U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 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 Small Business Issuer as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 95-3024222
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
</TABLE>
550 Rancheros Drive, San Marcos, California 92069
(Address of Principal Executive Offices)
(760) 471-4505
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)
Check whether the Issuer (1) 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares of each of the issuer's classes of common equity
outstanding as of the latest practicable date: Common Stock, $0.01 par value:
5,509,197 shares outstanding as of February 12, 1999.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION Page Number
Item 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of December 31, 1998 (unaudited) 3
and March 31, 1998.
Condensed Statements of Operations and Comprehensive Net Loss
for the Three Months and Nine Months Ended December 31, 1998 and 1997 (unaudited). 4
Condensed Statements of Cash Flows for the Nine Months Ended December 31, 1998 and
1997 (unaudited). 5
Notes to Condensed Financial Statements 6-7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-15
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 16
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
Item 3. DEFAULTS UPON SENIOR SECURITIES 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
Item 5. OTHER INFORMATION 16
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 16
Signatures 17
</TABLE>
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, 1998 March 31, 1998
(unaudited) Restated
----------------------- ------------------------
Current
<S> <C> <C>
Cash ....................................... $ 1,219,989 $ 648,986
Accounts receivable ........................ 110,734 78,594
Merchandise inventories .................... 10,824,770 7,872,804
Other current assets ....................... 1,736,769 433,928
------------ ------------
Total current assets ....................... 13,892,262 9,034,312
Property and Equipment, Net of accumulated
Depreciation and amortization of $4,121,412
And $3,414,235, respectively ............... 4,343,204 2,782,386
Deposits and other assets .................. 2,385,027 2,323,189
------------ ------------
$ 20,620,493 $ 14,139,887
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 1998 March 31, 1998
Current
Accounts payable ........................... $ 5,218,239 $ 3,505,230
Accrued expenses and other liabilities ..... 781,371 726,601
Current portion of notes payable and
capital leases (Note 4) .................... 405,965 350,000
------------ ------------
Total current liabilities .................. 6,405,575 4,581,831
Borrowings under financing agreement ....... 7,754,215 5,445,198
Notes payable, and capital leases, net
of current portion ......................... 620,030 1,500,000
Deferred rent liability .................... 124,005 110,351
------------ ------------
Total liabilities .......................... 14,902,825 1,637,380
------------ ------------
Stockholders' equity
Series E convertible preferred stock, $1 par
10,000,000 shares authorized;
5,883,903 and 4,200,570 shares outstanding . 5,236,642 3,974,376
Common stock, $.01 par value,
40,000,000 shares
authorized; 5,509,197 and 4,103,519 shares
outstanding ................................ 55,035 41,035
Additional paid-in-capital ................. 15,087,422 12,927,918
Accumulated deficit ........................ (14,662,431) (14,440,822)
------------ ------------
Total stockholders' equity ................. 5,716,668 2,502,507
------------ ------------
$ 20,620,493 $ 14,139,887
============ ============
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE NET LOSS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31, Nine Months Ended
December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales ........................................ $ 14,715,952 $ 10,396,440 $ 27,171,662 $ 17,768,033
Cost of sales .................................... 8,545,336 6,381,992 15,665,721 10,740,074
------------ ------------ ------------ ------------
Gross profit ..................................... 6,170,616 4,014,448 11,505,941 7,027,959
Operating expenses:
Operating expenses ............................... 4,052,115 2,716,214 9,146,006 6,773,188
Depreciation and amortization .................... 324,975 161,982 707,186 440,035
------------ ------------ ------------ ------------
Total operating expenses ......................... 4,377,090 2,878,196 9,853,192 7,213,223
Operating profit (loss) .......................... 1,793,526 1,136,252 1,652,749 (185,264)
Interest expense:
Interest and finance charges ..................... 221,860 165,933 517,172 415,445
Amortization of debt issuance costs .............. 73,032 88,653 127,434 268,208
------------ ------------ ------------ ------------
Total interest expense ........................... 294,892 254,586 644,606 683,653
Net income (loss) ................................ $ 1,498,634 $ 881,666 $ 1,008,143 $ (868,917)
============ ============ ============ ============
Calculation of Basic and Diluted Income Per Share:
Net income (loss) ................................ $ 1,498,634 $ 881,666 $ 1,008,143 $ (868,917)
Effect of non-cash dividends on preferred stock
477,973 -- 1,229,752 1,200,000
------------ ------------ ------------ ------------
Net income (loss) applicable to common shares
