As filed with the Securities and Exchange Commission on September 30, 1997
Registration No. 333-32051
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
AMENDMENT NO. 1
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
(760) 471-4505
(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
(510) 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 1933, 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. [ ]
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 September 30, 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 from the
date hereof, 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 September 30, 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. Until
September 24, 1997, the Company's Common Stock was listed on the Nasdaq SmallCap
Stock Market ("Nasdaq") under the symbol "PLCO." The Company expects that its
Common Stock together with the Series E Stock and Warrants will trade on the
over-the-counter market on the OTC Bulletin Board upon the consummation of this
Offering. 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 intends to seek the listing of its securities on
an exchange upon completion of this offering, although no assurance can be given
as to whether any such listing will be obtained. Quotation on the OTC Bulletin
Board, Nasdaq, or on an 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. 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, the
Warrants, shares of Series E Stock underlying same, or the shares of Common
Stock underlying the Series E Stock. 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." See "Underwriting."
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 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
flagship store in Santa Clarita, and acquired three Toys stores. In August 1997,
the Company opened an additional store in Clairemont and redesigned its
Encinitas location to a Contemporary. In conformance with its new goals, the
Company's new stores ("the Contemporaries") are smaller (3,500 to 5,200 square
feet in size) and 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 five Company Originals into
Contemporaries and open an additional eight locations by the end of fiscal 1999.
In addition to the location opened in August 1997, the Company plans to open
three more locations by the end of calendar year 1997. These three locations are
expected to open in October and November. The Company expects to have
twenty-five 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>
Symbols(4) Common Stock.............PLCO
Series E Stock...............PLCP
Warrants.....................PLCOW
(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) Until September 24, 1997 the Company's Common Stock was listed on
Nasdaq. The Company is seeking to have its Common Stock together with the Series
E Stock and Warrants quoted on the OTC Bulletin Board. Quotation on the OTC
Bulletin Board does not imply that a meaningful, sustained market for the
Company's Securities has or will develop. See "Risk Factors" and "Market for
Common Equity."
<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, June 30, 1997
1994 1995 1996 1997 (Unaudited)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working Capital (deficiency) ....$ (102,132) $ 1,805,396 $ 46,589 $ (1,570,486) $ (1,407,003)
Total Assets .................... 9,005,405 11,119,692 9,213,104 9,378,618 10,144,406
Total Current Liabilities ....... 7,094,257 7,298,136 6,673,570 8,148,657 8,889,702
Long-term obligations ........... 99,274 140,218 726,007 226,925 210,672
Redeemable preferred stock ...... 929,380 242,275 87,680 -- --
Stockholders' equity ............ 882,494 3,439,063 1,725,847 1,003,036 1,044,032
Common stock dividends ...... -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended Three Months Three Months
March 31, Ended Ended
June 30, 1997 June 30, 1996
1994 1995 1996 1997 (unaudited) (unaudited)
Operating Data:
<S> <C> <C> <C> <C> <C> <C>
Net sales ...................... $ 21,756,847 $ 25,374,722 $ 21,230,853 $ 19,624,276 $ 3,142,813 $ 3,184,903
Cost of sales .................. 15,001,015 16,704,757 15,132,895 13,669,104 1,973,365 2,151,718
Gross Profit .................. ($) 8,669,965 6,755,832 6,097,958 5,955,172 1,169,448 1,033,185
(%) ........................... 34.16 31.05 28.72 30.34 37.21 32.44
Operating expenses ............. 8,489,222 9,292,632 9,105,515 8,881,438 2,167,430 1,837,372
Net income (loss) ............... (1,631,775) (875,788) (3,542,715) (3,584,881) (1,209,504) (983,361)
Income (loss) per common share(1) (1.69) (0.87) (2.77) (1.29) (.30) (.76)
Average shares outstanding(1) 966,322 1,011,284 1,287,843 2,791,876 4,083,739 1,287,843
</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. For the three
months ended June 30, 1997, the Company recorded a net loss of $1,209,504 as
compared to a net loss of $983,361 for the three months ended June 30, 1996.
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 June 30, 1997, the Company had a working capital deficiency of
$1,407,003, an accumulated deficit of $9,259,980, and stockholders' equity of
$1,044,032. 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
two new stores, including 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. There are no written contracts and/or
agreements with any individual supplier; rather, all orders are on a purchase
order basis only. The Company relies on credit terms from suppliers to purchase
nearly all of its inventory. Credit terms vary from supplier to supplier and are
based upon many factors. including the ordering company's financial condition,
account history, type of product and the time of year the order is placed. The
Company
<PAGE>
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 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-Financing and
Supplier Credit" 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. 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;
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 price and credit 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. 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. The Company has entered into a Loan and Security
Agreement with Congress. The agreement provides the Company with a secured line
of credit of up to 60% of the value of all the Company's inventory, not to
exceed $7,000,000 which line expires in February 1998. Congress has informed the
Company that it will not exercise its option to
<PAGE>
extend the term of the credit line. In order for the Company to continue its
operations, it requires a credit line to support its receivables, inventory
purchases, and seasonable operations. The Company is seeking to replace its
credit line, though no assurances can be given that it will be able to obtain
another financing arm. This line of credit is secured by all of the Company's
assets. If, for any reason, such estimates prove inaccurate, the Company's only
recourse, outside the Congress line of credit, will be to 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 and Supplier Credit."
7. Current Litigation. The Company is currently in litigation in several venues
regarding four of five stores which the Company has closed. If the courts find
in favor of any one of three of the plaintiffs, then the outcome could have
adverse effects on the Company and its operations. The Company anticipates that
the fourth litigation will be amended to seek relief in the amount of payments
due under the balance of the term of the lease; in such instance, if the court
finds in favor of the plaintiff, then the outcome could have adverse effects on
the Company and its operations. Such outcomes could affect the use of the
proceeds of the Company and the implementation of its business plans. If the
Company's funds are insufficient, then the Company may be forced to seek
additional financing to implement its business plan.
See "Business-Legal Proceedings."
8. Seasonality. The Company's business is highly seasonal with a large
portion of its revenues (approximately 45% to 49% of the Company's annual sales)
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 and
Supplier Credit."
9. Management's Broad Discretion in the Application of Proceeds. The
Company's management will have broad discretion regarding the use of proceeds of
this Offering, $845,000 or 33.8%, which proceeds have been allocated to working
capital. See "Use of Proceeds."
10. 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 Company currently employs only two
executive officers; Richard Brady, Chief Executive Officer, and James Frakes,
Chief Financial Officer and Secretary. The loss of the services of either Mr.
Rashbaum, Mr. Brady, or Mr. Frakes could adversely affect the business of the
Company. The Company does not have or intend to obtain "key-man" insurance
coverage on any of these individuals.
11. 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 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,"
<PAGE>
formerly known as 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."
12. 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 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 June 30, 1997 is $1,044,032, or approximately $.25 per
outstanding share of Common Stock ($1,044,032 / 4,103,519), or approximately
$.04 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 x 6 + 4,103,519) which represents an immediate dilution of
$.21 per share of Common Stock on a pro forma basis. After completion of the
offering, the tangible net book value is estimated to be $3,544,032, or
approximately $.86 per outstanding share of Common Stock ($3,544,032 /
4,103,519), or approximately $.12 per share of Common Stock assuming immediate
conversion of all 4,200,570 shares of Series E Stock then outstanding (4,200,570
x 6 + 4,103,519) which represents an immediate dilution of $.74 per share of
Common Stock on an as adjusted basis.
13. 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.
14. 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.
<PAGE>
15. Arbitrary Offering Price of Series E Stock and Exercise Price of
Warrants. The offering price of the Series E Stock and the offering price and
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.
16. 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 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 E Stock and Warrants will not have the use of
any funds paid during the subscription period.
17. Delisting of Securities from Nasdaq System; Risks of Low Priced Stocks,
Penny-Stocks. The Nasdaq Stock Market has delisted the Company's Common Stock
from trading in its market based on its belief the Company does not meet the
stockholders' equity maintenance requirement of $1,000,000 and due to public
interest concerns. The Company had sought appeal through the Nasdaq Listings
Qualifications Panel which upheld Nasdaq's determination. The Company plans to
continue to appeal Nasdaq's and the hearing panel's decision to the fullest
extent of its administrative and legal remedies. The Company's management does
not agree with Nasdaq's conclusions. There can be no assurances that any appeal
will be successful or that if successful, any of the Company's securities will
be reinstated for listing on the Nasdaq Stock Market. The Company's Securities
shall be quoted on the over-the-counter market on the OTC Bulletin Board. See
"Market for Common Equity."
18. 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. See "Market for Common Equity."
19. 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."
20. 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
<PAGE>
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 and liquidity 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.
21. Penny Stock Regulation. The Commission has adopted regulations that
generally define a "penny stock" to be any equity security that has a market
price of less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. Such exceptions include an equity security
listed on Nasdaq or a stock exchange, and an equity security issued by an issuer
that has (i) net tangible assets of at least $2,000,000, if such issuer has been
in continuous operation for three years; (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years; or (iii) average revenues of at least $6,000,000 for the preceding three
years. Since the Company has had more than $6,000,000 in revenues for the
preceding three years, it is not a designated penny stock. Unless an exception
is available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a risk disclosure schedule explaining the penny
stock market and the risks associated therewith.
If the Company's securities were to become subject to the regulations
applicable to penny stocks, the market liquidity for the securities would be
severely affected, limiting the ability of broker-dealers to sell the securities
and the ability of purchasers in this Offering to sell their securities in the
secondary market. There is no assurance that trading in the Company's Securities
will not be subject to these or other regulations that would adversely affect
the market for such securities.
22. 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."
23. Restrictions on Exercise of Warrants; Necessity for Updating
Registration Statement. The Warrants offered hereby are not exercisable unless,
at the time of the exercise, the Company has a current prospectus covering the
shares of Preferred Stock issuable upon exercise of the Warrants and such shares
have been registered, qualified or deemed to be exempt under the securities laws
of the state of residence
<PAGE>
of the exercising holder of the Warrants. The Company shall file amendments to
this Registration Statement and must have same declared effective before the
Warrants may be exercised. The Company shall undertake to use its best efforts
to have all of the shares of Preferred Stock issuable upon exercise of the
Warrants registered or qualified on or before the exercise date and to maintain
a current prospectus relating thereto until the expiration of the Warrants;
there is no assurance that it will be able to do so. The Company will notify all
Warrantholders and its transfer agent that the Warrants may not be exercised in
the event there is no current prospectus.
