SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number O-25030
PLAY CO. TOYS & ENTERTAINMENT CORP.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 95-3024222
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
</TABLE>
550 Rancheros Drive, San Marcos, California 92069
(Address of Principal Executive Offices)
(760) 471-4505
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of
the Act:
Title of each class Name of each exchange on which registered
NONE
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, $.01 par value
Series E Preferred Stock, $.01 par value
Series E Preferred Stock Purchase Warrants
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ X].
The Registrant's revenues for its fiscal year ended March 31, 1998 were
$22,568,527.
The aggregate market value of the voting stock on March 31, 1998
(consisting of Common Stock, par value $.01 per share) held by non-affiliates
was approximately $1,241,018, based upon the closing price for such Common Stock
on said date ($.75), as reported by a market maker. On such date, there were
4,103,519 shares of Registrant's Common Stock outstanding.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
History
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 19 stores: 18 are located
throughout Southern California in the Los Angeles, Orange, San Diego, Riverside,
and San Bernardino Counties, and one is located in Tempe, Arizona. The Company
has executed leases to build and open six additional stores during calendar
1998. The Company expects that by the end of calendar 1998 it shall have 25
stores, 18 of which (the "New Stores") shall follow the Company's new concept
and seven of which (the "Original Stores") shall follow its old format.
In 1996, the Company redefined its corporate goals and philosophy,
changing its focus from the sale of traditional toys in stores located in strip
shopping centers to the sale of educational, new electronic interactive, and
specialty and collectible toys and items in high traffic malls. In light of its
new focus, the Company has redesigned four of its Original Stores to the
Company's new format, opened five new locations, and acquired three stores in
its acquisition of Toys International, Inc. (" Toys"). Two of the five New
Stores operate under the tradename Toy Co. In conformance with its new goals,
the Company's New Stores shall be smaller (5,000 to 10,000 square feet in size)
and shall operate exclusively in high traffic malls rather than in strip
shopping centers.
The Company's New Stores have and are expected to continue to produce
higher gross profits since they focus on the sale of educational and electronic
interactive games and toys, specialty products, and collector's toys, which
generally carry higher gross margins than traditional toys.
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 Toys' entire 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 its three store locations: two of such locations operate
under the tradename Toys International, and the third operate under the Tutti
Animali tradename. The total purchase price was $1,024,184 which consisted
mainly of inventory and certain prepaid expenses and deposits. The purchase
price was tendered in the form of a $759,184 cash payment remitted in January
1997 and the execution of two promissory notes, aggregating $265,000, payable
over a two year period. In order to ensure a smooth transition in operations,
the former president of Toys, Mr. Gayle Hoepner, continued his relationship as a
consultant to the Company for a period of ninety days.
Series E Preferred Offering
On December 29, 1997, through West America Securities Corp. as agent,
the Company completed a public offering of its Series E Preferred Stock and
Redeemable Series E Stock Purchase Warrants. The offering raised $3,150,000 in
gross proceeds from which the Company realized net proceeds of $2,303,441 after
discounts, commissions, and expenses of the offering. The proceeds were
apportioned as follows: (i) $500,000 was placed in a restricted certificate of
deposit to secure a stand-by letter of credit in favor of FINOVA Capital
Corporation ("FINOVA"), the Company's working capital lender (see "--
Financing"); (ii) approximately $140,000 has been expended for the relocation
and enlargement of the Company's Toys store located in the Century City shopping
center (the Company expects to expend an additional $100,000 to complete the
renovation)' (iii) $250,000 was placed in a restricted short-term certificate of
deposit as collateral for a facility to issue letters of credit; (iv)
approximately $1,050,000 was used to pay down the FINOVA credit line to reduce
interest expenses; and (v) approximately $363,000 was used to reduce trade
accounts payable or to opportunistically purchase inventory from vendors on
advantageous terms.
<PAGE>
Series F Preferred Offering
In May 1998, the Company commenced an offering of Units, each Unit
comprising one share of the Company's Series F Preferred Stock, par value $.01
per share (the "Series F Stock"), and one Series F Preferred Stock Purchase
Warrant (the "Warrants"), at a purchase price of $3.00 per Unit, through Morgan
Grant Capital Group, Inc., as placement agent. The Company is seeking to raise
an aggregate of $4,500,000 which requires the sale of a minimum of 250,000 Units
to close the offering. Each Warrant is exercisable for a period of five years,
commencing one year from issuance, at $4.00 per share. Each share of Series F
Stock shall carry a $0.36 annual dividend, payable quarterly, and the holder has
the right, commencing six months after issuance, to convert each share into two
fully paid and non-assessable shares of Common Stock. As of the date of this
report, the offering has not been consummated.
Merchandising Strategy; Refocusing of Corporate Direction
Traditionally, the Company's merchandising strategy was to offer an
alternative, less intimidating environment than that provided by the larger toy
retailers who are in competition with 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 New Stores and will continue to provide
these quality services to patrons of all its stores.
Beginning in 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 toys. In addition, the Company determined
that it should place its stores in high traffic malls, rather than in strip
shopping centers where most of its Original Stores have operated. 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 what it believes are the
industry's current and future demands. The Company has thus far remodeled four
Original Stores to fit its New Store design, opened five New Stores, and
acquired three New Stores (Toys stores). By the end of calendar year 1998, the
Company intends to open six additional New Stores, the leases for which were
executed in the first calendar quarter of 1998, and thereby operate a total of
twenty-five stores. In calendar 1999, the Company expects to open an additional
six stores, bringing its total to 31. The Company shall continue to operate its
Original Stores until their leases expire, except with respect to certain stores
for which it is negotiating lease extensions, which stores it may redesign to
fit the New Store concept. The Company periodically reviews each individual
store's sales history and prospects on an individual basis to decide on the
appropriate product mix. As part of its business plan, the Company shall
continue to assess current and future trends and demands in the industry, refine
its new format, and analyze and evaluate markets for future store openings,
product lines, and marketing strategies. The Company shall continue to operate
its stores under the names it currently utilizes - Play Co. Toys, Toys
International, Toy Co., and Tutti Animali - and shall continue to open stores
with such names contingent upon the product mix and location of the store.
To a certain extent, mostly with respect to its Original Stores, the
Company offers a broad in-stock selection of products at prices generally
competitive within the industry. While the Company does not stock the depth or
breadth of selection of toys for its Original Stores as some of its larger
competitors do, the Company does strive to stock all basic categories of toys
and all television advertised items. The Company also offers a special order
program for many items; this program is free to its customers. In June 1994, the
Company began to sell toy and hobby items on a wholesale basis to military bases
located in Southern California. In accordance with its new corporate focus, and
given that wholesale sales to military bases were minimal in fiscal 1998
(approximating $444,000, or 2% of sales), whereas they totaled approximately
$619,000, or 3% of sales for the year ended March 31, 1997, the Company has
decided to cease such sales as of July 1998.
<PAGE>
Product Lines
The Original Stores sell children's and adult toys, games, bicycles,
and other wheel goods, sporting goods, puzzles, Nintendo and Sony electronic
game systems and cartridges for such game systems, cassettes, and books. They
offer over 15,000 items for sale, most of which are major brand name toys and
hobby products.
The New Stores also carry some of the items found in the Original
Stores; however, they focus on selling educational toys, Steiff and North
America Bears, Small World toys, LBG trains, CD-ROMs, electronic software games,
Learning Curve and Ty products. The Company's Tutti Animali store, located in
the Crystal Court Mall in Costa Mesa, California, is a unique store which sells
only stuffed animals.
Warehousing, Shipping and Inventory Systems
Until recently, the Company's stores were serviced from two adjacent
distribution facilities (one 43,000 square feet in size, the other 5,200 square
feet in size) encompassing an aggregate of approximately 48,200 square feet.
Inventory and shipment of products continues to be monitored by a computerized
point-of-sale system. The point-of-sale system is a sophisticated scanning,
inventory control, purchasing, and warehouse system which allows each store
manager to monitor sales activity and inventory at each store and enables the
Company's Officers to obtain reports on all stores. It monitors sales at all
store locations and automatically notifies the warehouse and shipping department
each time stock of a particular item is low or out, depending upon the item and
the instructions programmed into it. Though this system, management continuously
analyzes the sales of its product lines and adjusts product mix in order to
maximize return and effectively manage its retail space. The Company's stores
generally are restocked on a weekly basis, although certain stores and certain
items may be restocked at more frequent intervals. In addition, restocking of
products is increased during the fourth quarter, during the holiday season.
During the holiday season some stores and some items are restocked on a daily
basis.
All shipments to stores in California are made by vehicles owned or
leased by the Company.
Suppliers and Manufacturers
The Company purchases all of its products from manufacturers and
wholesalers and ships them to its stores from its distribution center. There are
no written contracts and/or agreements with any individual manufacturer or
supplier; rather, all orders are on a purchase order basis only. The Company
relies on credit terms from suppliers and manufacturers to purchase nearly all
of its inventory. Credit terms vary from company to company and are based upon
many factors, including the ordering company' financial condition, account
history, type of product and the time of year the order is placed. Such credit
arrangements vary for reasons both within and outside the control of the
Company. In past years the Company's credit lines decreased due to the Company's
then poor financial condition. Recently, the Company has seen a significant
increase in its credit lines based on its improved financial condition and its
ability to remain current with its accounts payable.
Seasonality
Since inception, the Company's business has been highly seasonal, with
the majority of its sales and profits being generated in the fourth quarter of
the calendar year, particularly during the November and December holiday season.
However, during fiscal 1998 and during the first quarter of fiscal 1999, the
Company has seen a significant increase in sales during the remaining three
quarters, giving a lesser effect to the fourth quarter holiday season, although
the Company does expect that the holiday season shall continue to represent a
significant (30-40%) portion of the Company's annual sales. This adjustment in
revenues is due to the Company's new store design and refocused product lines.
<PAGE>
Trademarks
In 1976 and 1994, the Company received federal registrations for the
trademarks "Play Co. Toys" and "TKO." Play Co. Toys is a trademark utilized by
the Company in connection with its marketing and sales; TKO was used for certain
items the Company previously manufactured. In addition, the Company has applied
for the federal registration of the name "Toy Co." as a tradename of the
Company: this application is pending. Two of the Company's New Stores, those
located in Arizona Mills and Ontario Mills, operate under this name. In
accordance with its acquisition of Toys, the Company acquired the rights to the
tradenames "Toys International" and "Tutti Animali."
Financing
On January 21, 1998, the Company entered into a $7.1 million secured,
revolving Loan and Security Agreement (the "FINOVA Agreement") with FINOVA. The
credit line offered under the FINOVA Agreement replaced the $7 million credit
line the Company had with Congress Financial Corporation (Western) ("Congress").
