PLAY CO. TOYS & ENTERTAINMENT CORP.
550 Rancheros Drive
San Marcos, CA 92069
INFORMATION STATEMENT REGARDING THE PROPOSED
ACTION TO BE TAKEN PURSUANT THE WRITTEN CONSENT
OF A MAJORITY STOCKHOLDER IN LIEU OF A SPECIAL
MEETING OF THE STOCKHOLDERS
This information statement has been mailed on April 23, 1998 to the
stockholders of record on April 15, 1998 of Play Co. Toys & Entertainment Corp.,
a Delaware corporation (the "Company") in connection with the proposed action to
be take by the Company pursuant to the written consent by the majority
stockholder of the Company, dated April 5, 1998. The action to be taken pursuant
to the written consent shall be taken on May 14, 1998. The principal executive
offices of the Company are located at 550 Rancheros Drive, San Marcos, CA 92069,
the Company's telephone number is (760) 471-4505.
THIS IS NOT A NOTICE OF A SPECIAL MEETING OF STOCKHOLDERS AND NO
STOCKHOLDER MEETING WILL BE HELD TO CONSIDER ANY MATTER
WHICH WILL BE DESCRIBED HEREIN.
WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO
SEND US A PROXY.
The Company has received authorization (i) to effect an increase in the
total number of shares of all classes of capital stock which the Company has
authority to issue to sixty two million five hundred thousand (62,500,000)
shares consisting of fifty million (50,000,000) shares of Common Stock, par
value $0.01 per share (the ACommon Stock@), and twelve million five hundred
thousand (12,500,000) shares of Preferred Stock, par value $0.01 per share (the
APreferred Stock@); (ii) to effect an increase in the authorized number of
shares of Preferred Stock to twelve million five hundred thousand (12,500,000)
shares of which ten million (10,000,000) is designated ASeries E Preferred
Stock,@ and two million five hundred thousand (2,500,000) is designated ASeries
F Preferred Stock@; (iii) to authorize two million five hundred thousand
(2,500,000) shares of a newly created Series of Preferred Stock , as the ASeries
F Preferred Stock@; and (iv) to effect an increase in the total number of
authorized shares of Common Stock to fifty million (50,000,000) shares.
On April 5, 1998, a consent by a majority of the Company=s
stockholders, which owned 2,419,581 shares or approximately 59.0% of the
4,103,519 issued and outstanding shares of the Company's Common Stock, as of
such date, executed a written consent authorizing the Company (i) to increase
the authorized number of shares of all classes of capital stock from 50,000,000
to 62,500,000 shares; (ii) to increase the authorized number of shares of
Preferred Stock from 10,000,000 to 12,500,000 shares; (iii) to authorize
2,500,000 shares of the newly created Series F Preferred Stock; and (iv) to
increase the authorized number of authorized number of shares of Common Stock
from 40,000,000 to 50,000,000.
Under Section 228 of the General Corporation Law of the State of Delaware,
any action requiring the consent of the stockholders at an annual or special
meeting of the stockholders of the Company, may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted and shall be delivered to the Company.
<PAGE>
No Dissenter's Rights
The corporate action described in this Information Statement will not
afford to stockholders the opportunity to dissent from the action described
herein and to receive an agreed or judicially appraised value for their shares.
RECENT DEVELOPMENTS
On December 29, 1997, the Company completed a public offering of Series E
Preferred Stock and Redeemable Series E Purchase Warrants through West America
Securities Corp as agent. The offering raised $3,150,000 in gross proceeds from
which the Company realized the net proceeds of $2,378,978 after discounts,
commissions, and expenses of the offering. The proceeds were apportioned as
follows:
$500,000 was placed in a restricted certificate of deposit to secure a
stand-by letter of credit in favor of FINOVA Capital Corporation, its working
capital lender (see below);
Approximately $40,000 in initial payment were made for the construction of
a new, enlarged and relocated store at the Century City shopping center;
$250,000 was placed in a restricted short-term certificate of deposit to
secure a letter of credit;
Approximately $1,050,000 was used to pay down the Company=s line of credit
(see below) to reduce interest expense;
Approximately $540,000 was used to reduce accounts payable or to
opportunistically purchase inventory from its vendors on advantageous terms.
The Company currently plans to open four to six new stores in 1998 in
addition to the relocation of its Century City store. Those new stores are
expected to open between July and December of 1998. Since construction has not
yet begun on those new sites, the Company has elected to utilized the proceeds
of the December 1997 public offering prior to the construction phase begins on
the new stores. Once construction begins, the Company plans to draw upon the
available portion of its credit line to pay for the construction costs.
On January 21, 1997, the Company entered into a $7.1 million secured,
revolving Loan and Security Agreement with FINOVA Capital Corporation (AFINOVA@
or the AFINOVA Agreement@). The FINOVA Agreement replaces the $7 million credit
arrangement the Company had with Congress Financial Corporation (ACongress@ or
the ACongress Arrangement@). The FINOVA Agreement is secured by substantially
all of the Company=s assets and it expires on August 3, 2000. The FINOVA line
accrues interest at a rate of floating prime plus one and one-half percent.