Although the Warrants will not knowingly be sold to purchasers in
jurisdictions in which the Warrants are not registered or otherwise qualified
for sale, purchasers may buy Warrants in the after-market or may move to
jurisdictions in which the shares underlying the Warrants are not so registered
or qualified during the period that the Warrants are exercisable. In this event,
the Company would be unable to issue shares to those persons desiring to
exercise their Warrants unless and until the shares could be qualified for sale
in the jurisdictions in which such purchasers reside, or an exemption from such
qualification exists in such jurisdictions, and Warrantholders would have no
choice but to attempt to sell the Warrants in a jurisdiction where such sale is
permissible or allow them to expire unexercised. See "Description of Securities
- - Warrants."
24. 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 should consider the Underwriter's
lack of experience in underwritten public offerings. See "Underwriting."
25. 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."
26. 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 5 existing .. (1) $ 500,000 20.0%
stores
Opening 5 new stores .... (2) 1,100,000 44.0%
Relocating two stores (3) 55,000 2.2%
Working Capital (4) ..... 845,000 33.8%
Total ................... $ 2,500,000 100%
</TABLE>
(1) The Company shall redesign five of its existing Company Originals into
Contemporaries at an estimated cost of $100,000 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 $220,000. The Company plans to open
three 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"
and "Business-Financing and Supplier Credit."
(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 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.
<PAGE>
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.
<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>
June 30, 1997
Actual ........ As Adjusted
(Unaudited)
<S> <C> <C>
Total Liabilities ............................. ............................. $ 9,100,374 $ 9,100,374
Stockholders' Equity:
Series E Preferred Stock, $.01 par value, 5,000,000 shares authorized
3,450,570 outstanding actual, 4,200,570 issued and outstanding
as adjusted .(1) 3,700,570 6,081,570
Common Stock, $.001 par value,
40,000,000 shares authorized,
and 4,103,519 shares issued
and outstanding actual .. 41,035 41,035
Additional Paid-in Capital .....................................................6,562,407 6,681,407
Accumulated deficit ............................................................(9,259,980) (9,259,980)
Total Stockholders' Equity (deficit) ......................................... 1,044,032 3,544,032
Total Capitalization ...........................................................$ 10,144,406 $ 12,644,406
</TABLE>
(1) Includes 250,000 shares of Series E Stock and 500,000 Warrants
subscribed as of June 30, 1997 of which the proceeds of $550,000 were received
in August 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 three months ended June 30, 1997 compared to three months ended
June 30, 1996
The Company generated net sales of $3,142,813 in the three months ended
June 30, 1997. This represented a decrease of $42,090, or 1.3%, from net sales
of $3,184,903 in the three months ended June 30, 1996. The decline in sales is
directly attributable to decreased wholesale sales, primarily to military bases,
of $72,101 and to an absence of video rental income compared to $27,173 of such
income in the prior period. Prior to the beginning of the period ended June 30,
1997, management had determined that the video rental market had become
unprofitable and, accordingly, exited that market. Excluding the video rental
and wholesale related sales, the Company's sales from its stores actually
increased by $57,184, or 1.9%, from $2,996,759 to $3,053,943.
The Company posted a gross profit of $1,169,448 in the three months
ended June 30, 1997, an increase of $136,263, or 13.2%, from the gross profit of
$1,033,185 in the three months ended June 30, 1996. This represented an
improvement in the Company's gross margin from 32.4% in the June 1996 period to
37.2% in the June 1997 period. This 4.8% gross margin improvement was largely
due to the ongoing implementation of the Company's new business plan to revise
its product mix and retail operations to mix promotional toys with educational
toys, which generally produce better margins than promotional toys.
Operating expenses in the three months ended June 30, 1997 were
$2,028,403. This represented a $286,611, or 16.5%, increase over the Company's
operating expenses of $1,741,792 in the three months ended June 30, 1996. The
primary reasons for the operating expense increase were an increase in rent
expense of $226,338 and an increase in payroll and related expenses of $103,896.
Those increases were partially offset by a reduction in advertising expense of
$137,565. The operating expenses in the June 1996 period also had the benefit of
$67,229 more of other income, primarily related to income received from the
filming of a movie at one of the Company's stores in the earlier period.
During the three months ended June 30, 1997, the Company recorded non-cash
depreciation and
<PAGE>
amortization expenses of $139,027, a $43,447 increase from $95,580 in the period
ended June 30, 1996. This increase was largely due to depreciation on the Toys
International assets acquired in January 1997. Total operating expenses
(operating expenses combined with depreciation and amortization) in the June
1997 period were $2,167,430, a $330,058, or 18.0%, increase from total operating
expenses of $1,837,372 in the June 1996 period.
As a result of the $330,058 increase in total operating expenses more
than offsetting the $136,263 improvement in gross profit, the Company's
operating loss increased by $193,797 from $804,187 during the three months ended
June 30, 1996 to $997,984 during the three months ended June 30, 1997.
Interest expense totaled $211,522 for the three months ended June 30,
1997. This represented a $32,348, or 18.1%, increase over interest expense of
$179,174 in the three months ended June 30, 1996. The primary reason for the
increased level of interest expense was a higher level of borrowings in the June
1997 period than in the June 1996 period.
As a result of the above mentioned factors, the Company recorded a net
loss of $1,209,506 for the three months ended June 30, 1997. This represented a
$226,145 increase to the net loss of $983,361 recorded in the three months ended
June 30, 1996. The net loss per common share for the June 1997 period was
$(0.30) compared to a net loss per common share in the June 1996 period of
$(0.76). The loss per common share decreased in the June 1997 period compared to
the corresponding prior period due to an increase in the weighted average number
of shares outstanding from 1,287,843 in the June 1996 period to 4,083,739 in the
June 1997 period.
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.
<PAGE>
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 $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 June 30, 1997, the Company had a working capital deficit of
$1,407,003 compared to a working capital deficit of $1,570,486 at March 31,
1997. The Company has generated operating losses for the past several years and
has historically financed those losses and its working capital requirements
through sales of preferred stock. 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.
During the three months ended June 30, 1997, the Company used $929,762
of cash in its operations compared to $864,590 used in operations in the three
months ended June 30, 1996. The Company's net loss was approximately $1.2
million and $1.0 million, respectively, in those periods.
<PAGE>
The Company used $64,518 of cash in its investing activities during the
three months ended June 30, 1997 compared to $86,905 in the three months ended
June 30, 1996.
The Company generated $979,580 from its financing activities in the
three months ended June 30, 1997 compared to the generation of $1,100,088 from
financing activities in the three months ended June 30, 1996. The largest
contribution to the Company's financing activities in the 1997 fiscal year was
the receipt of $700,000 from the sale of preferred stock. Those proceeds were
used to finance the Company's operating losses during the three months ended
June 30, 1997.
As a result of the above factors, the Company had a net decrease in
cash of $14,700 in the three months ended June 30, 1997 compared to a net
increase in cash of $148,593 in the three months ended June 30, 1996.
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.
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.
At June 30, 1997, the Company had an inventory financing line of credit
with Congress Financial Corporation ("Congress") in connection with a Loan and
Security Agreement ("Loan Agreement") that was executed on February 1, 1996. 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 Europe American Capital Corp. ("EACC"). Interest
on outstanding balances is charged at prime plus 1.5%. The Loan Agreement
matures February 1, 1998. Congress has notified the Company that it will not
exercise its option to extend the terms of the Loan Agreement.
<PAGE>
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 Stock at a purchase price of 25% of the closing bid price for
the Common Stock on the last business day prior to exercise, for a period of six
months from the date of issuance and (ii) to purchase up to an aggregate of
20,000,000 shares of the Company's newly authorized Series E Preferred Stock.
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 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 support from its line 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 may 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 filed a registration statement with the Securities and Exchange
Commission for an initial public offering for the Company's Series E preferred
shares to meet those impending capital requirements. That offering is being led
by West America Securities Corp. on a best efforts basis with an objective of
raising net proceeds to the Company of approximately $2.5 million. However,
there can be no assurance that this offering will be consummated. In addition,
Mr. Ilan Arbel, an affiliate of EACC, 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.
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.
<PAGE>
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 products 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.
Inflation and Seasonality
During the past few years, inflation in the United States has been
relatively stable. In management's opinion, this is expected to continue for the
foreseeable future. However, should the American economy again experience double
digit inflation rates, as was the case in the past, the impact on prices could
adversely affect the Company's operations.
The Company's business is highly seasonal with 45 to 49% of its
revenues and profits being derived during the months from October to December.
Accordingly, the Company is required to obtain substantial short-term borrowing
during the first three quarters of the calendar year in order to purchase
inventory and to finance capital and operational expenditures. The Company's
past history of negative cash flows during the fiscal year are partially a
result of its seasonal business nature. The Company's cash flows are negative
for most months prior to the Christmas season. The Company's negative cash flow
for all months except November and December historically have been serviced via
the Company's line of credit, special credit terms with vendors and from the
sale of equity instruments, principally preferred stock.
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.
<PAGE>
MARKET FOR COMMON EQUITY
Until September 24, 1997, the Company's common stock was quoted on the
Nasdaq SmallCap Stock Market. The following table sets forth representative high
and low closing bid quotes as reported by a market maker during the periods
stated below. The Company's Securities will be quoted on the OTC Bulletin Board
upon consummation of this Offering. 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
07/01/97 - 09/23/97(3) 2 3 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.
(3) Effective September 24, 1997, Nasdaq delisted the Company's Common
Stock; therefore, same have not been traded on Nasdaq since said date.
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.
On September 24, 1997, the Company's Common Stock was delisted from
trading on the Nasdaq Stock Market. The Company appealed an earlier Nasdaq
determination and presented its argument at an oral hearing before the Nasdaq
Listings Qualifications Panel. On September 23, 1997, the Company received a
decision from the panel that based its decision to delist on its belief that the
Company did not meet the stockholders' equity maintenance requirement of
$1,000,000 and based on transactions it deemed "detrimental to the investing
public and the public interest" concerning transactions undertaken in February
1996 with respect to options issued to an investor which provided a $2,000,000
Letter of Credit as security for the Congress credit line. See
"Business-Financing and Supplier Credit." The Company's management believes that
Nasdaq has erred in its determination and plans to seek all administrative and
legal remedies in an attempt to overturn Nasdaq's determination. A market maker
has filed a Form 2(11) in order to have the Company's Common
Stock quoted on the OTC Bulletin Board. This application is pending.
<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
seventeen stores 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 ("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, the Company
has redesigned three of its Company Originals, opened two additional locations,
including 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") are smaller (3,500 to 5,200 square feet in size) and 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 five Company Originals into
Contemporaries and open an additional eight locations by the end of fiscal 1999.