$ 1,020,661 $ 881,666 $ (221,609) $ (2,068,917)
============ ============ ============ ============
Basic income (loss) per common
Share and share equivalents ...................... $ 0.22 $ 0.21 $ (0.05) $ (0.50)
============ ============ ============ ============
Weighted average number of
Shares and share equivalents outstanding - basic
4,666,562 4,103,519 4,291,883 4,096,974
============ ============ ============ ============
Diluted income (loss) per common
share and share equivalents ...................... $ 0.03 $ 0.04 $ (0.01) n/a
============ ============ ============ ============
Weighted average number of common
share and share equivalents outstanding - diluted
36,069,029 24,904,765 39,820,796 n/a
=========== ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
-------------------------------
1998 1997
------------ ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (loss) .................................................. $ 1,008,143 $ (868,917)
Adjustments used to reconcile net income (loss) to net cash used for operating
activities:
Depreciation and amortization ...................................... 707,186 440,035
Amortization of debt issuance costs ................................ 127,434 268,208
Deferred rent ...................................................... 4,552 29,073
Stock compensation ................................................. 32,814 --
Increase (decrease) from changes in:
Accounts receivable ................................................ (32,140) (256,915)
Merchandise inventories ............................................ (2,951,966) (519,083)
Other current assets ............................................... (1,302,841) 83,889
Deposits and other assets .......................................... (213,123) (122,073)
Accounts payable ................................................... 1,713,009 180,313
Accrued expenses and other liabilities ............................. 54,770 448,319
----------- -----------
Net cash used for operating activities ............................. 852,162 317,151
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................ 1,917,810 853,072
----------- -----------
Net cash used for investing activities ............................. 1,917,810 853,072
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred and common stock ............... 706,148 3,629,470
Borrowings on line of credit, net .................................. 2,309,017 307,432
Borrowings under notes payable and capital leases, net ............. 325,810 (116,666)
----------- -----------
Net cash provided by financing activities .......................... 3,340,975 3,820,236
----------- -----------
Net increase in cash ............................................... 571,003 2,650,013
Cash at beginning of period ........................................ 648,986 177,722
----------- -----------
Cash at end of period .............................................. $ 1,219,989 $ 2,827,735
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
Note 1. General
The interim accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. For further information, management
suggests that the reader refer to the audited financial statements for the year
ended March 31, 1998 included in its Annual Report on Form 10-KSB. Operating
results for the nine-month period ended December 31, 1998 are not necessarily
indicative of the results of operations that may be expected for the year ending
March 31, 1999.
Note 2. Capital Leases
During the nine-month period ended December 31, 1998, the Company entered
into several capital leases and loans to help finance the cost of opening its
new stores. The leases are for an aggregate principal amount of $770,332. They
generally carry terms of five years and bear interest at rates between 13.3% and
18.0%.
Note 3. Breaking Waves Investment
On November 24, 1998, pursuant to a sales agreement entered into by and
between the Company and Breaking Waves, Inc. ("B.W."), a wholly-owned subsidiary
of Hollywood Productions, Inc. ("Hollywood"), a related party, B.W. purchased
1.4 million unregistered shares of the Company's common stock in a private
transaction. The President of Hollywood is also the Chairman of the Company.
Hollywood is a publicly traded company. The shares purchased by B.W. represent
approximately 25.4% of the total common stock issued and outstanding after the
transaction.
The consideration for the stock was $505,000, which represented an
approximate price of $0.36 per share. This price was discounted 50% from the
then current market price reflecting a discount for the illiquidity of the
shares, which do not carry any registration rights. $300,000 of the
consideration remitted was in cash, and the remaining $205,000 was provided in
B.W. product, primarily girls' swimsuits. The Company had previously carried
swimsuits from B.W. in its stores on a trial basis.
Note 4. Financing Agreements
In November 1998, the Company borrowed $250,000 from Amir under a
Promissory Note. The Note bore interest at 12% and was repaid in January 1999.
Also in November 1998, the Company entered into agreements with ZD Group,
L.L.C. ("ZD"), a related party, and Frampton Industries, Ltd. ("Frampton"), an
unaffiliated British Virgin Islands company, to secure additional financing. ZD
is a New York limited liability company, the beneficiary of which is a member of
the family of the Company's Chairman.