The Company paid off the Congress loan on February 3, 1998. The Company believes
that its credit availability against the cost value of its inventory under the
FINOVA Agreement will be comparable to its availability under the Congress loan.
The FINOVA credit line is secured by substantially all the Company's assets and
expires on August 3, 2000. It accrues interest at a rate of floating prime plus
one and one-half percent.
Under the FINOVA Agreement, the Company is able to borrow against the cost
value of eligible inventory and is able to borrow up to $2.4 million against a
combination of $3 million in standby letters of credit in favor of FINOVA and
restricted cash provided by a subordinated loan compared to a $2 million advance
against $3 million in standby letters of credit under the Congress Arrangement.
$1.5 million of the $3 million in additional borrowing support from the standby
letters of credit was provided by an institutional investor in the form of a
subordinated loan; $1.0 million was provided in the form of a standby letter of
credit issued by Multimedia Concepts International, Inc., an affiliate of the
Company; the other $500,000 was provided by the Company.
The Company relies on credit terms from its suppliers and manufacturers to
purchase nearly all of its inventory. While its accounts payable to vendors is
current as of March 31, 1998, there can be no assurance that the Company will be
able to keep such payable current in the future. Credit arrangements vary for
reasons both within and outside the control of the Company. See "-- Suppliers
and Manufacturers."
The Company has entered into one fixture financing agreement, with Pacifica
Capital, for the leasing of fixtures for its remodeled store in the Century City
Shopping Center located in west Los Angeles. The agreement is for a term of five
years and provides fixture financing in the approximate amount of $85,000. The
financing is secured by the store fixtures. The Company is negotiating two
additional fixture financing arrangements which it hopes to consummate by August
1998. There can be no assurance, however, that either such financing will be
consummated.
Competition
The toy and hobby products market is highly competitive. Though the
Company's New Stores offer a combination of traditional, educational, new
electronic interactive, specialty, and collectible toys and items, the Company
remains in direct competition with local, regional, and national toy retailers
and department stores, including Toys R Us (considered to be the dominant toy
retailer in the United States), Kay Bee Toy Stores, K-Mart, and Wal Mart. Most
of the Company's larger competitors are located in free-standing stores, not
malls. Kay Bee stores however, are located in malls, though their product line
is different than the Company's. In addition, the toy and hobby products market
is particularly characterized by large retailers and discount stores with
intensive advertising and marketing campaigns and with deeply discounted pricing
of such products. 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 those of the Company.
<PAGE>
As a result of the continual changing nature of children's consumer
preferences and tastes, the success of the Company is dependent on its ability
to change and adapt to such changing tastes and preferences. Children's
entertainment products are often characterized by fads of limited life cycles.
Combining the traditional and educational toy segments of the market into one
retail location is believed to be a unique concept that should prove to
differentiate the Company's stores from those of any of its larger or similar
size competitors. Management has been unable to locate any other retailer
currently using this combined marketing concept. The Company will compete for
the educational toy customer with other specialty stores such as Disney Stores,
Warner Bros. Stores, Learning Smith, Lake Shore, Zainy Brainy, and Noodle
Kidoodle.
Most of the companies with which the Company compete have more
extensive research and development, marketing and customer support capabilities
and greater financial, technological and other resources than that of the
Company. There can be no assurance that the Company will be successful or that
it can distinguish itself from such larger, more well known entities. In
addition, the Company does not believe there are any significant barriers to
entry to discourage new companies from entering into this industry.
Employees
As of March 31, 1998, the Company has three executive officers,
approximately 65 full time employees, and approximately 259 part time employees.
None of the employees of the Company is represented by a union, and the Company
considers employee relations to be good. Each store employs a store manager, an
assistant manager, and between fifteen to twenty-five full-time and part-time
employees. Each of 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.
ITEM 2. DESCRIPTION OF PROPERTY
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 18 stores in southern California and one store in
Arizona. During the last calendar quarter of 1997, the Company opened a
temporary short-term seasonal store (in Crystal Court Mall in Costa Mesa,
California) and three new stores in high traffic shopping malls: one in South
Bay Galleria in Redondo Beach, California; one in Ontario Mills in Ontario,
California; and one in Arizona Mills in Tempe, Arizona (the Company's first
store outside of southern California). The Company has executed six leases to
open additional locations within the 1998 calendar year.
The Company has recently completed the enlargement of one of its 19
stores, the Toys store located in Los Angeles, California. The lease for this
store expired in January 1998 and was extended, at a new location within the
same mall, through and until March 31, 2001. Three of the Company's other stores
are operating under leases that either also have expired or will expire in 1998,
the fate of such stores to depend upon the Company's intentions and concomitant
lease negotiations with the landlords of same.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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. In addition, 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. In May 1997, in the Superior Court of the State of California, Los
Angeles County, PNS Stores, Inc. commenced suit against the Company and its
former guarantor for breach of contract pertaining to premises leased by the
Company. These actions settled for an aggregate of $469,600 during fiscal year
1998.
In October 1997, in the Superior Court of the State of California, County
of San Bernardino, Foothill Marketplace commenced suit against the Company and
its former guarantor for breach of contract pertaining to premises leased by the
Company in Rialto, California. The lease for the premises has a term from
February 1987 through November 2003. The Company vacated the premises in August
1997. Under California State law and the provisions of the lease, plaintiff has
a duty to mitigate its damages. Plaintiff seeks damages, of a continuing nature,
for unpaid rent, proximate damages, costs, and attorneys' fees. This action is
in the discovery phase.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 28, 1998, the Company held its annual meeting during which
it proposed to elect four Directors to the Board. The proposal was adopted, and
the following were elected Directors of the Board for a term of one year:
Richard Brady, James Frakes, Harold Rashbaum, and Sheikhar Boodram.
The votes cast or withheld for the election of the Directors are set forth
as follows:
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Nominees Votes For Votes Withheld
<S> <C> <C>
Harold Rashbaum 2,781,477 2,539
Richard Brady 2,782,623 1,393
James Frakes 2,782,241 1,775
Sheikhar Boodram 2,781,477 2,539
</TABLE>
On March 16, 1998, Mr. Boodram resigned as Director. On March 18, 1998, in
order to fill the vacancy left by Mr. Boodram, the Board of Directors appointed
Moses Mika as a Director.
An Information Statement was mailed on May 8, 1998 to the Company's
stockholders of record on April 15, 1998 in connection with the proposed action
to be taken by the Company pursuant to the written consent of the Company's
majority stockholder. The Company received authorization to effect an increase
in the total number of shares of all classes of capital stock which the Company
has authority to issue from forty million (40,000,000) shares to sixty-six
million five hundred thousand (66,500,000) shares, consisting of (i) an increase
in the number of authorized shares of common stock, par value $.01 (the "Common
Stock"), from forty million (40,000,000) shares to fifty-one million
(51,000,000) shares of Common Stock; (ii) ten million (10,000,000) shares of the
Series E Preferred Stock as previously authorized; and (iii) the authorization
of 5,500,000 shares of a new class of preferred stock, par value $.01 per share,
designated the "Series F Preferred Stock." The increase in the authorized
capital stock was undertaken to enable the Company to commence its Series F
private offering. The action was taken by amendment to the Company's Certificate
of Incorporation filed on May 29, 1998. See "-- Series F Preferred Offering."
<PAGE>
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 are quoted on the OTC Bulletin Board. 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.
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<CAPTION>
Calendar Series E (2) Series E (2)
Period Stock(1 Common) Warrants (1) Preferred Stock Warrants
------ --------------- ---------------- --------
Low High Low High Low High Low High
1996
<S> <C> <C> <C> <C> <C> <C>
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 21/2
10/01/96 - 12/31/96 1 1/8 1 3/8
1997
01/01/97 - 03/31/97 1 11/4 1 11/4
04/01/97 - 06/30/97 1 1 1/8
07/01/97 - 09/23/97(3) 1 1 1/8
10/14/97 - 12/31/97 2 3
1998
01/01/98 - 03/31/98 .68 2 1 4.75 .5 1.75
04/01/98 - 06/19/98 1.37 1.75 .87 3.5 .5 1.25
- ---------------------
</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 consummated an offering of its Series E Preferred Stock and
Series E Preferred Stock Purchase Warrants in December 1997. These securities
commenced trading on the OTC Bulletin Board on January 5, 1998.
(3) The Company's Common Stock was delisted from Nasdaq effective September
24, 1998. It began trading on the OTC Bulletin Board
As of June 24, 1998, there were 344 holders of record of the Company's
Common Stock, although the Company believes that there are 636 additional
beneficial owners of shares of Common Stock held in street name. As of June 24,
1998, the number of outstanding shares of the Company's Common Stock was
4,103,519. (This number is subject to change, nominally, as the 7,521,563
pre-reverse split shares which have not been exchanged as yet are offered for
such exchange by the Company's shareholders.)
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 has sought all administrative remedies available from the
Nasdaq Stock Market. The Company has decided not to appeal Nasdaq's decision to
the Securities and Exchange Commission.
<PAGE>
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table summarizes certain selected financial data and is
qualified in its entirety by the more detailed financial statements contained
elsewhere in this document.
<TABLE>
<CAPTION>
Year Ended March 31,
1995 1996 1997 1998
----
Balance Sheet Data:
<S> <C> <C> <C> <C>
Working capital (deficiency) $1,805,396 $192,401 $(1,570,486) $4,452,481
Total assets 11,119,692 9,213,104 9,378,618 14,139,887
Total current liabilities 7,298,136 6,673,570 8,148,657 4,581,831
Long term obligations 140,218 726,007 226,925 7,055,549
Redeemable preferred stock 242,275 87,680 --- ---
Stockholders' equity 3,439,063 1,725,847 1,003,036 2,502,507
Common stock dividends --- --- --- ---
</TABLE>
Year Ended March 31,
<TABLE>
<CAPTION>
1995 1996 1997 1998
----
Operating Data:
<S> <C> <C> <C> <C>
Net sales $25,374,722 $21,230,853 $19,624,276 $22,568,527
Cost of sales 16,704,757 15,132,895 13,669,104 13,689,599
Total Operating expenses 9,292,632 9,105,515 8,789,570 10,119,430
Net income (loss) (875,788) (3,542,715) (3,584,881) (2,054,470)
Income (loss) per common share(1) (0.87) (2.77) (1.29) (0.50)
Average shares outstanding(1) 1,011,284 1,287,843 2,791,876 4,098,971
</TABLE>
<PAGE>
(1) Adjusted for effects of 1 for 3 reverse split of Common Stock in July
1997.
Results of Operations
Statements contained in this report which are not historical facts may be
considered forward looking information with respect to plans, projections, or
future performance of the Company as defined under the Private Securities
Litigation Reform Act of 1995. These forward looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected.
The Company's operations are substantially controlled by United Textiles &
Toys Corp. ("UTTC") , the Company's parent. UTTC currently owns approximately
59.3% of the issued and outstanding shares of the Company's Common Stock.