Three of the additional locations shall be opened by the end of calendar year
ended 1997 (they are scheduled to open during October and November). The
remaining new locations shall be opened by the end of calendar 1998. The Company
anticipates having twenty-five 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. 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 January
1997 and the execution of two promissory Notes aggregating $265,000. In order to
ensure a smooth transition in operations, the former 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 EACC of its option to purchase Series E Stock; EACC purchased
1,200,000 shares of the Company's Series E Preferred Stock. These shares were
issued to an assignee of
<PAGE>
EACC. The funding obtained from the exercise was $1,200,000. See
"Business-Financing and Supplier Credit."
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's merchandise is stacked from the ground to the eye level
of an adult no more than six feet high. 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 has formed 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 two
new stores, including its flagship store in Santa Clarita, California. By the
end of calendar year 1997, the Company intends to open three additional
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 eight new stores and to have redesigned five 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
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
<PAGE>
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 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.
<PAGE>
Seasonality
The Company's business is highly seasonal, with the majority of its
sales (45% to 49%) 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.
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 and Supplier Credit
On February 1, 1996, the Company entered into a Loan and Security
Agreement ("the Loan Agreement") with Congress Financial Corporation (Western)
("Congress") to replace its 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") for a period of two years until February 1998. Congress has notified
the Company that it will not renew its credit line upon expiration. The Company
is seeking an additional credit line with a new financing company. There can be
no assurances that the Company will be successful in entering into a new
financing agreement with this or any other financing company. Without a
financing facility, the Company would be unable to continue operations. 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
<PAGE>
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 3,562,070
shares of the Series E Preferred Stock of which 3,200,570 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. Additionally, the Company sold an additional 250,000 Series E shares
and 500,000 Warrants for $550,000 as a bridge financing to the completion of
this Offering. See "Plan of Distribution for Securities of the Selling
Securityholders."
The Company is currently seeking to obtain fixture financing for the
leasing of fixtures for its new and remodeled stores. The Company has not been
able to obtain such financing as of the date hereof.
Description of Securities Series E Preferred Stock
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. There are no written contracts
and/or agreements with any individual supplier; rather, all orders are on a
purchase order basis only. The Company relies on credit terms from suppliers to
purchase nearly all of its inventory. Credit terms vary from supplier to
supplier and are based upon many factors. including the ordering company's
financial condition, account history, type of product and the time of year the
order is placed. 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 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.
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
<PAGE>
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.
The Company's management believes there is a demand in the marketplace
for 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. 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 September 30, 1997, the Company has two executive officers,
approximately 70 full time employees, and approximately 280 part time employees.
The Company maintains approximately two employees in administration, two
employees in accounting, one employee in advertising/marketing, two employees in
purchasing, one receptionist and fifteen employees in warehousing. During the
seasonal period of October through December, the Company employs additional
staff on a part-time basis. The balance of employees are those that are staffed
directly at the Company's stores. None of the employees of the Company are
represented by a union, and the Company considers employee relations to be good.
Properties
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 August 1997, the Company closed five stores, four of
which closings have resulted in litigation with the landlords and one settlement
regarding the outstanding terms on the leases. See "Business-Legal Proceedings."
2) In September 1997, the Company signed a short-term lease to rent an
additional approximately 2,000 square feet of store space (in Suite 307 of
Crystal Court). The lease extends from October 1, 1997 to January 5, 1998.
In August 1997, the Company opened a new store in Clairemont,
California. In addition to the above stores, the Company previously operated
several Company Originals which were closed for various reasons. The leases
therefor are of considerable duration and have been broken, which may impose
significant potential hardship (legal and/or financial) on the Company. See
"Business-Legal Proceedings." 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 operated at a loss. In addition,
since fixtures from closed stores are typically used in new store locations, the
cost of opening new locations is reduced.
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 closed. (The Company has negotiated a buyout of the lease for
the fifth store. The Company anticipates that the litigation matter pertaining
to the fourth store will be amended to seek relief in the amount of payments due
under the balance of the term of the lease; in such instance, if the court finds
in favor of the plaintiff, then the outcome could have adverse effects on the
Company and its operations.) 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.
In June 1997, in the Superior Court of the State of California, Los
Angeles County, Shook Development Corp. commenced suit against the Company for
breach of contract pertaining to premises leased by the Company from South San
Dimas, a California Limited Partnership. The premises are located in San Dimas,
California. The lease for the premises has a term from November 15, 1990 through
March 2000. The Company vacated the premises in April 1997. The plaintiff is not
the entity with which the Company entered the lease. Under California State law
and the provisions of the lease, plaintiff has a duty to mitigate its damages.
Plaintiff seeks damages, of a continuing nature, for unpaid rent, unpaid
<PAGE>
Common Area Maintenance charges, late charges, interest, costs, and attorney's
fees. The Company is defending against this action.
Also in June 1997, in the Superior Court of the State of California,
Orange County, Prudential Insurance Company of America commenced suit against
the Company for breach of contract pertaining to premises leased by the Company.
The premises are located in Riverside, California, and the lease extends from
August 1995 through January 2001. In April 1997, the Company vacated the
premises. Under California State law and the provisions of the lease, plaintiff
has a duty to mitigate its damages. Plaintiff seeks damages, of a continuing
nature, for unpaid rent, unpaid Common Area Maintenance charges, late charges,
interest, costs, and attorney's fees. The Company is defending against this
action.
In May 1997, in the Superior Court of the State of California, Los
Angeles County, PNS Stores, Inc. commenced suit against the Company for breach
of contract pertaining to premises leased by the Company. The premises are
located in Whittier, California. The lease for the premises has a term from
September 1994 through January 2000. The Company vacated the premises in March
1997. Under California State law and the provisions of the lease, plaintiff has
a duty to mitigate its damages. Plaintiff seeks damages, of a continuing nature,
for unpaid rent, unpaid Common Area Maintenance charges, late charges, interest,
costs, and attorney's fees. The Company is defending against this action.
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.
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>
<PAGE>
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 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. Mr. Rashbaum was a crisis management consultant to the
Company from July 1995 to 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. 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 re-elected Director of the Company
in May 1997.
James Frakes was elected Chief Financial Officer and Secretary of the
Company in July 1997. In August 1997, in order to fill a vacancy, Mr. Frakes was
appointed by the Board as a Director of the Company. 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
<PAGE>
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. 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 1 for 3
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 and Secretary, 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 terms of the option
<PAGE>
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.
PRINCIPAL SECURITYHOLDERS
The following table sets forth certain information as of September 30, 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>
(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
conversion 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.
(3) Does not include 4,818,420 shares of Common Stock issuable upon the
conversion of 803,070 shares of the Series E Stock.
(4) Does not include 7,035,000 shares of Common Stock issuable upon the
conversion of 1,172,500 shares of the Series E Stock.
(5) Does not include 4,500,000 shares of Common Stock issuable upon the
conversion of 750,000 shares of the Series E Stock.
(6) 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."
(7) Does not include 1,500,000 shares of Common Stock issuable upon the
conversion 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, 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
<PAGE>
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 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.
<PAGE>
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.
The Company leases a combined 51,700 square feet of office and
warehouse space at an approximate annual cost of $228,000, the lease expiring in
April 2000. The office and warehouse are leased from a partnership of which one
of the partners is 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.
All transactions and loans between the Company and any officer,
director, or 5% stockholder will be on terms no less favorable than could be
obtained from independent third parties and will be approved by a majority of
the independent disinterested directors of the Company. The Company believes
that all prior affiliated transactions were made on terms no less favorable to
the Company than available from unaffiliated parties.
Any forgiveness of loans must be approved by a majority of the
Company's independent directors who do not have an interest in the transactions
and who have access, at the Company's expense, to Company's or independent
counsel.
DESCRIPTION OF SECURITIES
The Company's authorized capitalization consists of 50,000,000 shares
of capital stock. The Company is authorized to issue 40,000,000 shares of Common
Stock, par value $.01 per share and 10,000,000 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,
<PAGE>
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.
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.
<PAGE>
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 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 10,000,000 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
<PAGE>
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 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 addressed its needs with
EACC and assigns, 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.
<PAGE>
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 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 made 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
<PAGE>
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, of which $30,000 has been advanced to date. The
Underwriter's expenses in excess of the non-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. The Underwriter does not intend to
sell any of the Company's Securities to accounts for which it exercises
discretionary authority.
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
<PAGE>
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 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, New York, New York. 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 three actions concerning the
Company as referenced herein. See "Business-Legal Proceedings."