Pursuant to the ZD agreement, ZD issued a $700,000 irrevocable standby
letter of credit ("L/C") in favor of FINOVA Capital Corp ("FINOVA"), the
Company's working capital lender. FINOVA then lent a matching $700,000 to the
Company in the form of a term loan, pursuant to a Third Amendment to Loan and
Security Agreement executed on February 11, 1999 by and between the Company and
FINOVA. The term loan from FINOVA expires on August 3, 2000 and bears interest
at prime plus one percent. As consideration for its issuance of the L/C, ZD will
receive a profit percentage after application of corporate overhead from three
of the Company's stores.
<PAGE>
Under the Frampton agreement, Frampton will loan $500,000 in the form of a
convertible, subordinated debenture due December 31, 1999. The debenture will
bear a 5% interest rate and will be convertible into the Company's Series E
preferred stock at a price of $0.10 per share at Frampton's option. This price
represents a 50% discount from the then current (November 13, 1998) market price
reflecting a discount for the illiquidity of the shares, which do not carry any
registration rights. The Company expects to receive the proceeds of this loan in
the near future.
Note 5. Subsequent Events
In January 1999, the Company and Frampton executed a letter agreement
pursuant to which Frampton has agreed to act as the exclusive placement agent
and financial advisor for the Company in connection with a contemplated proposed
offering of convertible debentures. The agreement is for a term of six months
(with a potential two month extension at Frampton's option) and provides that
Frampton shall be provided an investment banking fee of 8% of the face amount of
each debenture funded.
In February 1999, the Company borrowed $100,000 from B.W. and issued an
unsecured 9% promissory note which calls for repayment of the note in four equal
monthly installments, comprising principal and interest, commencing March 15,
1999 and ending June 15, 1999.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
45.1% of the issued and outstanding shares of the Company's common stock.
For the three months ended December 31, 1998 compared to the three months ended
December 31, 1997
The Company generated net sales of $14,715,952 in the three months ended
December 31, 1998. This represented an increase of $4,319,512, or 41.5%, from
net sales of $10,396,440 in the three months ended December 31, 1997.
Approximately $900,000 of this sales growth came from an 11.8% increase in same
store sales. The remaining sales increase of approximately $3.4 million came
from the Company's new stores.
The Company posted a gross profit of $6,170,616 in the three months ended
December 31, 1998, reflecting an increase of $2,156,168, or 53.7%, from the
gross profit of $4,014,448 in the three months ended December 31, 1997. This
increase was due to the above noted growth in sales and to an increase in the
Company's gross margin. The gross margin of 41.9% in the December 1998 period
was 3.3% higher than the Company's gross margin of 38.6% in the December 1997
period. This gross margin improvement was largely due to the ongoing
implementation of the Company's plan to sell educational, new electronic
interactive, and specialty and collectible toys and items in high traffic malls.
The mix of specialty and educational toys generally produce better margins than
traditional toys.
Operating expenses (excluding depreciation and amortization expenses) for
the three months ended December 31, 1998 were $4,052,115. This represented a
$1,335,901, or 49.2%, increase over the Company's operating expenses of
$2,716,214 in the three months ended December 31, 1997. The primary reasons for
the operating expense increase were an increase in payroll and related expenses
of $712,812 and an increase in rent expense of $405,514. The payroll expense
increase was due to the addition of several middle managers and employees at the
Company's new stores. The growth of rent expense was the result of adding
additional stores.
During the three months ended December 31, 1998, the Company recorded
non-cash depreciation and amortization expense of $324,975, a $162,993 increase
from $161,982 in the period ended December 31, 1997. Total operating expenses
(operating expenses combined with depreciation and amortization) in the December
1998 period were $4,377,090, representing a $1,498,894, or 52.1%, increase from
total operating expenses of $2,878,196 in the December 1997 period.
As a result of the $2,156,168 increase in gross profit less the $1,498,894
increase in total operating expenses, the Company's operating profit increased
by $657,274, or 57.8%, from $1,136,252 during the three months ended December
31, 1997 to $1,793,526 during the three months ended December 31, 1998.
Interest expense totaled $294,892 for the three months ended December 31,
1998. This represented a $40,306 increase from interest expense of $254,586 for
the three months ended December 31, 1997. The primary reason for the increased
level of interest expense was a higher level of borrowings in the three months
ended December 31, 1998 than in the December 1997 period.
<PAGE>
As a result of the above-mentioned factors, the Company recorded a net
income of $1,498,634 for the three months ended December 31, 1998. This
represented a $616,968 increase over the net income of $881,666 recorded in the
three months ended December 31, 1997.