FINOVA paid off Congress Financial Corporation on February 3, 1998. Under the
credit agreement, the Company is able to borrow against the cost value of
eligible inventory.
Under the FINOVA Agreement, the Company is able to borrow up to $2.4
million against a combination of $3 million in standby letters of credit and
restricted cash deposits. $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 by the Company=s majority stockholder, United
Textiles & Toys Corp., and the balance of $500,000 was placed in a restricted
certificate of deposit to secure it credit line with FINOVA.
Under the credit agreement, the Company is able to borrow against the cost
value of eligible inventory. 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 Arrangement.
<PAGE>
During the last quarter of 1997, the Company opened three new stores in
highly trafficked shopping malls and also opened a temporary short-term seasonal
store. The three new 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. The temporary seasonal store was located
in the Crystal Court in Costa Mesa, California.
The Company currently plans to open six new stores in highly trafficked
malls in 1998. Four of the Company=s 19 stores are operating under leases that
either have expired or will expire in 1998. The Company is in the process of
relocating one of these stores, the location in Century City, California. The
former location was closed down in March and the Company expects to open the new
location, also in Century City, in April. The fate of the remaining three stores
will depend upon lease negotiations with the owners of the store locations.
Independent Public Auditors
The Board of Directors of the Company has selected Haskell & White, LLP,
Certified Public Accountants, as independent accountants of the Company for the
fiscal year ending March 31, 1998. Stockholders are not being asked to approve
such selection because such approval is not required. The audit services
provided by Haskell & White, LLP, consisted of examination of financial
statements, services relative to filings with the Securities and Exchange
Commission, and consultation in regard to various accounting matters.
<PAGE>
VOTING SECURITIES AND SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31, 1997
based upon information obtained by the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of 5% or more of the outstanding shares of Common Stock;
(ii) each Officer and Director; and (iii) all Officers and Directors as a group.
Except to the extent indicated in the footnotes to the table, each of the
individuals listed below possesses sole voting power with respect to the shares
of Common Stock listed opposite his name.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Name and Address Shares of % of Common
of Beneficial Owner Common Stock Stock outstanding (1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harold Rashbaum (2)(3)
c/o Play Co. Toys & Entertainment Corp. -- --
550 Rancheros Drive
San Marcos, CA
- ---------------------------------------------------------------------------------------------------------------------------
Richard Brady(2)(3)
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 2,419,581(3)(4) 59.0
448 West 16th Street
New York, NY 10011
- ---------------------------------------------------------------------------------------------------------------------------
Multimedia Concepts International, Inc.
448 West 16th Street --(3)(5) --(5)
New York, NY 10011
- ---------------------------------------------------------------------------------------------------------------------------
Europe American
Capital Foundation --(3)(6) --(6)
Box 47
Tortola, BVI
- ---------------------------------------------------------------------------------------------------------------------------
Vermogenstreuhand GMBH
Kiser Street, #14 --(3)(7) --(7)
Bregenz Austria
- ---------------------------------------------------------------------------------------------------------------------------
Volcano Trading
Limited --(3)(8) --(8)
Via Cantonale, #16
Lugano Switzerland
- ---------------------------------------------------------------------------------------------------------------------------
* Less than 1%
</TABLE>
(1) Does not include the shares of Common Stock issuable upon the
conversion of 4,250,570 shares of Series E Preferred Stock outstanding which
shares are convertible into 25,203,420 shares, convertible at various times two
years from issuance.
(2) Does not include the shares of Common Stock issuable upon conversion of
the 25,000 shares of Series E Preferred Stock issued as a bonus in April 1998.
(3) Subject to two year lock up on transfer commencing December 1997, in
accordance with lock up agreements executed in connection with the Company
Series E Preferred Stock offering.
<PAGE>
(footnotes from previous page)
(4) 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 to UTTC in connection with the August 1996 distribution of the
Company=s shares by American Toys in August 1996.
(5) Does not include 4,818,420 shares of Common Stock issuable upon the
conversion of 803,070 shares of the Series E Preferred Stock.
(6) 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.
(7) Does not include 4,500,000 shares of Common Stock issuable upon the
conversion of 750,000 shares of the Series E Preferred Stock.
(8) Does not include 1,500,000 shares of Common Stock issuable upon the
conversion of 250,000 shares of the Series E Preferred Stock.
MANAGEMENT
Officers and Directors.
The Directors of the Company are elected annually by the shareholders,
and the Officers are appointed annually by the Board of Directors. Vacancies on
the Board of Directors may be filled by the remaining Directors. Each Director
and Officer will hold office until the next annual meeting of shareholders or
until his successor is elected and qualified. The Executive Officers and
Directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Harold Rashbaum 70 Chairman of the Board
Richard Brady 45 Chief Executive Officer, President,
and Director
James Frakes 41 Chief Financial Officer, Secretary,
and Director
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. Each Director is elected for a period of one year at an annual meeting
of the Company's shareholders and serves until his successor is duly elected.
As permitted under the Delaware Corporation Law, the Company's Certificate
of Incorporation eliminates the personal liability of the Directors to the
Company or any of its shareholders for damages caused by breaches of said
Directors= fiduciary duties. As a result of such provision, stockholders may be
unable to recover damages against then Directors for actions which constitute
negligence or gross negligence or are in violation of their fiduciary duties.