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 LLP, 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 LLP,
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 LLP,
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 LLP 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 LLP was engaged by American Toys, the
former parent company, to re-audit the financial statement of American Toys for
the year ended
<PAGE>
March 31, 1996. In so doing, Haskell & White LLP 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 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
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants ............................................................... F-2
Balance Sheets as of June 30, 1997 (unaudited), March 31, 1997 and 1996 .......................................... F-3
Statements of Operations for the Three Months Ended June 30, 1997 and 1996
(unaudited) and for the Years Ended March 31, 1997 and 1996
F-5
Statements of Stockholders' (Deficit) Equity for the Years Ended March 31, 1996
and 1997 and for the Three Months Ended June 30, 1997
(unaudited) .................................................................................................... F-6
Statements of Cash Flows for the Three Months Ended June 30, 1997 and
1996 (unaudited) and for the Years Ended March 31, 1997 and 1996 ............................................... F-8
Notes to Financial Statements .................................................................................... F-10
</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'
(deficit) 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 LLP
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, Notes
15 c) and d) which are as of June 30,
1997 and Note 15 f) which is
as of September 24, 1997
F - 2
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
BALANCE SHEETS
ASSETS (Note 5)
<TABLE>
<CAPTION>
June 30, 1997 March 31,
(Unaudited) 1997 1996
Current
<S> <C> <C> <C>
Cash ........................................... $ 163,022 $ 177,722 $ 192,401
Accounts receivable (Note 2) ................... 45,430 60,206 35,273
Subscription receivable (Note 13) .............. 550,000 -- --
Merchandise inventories ........................ 6,550,784 6,092,930 6,259,084
Other current assets ........................... 173,463 247,313 233,401
----------- ----------- -----------
Total current assets .............. 7,482,699 6,578,171 6,720,159
Property and equipment, net of accumulated
depreciation and amortization of $2,967,939,
$2,828,913 and $2,457,813, respectively (Note 3) 2,401,143 2,475,650 1,858,538
Deposits and other assets (Notes 4 and 5) ........... 260,564 324,797 634,407
----------- ----------- -----------
$10,144,406 $ 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.)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 1997 March 31,
(Unaudited) 1997 1996
Current
<S> <C> <C> <C>
Bank overdraft ............................................................ $ 93,882 $ 135,325 $ 108,751
Borrowings under financing agreement (Note 5) ............................. 4,826,063 4,438,875 3,403,025
Accounts payable .......................................................... 3,726,313 3,123,851 2,878,183
Accrued expenses and other liabilities .................................... 143,444 308,940 283,611
Current portion of notes payable (Note 7) ................................. 100,000 141,666 --
------------ ------------ ------------
Total current liabilities .................................... 8,889,702 8,148,657 6,673,570
Notes payable, net of current portion (Note 7) ................................. 75,000 100,000 --
Due to affiliate (Note 8) ...................................................... -- -- 528,070
Deferred rent liability (Note 9) ............................................... 135,672 126,925 197,937
------------ ------------ ------------
Total liabilities ............................................ 9,100,374 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, 4,000,000 shares
authorized; 3,200,570 shares outstanding,
250,000 shares subscribed; full liquidation value
at $3,200,570, $2,500,570 and $0 ........................................ 3,700,570 2,500,570 --
Common stock, $.01 par value, 40,000,000 shares
authorized; 4,103,519, 4,083,519 and
1,287,843 shares outstanding ............................................ 41,035 40,835 12,878
Additional paid-in capital ................................................ 6,562,407 6,512,107 4,779,520
Accumulated deficit ....................................................... (9,259,980) (8,050,476) (4,465,595)
------------ ------------ ------------
Total stockholders' equity ................................... 1,044,032 1,003,036 1,725,847
------------ ------------ ------------
$ 10,144,406 $ 9,378,618 $ 9,213,104
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30, Year Ended March 31,
1997 1996 1997 1996
(Unaudited)
<S> <C> <C> <C> <C>
Net sales (Note 2) ............................ $ 3,142,813 $ 3,184,903 $ 19,624,276 $ 21,230,853
Cost of sales ................................. 1,973,365 2,151,718 13,669,104 15,132,895
------------ ------------ ------------ ------------
Gross profit ................ 1,169,448 1,033,185 5,955,172 6,097,958
------------ ------------ ------------ ------------
Operating expenses:
Operating expenses (Notes 11 and 12) ..... 2,028,403 1,688,106 8,474,423 8,568,677
Depreciation and amortization ............ 139,027 149,266 407,015 407,261
Costs associated with permanent closure of
retail stores (Note 9) ................... -- -- -- 129,577
------------ ------------ ------------ ------------
Total operating expenses ............... 2,167,430 1,837,372 8,881,438 9,105,515
------------ ------------ ------------ ------------
Operating loss ................................ (997,982) (804,187) (2,926,266) (3,007,557)
Interest expense (Notes 4 and 5) .............. 211,522 179,174 658,615 535,158
------------ ------------ ------------ ------------
Net loss ...................................... $ (1,209,504) $ (983,361) $ (3,584,881) $ (3,542,715)
============ ============ ============ ============
Net loss applicable to common shares .......... $ (1,209,504) $ (983,361) $ (3,584,881) $ (3,570,260)
============ ============ ============ ============
Net loss per common share ..................... $ (.30) $ (.76) $ (1.29) $ (2.77)
============ ============ ============ ============
Weighted average number of common shares and
share equivalents outstanding ............ 4,083,739 1,287,843 2,791,876 1,287,843
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<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> <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 - -(1)
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-6
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Years Ended March 31, 1996 and 1997 and Three Months Ended June 30, 1997
Additional Redeemable Preferred Stock Preferred Stock
Common Stock Paid-in Series B Series D Series E Accumulated
Shares Amount Capital Shares Amount Shares Amount Shares Amount Deficit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock .......20,000 200 300 - -- -- -- -- -- --
Issuance of Series E preferred
stock for cash ..............-- -- -- - -- -- -- 950,000 1,200,000 --
Issuance of common stock
purchase warrants for cash ..-- -- 50,000 -- - -- -- -- -- -
Net loss for three months ended
June 30, 1997 ...............-- -- -- - -- -- -- -- -- (1,209,504)
Balance, June 30, 1997
(Unaudited) . ............. 4,103,519 $41,035 $ 6,562,407 $-- $-- $3,450,570 $3,700,570 $(9,259,980)
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
STATEMENTS OF CASH FLOWS
(Note 14)
<TABLE>
<CAPTION>
Three Months Ended June 30, Year Ended March 31,
1997 1996 1997 1996
(Unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss ................................................... $(1,209,504) $ (983,361) $(3,584,881) $(3,542,715)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization ............................. 139,027 95,580 407,015 407,261
Amortization of common stock options ...................... 53,685 53,685 214,743 64,300
Deferred rent ............................................. 8,746 (20,825) (71,012) 57,719
Preferred stock issued for financing charges .............. -- 16,000 -- --
Increase (decrease) from changes in:
Accounts receivable ...................................... (14,776) (72,130) (24,933) 586,827
Merchandise inventories ......................... ........ (457,854) (1,259,686) 431,154 1,673,284
Other current assets ............................. ....... 101,504 140,488 (13,912) (52,099)
Deposits and other assets .......................... ..... 12,420 22,968 94,867 (49,986)
Accounts payable .......................................... 602,459 1,320,106 245,668 (380,817)
Accrued expenses and other liabilities ................... (165,469) (177,415) 25,329 60,054
Cash used for operating activitieS.......................... (929,762) (864,590) (2,275,962) (1,176,172)
Cash flows from investing activities:
Purchases of property and equipment ........................ (64,518) (86,905) (1,024,127) (340,311)
Amounts due from stockholder .... .................... -- -- -- 17,788
Cash used for investing activities ......................... (64,518) (86,905) (1,024,127) (322,523)
</TABLE>
See accompanying notes to financial statements
F-8
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Three Months Ended June 30, Year Ended March 31,
1997 1996 1997 1996
(Unaudited)
Cash flows from financing activities:
<S> <C> <C> <C> <C>
Change in bank overdraft .................................. $ (41,443) $ -- $ 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 .... .................. 4,486,974 4,297,041 22,404,385 5,637,392
Repayments under financing agreement ..... ............... (4,099,785) (3,443,273) (21,368,535) (2,234,367)
Payments on capital lease obligations .................. -- -- -- (42,045)
Repayment of notes payable ................................ (66,666) -- (23,334) --
Due to affiliate ....................................... -- -- -- 528,070
Redemption of preferred stock .......................... -- (87,680) (81,579) (163,157)
Payment of dividends on preferred stock ................ -- -- (6,101) (18,982)
Proceeds from issuance of preferred stock .................. 700,500 334,000 2,334,000 --
Cash provided by financing activities ........ 979,580 1,100,088 3,285,410 1,441,171
Net increase (decrease) in cash ................................ (14,700) 148,593 (14,679) (57,524)
Cash, beginning of period ...................................... 177,722 83,650 192,401 249,925
Cash, end of period ............................................ $ 163,022 $ 232,243 $ 177,722 $ 192,401
</TABLE>
See accompanying notes to financial statements
F-9
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
Information With Respect to the Three Months Ended
June 30, 1997 and 1996 is Unaudited
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.
Basis of Presentation - Three Months Ended June 30, 1997 and 1996
The unaudited interim financial statements for the three month periods
ended June 30, 1997 and 1996 included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of the Company,
reflect all adjustments (consisting only of normal recurring
adjustments) and disclosures which are necessary for a fair
presentation. The results of operations for the three month period
ended June 30, 1997 is not necessarily indicative of the results for
the full year.
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.
F-10
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
1. Summary of Accounting Policies (continued)
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.
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-11
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
1. Summary of Accounting Policies (continued)
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; and $4,087 and $8,118 for the three months
ended June 30, 1997 and 1996, respectively. At June 30, 1997, March 31,
1997 and 1996, the Company had accounts receivable from wholesale sales
of TKO items totaling $7,285, $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.
F-12
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
3. Property and Equipment
Property and equipment consisted of the following:
June 30, March 31,
1997 1997 1996
Furniture, fixtures and equipment $ 3,270,102 $ 3,231,161 $ 2,918,621
Leasehold improvements .......... 1,245,824 1,220,246 542,785
Computerized inventory management
system ........................ 468,210 468,210 484,074
Signs ........................... 280,034 280,034 265,959
Vehicles ........................ 104,912 104,912 104,912
5,369,082 5,304,563 4,316,351
Accumulated depreciation and
amortization .................. (2,967,939) (2,828,913) (2,457,813)
$ 2,401,143 $ 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.
Amortization of the value of the option, which is included in interest
expense, aggregated $24,435 for each of the three month periods ended
June 30, 1997 and 1996, and $97,740 and $44,800 for the years ended
March 31, 1997 and 1996, respectively. The unamortized value of the
option at June 30, 1997 and March 31, 1997 and 1996 was $57,025,
$81,460 and $179,200 and is included in other assets. The exercise
period expired on April 16, 1996 and no options were exercised.
However, the unamortized portion of the value was not written off as of
April 16, 1996 as the related financing costs were incurred for interim
financing as a direct precursor to a new financing agreement as
discussed below. As such, the debt issue costs are being amortized
concurrently with additional costs incurred over a period ending
February 1998 which coincides with the maturity of the new financing
agreement.
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 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 June 30,
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
June 30, 1997, the Company was in compliance with this financial
covenant.
F-13
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
5. Financing Agreement (continued)
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. Amortization of the value of
the option, which is included in interest expense, aggregated $29,250
for each of the three month periods ended June 30, 1997 and 1996, and
$117,000 and $19,500 for the years ended March 31, 1997 and 1996. The
unamortized value of the option at June 30, 1997, March 31, 1997, and
1996 aggregates $68,250, $97,500, and $214,500, respectively, 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 June 30, 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 January 1997 and the execution of two promissory Notes aggregating
$265,000 (Note 7).
7. Notes Payable
<TABLE>
<CAPTION>
June 30, March 31,
--------------- ----------------------
1997 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. Paid in full on June 16, 1997.
Note is subordinate to the financing
agreement with a financial institution (Note 5).
<S> <C> <C> <C>
$ - $41,666 $ -
</TABLE>
F-14
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
7. Notes Payable (continued)
<TABLE>
<CAPTION>
June 30, March 31,
--------------- ----------------------
1997 1997 1996
--------------- --------------- ----------
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).
<S> <C> <C> <C>
175,000 200,000 --
Total long-term debt 175,000 241,666 --
Less current portion (100,000) (141,666) --
Long-term debt ..... $75,000 $ 100,000 $--
</TABLE>
Future obligations under these promissory Notes as of June 30, 1997 are as
follows:
Year Ending
March 31 Amount
1998 $ 100,000
1999 75,000
- ----------------
$ 175,000
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
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
addition, $14,165 and $70,833 was outstanding at June 30, 1997 and
1996, respectively.
F-15
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
9. Costs Associated with Closure of Retail Stores (continued)
In March, April, and May 1997, the Company vacated four locations. 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.
