of the Loan Agreement.
Sub-paragraph (i) of paragraph (a) of Section 2.1 of the Loan Agreement
(entitled "Revolving Loans") is hereby amended in its entirety to read as
follows:
"(i) the lesser of the Maximum Credit (less any amounts advanced under the
Special Loan Facility) or (A) for Peak Period, the lowest of (1) sixty percent
(60%) of the Cost Value of Eligible Inventory or categories thereof for that
portion of the Peak Period from August 1 through December 15, such percentage
thereafter to decrease by two (2) percentage points per week commencing December
16, and for each seven (7) day period thereafter, through the end of the Peak
Period: (2) eighty-one (81%) of the Appraised Value of Eligible Inventory or
categories thereof; or (3) thirty-eight and one-half percent (38.5%) of the
Retail Value of Eligible Inventory or categories thereof for that portion of the
Peak Period from August 1 through December 15, such percentage thereafter to
decrease by one (1) percentage point per week commencing December 16, and for
each seven (7) day period thereafter, through the end of Peak Period; or (B) for
non-Peak Period, the lowest of (1) fifty percent (50%) of the Cost Value of
Eligible Inventory or categories thereof; (2) eighty-eight percent (88%) of the
Appraised Value of Eligible Inventory or categories thereof; or (3) thirty-three
percent (33%) of the Retail Value of Eligible Inventory or categories thereof,
plus"
3. Amendment to Collateral Reporting and Covenants Provision of the Loan
Agreement. Clause (b) of Section 7.3 of the Loan Agreement (entitled "Inventory
Covenants") is hereby amended in its entirety to read as follows:
"(b) Lender may conduct physical counts of the Inventory, no more than
twice in any twelve month period, but at any time as Lender may request on or
after an Event of Default, provided, however, notwithstanding the foregoing,
Lender may conduct (in addition to the physical counts of inventory described
above) a test count of the inventory for the second quarter ended for fiscal
year 1998 of Borrower, and Lender may engage Washington Inventory Service or
another outside inventory counting service acceptable to Lender to conduct a
periodic physical count of the Inventory in such manner as Lender shall
reasonably determine, the costs and expenses of such firm engaged to conduct the
physical count such firm shall supply Lender with a report in the form and with
such specificity as may be reasonably satisfactory to Lender concerning such
physical count,"
4. Amendment to Term of Agreement; Miscellaneous Provision of the Loan
Agreement.
(a) The first sentence of paragraph (a) of Section 12.1 of the Loan
Agreement (entitled "Term") is hereby amended in its entirety to read as
follows:
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<PAGE>
"This Agreement and the other Financing Agreement shall become
effective as of the date set forth on the first page hereof and shall continue
in full force and effect for a term ending on February 2, 1998 (the "Termination
Date"), unless sooner terminated pursuant to the terms hereof."
(b) Clause (iii) of paragraph c of Section 12.1 of the Loan Agreement
(entitled "Term") is hereby deleted in its entirety.
5. Effectiveness of this Amendment. Leader must have received the
following items, in form and content acceptable to Lender, before this Amendment
is effective and before Lender is required to extend any credit to Borrower as
provided for by this Amendment. The date on which all of the following
conditions have been satisfied is the "Closing Date".
(a) Amendment. This Amendment fully executed in a sufficient number of
counterparts for distribution to Lender and Borrower.
(b) Authorizations. Evidence that the execution, delivery and performance
by Borrower and each guarantor or subordinating creditor of this Amendment and
any instrument or agreement required under this Amendment have been duly
authorized.
(c) Representations and Warranties. The Representations and Warranties set
forth in the Loan Agreement must be true and correct.
(d) Consents. Lender has received counterparts of the Consent appended
hereto (the "Consent") executed by United Textiles & Toys Corporation, a
Delaware corporation, formerly known as Mister Jay Fashions International, Inc.
("Guarantor") (together with the Borrower, each a "Loan Party" and,
collectively, the "Loan Parties").
(e) Other Required Documentation. All other documents and legal matters in
connection with the transactions contemplated by this Agreement shall have been
delivered or executed or recorded and shall be in form and substance
satisfactory to Lender.
(f) Payment of Modification Fee. Lender shall have charged a Modification
Fee of One Thousand Dollars ($1,000) to the loan account(s) of Borrower for the
processing and approval of this Amendment.
6. Representations and Warranties. The Borrower represents and warrants as:
(a) Authority. The Borrower and each other Loan Party has the requisite
corporate power and authority to execute and deliver this Amendment or the
Consent, as applicable, and to perform its obligations hereunder and under the
Financing Agreements (as amended or modified hereby) to which it is a party. The
execution, delivery and performance by the Borrower of this Amendment and by
each other Loan Party of the Consent, and the performance by each Loan Party of
each Financing Agreement (as amended or modified hereby) to which it is a party
have
3
<PAGE>
been duly approved by all necessary corporate action of such Loan Party and no
other corporate proceedings on the part of such Loan Party are necessary to
consummate such transactions.