For the year ended March 31, 1998 compared to the year ended March 31, 1997
The Company generated net sales of $22,568,527 in the year ended March 31,
1998 (also referred to as fiscal year 1998). This represented an increase of
$2,944,251, or 15%, over net sales of $19,624,276 in the year ended March 31,
1997 (also referred to as fiscal year 1997). Approximately $2.46 million of this
sales growth came from new stores (including the three Toys International, Inc.-
"Toys" - stores acquired in January 1997) and the remaining $480,000 came from a
3.7% increase in same store sales. Sales from the Company's wholesale operations
were insignificant in both fiscal years.
The Company ended fiscal year 1998 with 19 retail locations, compared to 21
retail locations at the end of fiscal year 1997. During fiscal year 1998, the
Company opened four new stores and closed six stores (the lease for one of which
stores expired).
The Company posted a gross profit of $8,878,928 in the year ended March 31,
1998. This represented an increase of $2,923,756, or 49.1%, over the gross
profit of $5,955,172 in the year ended March 31, 1997. The gross profit increase
was due to the above noted growth in net sales and to an improvement in the
Company's gross margin from 30.3% in fiscal year 1997 to 39.3% in fiscal year
1998. This 9.0% gross margin improvement was the result of a change in the
Company's merchandising mix to augment its historical product base of lower
margin traditional toys with educational and specialty toys which generally
produce better margins than traditional toys. This change in merchandising mix
has been the centerpiece of the Company's business plan for fiscal years 1997
and 1998.
Operating expenses (total operating expenses less litigation related
expenses and depreciation and amortization) in the year ended March 31, 1998
were $8,864,607. This represented a $482,052, or 5.8%, increase over the
Company's operating expenses of $8,382,555 in the year ended March 31, 1997. The
primary reasons for the operating expense increase were a growth in rent expense
of approximately $411,000 and in payroll and related expense of $367,000. Those
expense increases were partially offset by a reduction of advertising expense of
$574,000.
The Company incurred $583,541 of litigation related expenses in fiscal year
1998. The expenses were associated with the closure of five store locations and
related subsequent litigation. This expense includes settlement amounts relating
to four of the five closed locations and the related legal fees and costs. The
Company remains in litigation regarding the fifth closed store.
Depreciation and amortization expense in the year ended March 31, 1998 was
$671,282. This represented a $264,267, or 64.9%, increase over the Company's
depreciation and amortization expense of $407,015 in the year ended March 31,
1997. Depreciation and amortization are non-cash charges. The primary reason for
the depreciation and amortization expense increase was the depreciation on the
fixed assets purchased for the four new stores opened during fiscal year 1998.
Total operating expenses (the sum of operating expenses, litigation related
expenses and depreciation and amortization expense) in the year ended March 31,
1998 were $10,119,430. This represented a $1,329,860, or 15.1%, increase over
the Company's total operating expenses of $8,789,570 in the year ended March 31,
1997. The reasons for this increase are noted in the three preceding paragraphs.
<PAGE>
The Company's operating loss improved from $2,834,398 in fiscal year 1997
to $1,240,502 in fiscal year 1998. This represented an improvement of
$1,593,896, or 56.2%. This improvement was a result of the $2,923,756 increase
in gross profit being partially offset by the $1,329,860 increase in total
operating expenses.
Total interest expense amounted to $813,968 in the year ended March 31,
1998. This represented a $63,485, or 8.5%, increase in total interest expense.
The primary reason for the increased level of interest expense was a higher
level of borrowings in fiscal year 1998 than in fiscal year 1997.
During each of the years ended March 31, 1998 and 1997, 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, 1998 and 1997 and resulted in a net
zero dollar provision for deferred income taxes for each of the years ended
March 31, 1998 and 1997.
As a result of the above mentioned factors, the Company recorded a net
loss of $2,054,470 for the fiscal year ended March 31, 1998 and a net loss of
$3,584,881 recorded in the fiscal year ended March 31, 1997. In fiscal year
1997, 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 1998 fiscal year was $0.50 compared to a net loss
per common share in the 1997 fiscal year of $1.29. The loss per common share
decreased both as a result of the decreased net loss and due to the increase in
the weighted average number of shares outstanding from 2,791,876 in fiscal year
1997 to 4,098,971 in fiscal year 1998.
Liquidity and Capital Resources
At March 31, 1998, the Company had a working capital position of $4,452,481
compared to a working capital deficit of $1,570,486 at March 31, 1997. This
change in the Company's working capital was largely due to the classification of
the borrowings under the Company's new financing agreement as a long term
liability at March 31, 1998 compared to the borrowings under its previous
financing agreement that were classified as a short term liability 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 financing transactions, most recently from a public offering of the
Company's Series E Preferred Stock consummated in December 1997. 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.
For the year ended March 31, 1998, the Company used $2,288,736 of cash in
its operations compared to $2,275,962 used in operations in the year ended March
31, 1996. A $1,779,874 increase in merchandise inventories was the primary
reason that cash used in operations actually grew by $12,774 while the net loss
decreased by $1,530,411. The Company believes that this inventory growth
occurred due to improved support from its trade vendors in fiscal year 1998
compared to fiscal year 1997.
The Company used $3,273,273 in its investing activities during fiscal year
1998 compared to $1,024,127 in fiscal year 1997. In fiscal year 1998, $2,250,000
of the investing activities related to the purchase of restricted certificates
of deposit. $2 million of that amount was used to collateralize a letter of
credit in the same amount in favor of FINOVA Capital Corp. ("FINOVA" - see
below), its working capital lender. The other $250,000 is collateral for a
facility for letters of credit. The remaining $1,023,273 of investing activities
related to purchases of property and equipment, largely at four new stores that
the Company opened. The $1,024,127 in investing activities in fiscal 1997
related to the acquisition of Toys, a Southern California-based, three store
chain of specialty toy stores located in high traffic shopping malls.
<PAGE>
The Company generated $6,033,273 from its financing activities in the year
ended March 31, 1998 compared to the generation of $3,285,410 from financing
activities in the year ended March 31, 1997. The largest contributions to the
Company's financing activities in the 1998 fiscal year were the receipt of
$3,390,450 of net proceeds from the sale of preferred stock through a
combination of public and private offerings and $1,750,000 in proceeds from
notes payable. Proceeds from preferred stock sales was the single largest
contributor to the Company's financing activities in fiscal 1997 as well.
As a result of the above factors, the Company had a net increase in cash of
$471,264 in fiscal year 1998 compared to a net decrease in cash of $14,679 in
fiscal year 1997.
During fiscal 1998, the Company opened three new stores in high traffic
shopping malls and one new store in a large strip mall in San Diego, California.
In addition, it reformatted one existing store in the San Diego area. The three
new high traffic shopping mall stores are located in the South Bay Galleria in
Redondo Beach, California; in Ontario Mills in Ontario, California; and in
Arizona Mills in Tempe, Arizona. The Arizona Mills location is the Company's
first store located outside of Southern California.
On December 29, 1997, the Company completed a public offering of Series E
Preferred Stock and Redeemable Series E Purchase Warrants. The offering was
managed by West America Securities Corp and generated $3,150,000 in gross
proceeds. The net proceeds of the offering were $2,303,441 after discounts and
commissions, legal expenses, Blue Sky fees, accounting fees, printing expenses,
other investment banking fees, and other miscellaneous costs and expenses.
At March 31, 1998, the Company had an inventory financing line of
credit with FINOVA in connection with a Loan and Security Agreement ("FINOVA
Agreement"). On February 3, 1998, the Company borrowed $4,866,324 under the
FINOVA Agreement, the proceeds of which were used primarily to repay the then
outstanding borrowings under the financing arrangement with Congress Financial
Corporation, its previous working capital lender, and to pay fees related to the
FINOVA Agreement. The FINOVA Agreement provides for maximum borrowings up to
$7,100,000 based on a percentage of the cost value of eligible inventory, as
defined. Outstanding borrowings bear interest at 1.5% above the prime rate, as
defined (the prime rate at March 31, 1998 was 8.5%). The FINOVA Agreement
matures on July 21, 2000 and can be renewed for one additional year at the
lender's option.
The FINOVA Agreement is guaranteed by UTTC and is secured by substantially
all the assets of the Company and $3,000,000 in letters of credit. Of the
$3,000,000 in letters of credit, $2,000,000 is collateralized by amounts held in
a restricted certificate of deposit. The remaining $1,000,000 letter of credit
has been provided by Multimedia Concepts International, Inc., an affiliate.
In April 1998, the Company relocated its store in the Century City Shopping
Center in west Los Angeles to a new, larger location within that same high
traffic shopping center. This store was one of the three stores acquired in the
purchase of Toys in January 1997. The relocation involved the renovation of the
new store space at an overall aggregate cost of approximately $251,000.
The Company plans to open six new stores in high traffic malls by the end
of calendar 1998. The Company plans to open these new stores in Nevada, Texas,
Illinois, Michigan, and Southern California. The Company has entered into leases
for six of these locations. The costs involved in opening the six new stores
will require a significant capital expenditure, estimated to be approximately
$1.5 million to $2.4 million.
In order to raise additional capital to help finance this planned store
expansion, in May 1998, the Company began a private placement sale of units (the
"Private Placement") through Morgan Grant Capital Group, Inc. as placement
agent. The Private Placement carries a minimum amount of $750,000 and a maximum
of $4,500,000. Each unit consists of one share of the Company's Series F
Preferred Stock, par value $.01 per share, and one Series F Preferred Stock
Purchase Warrant at a purchase price of $3.00 per Unit.
<PAGE>
In addition to the equity that the Company plans to raise in the Private
Placement, other potential sources of capital to help finance the store
expansion include a combination of landlord tenant improvement contributions,
borrowings on its credit line, and borrowings under capital leases. Any
remaining expenditure will be paid out of the Company's working capital. There
can be no assurance that the Company will be able to complete the Private
Placement or obtain sufficient landlord or lease financing to support the
projected new store opening costs.
Year 2000
An additional area that represents a near term commitment of capital
resources is the Company's management information system. The Company has
investigated its existing management information system and has determined that
it does not provide sufficient scope to support the planned level of expanded
operations and, furthermore, is not year 2000 compliant. The Company is
exploring the cost of upgrading its current system or purchasing a new system to
meet the projected demands of the business and to become year 2000 compliant.
Based on information learned to date, the Company estimates that the cost of
upgrading its current system will be on the order of $190,000 to $300,000. The
Company does not have any estimates yet as to the cost of replacing its current
system.
Beyond the above noted internal year 2000 system issue, the Company has no
current knowledge of any outside third party year 2000 issues that would result
in a material negative impact on its operations. Should the Company become aware
of any such situation, contingency plans will be developed.