F-16
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
10. Income Taxes (continued)
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:
March 31,
1997 1996
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 ........ --% -%
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 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 June 30, 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 June
30, 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).
F-17
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
11. Commitments and Contingencies (continued)
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.
The Company incurred rental expense under all operating leases of
$838,982 and $612,644 for the three months ended June 30, 1997 and
1996, respectively, and $2,681,728 and $2,841,215 for the years ended
March 31, 1997 and 1996. Contingent rent expense was insignificant
during the three months ended June 30, 1997 and 1996 and the years
ended March 31, 1997 and 1996.
During the three months ended June 30, 1997 and 1996 and, the Company
sub-leased portions of its warehouse building and a portion of one of
its retail locations under noncancelable operating leases. Sublease
income totaled $2,310 and $33,297 for the three months ended June 30,
1997 and 1996 and $134,093 and $93,822 for the years ended March 31,
1997 and 1996 (Notes 12 and 15a).
At March 31, 1997 the aggregate future minimum lease payments due under
these noncancelable leases are as follows:
Year Ending
March 31,
1998 $2,099,491
1999 1,776,806
2000 1,641,013
2001 1,014,003
2002 774,325
Thereafter 1,968,345
Total minimum lease payments $9,273,983
- ----------------------------- ==========
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
F-18
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
11. Commitments and Contingencies (continued)
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
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 totaled $170,744 and $128,327
for the three months ended June 30, 1997 and 1996 and $227,546 and
$227,916 for the years ended March 31, 1997 and 1996. 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. During the three
months ended June 30, 1997 and 1996 sublease rental income was $2,310
and $33,297, respectively.
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, and $9,999 for the three months ended June 30, 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.
F-19
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
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.
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.
F-20
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
13. Equity Transactions (continued)
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
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:
Three Months Ended June 30, Years Ended March 31,
1997 1996 1997 1996
Interest paid $118,619 $ 91,858 $443,875 $464,832
Income taxes $ 1,600 $ -- $ 800 $ 800
During the three months ended June 30, 1997, the Company entered into
an agreement to sell 250,000 shares of Series E preferred stock and
500,000 warrants to purchase Series E preferred stock. As a result,
$550,000 was recorded as subscription receivables at June 30, 1997. 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. Such amount was collected in
August 1997 (Note 15e).
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. Events Subsequent to March 31, 1997
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.
Termination of this warehouse lease also resulted in the cancellation
of sub-lease agreements.
F-21
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
15. Events Subsequent to March 31, 1997 (continued)
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. The advances were exchanged for 700,000 shares
of Series E preferred stock.
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.
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 II preferred stock outstanding.
The elimination of the dividend provisions on the Series E
preferred stock.
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.
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.
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
F-22
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
15. Events Subsequent to March 31, 1997 (continued)
retrofitting six existing stores; for relocation of two stores upon
expiration of existing leases; and for general working capital needs.
e) Subscribed Preferred Stock (unaudited)
In an agreement dated June 30, 1997, the Company agreed to issue
250,000 shares of Series E preferred stock for $500,000 and for an
additional $50,000 to issue 500,000 warrants to purchase Series E
preferred stock in a private sale. As a result of that agreement, the
Company booked a subscription receivable for $550,000 and recorded
increases to Series E preferred stock and additional paid-in-capital of
$500,000 and $50,000, respectively. The Company received all of the
$550,000 of proceeds on August 12, 1997.
f) Delisting of Securities
On September 24, 1997, the Company's Common Stock was delisted from
trading on the Nasdaq Stock Market. The Company appealed an earlier
Nasdaq determination and presented its argument at an oral hearing in
front of the Nasdaq hearings panel. On September 23, 1997, the Company
received a decision from the hearings panel that based its delisting on
its belief that the Company did not meet the stockholders' equity
maintenance requirement of $1,000,000 and based on transactions it
deemed "detrimental to the investing public and the public interest"
concerning transactions undertaken in February 1996 with respect to the
Company obtaining its credit line with Congress Financial Corporation
(Western). The Company's management believes that Nasdaq has erred in
its determination and plans to seek all administrative and legal
remedies in an attempt to overturn Nasdaq's determination.
The Company expects that its Common Stock, together with the Series E
Preferred Stock and redeemable Series E Stock purchase warrants being
offered in the public offering described above, will trade on the
over-the-counter market on the OTC Bulletin Board.
F-23
<PAGE>
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
September 30, 1997
PROSPECTUS SUMMARY............................................
RISK FACTORS..................................................
DIVIDEND POLICY...............................................
USE OF PROCEEDS...............................................
CAPITALIZATION................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
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-1
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.
<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
Boston 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 ....................... 13,683.84
-----------
Total ............................... $335,000.00 (1)
(1) Estimated.
<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 this Amendment No.1, have been previously filed with the
Commission, either on the initial filing of this Registration on Form SB-2 filed
August 14, 1997, or 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.
3.2(a)* - Amendment to Certificate of Incorporation of the Company, filed August 11,
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.
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).
10.44 - 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.
<PAGE>
10.76 - Lease Agreement for Store-Riverside International (incorporated by
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 LLP
23.02 - Consent of Klarman & Associates, is contained in their opinion filed as exhibit
5.0 to this Registration Statement.
</TABLE>
<PAGE>
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 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.
<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 29th day of September, 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 09/29/97
Harold Rashbaum Date
\s\ Richard Brady Chief Executive Officer, 09/29/97
Richard Brady President and Director Date
\s\ James B. Frakes Chief Financial Officer 09/29/97
James B. Frakes and Secretary Date
\s\ Sheikhar Boodram Director 09/29/97
Sheikhar Boodram Date
</TABLE>
<PAGE>
Exhibit 3.2(a)
Amendment to Certificate of Incorporation of the Company filed
August 11, 1997.
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PLAY CO. TOYS & ENTERTAINMENT CORP.
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
Mail Filing Receipt to:
Klarman & Associates
2694 Bishop Drive
Suite 213
San Ramon, CA 94583
<PAGE>
CERTIFICATE OF AMENDMENT
OF
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 increase the authorized number
of shares of the Series E Preferred Stock from 5,000,000 to 10,000,000 shares.
The Certificate of Incorporation of this Corporation is amended by changing
"Article FOURTH," so that, as amended, said Article shall read as follows:
FOURTH:
1Authorized Capital Stock. The total number of shares of all classes of
capital stock which this Corporation shall have authority to issue is FIFTY
MILLION (50,000,000) shares consisting of FORTY MILLION (40,000,000) shares of
Common Stock, par value $0.01 per share (hereinafter, the "Common Stock"), and
TEN MILLION (10,000,000) shares of Preferred Stock, par value $0.01 per share
(hereinafter, the "Preferred Stock"), designated "Series E Preferred Stock," the
relative rights, preferences, and limitations of which are as set forth in
subparagraph of this Article FOURTH.
B. Series E Preferred Stock.
(i) Designation. The designation of this series of Preferred
Stock, par value $0.01 per share, shall be the "Series E Preferred Stock." The
number of shares of Series E Preferred Stock authorized hereby shall be
10,000,000 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
<PAGE>
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.
(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 the 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 holders 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, nor transfer (for cash, shares of stock,
securities, or their consideration) of all or substantially all of 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 are 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
certificates representing such shares 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,
<PAGE>
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).
1 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 shall have
been 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 is 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
all such outstanding shares 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, 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.
1In 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
1Dividends. 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.
1 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.
1 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 the Common Stock.
<PAGE>
FIFTH:
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 30th day of June, 1997.
IN WITNESS WHEROF, the undersigned President of this Corporation has
executed this Certificate of Amendment on this 6th day of August, 1997.
PLAY CO. TOYS & ENTERTAINMENT CORP.
Richard Brady, President
<PAGE>
Exhibit 4.2
Specimen Warrant Certificate.
<PAGE>
VOID AFTER , 2002
REDEEMABLE WARRANT CERTIFICATE FOR PURCHASE OF SERIES E PREFERRED STOCK
No.
PLAY CO. TOYS & ENTERTAINMENT CORP.
This certifies that FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Series E Preferred Stock Purchase Warrants ("Warrants") specified
above. Each Warrant initially entitles the Registered Holder to purchase subject
to the terms and conditions set forth in this Certificate and the Warrant
Agreement (as hereinafter defined), one fully paid and nonassessable share of
Series E Preferred Stock, $.01 par value, of PLAY CO. TOYS & ENTERTAINMENT
CORP., a Delaware corporation (the "Company"), for a period of four years
commencing one year from the date the Offering closes, upon the presentation and
surrender of this Warrant certificate with the Subscription Form on the reverse
hereof duly executed, at the corporate office of Continental Stock Transfer &
Trust Company as Warrant Agent, or its successor (the "Warrant Agent"),
accompanied by payment of $5.00 (the "Purchase Price") in lawful money of the
United States of America in cash or by official bank or certified check made
payable to the order of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated
, 1997 by and among the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Series E Preferred
Stock subject to purchase upon the exercise of each Warrant represented hereby
are subject to modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Series E Preferred Stock will be
issued. In the case of the exercise of less than all the Warrants represented
hereby, the Company shall cancel this Warrant Certificate upon the surrender
hereof and shall execute and deliver a new Warrant Certificate or Warrant
Certificates of like tenor, which the Warrant Agent shall countersign, for the
balance of such Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York time) on ,
2002, or such earlier date as the Warrants shall be redeemed. If such date shall
in the State of New York be a holiday or a day on which the banks are authorized
to close, then the Expiration Date shall mean 5:00 p.m. (New York time) the next
following day which in the State of New York is not a holiday or a day on which
banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of the Warrants represented by this Warrant Certificate unless a
registration statement under the Securities Act of 1933, as amended, with
respect to such securities is effective. The Company has covenanted and agreed
that it will file post effective amendments to the registration statement (when
events require such amendments) and will use its best efforts to cause the same
to become effective and to keep such registration statement current. The
Warrants represented hereby shall not be exercisable by a Registered Holder in
any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due
<PAGE>
presentment together with any service charge in addition to any tax or other
governmental charge imposed in connection therewith, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrant will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Warrants represented by this Warrant Certificate may be redeemed at the
option of the Company, at any time commencing one year from the Closing Date,
upon thirty (30) days notice, at a redemption price of $.05 per warrant,
provided the closing bid price (as defined in the Warrant Agreement) for the
Series E Preferred Stock issuable upon exercise of such Warrant is at least 170%
of the exercise price of the Warrants being redeemed. On and after the date
fixed for redemption, the Registered Holder shall have no rights with respect to
the Warrants represented by this Warrant Certificate except to receive the $.05
per Warrant upon surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: Play Co. Toys & Entertainment Corp.