This provision in the Company's Certificate of Incorporation may reduce the
likelihood of derivative, and other types of shareholder, litigation against
Directors.
<PAGE>
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. (AHollywood@)
since January 1997. From May 1996 to January 1997, Mr. Rashbaum served as
Secretary and Treasurer of Hollywood and the President of Breaking Waves, Inc.,
a subsidiary of Hollywood. Since February 1996, Mr. Rashbaum has also been the
President and a Director of H.B.R. Consultant Sales Corp. (AHBR@), 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. In August 1997, Mr. Frakes was appointed by the Board as a
Director of the Company, a post he was subsequently elected to in January 1998.
In January 1998, Mr. Frakes was elected Director of of Hollywood Productions,
Inc. Prior thereto, from June 1990 to March 1997, Mr. Frakes was Chief Financial
Officer of Urethane Technologies, Inc. (AUTI@) and two of its subsidiaries,
Polymer Development Laboratories, Inc. (APDL@) 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.
Moses Mika was appointed director of the Company in March 1998. Mr. Mika
has been retired since 1989.
<PAGE>
Executive Compensation
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and Non-Plan
(as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded or paid
by the Company during the years ended March 31, 1997, 1996, and 1995 to each of
the named Executive Officers of the Company.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
(a) (b) (c) (d) (e)
Name and Principal Other Annual
Position Year Salary($) Bonus($)(1) Compensation($)
-------------------- ---- --------- ----------- ---------------
<S> <C> <C> <C> <C>
Richard Brady 1997 108,000 - 6,179(2)
Chief Executive Officer, 1996 117,230 - 7,979(2)
President and Director 1995 120,000 - 7,829(2)
----------------------
</TABLE>
(1) No bonuses were paid during the periods herein stated.
(2) Includes an automobile allowance of $4,800 for 1997 and $6,600 for 1996
and 1995, and the payment of life insurance premiums of $1,379, $1,379, and
$1,888 for 1997, 1996, and 1995, respectively.
1994 Stock Option Plan
In 1994, the Company adopted the Company's 1994 Stock Option Plan (Athe
Plan@). The Board believes that the Plan is desirable to attract and retain
executives and other key employees of outstanding ability. Under the Plan,
options to purchase an aggregate of not more than 50,000 (reflects 1 for 3
reverse split) shares of Common Stock may be granted from time to time to key
employees, Officers, Directors, advisors, and independent consultants to the
Company and its subsidiaries. The Company has granted to James Frakes, Chief
Financial Officer and Secretary, pursuant to his hire, options to purchase
30,000 shares of Common Stock at an exercise price of $3.25 per share, vesting
at the rate of 10,000 shares per annum for the years ending July 1998, 1999, and
2000.
The Board of Directors is charged with administration of the Plan and is
generally empowered to interpret the Plan, prescribe rules and regulations
relating thereto, determine the terms of the option 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.
<PAGE>
Options granted pursuant to the Plan may be designated as ISOs with the
attendant tax benefits provided therefor pursuant to Sections 421 and 422A of
the Internal Revenue Code of 1986. Accordingly, the Plan provides that the
aggregate fair market value (determined at the time an ISO is granted) of the
Common Stock subject to ISOs exercisable for the first time by an employee
during any calendar year (under all plans of the Company and its subsidiaries)
may not exceed $100,000. The Board may modify, suspend, or terminate the Plan,
provided, however, that certain material modifications affecting the Plan must
be approved by the shareholders, and any change in the Plan that may adversely
affect an Optionee's rights under an option previously granted under the Plan
requires the consent of the Optionee.
1994 401(k) Employee Stock Option Plan ("ESOP")
In May 1994, the Company adopted corporate resolutions approving a 401(k)
Employee Stock Ownership Plan (Athe ESOP Plan@) which covers substantially all
employees of the Company. The ESOP Plan was filed on July 14, 1995 with the
Internal Revenue Service and includes provisions for both employee stock
ownership and a 401(k) Plan. The ESOP Plan allows contributions only by the
Company: these can be made annually at the discretion of the Company's Board of
Directors. The ESOP Plan has been designed to invest primarily in the Company's
stock. The 401(k) portion of the ESOP Plan will be contributed to by the
employees of the Company through payroll deductions. The Company does not intend
to match contributions to the 401(k). Contributions to the ESOP Plan may result
in an expense, resulting in a reduction in earnings, and may dilute the
ownership interests of persons who currently own securities of the Company.
<PAGE>
I. AMENDMENT TO THE COMPANY'S CERTIFICATE
OF INCORPORATION TO AUTHORIZE SHARES OF
SERIES F PREFERRED STOCK
The Board of Directors has unanimously approved a proposal to amend the
Company's Certificate of Incorporation (i) to effect an increase in the
authorized number of shares of Preferred Stock from 10,000,000 to 12,500,000
shares; (ii) to authorize 2,500,000 shares of the newly created Series F
Preferred Stock; and (iii) to effect an increase in the authorized number of
shares Common Stock from 40,000,000 to 50,000,000 shares. Such proposal was
authorized by consent of the majority stockholder of the Company on April 5,
1998. The full text of the proposed Amendment to the Certificate of
Incorporation is annexed hereto as Appendix A to this Information Statement.