Trends Affecting Liquidity, Capital Resources and Operations
As a result of its planned merchandise mix change to emphasize specialty
and educational toys, the Company enjoyed significant sales and gross profits in
fiscal 1998. Same can be attributed to the expansion of its collectible die cast
cars, specialty yo-yo's, Rokenbok and Learning Curve toys, and the continued
strength of Beanie Babies(R)and other plush and educational toys. While the
Company believes these particular toys will remain popular with its customer
base for the remainder of calendar year 1998, there can be no assurance that
these particular specialty toys will continue to contribute strongly to the
Company's sales and gross profits. However, the history of the toy industry
indicates that there is generally at least one highly popular toy every year.
The Company's sales efforts are focused primarily on a defined geographic
segment consisting of the Southern California area and the Southwestern United
States. The Company's future financial performance will depend upon continued
demand for toys and hobby items and on general economic conditions within that
geographic market area, the Company's ability to choose locations for new
stores, the Company's ability to purchase product at favorable prices and on
favorable terms, and 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 Company competes with a variety of mass merchandisers,
superstores and other toy retailers, including Toys R Us and Kay Bee Toy Stores.
Competitors that emphasize specialty and educational toys include Disney Stores,
Warner Bros. Stores, Learning Smith, Lake Shore, Zainy Brainy, and Noodle
Kidoodle. There can be no assurance that the Company's business strategy will
enable it to compete effectively in the toy industry.
Seasonality
The Company's operations are highly seasonal with approximately 30-40% of
its net sales falling within the Company's third quarter, which coincides with
the Christmas selling season. The Company intends to open new stores throughout
the year, but generally before the Christmas selling season, which will make the
Company's third quarter sales an even greater percentage of the total year's
sales.
<PAGE>
Impact of Inflation
The impact of inflation on the Company's results of operations has not been
significant. The Company attempts to pass on increased costs by increasing
product prices over time.
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 20, 1997, the Company engaged Haskell & White, Certified
Public Accountants, as its new independent accountants to audit the Company's
financial statements for the year ending March 31, 1997, replacing BDO Seidman,
LLP as auditors of the Company. Prior to engaging Haskell & White, such
accounting firm was not consulted on any matters relative to the application of
accounting principles on specified transactions or in any matter that was the
subject of a disagreement between the Company and its former accountants. During
the past year, Haskell & White has provided services of a general financial
consulting nature to the Company and has performed agreed upon procedures in the
due diligence process related to the January 1997 acquisition of substantially
all the assets of Toys.
In December 1996, Haskell & White was engaged by U.S. Wireless
Corporation, (formerly known as American Toys, Inc.), the Company's former
parent company, to re-audit the financial statement of American Toys, Inc. for
the year ended March 31, 1996. In so doing, Haskell & White re-audited the
financial statements 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.
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.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Officers and Directors
The Directors of the Company are elected annually by the shareholders,
and the Officers are appointed annually by the Board of Directors. Vacancies on
the Board of Directors may be filled by the remaining Directors. Each Director
and Officer will hold office until the next annual meeting of shareholders or
until his successor is elected and qualified. The Executive Officers and
Directors of the Company are as follows:
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Harold Rashbaum 70 Chairman of the Board
Richard Brady 46 Chief Executive Officer, President,
and Director
James Frakes 41 Chief Financial Officer, Secretary,
and Director
John Hites 41 Vice President of Retail Operations
Moses Mika 78 Director
</TABLE>
All Directors hold office until the next annual meeting of stockholders or
until their successors are duly elected and qualified. Officers are elected
annually by, and serve at the discretion of, the Board of Directors. There are
no family relationships between or among any Officers or Directors of the
Company, except Mr. Rashbaum is the father-in-law of Mr. Mika's son. Each
Director is elected at an annual meeting of the Company's shareholders and
serves for a period of one year or until a successor is duly elected.
As permitted under the Delaware General Corporation Law, the Company's
Certificate of Incorporation eliminates the personal liability of the Directors
to the Company or any of its shareholders for damages caused by breaches of said
Directors' fiduciary duties. As a result of such provision, stockholders may be
unable to recover damages against Directors for actions which constitute
negligence or gross negligence or are in violation of their fiduciary duties.
This provision in the Company's Certificate of Incorporation may reduce the
likelihood of derivative, and other types of shareholder, litigation against
Directors.
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. He has been the President of Breaking
Waves, Inc., a subsidiary of Hollywood, since September 1996. 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
January 1998.
James Frakes was elected Chief Financial Officer and Secretary of the
Company in July 1997. Since August 1997, he has been a Director of the Company.
In January 1998, Mr. Frakes was elected Director of Hollywood. 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. From 1985 to 1990, Mr. Frakes
was a manager for Berkeley International Capital Corporation, an investment
banking firm specializing in later stage venture capital and leveraged buyout
transactions. In 1980, Mr. Frakes obtained a Masters in Business Administration
from University of Southern California. He obtained his Bachelor of Arts degree
in history from Stanford University, from which he graduated with honors in
1978.
<PAGE>
John Hites was appointed Vice President of Retail Operations of the Company
in April 1998. From 1991 through March 1998, Mr. Hites operated a sole
proprietorship known as Vintage Sports Company which engaged in the retail sale
of sporting goods. From November 1995 to September 1997, Mr. Hites operated
Vintage Game and Hobby, a related business which engaged in the retail sale of
games, toys, and crafts. Since 1974, Mr. Hites has been actively involved in the
retail sale of specialty toys and items. From 1976 through 1982, Mr. Hites was
employed by Toys International, Inc. Mr. Hites attended California Polytechnic
University, Pomona, California, from 1974 through 1976 where he focussed his
studies on business administration.
Moses Mika was appointed Director of the Company in March 1998. Mr. Mika
has been retired since 1989.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's Officers, Directors, and persons who beneficially own more than
ten percent of a registered class of the Company's equity securities to file
reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission ("SEC"). Officers, Directors, and greater
than ten percent beneficial owners also are required by rules promulgated by the
SEC to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon requests for information of the Company's Officers, Directors,
and greater than 10% shareholders, during fiscal 1997, the Company has been
informed that all Officers, Directors, or greater than 10% shareholders have
stated that they have filed such reports as are required pursuant to Section
16(a) during the 1996 fiscal year, except that Mr. Brady and Mr. Rashbaum failed
to file Form 4's timely upon receipt of shares of Series E Preferred Stock and
Mr. Frakes failed to file a Form 3 upon becoming an officer of the Company or
upon his receipt of stock options. All required filings have since been made.
The Company has no basis to believe that any required filing by any of the above
indicated individuals has not been made.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
or paid by the Company during the years ended March 31, 1998, 1997, and 1996 to
each of the named Executive Officers of the Company.
<PAGE>
Summary Compensation Table
Annual Compensation
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
Name and Principal Options/ Other Annual
Position Year Salary($) Bonus($)(1) SARs(shs) Compensation($)
-------------------- ---- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Richard Brady 1998 120,000 - 25,000 (2) 8,579 (3)
Chief Executive Officer, 1997 108,000 - -- 6,179(3)
President, and Director 1996 117,230 - -- 7,979(3)
----------------------
</TABLE>
(1) No bonuses were paid during the periods herein stated.
(2) Mr. Brady received 25,000 shares of the Series E Preferred Stock as a
bonus in March 1998, which shares vest equally over a 12 month period commencing
in April 1998.
(3) Includes an automobile allowance of $7,200 for 1998, $4,800 for 1997,
and $6,600 for 1996 and the payment of life insurance premiums of $1,379 for
each of 1998, 1997, and 1996.
Commencing January 1998, Harold Rashbaum, the Company's Chairman of the
Board has received a $2,500 monthly consulting fee. Mr. Rashbaum works closely
with management in developing the Company's ongoing business strategy.
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 in each of July 1998, 1999, and 2000. On
June 17, 1998 the Board elected to reset the exercise price of the option to
$1.15, representing approximately 110% of the closing price of the Common Stock
on said date.
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 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.
<PAGE>
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 employees of the Company will contribute to the 401(k)
portion of the ESOP Plan 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's outstanding Common Stock as of June 24, 1998, by (i)
each beneficial owner of 5% or more of the Company's Common Stock; (ii) each of
the Company's Executive Officers, Directors and key employees; and (iii) all
Executive Officers, Directors, and key employees as a group:
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of Common Stock
Of Beneficial Owner Beneficially Owned (1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harold Rashbaum (4)(5)
c/o Play Co. Toys & Entertainment Corp. -- --
550 Rancheros Drive
San Marcos, CA
- ---------------------------------------------------------------------------------------------------------------------------
Richard Brady(4)(5)
c/o Play Co. Toys & Entertainment Corp. 25,587 *
550 Rancheros Drive
San Marcos, CA
- ---------------------------------------------------------------------------------------------------------------------------
Moses Mika
c/o Play Co. Toys & Entertainment Corp. -- --
550 Rancheros Drive
San Marcos, CA
- ---------------------------------------------------------------------------------------------------------------------------
United Textiles &
Toys Corporation 2,486,247(5)(6) 59.1
448 West 16th Street
New York, NY 10011
- ---------------------------------------------------------------------------------------------------------------------------
Multimedia Concepts International, Inc.
448 West 16th Street --(5)(7) --(7)
New York, NY 10011
- ---------------------------------------------------------------------------------------------------------------------------
Europe American
Capital Foundation --(5)(8) --(8)
Box 47
Tortola, BVI
- ---------------------------------------------------------------------------------------------------------------------------
Vermongenstreuhand GMBH
Kiser Street, #14 --(5)(9) --(9)
Bregenz Austria
- ---------------------------------------------------------------------------------------------------------------------------
Volcano Trading
Limited --(5)(10) --(10)
Via Cantonale, #16
Lugano Switzerland
- ---------------------------------------------------------------------------------------------------------------------------
Officers and Directors as a group
(5 persons)(3)(5) 25,587 *
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(footnotes from previous page)
(1) Unless otherwise noted, all of the shares shown are held by individuals
or entities possessing sole voting and investment power with respect to such
shares. Shares not outstanding but deemed beneficially owned by virtue of the
right of an individual or entity to acquire them within 60 days, whether by the
exercise of options or warrants, are deemed outstanding in determining the
number of shares beneficially owned by such person or entity.
(2) The "Percent of Common Stock Beneficially Owned" is calculated by
dividing the "Number of Shares Beneficially Owned" by the sum of (i) the total
outstanding shares of Common Stock of the Company, and (ii) the number of shares
of Common Stock that such person or entity has the right to acquire within 60
days, whether by exercise of options or warrants. The "Percent of Common Stock
Beneficially Owned" does not reflect shares beneficially owned by virtue of the
right of any person, other than the person named and affiliates of said person,
to acquire them within 60 days, whether by exercise of options or warrants.