BY: BY:
(Facsimile Signature), Chief Financial Officer (Facsimile Signature), President
COUNTERSIGNED
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY, as Warrant Agent
BY
, Authorized Officer
<PAGE>
SUBSCRIPTION FORM
To be executed by the Registered Holder in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
________________ Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of
______________________________.
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
(please print or type name and address)
and be delivered to
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered, to, the Registered Holder
at the address stated below.
The undersigned represents that the exercise of the within Warrant was
solicited by a member of the National Association of Securities Dealers, Inc. if
not solicited by an NASD member, please write "unsolicited" in the space below.
----------------------------------------
(Name of NASD Member)
Dated:________________________
----------------------------------------
----------------------------------------
Address
----------------------------------------
Taxpayer Identification Number
----------------------------------------
Signature Guaranteed
----------------------------------------
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
(Please print or type name and address)
of the Warrants represented by this Warrant Certificate, and hereby
irrevocably constitutes and appoints
Attorney
to transfer this Warrant Certificate on the books of the Company, with full
power of substitution in the premises.
Dated: ___________________
X____________________________________________
Signature Guaranteed
---------------------------------------------
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY AN ELIGIBLE INSTITUTION (AS DEFINED IN RULE 17Ad-15 UNDER THE
SECURITIES EXCHANGE ACT OF 1934) WHICH MAY INCLUDE A COMMERCIAL BANK, TRUST
COMPANY OR SAVINGS ASSOCIATION, CREDIT UNION OR MEMBER FIRM OF THE AMERICAN
STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR MIDWEST STOCK
EXCHANGE.
Exhibit 4.3
Specimen Series E Preferred Stock Certificate.
<PAGE>
VOID AFTER , 2002
SERIES E PREFERRED STOCK CERTIFICATE
No.
PLAY CO. TOYS & ENTERTAINMENT CORP.
THIS IS TO CERTIFY THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF SERIES E PREFERRED STOCK OF $.01
PAR VALUE EACH OF
Play Co. Toys & Entertainment Corp.
transferable on the books of the Corporation in person or by attorney upon
surrender of this certificate duly endorsed or assigned. This certificate and
the shares represented hereby are subject to the laws of the State of Delaware,
and to the Certificate of Incorporation and Bylaws of the Corporation, as now or
hereafter amended. This certificate is not valid until countersigned by the
Transfer Agent.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated: Play Co. Toys & Entertainment Corp.
BY: BY:
(Facsimile Signature), Chief Financial Officer(Facsimile Signature), President
COUNTERSIGNED
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY, as Warrant Agent
BY
, Authorized Officer
Exhibit 4.5
Form of Warrant Agreement between the Company,
the Underwriter and Continental Stock
Transfer & Trust Company.
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
and
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
REDEEMABLE WARRANT
WARRANT AGREEMENT
Dated as of
AGREEMENT dated as of , between PLAY CO. TOYS & ENTERTAINMENT
CORP., a Delaware corporation (hereinafter "the Company"), and CONTINENTAL STOCK
TRANSFER & TRUST COMPANY, a New York corporation, as Warrant and Transfer Agent
(hereinafter "the Warrant Agent").
WHEREAS, the Company proposes to issue and sell to the public
an aggregate of 750,000 Shares of Series E Preferred Stock, $.01 par value
(hereinafter referred to as "Series E Preferred Stock" or "Preferred Share(s)")
and 1,500,000 Redeemable Series E Preferred Stock Purchase Warrants ("the
Redeemable Warrants"), each to purchase one Preferred Share at a purchase price
of $5.00 per Preferred Share for a period of four years commencing one year from
the date the Offering closes. The Redeemable Warrants are redeemable by the
Company at any time commencing one year from the Closing Date, upon thirty (30)
days' prior notice, at a redemption price of $.05 each, provided that the
closing bid quotation of the Preferred Stock for at least 20 consecutive trading
days ending on the third day prior to the day on which the Company gives notice,
has been at least 170% of the exercise price of the Warrants being redeemed. The
Redeemable Warrants remain exercisable during the 30 day notice period; and
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing so to act, in connection
with the issuance, registration, transfer, exchange, and exercise of the
Warrants;
NOW, THEREFORE, in consideration of the promises and the
mutual agreements herein set forth, the parties hereto agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act for the Company in accordance with the
instructions hereinafter in this Agreement set forth, and the Warrant Agent
hereby accepts such appointment.
Section 2. Form of Warrants. The text of the Warrants and of
the form of election to purchase shares as is printed on the reverse thereof as
now outstanding, is substantially as set forth respectively in Exhibit A
attached hereto. The per share Warrant Price and the number of shares issuable
upon exercise of the Warrants are subject to adjustment upon the occurrence of
certain events, all as hereinafter provided. The Warrants shall be executed on
behalf of the Company by the manual or facsimile signature of the present or any
future President or Vice President of the Company, under its corporate seal,
affixed or in facsimile, attested by the manual or facsimile signature of the
present or any future Secretary or Assistant Secretary of the Company.
The Warrants will be dated as of the date of issuance by the Warrant
Agent either upon initial issuance or upon transfer or exchange.
<PAGE>
Section 3. Countersignature and Registration. The Warrant
Agent shall maintain books for the transfer and registration of Warrants. Upon
the initial issuance of the Warrants, the Warrant Agent shall issue and register
the Warrants in the names of the respective holders thereof. The Warrants shall
be countersigned manually or by facsimile by the Warrant Agent (or by any
successor to the Warrant Agent then acting as Warrant Agent under this
Agreement) and shall not be valid for any purpose unless so countersigned.
Warrants may be so countersigned, however, by the Warrant Agent (or by its
successor as warrant agent) and be delivered by the Warrant Agent,
notwithstanding that the persons whose manual or facsimile signatures appear
thereon as proper officers of the Company shall have ceased to be such officers
at the time of such countersignature or delivery.
Section 4. Transfers and Exchanges. The Warrant Agent shall
transfer, from time to time, any outstanding Warrants upon the books to be
maintained by the Warrant Agent for that purpose, upon surrender thereof for
transfer properly endorsed or accompanied by appropriate instructions for
transfer. Upon any such transfer, a new Warrant shall be issued to the
transferee, and the surrendered Warrant shall be delivered by the Warrant Agent.
Warrants so canceled shall be delivered by the Warrant Agent to the Company from
time to time upon request. Warrants may be exchanged at the option of the holder
thereof, when surrendered at the office of the Warrant Agent, for another
Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Preferred
Shares.
Section 5. Rights of Redemption by Company. 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 Preferred Stock for at least 20 consecutive trading
days ending on the third day prior to the day on which the Company gives notice,
has been at least 170% of the exercise price of the Warrants being redeemed. The
holder of any Warrants so called, and not either converted or tendered back to
the Company by the end of the date specified in the Notice of Call, will be
entitled only to the redemption price of such Redeemable Warrant, if redeemed,
and will forfeit his right to so exercise.
Section 6. Exercise of Warrants. Subject to the provisions of
this Agreement, each registered holder of a Warrant shall have the right to
purchase one (1) share of Preferred Stock at a price of $5.00 for a period of
four years, until , 2002, commencing one year from the date the Offering closes.
The Company shall issue and sell to such registered holder of Warrants the
number of fully paid and non-assessable shares of Preferred Stock specified in
such Warrants, upon surrender to the Company at the office of the Warrant Agent
of such Warrants, with the form of election to purchase duly filled in and
signed, and upon payment to the order of the Company for the Warrant exercise
price, determined in accordance with Sections 10 and 11 herein, for the number
of shares in respect of which such Warrants are then exercised. Payment of such
Warrant Price shall be made in cash or by certified check or bank draft or
postal or express money order, payable in United States Dollars to the order of
the Company. No adjustment shall be made for any dividends on any Preferred
Shares issuable upon exercise of any Warrant. Subject to Section 7, upon such
surrender of Warrants, and payment of the Warrant Price as aforesaid, the
Company shall issue and cause to be delivered with all reasonable dispatch to or
upon the written order of the registered holder of such Warrants and in such
name or names as such registered holder may designate, a certificate or
certificates for the largest number of whole Preferred Shares so purchased upon
the exercise of such Warrants. The Company shall not be required to issue any
fraction of a Share of Preferred Stock or make any cash or other adjustment as
provided in Section 12 herein, in respect of any fraction of a Preferred Share
otherwise issuable upon such surrender. Such certificate or certificates shall
be deemed to have been issued and any person so designated to be named therein
shall be deemed to have become a holder of record of such Shares as of the date
of the surrender of such Warrants and payment of the Warrant Price as aforesaid;
provided, however, that if at the date of surrender of such Warrants and payment
of such Warrant Price, the transfer books for the Preferred Shares or other
class of stock purchasable upon the exercise of such Warrants shall be closed,
the certificates for the Shares in respect of which such Warrants are then
exercised shall be issuable as of the date on which such books shall be opened
and until such date the Company shall be under no duty to deliver any
certificate for such shares; provided further, however, that the aforesaid
transfer books, unless otherwise required by law or by applicable rule of
national securities exchange, shall not be closed at any one time for a period
longer than 20 days. The rights of purchase represented by the Warrants shall be
exercisable, at the election of the registered holders thereof, either as an
entirety or from time to time for part only of the Shares specified therein and,
in the event that any Warrant is exercised in
<PAGE>
respect of less than all of the Shares specified therein at any time prior to
the date of expiration of the Warrant, a new Warrant or Warrants will be issued
to such registered holder for the remaining number of shares specified in the
Warrant so surrendered, and the Warrant Agent is hereby irrevocably authorized
to countersign and to deliver the required new Warrants pursuant to the
provisions of this Section during the warrant exercise period, and the Company,
whenever requested by the Warrant Agent, will supply the Warrant Agent with
Warrants duly executed on behalf of the Company for such purpose.
Section 7. Payment of Taxes. The Company will pay any
documentary stamp taxes attributable to the initial issuance of Preferred Shares
issuable upon the exercise of Warrants; provided, however, that the Company
shall not be required to pay any tax or taxes which may be payable in respect of
any transfer involved in the issue or delivery of any certificates for Preferred
Shares in a name other than that of the registered holder of Warrants in respect
of which such Shares are issued, and in such case, neither the Company nor the
Warrant Agent shall be required to issue or deliver any certificate for
Preferred Shares or any Warrant until the person requesting the same has paid to
the Company the amount of such tax or has established to the Company's
satisfaction that such tax has been paid.
Section 8. Mutilated or Missing Warrants. In case any of the
Warrants shall be mutilated, lost, stolen, or destroyed, the Company may, it its
discretion, issue and the Warrant Agent shall countersign and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant(s),
or in lieu of substitution for the Warrant lost, stolen, or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest, but only
upon receipt of evidence satisfactory to the Company and the Warrant Agent of
such loss, theft, or destruction of such Warrant, and indemnity, if requested,
also satisfactory to them. Applicants for such substitute Warrants shall also
comply with such other reasonable regulations and pay such reasonable charges as
the Company or the Warrant Agent may prescribe.