The Company has determined that in order to facilitate its planned
expansion of its retail locations to twenty-nine stores within the next two
years, the Company requires additional capital. Though the Company recently
completed a public offering of its shares of Series E Preferred Stock and did
not anticipate needing additional capital during the ensuing 12 month period,
the following occurrences have induced the Company to seek additional funding
after only four months:
Modified plans to open additional new stores B the Company has been
presented with a number of potential store locations with terms believed to be
beneficial to the Company=s operations. In order to take advantage of those
opportunities, the Company will require an additional $660,000 to open an
additional three locations.
Improved purchasing opportunities B the Company has begun to purchase
selected inventory items on advantageous Aclose-out@ terms from certain of its
vendors. This type of purchase requires short term or immediate payment by the
Company rather than the extended terms common to the toy industry and, as a
result, the Company will require an additional $500,000 in capital to continue
this pattern of purchasing. The Company believes that these types of purchases
contribute to gross margin improvement. In the past, the Company has never had
the capital to aggressively pursue this type of purchase arrangement.
In accordance with such capital requirements, the Company has decided to
conduct a private placement offering of a newly created Series of Preferred
Stock, the Series F Preferred Stock, in order to raise $1,000,000 to $10,000,000
of additional capital. The additional capital will be used to open additional
stores in upcoming years, to obtain economies of scale in purchasing inventory,
and for general working capital.
The Company currently plans to open four to six new stores in highly
trafficked malls in 1998, in addition to the relocation of its Century City
store. Those new stores are expected to open between July and December of 1998.
Since construction has not yet begun on those new sites, the Company has elected
to utilized the proceeds of the December 1997 public offering prior to the
construction phase begins on the new stores. Once construction begins, the
Company plans to draw upon the available portion of its credit line to pay for
the construction costs.
The Company currently plans to open six new stores in highly trafficked
malls in 1998. Four of the Company=s 19 stores are operating under leases that
either have expired or will expire in 1998. The Company is in the process of
relocating one of these stores, the location in Century City, California. The
former location was closed down in March and the Company expects to open the new
location, also in Century City, in April. The fate of the remaining three stores
will depend upon lease negotiations with the owners of the store locations.
The net proceeds to the Company from the private placement of the Series F
Preferred Stock are estimated to be between $1 and $10 million. The Company
intends to use those proceeds in combination with the proceeds of the December
1997 public offering (see above) to open six new store locations in 1998 and an
additional five locations in 1999. The six locations currently contemplated in
1998 are in Illinois, Nevada, Michigan, Texas and two in southern California.
The Company estimates the cost associated with opening a new store to be
approximately $220,000. The Company also estimates that each new store will
require an additional expenditure of approximately $250,000 to establish
inventory with approximately one-half of that amount typically financed under
its credit line. In addition, the Company will purchase inventory as defined
herein.
<PAGE>
Series F Preferred Stock
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 $0.12 per share.
The dividend is payable quarterly, subsequent to the initial payment date
declared by the Board of Directors (the ASeries F Dividend Payment Dates@), in
preference to dividends on the Junior Securities. Such dividend shall be paid to
the holder of record by the close of business on the date thirty business days
after Series F Dividend Payment Dates. Each of such dividends shall be fully
cumulative and shall accrue (whether or not declared), without interest, from
the date such dividends are payable as herein provided.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Company, the holders of the shares of Series F
Preferred Stock shall be entitled to be paid out of the assets of the Company
available for distribution to its stockholders an amount in cash equal to $4.00
per share.
The shares of Series F Preferred no voting rights attached thereto. The
Series F Preferred Stock ranks junior to the Series E Preferred.
The holders of the shares of Series F Preferred Stock shall have the right,
at the option of each individual holder, at any time, commencing one year from
issuance, to convert such share into four fully paid and nonassessable shares of
Common Stock of the Company. Upon the conversion of issued and outstanding
shares of the Series F Preferred Stock into shares of Common Stock, such
additional shares outstanding will cause there to be dilution of the ownership
interests of persons who currently own shares of Common Stock.
The Company may, at any time commencing one year from issuance, redeem all
of the issued and outstanding shares of the Series F Preferred Stock for a per
share price of $4.00 (the ARedemption Price@), plus accrued but unpaid
dividends, upon the terms set forth below. If the Company desires to redeem the
Series F Preferred Stock, it shall deliver notice (the ARedemption Notice@) by
regular mail to each holder of record of the Series F Preferred Stock at the
address of each holder as it appears on the books of the Company. Dividends
shall cease accruing on the date of the Redemption Notice.
The holder of a share of Series F Preferred Stock designated shall have the
right, at such holder=s option, to convert such share into four fully paid and
non-assessable shares of Common Stock of the Company. A holder of the Series F
Preferred Stock shall have the right to convert such share, at such holder=s
option, at any time commencing one year from issuance.