<PAGE>
(3) Does not include 25,503,420 shares of Common Stock issuable upon the
conversion (any time two years from issuance) of 4,200,570 shares of Series E
Stock outstanding and 50,000 shares of Series E Stock issuable on exercise of
options granted to Richard Brady and Harold Rashbaum. Does not include the sale
of any shares of Series F Preferred Stock or the conversion thereof into shares
of Common Stock. See "Business - Series F Preferred Offering."
(4) Does not include 150,000 shares of Common Stock issuable upon the
conversion (any time two years from issuance) of 25,000 shares of Series E Stock
issued as a bonus in April 1998.
(5) Subject to a two-year lock up on transfer commencing December 1997, in
accordance with lock up agreements executed in connection with the Company's
Series E Preferred Stock offering.
(6) Does not include 1,350,000 shares of Common Stock issuable upon the
conversion of 225,000 shares of the Series E Preferred Stock. Includes 578,742
shares issued in connection with the distribution of the Company's shares by
American Toys in August 1996.
(7) Does not include 4,818,420 shares of Common Stock issuable upon the
conversion of 803,070 shares of the Series E Preferred Stock.
(8) Does not include 7,035,000 shares of Common Stock issuable upon the
conversion of 1,172,500 shares of the Series E Preferred Stock. (9) Does not
include 4,500,000 shares of Common Stock issuable upon the conversion of 750,000
shares of the Series E Preferred Stock.
(10) Does not include (i) 1,500,000 shares of Common Stock issuable upon the
conversion of 250,000 shares of the Series E Preferred Stock; or (ii) 2,088,000
shares of Common Stock issuable upon conversion of the Series E Stock underlying
348,000 Series E Stock Purchase Warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1998, the Company issued 25,000 shares of Series E Stock,
subject to one year vesting schedules, to each of Richard Brady, President of
the Company, and Harold Rashbaum, Chairman of the Board of the Company, as
bonuses in recognition of their efforts to further the Company's turnaround
toward profitability.
In January 1998, in accordance with the FINOVA financing, the Company
received $3.0 million in standby letters of credit: $2.0 Million of which was
established by the Company and secured by a $2.0 certificate of deposit which
was acquired with $1.5 million in proceeds from a subordinated debt arrangement
and $500,000 from the proceeds of the Company's December 1997 public offering of
Series E Stock; and $1.0 million of which was provided by Multimedia Concepts
International, Inc., an affiliate of the Company.
From April 1996 to June 1997, Europe America Capital Corporation
("EACC"), an affiliate, exercised its options and purchased an aggregate of
3,562,070 shares of the Series E Stock for $3,562,070. An aggregate of 361,500
shares were converted to Common Stock which, inclusive of the 250,000 shares of
Series E Stock issued in June 1997, constituted an aggregate of 3,450,570 shares
of Series E Stock outstanding prior to the Series E Stock public offering in
December 1997. The proceeds of the funds received from this investment enabled
the Company to acquire the assets of Toys (a three store chain); to finance the
openings of the Santa Clarita, Arizona Mills, Redondo Beach, Ontario Mills, and
Clairemont stores; to redesign five store locations; and to support the
Company's operations during the Company's business turnaround.
<PAGE>
The Company leases a combined 51,700 square feet of office and
warehouse space at an approximate annual cost of $247,000, 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.
On January 30, 1996, pursuant to the requirements of the Company's Loan
Agreement with Congress, American Toys, Inc. converted all $1,400,000 of debt
owed by the Company into equity. In exchange for the debt, American Toys, Inc.
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, Inc. to spin such shares off to its stockholders and divest its interest
in the Company.
See "Executive Compensation" for a description of the Company's
compensation of its Officers and Directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements of the Company are included as Part
II, Item 8:
<TABLE>
<CAPTION>
<S> <C>
Index to Financial Statements F-1
Report of Independent Certified Public Accountants F-2
Balance Sheets F-3
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-9
</TABLE>
(b) During the last quarter, the Company filed one Form 8-K. In March 1998,
the Company filed a Form 8-K apprising of Mr. Sheikhar Boodram's resignation as
a Director of the Company.
(c) All exhibits, except those designated with an asterisk (*), which are
filed herewith, have previously been filed with the Commission either (i) in
connection with the Company's Registration Statement on Form SB-2, dated
November 2, 1994, under file No. 33-81940-NY; (ii) to the Company's Registration
Statement on Form SB-2, Registration No. 333-32051; or (iii) by the reference
herein and pursuant to 17 C.F.R. ss.230.411, are incorporated by reference
herein. Exhibits previously filed but not as part of the SB-2 Registration
Statement are incorporated herein by reference to the appropriate document.
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement. See (ii) above.
3.1 Certificate of Incorporation of the Company dated June 15, 1995. See (i) above.
3.2 Amendment to Certificate of Incorporation of the Company, filed July 2, 1997. See (ii) above).
3.2(a) Amendment to Certificate of Incorporation of the Company, filed August 11, 1997. See (ii) above.
3.3 By-Laws of the Company. See (i) above.
4.1 Specimen Common Stock Certificate See (i) above).
4.2 Specimen Warrant Certificate. See (ii) above
4.3 Specimen Series E Preferred Stock Certificate. See (ii) above
4.4 ESOP Plan See (i) above).
4.5 Form of Warrant Agreement between the Company, the Underwriter and Continental Stock Transfer & Trust Company.
See (ii) above.
10.22 Lease Agreement for Store - Escondido. See (i) above.
10.23 Lease Agreement for Store - Convoy. See (i) above.
10.26 Lease Agreement for Store - Chula Vista. See (i) above.
10.27 Lease Agreement for Store - El Cajon. See (i) above.
10.29 Lease Agreement for Store - Simi Valley. See (i) above.
10.30 Lease Agreement for Store - Encinitas. See (i) above.
10.31 Lease Agreement for Store - San Dimas. See (i) above.
10.33 Lease Agreement for Store - Rialto. See (i) above.
10.34 Lease Agreement for Store - Redlands. See (i) above.
10.35 Lease Agreement for Store - Rancho Cucamonga. See (i) above.
10.36 Lease Agreement for Store - Woodland Hills. See (i) above.
10.37 Lease Agreement for Warehouse - Executive Offices. See (i) above.
10.38 Lease Agreement for Store - Pasadena. See (i) above.
10.38(a) Lease Agreement for Store - Whittier. See (i) above.
10.41 The Company Incentive Stock Option. Plan See (i) above.
10.44 Lease Agreement for Store - Corona Plaza. See (i) above.
10.50 Extension of Warehouse Lease. See (i) above.
10.65 Direct delivery Purchase Agreement between the Company and Camp Pendleton See (i) above.
10.66 Direct delivery Purchase Agreement between the Company and MCRD, San Diego See (i) above.
10.75 Asset Purchase Agreement for the purchase of Toys International - (incorporated by reference herein to exhibit
10.75 of the Company's 10-QSB for the period ended December 31, 1995 filed with the Commission).
10.76 Lease Agreement for Store - Riverside International (incorporated by 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/A1 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. See (ii) above.
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. (incorporated by
reference herein to exhibit 10.86 to the Company's Registration Statement on Form SB-2, Registration No.
333-32051.
10.87 Lease Agreement for Store - Clairemont (incorporated by reference herein to exhibit (iv) of the Company's 10-
QSB for the period ended September 30, 1997).
10.88 Lease Agreement for Store - Redondo Beach (incorporated by reference herein to exhibit (iv) of the Company's
10-QSB for the period ended September 30, 1997).
10.89 Lease Agreement for Store - Arizona Mills (incorporated by reference herein to exhibit (iv) of the Company's
10-QSB for the period ended September 30, 1997).
10.90 FINOVA Loan and Security Agreement (incorporated by reference herein to exhibit (iv) of the Company's 10-QSB
for the period ended December 31, 1997)
10.91 Schedule to Loan and Security Agreement (incorporated by reference herein to exhibit (iv) of the Company's 10-
QSB for the period ended Dec. 31, 1997).
10.92* Lease Agreement for Store - City Mills
10.93* Lease Agreement for Store - Las Vegas
16.01 Letter from BDO Seidman, LLP (incorporated by reference herein to Form 8-K dated February 20, 1997).
27.01* Financial Data Schedule.
</TABLE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 26th day of June, 1998.
PLAY CO. TOYS & ENTERTAINMENT CORP.
By: /s/Richard Brady___________
Richard Brady, Chief Executive
Officer and President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Harold Rashbaum Chairman of the 6/26/98
Harold Rashbaum Board of Directors Date
/s/ Richard Brady Chief Executive Officer 6/26/98
Richard Brady President, and Director Date
/s/ James Frakes Chief Financial Officer, 6/26/98
James Frakes Secretary, and Director Date
/s/ Moses Mika Director 6/26/98
Moses Mika Date
</TABLE>
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
TABLE OF CONTENTS
March 31, 1998 and 1997
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants F-2
Financial Statements:
Balance Sheets F-3
Statements of Operations F-5
Statements of Stockholders' (Deficit) Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-9
</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 &
Entertainment Corp. (a subsidiary of United Textiles & Toys Corp.) as of March
31, 1998 and 1997 and the related statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended March 31,
1998 and 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 &
Entertainment Corp. at March 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the two years in the period ended
March 31, 1998 and 1997 in conformity with generally accepted accounting
principles.