Section 9. Reservation of Preferred Shares. There have been
reserved, and the Company shall at all times keep reserved, out of the
authorized and unissued Preferred Shares, a number of Shares sufficient to
provide for the exercise of the rights of purchase represented by the Warrants,
and the Transfer Agent for the Preferred Shares and every subsequent transfer
agent for any Shares of the Company's capital stock issuable upon the exercise
of any of the rights of purchase aforesaid are hereby irrevocably authorized and
directed at all times to reserve such number of authorized and unissued Shares
as shall be requisite for such purpose. The Company agrees that all Preferred
Shares issued upon exercise of the Warrants shall be, at the time of delivery of
the certificates for such Preferred Shares, validly issued and outstanding,
fully paid and non-assessable and listed on any national security exchange upon
which the other Preferred Shares are then listed. The Company will file such
Registration Statement pursuant to the Securities Act of 1933 with respect to
the Preferred Shares as may be necessary to permit it to deliver to each person
exercising a Warrant, a Prospectus meeting the requirements of Section 11(a)(3)
of such Securities Act and otherwise complying therewith, and will deliver such
a Prospectus to each such person. The Company will keep a copy of this Agreement
on file with the Transfer Agent for the Preferred Shares and with every
subsequent transfer agent for any Shares of the Company's capital stock issuable
upon the exercise of the rights of purchase represented by the Warrants. The
Warrant Agent is hereby irrevocably authorized to requisition from time to time
such Transfer Agent for stock certificates required to honor outstanding
Warrants. The Company will supply such Transfer Agent with duly executed stock
certificates for such purpose. All Warrants surrendered in the exercise of the
rights thereby evidenced shall be canceled by the Warrant Agent and shall
thereafter be delivered to the Company, and such canceled Warrants shall
constitute sufficient evidence of the number of Preferred Shares which have been
issued upon the exercise of such Warrants. Promptly after the date of expiration
of the Warrants, the Warrant Agent shall certify to the Company the total
aggregate amount of Warrants then outstanding, and thereafter no Preferred
Shares shall be subject to reservation in respect to such Warrants which shall
have expired.
Section 10. Warrant Price. Each Warrant shall allow the holder thereof to
purchase one share of Preferred Stock at a price of $5.00 per whole Share. No
fractional Shares shall be issued for the Warrants.
Section 11. Adjustments. Subject and pursuant to the provisions of this
Section 11, the Warrant Price and number of Preferred Shares subject to this
Warrant shall be subject to adjustment from time to time as hereinafter set
forth.
<PAGE>
(A) If the Company shall at any time subdivide its outstanding Preferred
Shares by recapitalization, reclassification, split-up thereof, or other such
issuance without additional consideration, the Warrant Price immediately prior
to such subdivision shall be proportionately decreased and, if the Company shall
at any time combine the outstanding Preferred Shares by recapitalization,
reclassification, or combination thereof, the Warrant Price immediately prior to
such combination shall be proportionately increased. Any such adjustment to the
Warrant Price shall become effective at the close of business on the record date
for such subdivision or combination.
(B) In the event that prior to any Warrant's expiration date the Company
adopts a resolution to merge, consolidate, or sell all or substantially all of
its assets, each Warrant holder upon the exercise of his Warrant will be
entitled to receive the same treatment as the holder of any other Share of
Preferred Stock. In the event the Company adopts a resolution for the
liquidation, dissolution, or winding up of the Company's business, the Company
will give written notice of such adoption of a resolution to the registered
holders of the Warrants. Thereupon, all liquidation and dissolution rights under
the Warrants will terminate at the end of thirty (30) days from the date of the
notice to the extent not exercised within those thirty (30) days.
(C) If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation, shall be effected in such a way that holders of Preferred Stock
shall be entitled to receive stock, securities, cash, or assets with respect to
or in exchange for Preferred Stock, then as a condition of such reorganization,
reclassification, consolidation, merger, or sale, the Company or such successor
or purchasing corporation, as the case may be, shall execute with the Warrant
Agent a Supplemental Warrant Agreement providing that each registered holder of
a Warrant shall have the right thereafter and until the expiration date to
exercise such Warrant for the kind and amount of stock securities, cash, or
assets receivable upon such reorganization, reclassification, consolidation,
merger, or sale by a holder of the number of Shares of Preferred Stock for the
purchase of which such Warrant might have been exercised immediately prior to
such reorganization, reclassification, consolidation, merger, or sale, subject
to adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 11.
(D) In case at any time the Company shall declare a dividend or make any
other distribution upon any stock of the Company payable in Preferred Stock,
then such Preferred Stock issuable in payment of such dividend or distribution
shall be deemed to have been issued or sold without consideration.
(E) Upon any adjustment of the Warrant Price as hereinabove provided, the
number of Preferred Shares issuable upon exercise of this Warrant shall be
changed to the number of Shares determined by dividing (i) the aggregate Warrant
Price payable for the purchase of all Shares issuable upon exercise of this
Warrant immediately prior to such adjustment by (ii) the Warrant Price per Share
in effect immediately after such adjustment.
(F) Anything hereinabove to the contrary notwithstanding, no adjustment of
the Warrant Price or in the number of Preferred Shares subject to this Warrant
shall be made upon the issuance or sale by the Company of any Preferred Shares
pursuant to the exercise of any Underwriter's Warrants which may be issued by
the Company pursuant to any Underwriting Agreement between the Company and
Underwriter or pursuant to the issuance of Shares of Preferred Stock upon
exercise of any of the Warrants or pursuant to a stock option plan which may be
adopted by the Company.
(G) No adjustment in the Warrant Price shall be required under Section 11
hereof, unless such adjustment would require an increase or decrease in such
price of at least $.01 provided, however, that any adjustments which by reason
of the foregoing are not required at the time to be made shall be carried
forward and taken into account and included in determining the amount of any
subsequent adjustment; and provided further, however, that in case the Company
shall at any time subdivide or combine the outstanding Preferred Shares or issue
any additional Preferred Shares as a dividend, said amount of $.01 per share
shall forthwith be proportionately increased in the case of a combination or
decreased in the case of a subdivision or stock dividend so as to appropriately
reflect the same.
<PAGE>
(H) On the effective date of any new Warrant Price the number of Shares as
to which any Warrant may be exercised shall be increased or decreased so that
the total sum payable to the Company on the exercise of such Warrant shall
remain constant.
(I) The form of Warrant need not be changed because of any change pursuant
to this Article, and Warrants issued after such change may state the same
Warrant Price and the same number of shares as is stated in the Warrants
initially issued pursuant to this Agreement. However, the Company may at any
time in its sole discretion (which shall be conclusive) make any change in the
form of Warrant that the Company may deem appropriate and that does not affect
the substance thereof; and any Warrant thereafter issued or countersigned,
whether in exchange or substitution for an outstanding Warrant or otherwise, may
be in the form as so changed.
Section 12. Fractional Interest. The Company shall not be
required to issue fractions of Preferred Shares on the exercise of Warrants or
any cash or other adjustment in respect of such fractions of Preferred Shares.
If any fraction of a Preferred Share would, except for the provisions of this
Section 12, be issuable on the exercise of any Warrant (or specified portions
thereof), the Company shall issue the largest number of whole shares of
Preferred Stock to which the Warrant Certificate is entitled. All calculations
under this Section 12 shall be made to the nearest whole Share.
Section 13. Notices to Warrantholders.
(A) Upon any adjustment of the Warrant Price and the number of Shares
issuable on exercise of a Warrant, then and in each such case the Company shall
give written notice thereof to the Warrant Agent, which notice shall state the
Warrant Price resulting from such adjustment and the increase or decrease, if
any, in the number of Shares purchasable at such price upon the exercise of a
Warrant, setting forth in reasonable detail the method of calculations and the
facts upon which such calculation is based. The Company shall also publish such
notice once in two Authorized Newspapers. For the purpose of this Agreement, an
Authorized Newspaper shall mean a newspaper customarily published on each
business day, in one or more morning editions or one or more evening editions,
or both (and whether or not it shall be published in Saturday and Sunday
editions or on holidays), printed in the English language and of general
circulation in the Borough of Manhattan, City and State of New York. Failure to
give or publish such notice, or any defect therein, shall not affect the
legality or validity of the subject adjustments.
(B) Intentionally left blank.
(C) Upon any redemption of the Warrants pursuant to Section 5 hereof, then
and in each such case, the Company shall give written notice thereof to the
Warrant Agent, with directions that the Warrant Agent send a copy of each such
notice to each registered holder of Warrants by first class mail, postage
prepaid, at his address appearing on the Warrant register as of the record date
for the determination of the Warrantholders entitled to such documents, which
notice shall state the terms for such redemption, setting forth in reasonable
detail the procedure for redemption and the effect thereof. The Company shall
also publish such notice once in two Authorized Newspapers, one of which shall
be the Wall Street Journal. Failure to give or publish such notice, or any
defect therein, shall not affect the legality or validity of the subject
redemption.
(D) The Company shall cause copies of all financial statements and reports,
proxy statements and other documents as it shall send to its stockholders to be
sent by first class mail, postage prepaid, on the date of mailing to such
stockholders, to each registered holder of Warrants at his address appearing on
the Warrant register as of the record date for the determination of the
stockholders entitled to such documents.
Section 14. Disposition of Proceeds on Exercise of Warrants.
(A) The Warrant Agent shall forward promptly to the Company, with respect
to Warrants exercised, the funds which will be deposited in a special account in
a bank designated by the Company for the benefit of the Company, for the
purchase of Preferred Shares through the exercise of such Warrants.
<PAGE>
(B) The Warrant Agent shall keep copies of this Agreement available for
inspection by holders of Warrants during normal business hours.
Section 15. Merger or Consolidation or Change of Name of Warrant Agent. Any
corporation or company which may succeed to the business of the Warrant Agent by
any merger or consolidation or otherwise to which the Warrant Agent shall be a
party, shall be the successor to the Warrant Agent hereunder without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible for appointment
as a successor Warrant Agent under the provisions of Section 17 of this
Agreement. In case at the time such successor to the Warrant Agent shall succeed
to the agency created by this Agreement, any of the Warrants shall have been
countersigned but not delivered, any such successor to the Warrant Agent may
adopt the countersignature of the original Warrant Agent and deliver such
Warrants so countersigned; and in case at that time any of the Warrants shall
not have been countersigned, any successor to the Warrant Agent may countersign
such Warrants either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant Agent; and in all such cases such Warrants shall have
the full force provided in the Warrants and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrants shall have been countersigned but not delivered,
the Warrant Agent may adopt the countersignature under its prior name and
deliver Warrants so countersigned; and in case at that time any of the Warrants
shall have not been countersigned, the Warrant Agent may countersign such
Warrants either in its prior name or in its changed name; and in all such cases
such Warrants shall have the full force provided in the Warrants and in this
Agreement.