(b) Enforceability. This Amendment has been duly executed and delivered by
the Borrower. The Consent has been duly executed and delivered by Guarantor.
This Amendment and each Financing Agreement (as amended or modified hereby) is
the legal, valid and binding obligation of each Loan Party hereto or thereto,
enforceable against such Loan Party in accordance with its terms, and is in full
force and effect.
(c) Representations and Warranties. The representations and warranties
contained in each Financing Agreement (other than any such representations or
warranties that, by their terms, are specifically made as of a date other than
the date hereof) are correct on and as of the date hereof as though made on and
as of the date hereof.
(d) No Default. No event has occurred and is continuing that constitutes an
Event of Default.
7. Choice of Law. The validity of this Amendment, its construction,
interpretation and enforcement, the rights of the parties hereunder, shall be
determined under, governed by, and construed in accordance with the internal
laws of the State of California governing contracts only to be performed in that
State.
8. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties and separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute one and the same instrument. Delivery of
an executed counterpart of a signature page to this Amendment or the Consent by
telefacsimile shall be effective as delivery of a manually executed counterpart
of this Amendment of such Consent.
9. Due Execution. The execution, delivery and performance of this Amendment
are within the power of Borrower, have been duly authorized by all necessary
corporate action, have received all necessary governmental approval, if any, and
do not contravene any law or contractual restrictions binding on Borrower.
10. Reference to and Effect on the Loan Documents. (a) Upon and after the
effectiveness of this Amendment, each reference in the Loan Agreement to "this
Agreement", "hereunder", "hereof" or words of like import referring to the Loan
Agreement, and each reference in the other Financing Agreements to "the Loan
Agreement", "thereof" or words of like import referring to the Loan Agreement,
shall mean and be a reference to the Loan Agreement as modified and amended
hereby.
(b) Except as specifically amended above, the Loan Agreement and all
other Financing Agreements, are and shall continue to be in full force and
effect and are hereby in all respects ratified and confirmed and shall
constitute the legal, valid, binding and enforceable obligations of Borrower to
Lender.
4
<PAGE>
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of Lender under any of the Financing Agreements, not constitute
a waiver of any provision of any of the Financing Agreements.
(d) To the extent that any terms and conditions in any of the Financing
Agreements shall contradict or by in conflict with any terms or conditions of
the Loan Agreement, after giving effect to this Amendment, such terms and
conditions are hereby deemed modified or amended accordingly to reflect the
terms and conditions of the Loan Agreement as modified or amended hereby.
11. Ratification. Borrower hereby restates, ratifies and reaffirms each and
every term and condition set forth in the Loan Agreement, as amended hereby, and
the Financing Agreements effective as of the date hereof.
12. Estoppel. To induce Lender to enter into this Amendment and to continue
to make advances to Borrower under the Loan Agreement, Borrower hereby
acknowledges and agrees that, after giving effect to this Amendment, as of the
date hereof, there exists no Event of Default and no right of offset, defense,
counterclaim or objection in favor of Borrower as against Lender with respect to
the Obligations.
IN WITNESS WHEREOF, the parties have entered into this Amendment as of the
date first written above.
PLAY CO. TOYS & ENTERTAINMENT CORP.,
a Delaware corporation
By:_________________________________
Title:________________________________
CONGRESS FINANCIAL CORPORATION
(WESTERN), a California corporation
By:_________________________________
Title:________________________________
5
<PAGE>
Exhibit 10.86
Subscription Agreement between the
Company and Volcano Trading Limited dated June 30, 1997
<PAGE>
Play Co. Toys & Entertainment Corp.
SUBSCRIPTION AGREEMENT
June 30, 1997
Volcano Trading Ltd.
Via Cantonale, #16
Lugano, Switzerland CH-6901
Gentlemen/Ladies:
The following sets forth the terms and conditions of your
subscription to provide aggregate of $550,000 into equity of the Company. You
agree to purchase 250,000 Securities of the Series E Preferred Stock and 500,000
Warrants, identical to the Warrants expected to be sold in the Company's initial
public offering, at prices of $2.00 per share and $.10 per Warrant,
respectively.
1. Subscription: the Offering.
(a) By your signature hereto, you hereby subscribe for and agree to
purchase 250,000 Securities of the Company's Series E Preferred Stock and
500,000 Warrants (collectively the "Securities") at prices of $2.00 per share
and $.10 per Warrant, subject to the terms and conditions set forth in this
"Agreement".
(b) The funds for the purchase shall be received by the Company no later
that August 10, 1997.
(c) The Securities purchased shall be delivered against the receipt of full
payment therefore, in the form of cash, certified check or the wire of funds
delivered to the Company.