HASKELL & WHITE LLP
Certified Public Accountants
Newport Beach, California
May 15, 1998
F-2
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Balance Sheets
ASSETS (Note 4)
<TABLE>
<CAPTION>
March 31,
1998 1997
Current
<S> <C> <C>
Cash ............................................ $ 648,986 $ 177,722
Restricted certificate of deposit (Notes 2 and 4) 250,000 --
Accounts receivable ............................. 78,594 60,206
Merchandise inventories ......................... 7,872,804 6,092,930
Other current assets ............................ 183,928 247,313
----------- -----------
Total current assets ............... 9,034,312 6,578,171
Property and equipment, net of accumulated
depreciation and amortization of $3,414,235
and $2,828,913, respectively (Note 3) ........... 2,782,386 2,475,650
Restricted certificate of deposit (Notes 2 and 4) .... 2,000,000 --
Deposits and other assets (Note 4) ................... 323,189 324,797
----------- -----------
$14,139,887 $ 9,378,618
=========== ===========
</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>
March 31,
1998 1997
Current
<S> <C> <C>
Bank overdraft $ - $ 135,325
Borrowings under financing agreement (Note 4) - 4,438,875
Accounts payable 3,505,230 3,123,851
Accrued expenses and other liabilities 726,601 308,940
Current portion of notes payable (Note 6) 350,000 141,666
--------------- ----------------
Total current liabilities 4,581,831 8,148,657
Borrowings under financing agreement (Note 4) 5,445,198 -
Notes payable, net of current portion (Note 6) 1,500,000 100,000
Deferred rent liability (Note 9) 110,351 126,925
--------------- ----------------
Total liabilities 11,637,380 8,375,582
--------------- ----------------
Commitments and contingencies (Notes 2, 4, 7, 9, 10 and 13)
Stockholders' (deficit) equity (Notes 11 and 13)
Series E preferred stock, $1 par value, 10,000,000 shares authorized;
4,200,570 and 2,500,570 shares outstanding, respectively, full liquidation
value of $4,200,570 and $2,500,570 5,891,020 2,500,570
Common stock, $.01 par value, 40,000,000 shares authorized; 4,103,519 and
4,083,519 shares outstanding, respectively 41,035 40,835
Additional paid-in capital 6,675,398 6,512,107
Accumulated deficit (10,104,946) (8,050,476)
--------------- ----------------
Total stockholders' equity 2,502,507 1,003,036
--------------- ----------------
$ 14,139,887 $ 9,378,618
=============== ================
</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>
Years Ended March 31,
1998 1997
<S> <C> <C>
Net sales .................................. $ 22,568,527 $ 19,624,276
Cost of sales .............................. 13,689,599 13,669,104
------------ ------------
Gross profit ............. 8,878,928 5,955,172
------------ ------------
Operating expenses
Operating expenses (Notes 9 and 10) ... 8,864,607 8,382,555
Litigation related expenses (Note 7) .. 583,541 --
Depreciation and amortization ......... 671,282 407,015
------------ ------------
Total operating expenses . 10,119,430 8,789,570
------------ ------------
Operating loss ............................. (1,240,502) (2,834,398)
------------ ------------
Interest expense (Note 4)
Interest and finance charges .......... 525,323 443,872
Amortization of debt issuance costs ... 288,645 306,611
------------ ------------
Total interest expense ... 813,968 750,483
------------ ------------
Net loss ................................... $ (2,054,470) $ (3,584,881)
============ ============
Net loss applicable to common shares ....... $ (2,054,470) $ (3,612,426)
============ ============
Basic and diluted loss per common share and
share equivalents ..................... $ (.50) $ (1.29)
============ ============
Weighted average number of common shares and
share equivalents outstanding ......... 4,098,971 2,791,876
============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Additional Redeemable Preferred Stock
Common Stock Paid-in Series B Series D
........................................Shares Amount Capital Shares Amount Shares
------------- ----------- ------------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1996 1,287,843 $ 12,878 $ 4,779,520 81,579 $ 87,680
Redemption of preferred stock - - - (81,579) (81,579)
Payment of accrued dividends - - - - (6,101)
Conversion of due to affiliate and
related accrued interest to Series
E preferred stock - - - - -
Issuance of Series E preferred
stock for cash - - - - -
Conversion of Series E preferred
stock to common 2,410,000 24,100 337,400 - -
Conversion of Series D preferred
stock to common 385,676 3,857 1,395,187 - -
Net loss for the year - - - - -
----------- ----------- ------------ ------------- -------------
Balance, March 31, 1997 4,083,519 40,835 6,512,107 - -
Issuance of common stock for cash 20,000 200 300 - -
Issuance of Series E preferred stock
for cash - - - - -
Issuance of Series E warrants for cash - - 50,000 - -
Issuance of Series E preferred
stock and warrants for cash,
net of offering expenses - - 112,991 - -
Net loss for the year - - - - -
----------- ----------- ------------ ------------- -------------
Balance, March 31, 1998 4,103,519 $ 41,035 $ 6,675,398 - $ -
=========== ========= ============ === ====
</TABLE>
Statements of Stockholders' (Deficit) Equity
Years Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Preferred Stock
Series E Class I Accumulated
........................................Shares Amount Deficit
<S> <C> <C> <C>
Balance, April 1, 1996 - $ - $ (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 - - -
Net loss for the year - - (3,584,881)
----------- ----------- ------------
Balance, March 31, 1997 2,500,570 2,500,570 (8,050,476)
Issuance of common stock for cash - - -
Issuance of Series E preferred stock
for cash 950,000 1,200,000 -
Issuance of Series E warrants for cash _ _ -
Issuance of Series E preferred
stock and warrants for cash,
net of offering expenses 750,000 2,190,450 -
Net loss for the year - - (2,054,470)
----------- ----------- ------------
Balance, March 31, 1998 4,200,570 $ 5,891,020 $ (10,104,946)
=========== ========= ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Statements of Cash Flows (Note 12)
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net loss ...................................... $(2,054,470) $(3,584,881)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization ............. 671,282 407,015
Loss on abandonment of assets ............. 45,255 --
Amortization of debt issuance costs ....... 196,849 214,743
Deferred rent ............................. (16,574) (71,012)
Increase (decrease) from changes in:
Accounts receivable ....................... (18,388) (24,933)
Merchandise inventories ................... (1,779,874) 431,154
Other current assets ...................... 63,385 (13,912)
Deposits and other assets ................. (195,241) 94,867
Accounts payable .......................... 381,379 245,668
Accrued expenses and other liabilities .... 417,661 25,329
----------- -----------
Cash used for operating activities (2,288,736) (2,275,962)
----------- -----------
Cash flows from investing activities:
Purchase of restricted certificates of deposit (2,250,000) --
Purchases of property and equipment ........... (1,023,273) (1,024,127)
----------- -----------
Cash used for investing activities (3,273,273) (1,024,127)
----------- -----------
</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 12)
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997
Cash flows from financing activities:
<S> <C> <C>
Change in bank overdraft ......................... $ (135,325) $ 26,574
Borrowings under financing agreements ............ 33,560,443 22,404,385
Repayments under financing agreements ............ (32,554,120) (21,368,535)
Proceeds from notes payable ...................... 1,750,000 --
Repayment of notes payable ....................... (141,666) (23,334)
Proceeds from issuance of common stock ........... 500 --
Proceeds from issuance of preferred stock ........ 3,390,450 2,334,000
Proceeds from issuance of preferred stock warrants 162,991 --
Redemption of preferred stock .................... -- (81,579)
Payment of dividends on preferred stock .......... -- (6,101)
------------ ------------
Cash provided by financing activities 6,033,273 3,285,410
------------ ------------
Net increase (decrease) in cash ....................... 471,264 (14,679)
Cash, beginning of year ............................... 177,722 192,401
------------ ------------
Cash, end of year ..................................... $ 648,986 $ 177,722
============ ============
</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
Years Ended March 31, 1998 and 1997
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 educational,
specialty, collectible, and traditional toys. The Company had nineteen (19)
retail stores located within southern California and Arizona at March 31, 1998.
The Company's retail stores, which are located in high-traffic malls and strip
centers, operate under the names "Play Co. Toys," "Toys International," and "Toy
Co."
In August 1996, the Company became a subsidiary of United Textiles & Toys
Corp. ("United Textiles"), formerly known as Mister Jay Fashions International
(Note 11). As of March 31, 1998 United Textiles owns approximately 57% of the
outstanding shares of the Company's common stock.
Revenues are recognized at the point of sale for retail locations and at
the shipping date for wholesale operations. Wholesale operations represent a
minor portion of the Company's operations.
Merchandise Inventories
Merchandise inventories are stated at the lower of cost (first-in,
first-out method - "FIFO") or market.
Concentration of Credit Risk
The Company maintains cash balances at two banks. Accounts at each bank are
insured by the Federal Deposit Insurance Corporation up to $100,000 in
aggregate. Uninsured balances are approximately $2,698,986 and zero at March 31,
1998 and 1997, respectively.
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.
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 generally expensed as
incurred and improvements to leased facilities are capitalized. Upon permanently
closing a retail location, the costs to relocate fixtures, terminate employees
and other related costs are expensed as incurred. In addition, the unamortized
balance of any abandoned leasehold improvements are expensed.
Income Taxes
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) 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
During the three-month period ended December 31, 1997, the Company adopted
the provisions of SFAS No. 128, Earnings Per Share, which requires the
disclosure of "basic" and "diluted" earnings (loss) per share. Basic earnings
(loss) per share is computed by dividing net income (loss), after reduction for
preferred stock dividends and the accretion of any redeemable preferred stock,
by the weighted average number of common shares outstanding during each period.
Diluted earnings (loss) per share is similar to basic earnings (loss) per share
except that the weighted average number of common shares outstanding is
increased to reflect the dilutive effect of potential common shares, such as
those issuable upon the exercise of stock or warrants and the conversion of
preferred stock, as if they had been issued.
F-9
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1998 and 1997
1. Summary of Accounting Policies (continued)
Net Loss Per Share (continued)
Dividends accrued and accretion recorded on the former Series B preferred
stock aggregated $27,545 for the year ended March 31, 1997. No such transactions
occurred during the year ended March 31, 1998.
The financial statements for the year ended March 31, 1997 have been
restated to reflect the effects of adopting SFAS No. 128. However, for both of
the years ended March 31, 1998 and 1997, there is no difference between basic
and diluted loss per common share as the effects of the exercise of stock
options or warrants and conversion of preferred stock are anti-dilutive given
the net loss recorded for both years.
Common share and per share amounts have been retroactively adjusted for the
one-for-three reverse stock split which was effective in July 1997.
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.
1. Summary of Accounting Policies (continued)
Impairment of Long-Lived Assets
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company adopted SFAS 121
effective April 1, 1997. There was no impact of such adoption on the Company's
financial condition and results of operations.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, established
financial accounting and reporting standards for stock-based employee
compensation plans and certain other transactions involving the issuance of
stock. The Company adopted the disclosure requirements of SFAS 123 for
stock-based employee compensation effective April 1, 1996. However, the Company
continues to use the intrinsic value method for recording compensation expenses
as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees.
The fair value method prescribed by SFAS No. 123 is used to record stock-based
compensation to non-employees.
Effect of New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in an entity's
financial statements. This statement requires an entity to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional pai in-capital in the equity section of a statement of
financial position. This pronouncement is effective for fiscal years beginning
after December 15, 1997 and the Company expects to adopt the provision statement
in the fiscal year ending March 31, 1999. Management does not expect this
statement to significantly impact the Company's financial statements.
1. Summary of Accounting Policies (continued)
Effect of New Accounting Pronouncements (continued)
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. This statement requires public enterprises
to report financial and descriptive information about its reportable operating
segments and establishes standards for related disclosures about product and
services, geographic areas, and major customers. This pronouncement is effective
for fiscal years beginning after December 15, 1997 and the Company expects to
adopt the provisions of this statement in the fiscal year 1999. Management does
not expect this statement to significantly impact the Company's financial
statements.
In April 1998, the AICPA's Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities.
The SOP, which is effective for fiscal years beginning after December 15, 1998
with earlier application encouraged, requires entities to expense start-up and
organization costs for establishing new operations. Management does not expect
this statement to significantly impact the Company's financial statements.
Reclassification of Prior Year Amounts
To enhance comparability, certain reclassifications have been made to the
1997 financial statements, where appropriate, to conform with the financial
statement presentation used in 1998.