Section 16. Duties of Warrant Agent. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrants, by their
acceptance thereof, shall be bound:
(A) The statements of fact and recitals contained herein and in the
Warrants shall be taken as statements of the Company, and the Warrant Agent
assumes no responsibility for the correctness of any of the same except such as
describe the Warrant Agent or action taken or to be taken by it. The Warrant
Agent assumes no responsibility with respect to the distribution of the Warrants
except as herein expressly provided.
(B) The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or in
the Warrants to be complied with by the Company.
(C) The Warrant Agent may consult at any time with counsel satisfactory to
it (who may be counsel for the Company) and the Warrant Agent shall incur no
liability or responsibility to the Company or to any holder of any Warrant in
respect of any action taken, suffered or omitted by it hereunder in good faith
and in accordance with opinion or the advice of such counsel.
(D) The Warrant Agent shall incur no liability or responsibility to the
Company or to the holder of any Warrant for any action taken in reliance on any
notice, resolution, waiver, consent, order, certificate or other papers,
document or instrument believed by it to be genuine and to have been signed,
sent, or presented by the proper party or parties.
(E) The Company agrees to pay to the Warrant Agent reasonable compensation
for all services rendered by the Warrant Agent in the execution of this
Agreement, to reimburse the Warrant Agent for all expenses, taxes, and
governmental charges and other charges of any kind and nature incurred by the
Warrant Agent in the execution of this Agreement and to indemnify the Warrant
Agent and save it harmless against any and all liabilities, including judgments,
costs, and reasonable counsel fees, for anything done or omitted by the Warrant
Agent in the execution of this Agreement except as a result of the Warrant
Agent's negligence, willful misconduct, or bad faith.
<PAGE>
(F) The Warrant Agent shall be under no obligation to institute any action,
suit, or legal proceeding or to take any other action likely to involve expense
unless the Company or one or more registered holders of Warrants shall furnish
the Warrant Agent with reasonable security and indemnity for any costs and
expenses which may be incurred, but this provision shall not affect the power of
the Warrant Agent to take such action as the Warrant Agent may consider proper,
whether with or without any such security or indemnity. All rights of action
under this Agreement or under any of the Warrants may be enforced by the Warrant
Agent without the possession of any of the Warrants or the production thereof at
any trial or other proceeding relative thereto, and any such action, suit, or
proceeding instituted by the Warrant Agent shall be brought in its name as
Warrant Agent, and any recovery of judgment shall be for the ratable benefit of
the registered holders of the Warrants, as their respective rights or interests
may appear.
(G) The Warrant Agent and any stockholder, director, officer, partner, or
employee of the Warrant Agent may buy, sell, or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested or contract with or lend
money to or otherwise act as fully and free as though it were not Warrant Agent
under this Agreement. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other legal entity.
(H) The Warrant Agent shall act hereunder solely as an agent and not in a
ministerial capacity, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not be liable for anything which it
may do or refrain from doing in connection with this Agreement except for its
own negligence, willful misconduct, or bad faith.
(I) The Warrant Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder, either itself or by or
through its attorneys, agents, officers, or employees, and the Warrant Agent
shall not be answerable or accountable for any act, default, neglect, or
misconduct of any such attorneys, agents, officers, or employees or for any loss
to the Company resulting from such neglect or misconduct, provided reasonable
care had been exercised in the selection and continued employment thereof.
(J) Any request, direction, election, order, or demand of the Company shall
be sufficiently evidenced by an instrument signed in the name of the Company by
its president or a vice president or its secretary or an assistant secretary or
its treasurer or an assistant treasurer (unless other evidence in respect
thereof be herein specifically prescribed); and any resolution of the Board of
Directors may be evidenced to the Warrant Agent by a copy thereof certified by
the secretary or an assistant secretary of the Company.
Section 17. Change of Warrant Agent. The Warrant Agent may resign and be
discharged from its duties under this Agreement by giving to the Company notice
in writing, and to the holders of the Warrants notice by mailing such notice to
holders at their addresses appearing on the Warrant register, of such
resignation, specifying a date when such resignation will take effect. The
Warrant Agent may be removed by like notice to the Warrant Agent from the
Company and by like mailing of notice to the holders of the Warrants. If the
Warrant Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Warrant Agent. If the
Company shall fail to make such appointment within a period of 30 days after
such removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or by the registered
holder of a Warrant (who shall, with such notice, submit his Warrant for
inspection by the Company), then the registered holder of any Warrant may apply
to any court of competent jurisdiction for the appointment of a successor to the
Warrant Agent. Any successor Warrant Agent, whether appointed by the Company or
by such a court, shall be a bank or trust company or an active transfer Agent,
in good standing, incorporated under the laws of the State of New York or of the
United States of America. After appointment, the successor Warrant Agent shall
be vested with the same powers, rights, duties, and responsibilities as if it
had been originally named as Warrant Agent without further act or deed; but the
former Warrant Agent shall deliver and transfer to the successor Warrant Agent
all canceled Warrants, records, and property at the time held by it hereunder,
and execute and deliver any further assurance, conveyance, act, or deed
necessary for the purpose. Failure to file or mail any notice provided for in
this Section 17 however, or any defect therein, shall not affect the legality or
validity of the resignation or removal of the Warrant Agent or the appointment
of the successor Warrant Agent, as the case may be.
<PAGE>
Section 18. Identity of Transfer Agent. Forthwith upon the appointment of
any Transfer Agent for the Preferred Shares or of any subsequent transfer Agent
for Preferred Shares or other shares of the Company's capital stock issuable
upon the exercise of the rights of purchase represented by the Warrants, the
Company will file with the Warrant Agent a statement setting forth the name and
address of such Transfer Agent. The Warrant Agent hereby acknowledges that it
is, at the time of execution hereof, the Transfer Agent, and waives any
statement required herein with respect thereto.
Section 19. Notices. Any notice pursuant to this Agreement to
be given or made by the Warrant Agent or by the registered holder of any Warrant
to the Company shall be sufficiently given or made if sent by first class mail,
postage prepaid, addressed (until another address is filed in writing by the
Company with the Warrant Agent) as follows:
Play Co. Toys & Entertainment Corp.
550 Rancheros Drive
San Marcos, California 92069
Copy to:
Klarman & Associates
2694 Bishop Drive, Suite 213
San Ramon, California 94583
Any notice pursuant to this Agreement to be given or made by the
Company or by the registered holder of any Warrant to or on the Warrant Agent
shall be sufficiently given or made if sent by first class mail, postage
prepaid, addressed (until another address is filed in writing by the Warrant
Agent with the Company) as follows:
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10002
Attn: Compliance Department
Section 20. Supplements and Amendments. The Company and the
Warrant Agent may from time to time supplement or amend this Agreement without
the approval of any holders of Warrants in order to cure any ambiguity or to
correct or supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Warrant Agent may deem necessary or desirable and which shall not be
inconsistent with the provisions of the Warrants and which shall not adversely
affect the interests of the holders of Warrants.
Section 21. Successors. All the covenants and provisions of this Agreement
by and for the benefit of the Company or the Warrant Agent shall bind and inure
to the benefit of their respective successors and assigns hereunder.
Section 22. New York Contract. This Agreement shall be deemed to be a
contract made under the laws of the State of New York and for all purposes shall
be construed in accordance with the laws of said State.
Section 23. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Warrant Agent, and the registered holders of the Warrants, any legal or
equitable right, remedy, or claim under this Agreement, but this Agreement shall
be for the sole and exclusive benefit of the Company, the Warrant Agent and the
registered holders of the Warrants.
<PAGE>
Section 24. Counterparts. This Agreement may be executed in any number of
counterparts,
and each of such counterparts shall be considered an original.
Section 25. Effectiveness. This Agreement shall be deemed binding and
therefore in effect as of, and subject to, the effective date of the
Registration Statement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
PLAY CO. TOYS & ENTERTAINMENT CORP.
By:
Richard Brady, President
(Seal)
Attest:
James B. Frakes, Secretary
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY.
By:
STATE OF CALIFORNIA )
)ss.:
COUNTY OF SAN DIEGO )
On the ____ day of , before me personally came Richard Brady,
to me known, who being by me duly sworn, did depose and say that he resides in
California, that he is the President of PLAY CO. TOYS & ENTERTAINMENT CORP., the
corporation described in and which executed the foregoing instrument; that he
knows the seal of said corporation, that the seal is affixed by order of the
Board of Directors of said corporation, and that he signed his name thereto by
like order.
Notary Public
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came , to me known, who being by
me duly sworn, did depose and say that he resides at
<PAGE>
, that he is the Principal of Continental Stock Transfer & Trust Company,
the company described in and which executed the foregoing instrument.
Notary Public
Exhibit 5.0
Opinion of Klarman & Associates
<PAGE>
KLARMAN & ASSOCIATES
2694 Bishop Drive, Suite 213
San Ramon, California 94583
(510) 830-8801 (phone)
(510) 830-8821 (fax)
September 25, 1997
Securities and Exchange Commission
Washington DC 20549
Re: Play Co. Toys & Entertainment Corp.
Registration Statement on Form SB-2
File No. 333-32051
Ladies and Gentlemen:
As counsel to Play Co. Toys & Entertainment Corp. (the "Registrant")
with respect to the above Registration Statement on Form SB-2 relating to the
registration of up to an aggregate 2,250,000 shares of Series E Preferred Stock
to be sold by the Company, of which 1,500,000 shares are issuable upon the
exercise of warrants, I have examined the Certificate of Incorporation and
By-Laws of the Registrant, as amended through the date hereof, and such other
materials as I deemed pertinent. It is my opinion that:
The 750,000 shares of Series E Preferred Stock and the 1,500,000 shares
of Series E Preferred Stock, when issued and paid for in accordance with the
terms of the warrants agreement, are and will be, respectively, legally issued,
fully paid and non-assessable.
I consent to the use of this opinion as an exhibit to said Registration
Statement on From SB-2, and further consent to the use of our name wherever
appearing in said Registration Statement, including the Prospectus constituting
a part thereof, and in any amendment thereto.
Very truly yours,
Klarman & Associates
Exhibit 23.01
Consent of Haskell & White
<PAGE>
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, Notes 15 c) and d) which are as of June 30, 1997, and Note 15f) which
is as of September 24, 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
September 29, 1997
Newport Beach, California
1
<PAGE>