2. Representations and Warrants by Subscriber. You hereby represent and
warrant as follows:
(a) You have received, read carefully and are familiar with this Agreement,
and the Company's form 10-KSB for the year ended March 31, 1997, respecting the
Company, its business, plans and financial condition: you have received all
materials which have been requested by you; and the Company has answered all
inquiries that you or your representatives have put to it. You have had access
to all additional information necessary to verify the accuracy of the
information set forth in this Agreement and any other
<PAGE>
materials furnished herewith, and you have taken all the steps necessary to
evaluate the merits and risks of an investment as proposed hereunder.
(b) You or your purchaser representative have such knowledge and experience
in finance, securities, investments and other business matters so as to be able
to protect your interests in connection with this transaction, and your
investment in the Company hereunder is not material when compared to your total
financial capacity.
(c) You understand the various risks of an investment in the Company as
proposed herein and can afford to bear such risks, including the risk of losing
your entire investment.
(d) You acknowledge that no market for the Securities sold herein presently
exists and none may develop in the future and that you may find it impossible to
liquidate your investment at a time when it may be desirable to do so, or at any
other time.
(e) You have been advised by the Company that the Securities have not been
registered under the Securities Act, and that they will be issued on the basis
of the statutory exemption provided by Sections 4(2) and 4(6) of the Securities
Act, relating to transactions by an issuer not involving any public offering and
under similar exemptions under certain state securities laws, that this
transaction has not been reviewed by, passed on or submitted to any Federal or
state agency or self-regulatory organization where an exemption is being relied
upon, and that the Company's reliance thereon is based in part upon the
representations made by you in this Agreement. You acknowledge that you have
been informed by the Company of, or are otherwise familiar with, the nature of
the limitations imposed by the Securities Act and the rules and regulations
thereunder on the transfer of securities. In particular, you agree that no sale,
assignment or transfer of the Securities shall be valid or effective, and the
Company shall not be required to give any effect to any such sale, assignment or
transfer, unless (i) the sale, assignment or transfer of the Securities is
registered under the Securities Act, it being understood that the Securities are
not currently registered for sale and that the Company has no obligation or
intention to so register the Securities except as contemplated herein, or (ii)
the Securities are sold, assigned or transferred in accordance with all the
requirements and limitations of Rule 144 under the Securities Act, it being
understood that Rule 144 is not available at the present time for the sale of
the Securities, or (iii) such sale, assignment, or transfer is otherwise exempt
from registration under the Securities Act. You acknowledge that the Securities
shall be subject to a stop transfer order and the certificate or certificates
evidencing any Securities shall bear the following or substantially similar
legends and such other legends as may be required by state blue sky laws:
"These securities have not been registered under the
Securities Act of 1933, as amended (the "Act"). Such
securities may not be sold or offered for sale, transferred,
hypothecated or otherwise assigned in the absence of an
effective registration statement with respect thereto under
such Act or an opinion reasonably acceptable to the Company of
counsel reasonably acceptable to
2
<PAGE>
the Company that an exemption from registration for such sale,
offer, transfer, hypothecation or other assignment is
available under such Act."
3. Transferability. Neither this Agreement, nor any of your interests
herein, shall be assignable or transferable by you in whole or in part except by
operation of law.
4. Commissions. There will be no commissions paid with respect to the sale
of the Securities.
5. Registration Rights. The undersigned shall have the right, on one
occasion, commencing ninety days for the effective date of a registration
statement with respect to the Company's initial public offering of its Series E
Preferred Stock, to demand the registration of the resale of the Securities.
Upon receipt of written notice of its right, the Company shall prepare and file
with the Securities and Exchange Commission a registration statement to enable
the undersigned to sell the Securities. The Company shall use its best efforts
to have the registration statement declared effective.
6. Miscellaneous.
(a) All notices or other communications given or made hereunder shall be in
writing and shall be delivered or mailed to you at your address set forth on the
signature page of this Agreement and to the Corporation at the address set forth
below. Notices hand delivered shall be deemed given upon receipt and notices
sent by mail shall be deed given on the second business day following deposit in
the Shared States mail.
(b) This Agreement shall be construed in accordance with and governed by
the laws of the State of California without reference to that State's conflicts
of laws provisions.
(c) This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and may be amended only by a
writing executed by all parties hereto.
(d) This Agreement may be executed in one or more counterparts
representing, however, one and the same agreement.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year this subscription has been accepted by the Company as set forth
below.
Very truly yours,
Play Co. Toys & Entertainment Corp.
By: ______________________________
Richard Brady, President
AGREED TO AND ACCEPTED:
Valcano Trading Ltd.
__________________________
Name:
Title:
5
<PAGE>
Exhibit 23.01
Consent of Haskell & White
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated May 13, 1997, except for Note 15 b)
which is as of June 10, 1997, the last paragraph of Note 9 which is as of June
20, 1997, and Notes 15 c) and d) which are as of June 30, 1997, relating to the
financial statements of Play Co. Toys & Entertainment Corp. which are contained
in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
HASKELL & WHITE LLP
Certified Public Accountants
July 23, 1997
<PAGE>
<PAGE>