The Company is authorized to increase the number of authorized shares of
Common Stock by 10,000,000 shares, to a total of 50,000,000, in order to provide
a sufficient number of authorized shares of Common Stock in the event that the
shares of Series F Preferred Stock are converted into shares of Common Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From October 1996 to June 1997, Europe America Capital Corporation (AEACC@)
an affiliate of Ilan Arbel, a former Director of the Company, exercised its
option and purchased an aggregate of 3,562,070 shares of the Series E Preferred
Stock, of which 361,500 shares were converted into shares of Common Stock.
The Company leases a combined 51,700 square feet of office and warehouse
space at an approximate annual cost of $228,000, the lease expiring in April
2000. The office and warehouse are leased from a partnership of which one of the
partners is Richard Brady, the President and a Director of the Company. The
Company believes that the lease is on terms no more or less favorable than terms
it might otherwise have negotiated with an unaffiliated party.
<PAGE>
In March 1998, the Company issued 25,000 shares of Series E Preferred
Stock, subject to a one year vesting schedule, to each 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.
Additional Information
A copy of the Company's quarterly report on form 10-QSB for the quarter
ended December 31, 1997 and the Company=s annual report on form 10-KSB for the
year ended March 31, 1997, upon filing of same with the Securities And Exchange
Commission, will be furnished without the accompanying exhibits to stockholders
without charge upon written request therefor sent to James Frakes, 550 Rancheros
Drive, San Marcos, CA 92069, Secretary, Play Co. Toys & Entertainment Corp. Each
such request must set forth a good faith representation that as of April 15,
1998, the person making the request was the beneficial owner of common shares of
the Company entitled to vote at the special meeting of stockholders.
By Order of the Board of Directors.
James Frakes, Secretary
April 23, 1998
<PAGE>
Appendix A
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PLAY CO. TOYS & ENTERTAINMENT CORP.
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
Mail Filing Receipt to:
Klarman & Associates
2303 Camino Ramon
Suite 200
San Ramon, CA 94583
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PLAY CO. TOYS & ENTERTAINMENT CORP.
Under Section 242 of the Delaware Corporation Law:
The Undersigned, for the purpose of amending the Certificate of
Incorporation of Play Co. Toys & Entertainment Corp., does hereby certify and
set forth:
FIRST:
The name of the Corporation is
PLAY CO. TOYS & ENTERTAINMENT CORP.
SECOND:
The Certificate of Incorporation was filed by the Department of State on
June 15, 1994.
THIRD:
The amendment to the Certificate of Incorporation of the Corporation
effected by this Certificate of Amendment is (i) to increase the authorized
number of shares of Preferred Stock from 10,000,000 to 12,500,000 shares; (ii)
to authorize 2,500,000 shares of Series F Preferred Stock; and (iii) to increase
the number of authorized shares of Common Stock from 40,000,000 to 50,000,000.
The Certificate of Incorporation of this Corporation is amended by changing
AArticle FOURTH,@ so that, as amended, said Article shall read as follows:
FOURTH:
Authorized Capital Stock. The total number of shares of all classes of
capital stock which this Corporation shall have authority to issue is SIXTY TWO
MILLION FIVE HUNDRED THOUSAND (62,500,000) shares consisting of FIFTY MILLION
(50,000,000) shares of Common Stock, par value $0.01 per share (hereinafter, the
ACommon Stock@), and TWELVE MILLION FIVE HUNDRED THOUSAND (11,500,000) shares of
Preferred Stock, par value $0.01 per share (hereinafter, the APreferred Stock@),
of which TEN MILLION (10,000,000) is designated ASeries E Preferred Stock,@ and
TWO MILLION FIVE HUNDRED THOUSAND (2,500,000) is designated ASeries F Preferred
Stock,@ the relative rights, preferences, and limitations of which are as set
forth in subparagraph of this Article FOURTH.
B. Series E Preferred Stock.
(i) Designation. The designation of this series of Preferred Stock, par
value $0.01 per share, shall be the ASeries E Preferred Stock.@ The number of
shares of Series E Preferred Stock authorized hereby shall be 10,000,000 shares.
(ii) Rank. The Series E Preferred Stock shall, with respect to rights on
liquidation, winding up, and dissolution, rank (a) junior to any other Senior
Securities established by the Board of Directors and, if required by Section
vii, approved by the affirmative vote of the holders of a majority of the shares
of the Series E Preferred Stock, the terms of which shall specifically provide
that such series shall rank prior to the Series E Preferred Stock; (b) on a
parity with any other Parity Securities established by the Board of Directors,
the terms of which shall specifically provide that such series shall rank on a
parity with the Series E Preferred Stock; and (c) prior to any other Junior
Securities of the Corporation.
<PAGE>
(iii) Dividends.
The Series E Preferred Stock shall not have any right to dividends.
(iv) Liquidation Preference.