2. Restricted Certificates of Deposit
At March 31, 1998, the Company has two certificates of deposit which are
restricted as to their nature. The first, in the amount of $2,000,000 represents
collateral against a letter of credit securing the FINOVA Financing (Note 4),
and is classified as a non-current asset since the funds in the certificate of
deposit will remain restricted until the letter of credit expires or is released
by FINOVA Capital Corporation. The second, in the amount of $250,000, is
collateral for a facility for letters of credit.
3. Property and Equipment
Property and equipment consisted of the following:
Property and equipment consisted of the following:
March 31,
1998 1997
Furniture, fixtures and
equipment $4,222,586 $3,699,371
Leasehold improvements . 1,551,760 1,220,246
Signs .................. 317,363 280,034
Vehicles ............... 104,912 104,912
---------- ----------
6,196,621 5,304,563
----------
Accumulated depreciation
and amortization (3,414,235) (2,828,913)
----------- ----------------
$ 2,782,386 $ 2,475,650
============== ================
4. Financing Agreements
On February 7, 1996, the Company borrowed, under an agreement with Congress
Financial Corporation (Western) (the "Congress Financing"), approximately
$2,243,000, the proceeds of which were used to repay the then outstanding
borrowings under a bank line of credit agreement. The Congress Financing
provided for maximum borrowings up to $7,000,000 based upon a percentage of the
cost value of eligible inventory, as defined. Outstanding borrowings bore
interest at 1.5% above the prime rate, as defined.
In connection with the Congress Financing, and the previous bank line of
credit agreement, European American Capital Corp. ("EACC"), an affiliate,
provided a $2,000,000 letter of credit for collateral. As compensation to EACC,
the Company granted EACC options to acquire shares of common stock, the value of
such options estimated at $224,000 by the Company; and options to acquire
additional shares of common stock and shares of Series E preferred stock, the
value of these options estimated at $234,000 by the Company. The aggregate
$458,000 was initially included in other assets, as debt issuance costs, and
additional paid-in capital. The option values were amortized into interest
expense through the February 1, 1998 maturity of the Congress Financing,
resulting in aggregate interest charges of $196,849 and $214,743 for the years
ended March 31, 1998 and 1997, respectively. No options to acquire shares of
common stock were exercised before the termination of the exercise period. 4.
Financing Agreements (continued)
The exercise of options to acquire shares of Series E preferred stock by
EACC, before the options terminated in December 1997 upon consummation of the
Company's Series E preferred stock offering (Note 11).
In March 1997, the Congress Financing was amended to provide for, among
other things, increased borrowing ratios and an additional $1,000,000 letter of
credit as collateral from EACC. Thereafter, the Congress Financing was
collateralized by an aggregate $3,000,000 in letters of credit through its
maturity on February 1, 1998.
On February 3, 1998, the Company borrowed, under an agreement with FINOVA
Capital Corporation (the "FINOVA Financing"), $4,866,324, the proceeds of which
were used primarily to repay the then outstanding borrowings under the Congress
Financing, and to pay fees related to the FINOVA Financing. The FINOVA Financing
provides for maximum borrowings up to $7,100,000 based on a percentage of the
cost value of eligible inventory, as defined. Outstanding borrowings bear
interest at 1.5% above prime rate, as defined (the prime rate at March 31, 1998
was 8.5%). The agreement matures on August 3, 2000 and can be renewed for one
additional year at the lender's option.
Total fees related to the FINOVA Financing aggregated approximately
$272,000 and are being amortized over the 30-month term of the agreement. The
unamortized portion of these debt issuance costs, $253,858, is included in
"deposits and other assets" at March 31, 1998.
The FINOVA Financing includes a financial covenant requiring the Company to
maintain, at all times, net worth, as defined, of $750,000. At March 31, 1998,
the Company was in compliance with this financial covenant.
The FINOVA Financing is guaranteed by United Textiles and is secured by
substantially all of the assets of the Company and $3,000,000 in letters of
credit. Of the $3,000,000 in letters of credit, $2,000,000 is collateralized by
amounts held in a restricted certificate of deposit (Note 2). The remaining
$1,000,000 letter of credit, has been provided by Multimedia Concepts
International, Inc., an affiliate of the Company.
5. 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 6).
6. Notes Payable
<TABLE>
<CAPTION>
March 31,
1998 1997
<S> <C> <C>
Note payable to ABC Fund Ltd., an affiliate, bearing interest at 5% per
annum, principal due on August 15, 2000, accrued interest due on May 10
1998, and quarterly until debt paid in full or converted (Note 9).
Note is subordinate to the FINOVA Financing (Note 13). $1,500,000 -
Note payable to Breaking Waves, Inc., an affiliate, bearing interest at
15% per annum, payable in ten monthly installments of $25,000 plus
accrued interest through maturity on December 31, 1998. Note is
subordinate to the FINOVA Financing (Note 4). 250,000 -
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 FINOVA Financing (Note 4). 100,000 200,000
</TABLE>
6. Notes Payable (continued)
<TABLE>
<CAPTION>
March 31,
1998 1997
<S> <C> <C>
Note payable to stockholder of Toys International, non-interest
bearing, guaranteed by United Textiles, payable in five installments
ranging from $11,667 to $15,000 through maturity, on June 16, 1997. - 41,666
Total notes payable 1,850,000 241,666
Less current portion (350,000) (141,666)
--------------- ----------------
Long-term portion $ 1,500,000 $ 100,000
=============== ================
</TABLE>
7. Closure of Retail Stores - Litigation
During the year ended March 31, 1998, the Company closed, and ultimately
vacated, five retail locations prior to the end of their lease terms. As a
result, four of the five landlords filed lawsuits against the Company to collect
unpaid rent as well as rental obligations remaining under the terms of the
respective leases.
Subsequent to the filing of actions by the landlords and through May 1998,
the Company, with assistance of outside counsel, reached settlement agreements
with the various landlords. These settlements aggregated $469,600.
F-10
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1998 and 1997
7. Closure of Retail Stores - Litigation (continued)
The statement of operations for the year ended March 31, 1998 includes
$583,541 of "litigation related expenses" which comprise the settlement costs on
the aforementioned leases, legal fees associated with the negotiations and
monthly rentals for the locations since vacating the premises.
The Company currently has one remaining landlord/tenant matter which has
yet to be resolved. The Company's management expects this matter to be resolved
without further material effects on the financial statements.
8. 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,
1998 1997
<S> <C> <C>
Inventories $ (227,696) $ (183,192)
---------
AMT tax credits (23,260) (23,260)
Accrued expenses (19,779) (15,119)
--------------- ----------------
Current portion of net deferred income
tax (assets) liabilities (270,735) (221,571)
--------------- ----------------
Depreciation and amortization (28,388) 150,857
Loss on disposal of assets 25,926 -
Net operating loss carryforwards (3,652,294) (3,142,710)
Deferred rent liability (43,891) (50,945)
Income taxes 508 -
Amortization of stock options (202,049) -
--------------- ----------------
Long-term portion of net deferred
income tax (assets) liabilities (3,900,188) (3,042,798)
Total net deferred income tax (assets) liabilities (4,170,923) (3,264,369)
Valuation allowance 4,170,923 3,264,369
--------------- ----------------
Net deferred income taxes $ - $ -
=============== ================
</TABLE>
At March 31, 1998 and 1997, a 100% valuation allowance has been
provided on the net deferred income tax assets since the Company can not
determine that it is "more likely than not" to be realized.
The reconciliation of income taxes computed at the federal statutory
tax rate to income taxes at the effective income tax rate in the statements of
operations is as follows:
<TABLE>
<CAPTION>
March 31,
1998 1997
<S> <C> <C>
Federal statutory income tax (benefit) rate (34.0)% (34.0)%
State income taxes, net of federal benefit 0.1 0.1
Change in valuation allowance 33.9 33.9
----------- --------------
Effective income tax rate -% -%
</TABLE>
F-11
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1998 and 1997
8. Income Taxes (continued)
A portion of the NOLs described above are subject to provisions of the
Internal Revenue Code ss.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 years ended March 31, 1994 and
1995, the Company's ownership changed by more than 50% as a result of
the May 1993 of a majority interest in the Company by American Toys and
the Company's November 1994 completion of an initial public offering of
its common stock. Further changes in common and preferred stock
ownership during each of the years ended March 31, 1998 and 1997, as
described in Note 11, have also potentially limited the use of NOLs.
The effect of such limitations has yet to be determined. NOLs could be
further limited upon the exercise of outstanding stock options and
stock purchase warrants or as a result of a planned private offering of
preferred stock (Note 13).
9. Commitments and Contingencies
Operating Leases
The Company leases its retail store properties under noncancelable
operating lease agreements which expire through October 2007 and require various
minimum annual rentals. Several of the leases provide for renewal options to
extend the leases for additional five or ten-year periods. Certain store leases
also require the payment of property taxes, normal maintenance and insurance on
the properties and additional rents based on percentages of sales in excess of
various specified retail sales levels.
During the years ended March 31, 1998 and 1997, the Company incurred rental
expense under all operating leases of $3,112,822 and $2,681,728, respectively.
Contingent rent expense was insignificant during the years ended March 31, 1998
and 1997.
During the year ended March 31, 1997, the Company sub-leased portions of
its warehouse building and a portion of one of its retail locations under
noncancelable operating leases. Sub-lease income during the year ended March 31,
1997 was $93,822 (Note 10).
F-12
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1998 and 1997
9. Commitments and Contingencies (continued)
Operating Leases (continued)
At March 31, 1998 the aggregate future minimum lease payments due under
these noncancelable leases are as follows:
<TABLE>
<CAPTION>
Year Ending Amount
March 31, Leases
<S> <C> <C>
1999 $ 2,541,123
------------------
2000 2,583,314
2001 2,103,669
2002 1,788,302
2003 1,665,152
Thereafter 3,919,531
Total minimum lease payments $ 14,601,091
</TABLE>
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.
Convertible Debt Agreement
As discussed in Note 6, the Company has a $1.5 million note payable to ABC
Fund, an affiliate. Prior to the August 15, 2000 maturity date, the note is
convertible into the common stock of a subsidiary of the Company. ABC Fund may,
at its option, convert all or a portion of the note and accrued unpaid interest
thereon into up to 25% of the common stock of the subsidiary at an exercise
price equal to the net book value of the subsidiary's shares.
F-13
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1998 and 1997
9. Commitments and Contingencies (continued)
Delisting of Securities
On September 24, 1997, the Company's common stock was delisted from
trading on the NASDAQ Stock Market ("NASDAQ") as the Company did not meet the
stockholders' equity maintenance requirement of $1,000,000 at the time and based
on certain transactions undertaken in February 1996 which NASDAQ deemed
"detrimental to the investing public and public interest" with respect to
options issued to an investor which provided a letter of credit as security for
the Congress Financing.