(a) In the event of any voluntary or involuntary liquidation, dissolution,
or winding up of the affairs of the Corporation, the holders of the shares of
Series E Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders an
amount in cash equal to $1.00 per share for each share outstanding, before any
payment shall be made or any assets distributed to the holders of any of the
Junior Securities, provided, however, that the holders of the outstanding shares
of the Series E Preferred Stock shall not be entitled to receive such
liquidation payment until the liquidation payments on all outstanding shares of
Senior Securities, if any, shall have been paid in full. If the assets of the
Corporation are not sufficient to pay in full the liquidation payments payable
to the holders of the outstanding shares of the Series E Preferred Stock or any
other Parity Securities, then the holders of all such shares shall share ratably
in such distribution of assets in accordance with the amount which would be
payable on such distribution if the amounts to which the holders of the
outstanding shares of Series E Preferred Stock and the holders of outstanding
shares of such other Parity Securities are entitled were paid in full.
(b) For the purposes of this Article FOURTH, neither the voluntary sale,
conveyance, lease, exchange, nor transfer (for cash, shares of stock,
securities, or their consideration) of all or substantially all of the property
or assets of the Corporation or the consolidation or merger of the Corporation
with one or more other corporations shall be deemed to be a liquidation,
dissolution, or winding up, voluntary or involuntary, unless such voluntary
sale, conveyance, lease, exchange, or transfer shall be in connection with a
dissolution or winding up of the business of the Corporation.
(v) Redemption. The shares of Series E Preferred Stock are not redeemable
by the Corporation.
(vi) Conversion.
(a) Subject to, and upon compliance with, the provisions of this Section
(vi), the holder of a share of Series E Preferred Stock designated shall have
the right, at such holder=s option, terminating five years from issuance, to
convert such share into 6 fully paid and non-assessable shares of Common Stock
of the Corporation. A holder of the Series E Preferred Stock shall have the
right to convert such share, at such holder=s option, at any time commencing two
years from issuance.
(b)(i) In order to exercise the conversion privilege, the holders of each
share of Series E Preferred Stock to be converted shall surrender the
certificates representing such shares at the office of the transfer agent for
the Series E Preferred Stock, appointed for such purpose by the Corporation,
with the Notice of Election to Convert on the back of said certificate completed
and signed. Unless the shares of Common Stock issuable on conversion are to be
issued in the same name in which such share of Series E Preferred Stock is
registered, each share surrendered for conversion shall be accompanied by
instruments of transfer, in form satisfactory to the Corporation, duly executed
by the holder of such holder=s duly authorized attorney and an amount sufficient
to pay any transfer or similar tax.
(ii) As promptly as practicable after the surrender of the certificates for
shares of Series E Preferred Stock as aforesaid, the Corporation shall issue and
shall deliver at such office to such holder, or on his written order, a
certificate or certificates for the number of full shares of Common Stock
issuable upon the conversion of such shares in accordance with the provisions of
this Section (iv).
<PAGE>
Each conversion shall be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for shares of Series
E Preferred Stock shall have been surrendered and such notice shall have been
received by the Corporation as aforesaid, and the person or persons in whose
name or names any certificate or certificates for shares of Common Stock shall
be issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares represented thereby at such time on such date,
unless the stock transfer books of the Corporation shall be closed on that date,
in which event such person or persons shall be deemed to have become such holder
or holders of record at the close of business on the next succeeding day on
which such stock transfer books are open and such notice is received by the
Corporation. All shares of Common Stock delivered upon conversion of the Series
E Preferred Stock will upon delivery be duly and validly issued and fully paid
and non-assessable, free of all liens and charges and not subject to any
preemptive rights.
(d) The Corporation covenants that it will at all times reserve and keep
available, free from preemptive rights, out of the aggregate of its authorized
but unissued shares of Common Stock or its issued shares of Common Stock held in
its treasury, or both, for the purposes of effecting conversions of the Series E
Preferred Stock, the full number of shares of Common Stock deliverable upon the
conversion of all outstanding shares of Series E Preferred Stock not theretofore
converted. For purposes of this subsection (d), the number of shares of Common
Stock which shall be deliverable upon the conversion of all outstanding shares
of Series E Preferred Stock shall be computed as if at the time of computation
all such outstanding shares were held by a single holder.
(vii) Voting Rights. The holders of record of shares of the Series E
Preferred Stock shall not be entitled to any voting rights except as hereinafter
provided in this Section (vii)(a) or as otherwise provided by law.
(a) So long as any shares of the Series E Preferred Stock are outstanding,
the Corporation will not, without the affirmative vote or consent of the holders
of at least a majority of the outstanding shares of the Series E Preferred
Stock, voting as a class, vote to amend the Corporation=s Certificate of
Incorporation to (i) increase or decrease the aggregate number of authorized
shares of the Series E Preferred Stock; (ii) increase or decrease the par value
of the Series E Preferred Stock; or (iii) alter the preferences, powers, or
rights of the Series E Preferred Stock so as to affect them adversely.
In exercising the voting rights set forth in this Section vii, each share
of Series E Preferred Stock shall have one vote per share.
C. Series F Preferred Stock.
(i) Designation. The designation of this series of Preferred Stock, par
value $0.01 per share, shall be the ASeries F Preferred Stock.@ The number of
shares of Series E Preferred Stock authorized hereby shall be 2,500,000 shares.
(ii) Rank. The Series F Preferred Stock shall, with respect to rights on
liquidation, winding up, and dissolution, rank (a) junior to any other Senior
Securities established by the Board of Directors, including the Series E
Preferred Stock, and, if required by Section vii, approved by the affirmative
vote of the holders of a majority of the shares of the Series F Preferred Stock,
the terms of which shall specifically provide that such series shall rank prior
to the Series F Preferred Stock; (b) on a parity with any other Parity
Securities established by the Board of Directors, the terms of which shall
specifically provide that such series shall rank on a parity with the Series F
Preferred Stock; and (c) prior to any other Junior Securities of the
Corporation.
(iii) Dividends.
a) 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
$0.12 per share. The dividend is payable quarterly, subsequent to the initial
payment date declared by the Board of Directors (the ASeries F Dividend Payment
Dates@), in preference to dividends on the Junior Securities. Such dividend
shall be paid to the holder of record by the close of business on the date
thirty business days after the Series E Dividend Payment Dates, which dividend
may be paid in cash or kind, at the discretion of the Corporation. Each of such
dividends shall be fully cumulative and shall accrue (whether or not declared),
without interest, from the date such dividends are payable as herein provided.
<PAGE>
(b) If at any time the Corporation shall have failed to pay full dividends
which have accrued (whether or not declared) on any Senior Securities, no
dividend shall be declared by the Board of Directors or paid or set apart for
payment by the Corporation on the shares of the Series F Preferred Stock or any
other Parity Securities unless, prior to or concurrently with such declaration,
payment or setting apart for payment, all accrued and unpaid dividends on all
outstanding shares of Senior Securities shall have been or are declared and paid
or set apart for payment, without interest. No dividends shall be declared or
paid or set apart for payment on any Parity or Junior securities for any period
unless full cumulative dividends have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for such
payment on the Series F Preferred Stock for all dividend payment periods
terminating on or prior to the date of payment of such full cumulative
dividends. If any dividends are not paid in full, as aforesaid, upon the shares
of the Series F Preferred Stock and any other Parity Securities shall be
declared pro rata so that the amount of dividends declared per share on the
Series F Preferred Stock and such other Parity Securities shall in all cases
bear to each other the same ratio that accrued dividends per share on the Series
F Preferred Stock and such other Parity securities bear to each other. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on the Series F Preferred Stock or any other
Parity Securities which may be in arrears.
(c) Holders of the shares of the Series F Preferred Stock shall be entitled
to receive the dividends provided for in paragraph (iii)(a) hereof in preference
to and in priority over any dividends of other Parity Securities and any other
Junior Securities.
(d) Subject to the foregoing provisions of this Section (iii) the Board of
Directors may declare, and the Corporation may pay or set apart for payment,
dividends and other distributions on any of the Junior Securities, and may
purchase or otherwise redeem any of the Junior Securities or any warrants,
rights or options exercisable for or convertible into any of the Junior
Securities, and the holders of shares of the Series F Preferred Stock shall not
be entitled to share therein
(iv) Liquidation Preference.
(a) In the event of any voluntary or involuntary liquidation, dissolution,
or winding up of the affairs of the Corporation, the holders of the shares of
Series E Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders an
amount in cash equal to $4.00 per share for each share outstanding, before any
payment shall be made or any assets distributed to the holders of any of the
Junior Securities, provided, however, that the holders of the outstanding shares
of the Series F Preferred Stock shall not be entitled to receive such
liquidation payment until the liquidation payments on all outstanding shares of
Senior Securities, including Series E Preferred Stock, shall have been paid in
full. If the assets of the Corporation are not sufficient to pay in full the
liquidation payments payable to the holders of the outstanding shares of the
Series F Preferred Stock or any other Parity Securities, then the holders of all
such shares shall share ratably in such distribution of assets in accordance
with the amount which would be payable on such distribution if the amounts to
which the holders of the outstanding shares of Series F Preferred Stock and the
holders of outstanding shares of such other Parity Securities are entitled were
paid in full.
(b) For the purposes of this Article FOURTH, neither the voluntary sale,
conveyance, lease, exchange, nor transfer (for cash, shares of stock,
securities, or their consideration) of all or substantially all of the property
or assets of the Corporation or the consolidation or merger of the Corporation
with one or more other corporations shall be deemed to be a liquidation,
dissolution, or winding up, voluntary or involuntary, unless such voluntary
sale, conveyance, lease, exchange, or transfer shall be in connection with a
dissolution or winding up of the business of the Corporation.
<PAGE>
(v) Redemption.
(a) Notice. The Corporation may, at any time commencing one years from
issuance, redeem all of the issued and outstanding shares of the Series F
Preferred Stock for a per share price of $4.00 (the ARedemption Price@), plus
accrued but unpaid dividends, upon the terms set forth below. If the Corporation
desires to redeem the Series F Preferred Stock, it shall deliver notice (the A
Redemption Notice) by regular mail to each holder of record of the Series F
Preferred Stock at the address of each holder as it appears on the books of the
Corporation. Dividends shall cease accruing on the date of the Redemption
Notice.
(b) Delivery of Certificates and Payment. On or before the tenth day after
the date of the Redemption Notice (the APeriod@), each holder of the Series F
Preferred Stock shall deliver to the secretary of the Corporation at its
principal office his certificates for the Series F Preferred Stock, duly
endorsed in blank (or accompanied by proper instruments of transfer). Upon such
surrender the holder thereof shall be entitled to receive payment of the
Redemption Price for each share of the Series F Preferred Stock so surrendered.