Since September 24, 1997, the Company's common stock, as well as its
Series E preferred stock and Series E stock purchase warrants sold in a public
offering completed in December 1997, have been quoted on the over-the-counter on
the OTC bulletin board.
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.
401(k) Employee Stock Ownership Plan
In August 1994, the Company adopted a 401(k) Employee Stock Ownership Plan
(the "Plan") which covers substantially all employees of the Company. The Plan
includes provisions for both an Employee Stock Ownership Plan ("ESOP") and a
401(k) Plan.
The ESOP allows only contributions by the Company which can be made
annually at the discretion of the Company's Board of Directors. The ESOP is
designed to invest primarily in the Company's stock. As of March 31, 1998, there
had been no transactions with regards to the ESOP.
F-14
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1998 and 1997
9. Commitments and Contingencies (continued)
401(k) Employee Stock Ownership Plan
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).
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. Pursuant to the hiring of the Company's
current Chief Financial Officer and Secretary, an option to purchase 30,000
shares of Common Stock at an exercise price of $1.15 per share was authorized,
vesting at the rate of 10,000 shares per annum in each of July 1998, 1999 and
2000. As of March 31, 1998, no options to purchase common stock had been
exercised.
Seasonality
The Company's business is highly seasonal with a large portion of its
revenues and profits being derived during the months of November and December.
Accordingly, in order for the Company to operate, it must obtain substantial
short-term borrowings from lenders and the Company's suppliers during the first
three-quarters of each fiscal year to purchase inventory and for operating
expenditures. Historically, the Company has been able to obtain such credit
arrangements and substantially repay the amounts borrowed from suppliers and
reduce outstanding borrowings from its lender during the fourth quarter of its
fiscal year.
F-15
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1998 and 1997
9. Commitments and Contingencies (continued)
Year 2000
An area that represents a near-term commitment of capital resources is
the Company's management information system. The Company has
investigated its existing management information system and has
determined that it does not provide sufficient scope to support the
planned level of expanded operations and, furthermore, is not Year 2000
compliant. The Company is currently exploring the cost of upgrading its
current system or purchasing a new system to meet the projected demands
of the business and to become Year 2000 compliant. Based on information
learned to date, the Company estimates that the cost of upgrading its
current system would be on the order of $190,000 to $300,000.
Management has not been able to estimate a replacement cost at March
31, 1998.
10. 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 for the years ended March 31, 1998 and 1997 totaled
$247,289 and $227,546, respectively. The lease expires in April 2000.
Sub-lease
During the year ended March 31, 1997, sub-lease rental income included
$54,422 from an entity in which stockholders and employees of the Company have
an ownership interest. Sub-lease income was insignificant for the year ended
March 31, 1998.
Consulting Agreement
In January 1997, the Company entered into a consulting agreement with the
stockholder of Toys International as part of the purchase agreement with 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. As a
result, the expenses related to the agreement totaled $23,334 and $6,666 for the
years ended March 31, 1998 and 1997, respectively.
10. Related Party Transactions (continued)
Consulting Fees
The Company made payments aggregating $25,000 and $7,000 to the Chairman of
the Board of Directors for various consulting services during the years ended
March 31, 1998 and 1997, respectively.
Commitment of Financing
The individual, beneficial majority stockholder of United Textiles, in a
letter dated May 15, 1998, has represented his intent and ability to provide
additional working capital to the Company, should such be necessary, through
September 1999.
11. Equity Transactions
Capital Structure
At March 31, 1998, the Company's capital structure consisted of 40,000,000
authorized shares of $.01 par value common stock and 10,000,000 authorized
shares of $1.00 par Series E preferred stock. Each share of series E preferred
stock is convertible into six shares of common stock at the option of the holder
after holding the shares of Series E preferred stock for two years from the date
of issuance. This capital structure became effective August 11, 1997 upon the
amendment of the Company's certificate of incorporation in anticipation of the
public offering of Series E preferred stock discussed below.
Issuance of Series E Preferred Stock
In April 1996, EACC exercised its option and acquired 528,070 shares of
Series E preferred stock. In connection therewith, the amount due to EACC,
aggregating $528,070 at March 31, 1996 was extinguished.
In June 1996, October 1996 and January 1997, EACC exercised its option and
acquired 334,000, 800,000 and 1,200,000 shares of Series E preferred stock,
respectively. All options were exercised at $1.00 per share resulting in an
aggregate cash consideration of $334,000, $800,000 and $1,200,000, respectively.
The 334,000 shares of Series E preferred stock issued to EACC in June 1996 were
subsequently transferred to United Textiles. 11. Equity Transactions (continued)
Issuance of Series E Preferred Stock (continued)
In an agreement dated June 30, 1997, the Company agreed to issue 250,000
shares of Series E preferred stock for $500,000 and 500,000 warrants to purchase
Series E preferred stock for an additional $50,000 in a private sale. The
$550,000 was collected on August 12, 1997 and the shares and warrants were
issued.
In June 1997, the Company issued 700,000 shares of Series E preferred stock
to EACC which had advanced funds subsequent to March 31, 1997 against its option
to acquire share of Series E preferred stock.
On December 29, 1997, the Company completed a public offering of 750,000
shares of Series E preferred stock and 1,500,000 redeemable Series E stock
purchase warrants. The gross proceeds from the offering were $3,150,000 and the
net proceeds to the Company totaled $2,303,441 after deduction of offering
expenses including such items as underwriter discounts and commissions, legal,
accounting, printing and filing fees.
Other Preferred Stock Transactions
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.
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 shares of the Company's common stock. On August 11,
1996, American Toys converted its one share of Series D preferred stock into
385,676 shares of the Company's common stock. At this time, American Toys owned
1,235,319 shares of the common stock of the Company which were spun-off to the
stockholders of American Toys, including United Textiles. As a result, United
Textiles became the majority stockholder of the Company.
In August 1996, the 334,000 shares of Series E preferred stock held by
United Textiles were converted into 2,226,667 shares of the Company's common
stock. In addition, in February 1997, EACC converted 27,500 shares of the Series
E preferred stock into 183,333 shares of the Company's common stock.
11. Equity Transactions (continued)
Stock Option Grants
In March 1998, the Company's Board of Directors granted to its Chairman of
the Board and to its President rendered, 25,000 shares each of its Series E
Preferred Stock, par value $.01 per share in recognition of their efforts to
further the Company's turnaround towards profitability. The shares shall vest on
a monthly basis over a one-year period commencing April 1, 1998, being fully
vested April 1999. On the date of grant management determined the compensation
value of this stock grant to be approximately $47,000 in the aggregate, based on
the closing market price as adjusted for the restrictive nature and vesting
requirement of the securities.
12. Supplemental Cash Flow Information
Cash paid for income taxes and interest was as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997
<S> <C> <C>
Interest paid $ 511,924 $ 443,875
============ ================
Income taxes $ 800 $ 800
======== ============
</TABLE>
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 preferred stock,
the conversion on 1 share of Series D preferred stock for 385,676
post-reverse split shares of common stock and the conversion of 361,500
shares of Series E preferred stock for 2,410,000 post-reverse split
shares 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.
F-16
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1998 and 1997
13. Subsequent Events
Change in Capital Structure
In anticipation of a private placement of securities, as discussed below,
the Company's Board of Directors, in April 1998, authorized an amendment to the
Company's capital structure which would (i) increase the total authorized common
shares from 40,000,000 to 51,000,000; (ii) increase the total authorized shares
of preferred stock from 10,000,000 to 15,500,000; and (iii) designate the
5,500,000 increase in shares of authorized preferred stock as "Series F
Preferred Stock," par value $.01 per share. Such amendment was approved by
written consent of a majority of the shareholders.
The holders of the shares of the Series F Preferred Stock shall be entitled
to receive, when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends, cumulative dividends at $0.09 per share
per quarter or $.036 per annum. The dividend is to be payable quarterly.
Dividends shall be fully cumulative and shall accrue (whether or not declared),
without interest, from the date such dividends are payable. The Series F Stock
shall have liquidation preference of $3.00 per share, subject only to the Series
E Stock preference.
The Series F Preferred Stock shall possess no voting rights, except as
provided by law with respect to altering the rights and preferences thereof. The
Series F Stock shall have the right, at the option of each individual holder, at
any time, commencing six months after issuance, to convert each share to two
fully paid and non-assessable shares of Common Stock. Upon conversion of the
Series F Stock into Common Stock, the ownership interests of persons who own
Common Stock at the time of conversion shall be diluted.
The Company may, at any time commencing one year from issuance, redeem all
of the issued and outstanding shares of the Series F Stock for a per share price
of $3.00, plus accrued but unpaid dividends, upon notice to each holder of
record of the Series F Stock.
Each warrant is exercisable into one share of Series F Stock commencing one
year from issuance at $4.00 for a period of five years. Unexercised warrants
will automatically expire at the end of such five-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.
F-17
<PAGE>
13. Subsequent Events (continued)
Change in Capital Structure (continued)
The Series F warrants are redeemable by the Company at any time, commencing
one year from issuance, upon 30 days' prior notice, at a redemption price of
$.05 each.
Private Placement of Series F Preferred Stock
In April 1998, the Company's Board of Directors approved a resolution to
seek additional equity capital of a minimum of $750,000 to a maximum of
$4,500,000 from a private placement sale of units. Each unit is to consist of
one share of Series F preferred stock par value $.01 per share and one Series E
preferred stock purchase warrant at a purchase price of $3.00 per unit.
Expansion Plans
The Company's Board of Directors has authorized management to locate
suitable expansion sites and enter into leases for new retail locations in the
states of: Nevada, Texas, Illinois, Michigan and additional sites in California.
Capital Lease Facility
The Company borrowed approximately $85,000 to finance equipment and
fixtures for the remodel of one of its retail locations through a finance
company. Borrowings under the agreement are to be paid monthly, including
interest, over sixty months.
F-18
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.01
FINANCIAL DATA SCHEDULE
This schedule contains summary information extracted from the Balance
Sheet, Statement of Operations, Statement of Cash Flows and Notes thereto
incorporated in Part I, Item 7, of this Form 10 - KSB and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> mar-31-1998
<PERIOD-END> mar-31-1998
<CASH> 648,986
<SECURITIES> 0
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<ALLOWANCES> 0
<INVENTORY> 7,872,804
<CURRENT-ASSETS> 9,034,312
<PP&E> 6,196,621
<DEPRECIATION> (3,414,235)
<TOTAL-ASSETS> 14,139,887
<CURRENT-LIABILITIES> 4,581,831
<BONDS> 0
0
0
<COMMON> 0
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<TOTAL-LIABILITY-AND-EQUITY> 14,139,887
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<NET-INCOME> (2,054,470)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