The Corporation shall make such payment within five days after the later of (i)
the date on which the holder delivered such certificates or (ii) the last day of
the Period.
(vi) Conversion.
(a) Subject to, and upon compliance with, the provisions of this Section
(vi), the holder of a share of Series F Preferred Stock designated shall have
the right, at such holder=s option, to convert such share into four fully paid
and non-assessable shares of Common Stock of the Corporation. A holder of the
Series F Preferred Stock shall have the right to convert such share, at such
holder=s option, at any time commencing one year from issuance.
(b) (i) In order to exercise the conversion privilege, the holders of each
share of Series F Preferred Stock to be converted shall surrender the
certificates representing such shares at the office of the transfer agent for
the Series F Preferred Stock, appointed for such purpose by the Corporation,
with the Notice of Election to Convert on the back of said certificate completed
and signed. Unless the shares of Common Stock issuable on conversion are to be
issued in the same name in which such share of Series F Preferred Stock is
registered, each share surrendered for conversion shall be accompanied by
instruments of transfer, in form satisfactory to the Corporation, duly executed
by the holder of such holder=s duly authorized attorney and an amount sufficient
to pay any transfer or similar tax.
(ii) As promptly as practicable after the surrender of the certificates for
shares of Series F Preferred Stock as aforesaid, the Corporation shall issue and
shall deliver at such office to such holder, or on his written order, a
certificate or certificates for the number of full shares of Common Stock
issuable upon the conversion of such shares in accordance with the provisions of
this Section (iv).
(iii) Each conversion shall be deemed to have been effected immediately
prior to the close of business on the date on which the certificates for shares
of Series F Preferred Stock shall have been surrendered and such notice shall
have been received by the Corporation as aforesaid, and the person or persons in
whose name or names any certificate or certificates for shares of Common Stock
shall be issuable upon such conversion shall be deemed to have become the holder
or holders of record of the shares represented thereby at such time on such
date, unless the stock transfer books of the Corporation shall be closed on that
date, in which event such person or persons shall be deemed to have become such
holder or holders of record at the close of business on the next succeeding day
on which such stock transfer books are open and such notice is received by the
Corporation. All shares of Common Stock delivered upon conversion of the Series
F Preferred Stock will upon delivery be duly and validly issued and fully paid
and non-assessable, free of all liens and charges and not subject to any
preemptive rights.
<PAGE>
(d) The Corporation covenants that it will at all times reserve and keep
available, free from preemptive rights, out of the aggregate of its authorized
but unissued shares of Common Stock or its issued shares of Common Stock held in
its treasury, or both, for the purposes of effecting conversions of the Series F
Preferred Stock, the full number of shares of Common Stock deliverable upon the
conversion of all outstanding shares of Series f Preferred Stock not theretofore
converted. For purposes of this subsection (d), the number of shares of Common
Stock which shall be deliverable upon the conversion of all outstanding shares
of Series F Preferred Stock shall be computed as if at the time of computation
all such outstanding shares were held by a single holder.
(vii) Voting Rights. The holders of record of shares of the Series F
Preferred Stock shall not be entitled to any voting rights except as hereinafter
provided in this Section (vii)(a) or as otherwise provided by law.
(a) So long as any shares of the Series F Preferred Stock are outstanding,
the Corporation will not, without the affirmative vote or consent of the holders
of at least a majority of the outstanding shares of the Series F Preferred
Stock, voting as a class, vote to amend the Corporation=s Certificate of
Incorporation to (i) increase or decrease the aggregate number of authorized
shares of the Series F Preferred Stock; (ii) increase or decrease the par value
of the Series F Preferred Stock; or (iii) alter the preferences, powers, or
rights of the Series F Preferred Stock so as to affect them adversely.
(b) In exercising the voting rights set forth in this Section vii, each
share of Series E Preferred Stock shall have one vote per share.
D. Common Stock
Dividends. Subject to the liquidation rights of the Series E Preferred
Stock, the holders of Common Stock shall be entitled to share equally all
dividends declared and paid by the Corporation.
Voting. The holders of record of Common Stock shall have one vote, on all
matters upon which stockholders of the Corporation may vote, for each share of
the Common Stock held by them.
Dissolution, Liquidation, Etc. In the event of the dissolution,
liquidation, or winding up of the affairs of the Corporation, after payment or
provision for payment of the debts and other liabilities of the Corporation and
after the payment to the holders of the Preferred Stock as provided for in this
Certificate of Incorporation, the remaining assets of the Corporation shall be
distributed to the holders of the Common Stock.
FIFTH:
The amendment to the Articles of Incorporation of the Corporation set forth
above was adopted by written consent of the Corporation's majority shareholder
at a Special Meeting of the Corporation=s stockholder on the 5th day of April,
1998.
IN WITNESS WHEROF, the undersigned President of this Corporation has
executed this Certificate of Amendment on this 20th day of April, 1998.
PLAY CO. TOYS & ENTERTAINMENT CORP.
Richard Brady, President
James Frakes, Secretary