For the three months ended December 31, 1998, net income of $1,498,634 was
reduced by non-cash dividends of $477,973 in order to determine the net income
applicable to common shares. The non-cash dividends represent amortization of
the discount recorded upon issuance of Series E preferred stock with a
beneficial conversion feature. No dividends in the form of securities or other
assets were actually paid out. There was no such dividend recorded for the
December 1997 period.
The basic income per share for the three months ended December 31, 1998 was
$0.22 compared to basic net income per share of $0.21 for the three months ended
December 31, 1997. The weighted average number of common shares outstanding
increased from 4,103,519 in the December 1997 period to 4,666,562 in the
December 1998 period.
The diluted income per share for the three months ended December 31, 1998
was $0.03 compared to diluted net income per share of $0.04 for the three months
ended December 31, 1997. The weighted average number of common shares
outstanding increased from 24,904,765 in the December 1997 period to 36,069,029
in the December 1998 period.
For the nine months ended December 31, 1998 compared to the nine months
ended December 31, 1997
The Company generated net sales of $27,171,662 in the nine-month period
ended December 31, 1998. This represented an increase of $9,403,629, or 52.9%,
from net sales of $17,768,033 in the nine-month period ended December 31, 1997.
Approximately $3.5 million of this sales growth came from a 25.4% increase in
same store sales during the nine-month period, with the remaining increase of
approximately $2.4 million from the Company's new stores.
The Company posted a gross profit of $11,505,941 in the nine-month period
ended December 31, 1998, reflecting an increase of $4,477,982, or 63.7%, from
the gross profit of $7,027,959 in the nine-month period ended December 31, 1997.
This increase was due to the above noted growth in sales and to an increase in
the Company's gross margin. The gross margin of 42.3% in the December 1998
period was 2.7% higher than the Company's gross margin of 39.6% in the December
1997 period. This gross margin improvement was largely due to the ongoing
implementation of the Company's plan to sell educational, new electronic
interactive, and specialty and collectible toys and items in high traffic malls.
The mix of specialty and educational toys generally produces better margins than
traditional toys.
Operating expenses (excluding depreciation and amortization expenses) in
the nine-month period ended December 31, 1998 were $9,146,006. This represented
a $2,372,818, or 35%, increase over the Company's operating expenses of
$6,773,188 in the nine-month period ended December 31, 1997. The primary reasons
for the operating expense increase were an increase in payroll and related
expenses of $1,245,860 and an increase in rent expense of $533,655. The
increased expenses were due to the lease payments on the new stores opened and
the addition of several middle managers and of employees at the new stores.
During the nine-month period ended December 31, 1998, the Company recorded
non-cash depreciation and amortization expenses of $707,186, a $267,151 increase
from $440,035 in the period ended December 31, 1997. This increase was largely
due to depreciation on the fixed assets purchased for the newly opened stores.
Total operating expenses (operating expenses combined with depreciation and
amortization) in the December 1998 period were $9,853,192, a $2,639,969, or
36.6%, increase from total operating expenses of $7,213,223 in the December 1997
period.
<PAGE>
As a result of the $4,477,982 increase in gross profit less the $2,639,969
increase in total operating expenses, the Company's operating profit increased
by $1,838,013 from an operating loss of $(185,264) during the nine-month period
ended December 31, 1997 to $1,652,749 during the nine-month period ended
December 31, 1998.
Interest expense totaled $644,606 for the nine-month period ended December
31, 1998. This represented a $39,047, or 5.7%, decrease from the interest
expense of $683,653 in the nine-month period ended December 31, 1997. The
primary reason for the decreased level of interest expense was a higher level of
amortization of debt issuance costs in the nine-month period ended December 30,
1997 than in the December 1998 period. The interest expense paid to the
Company's lenders actually increased in the period due to higher average
outstanding balances which financed increased levels of inventory.
As a result of the above-mentioned factors, the Company recorded net income
of $1,008,143 for the nine-month period ended December 31, 1998. This
represented a $1,877,060 increase over the net loss of $(868,917) recorded in
the nine-month period ended December 31, 1997.
For the nine months ended December 31, 1998, net income of $1,008,143 was
reduced by non-cash dividends of $1,229,752 in order to determine the net income
(loss) applicable to common shares. The non-cash dividends represent
amortization of the discount recorded upon issuance of Series E preferred stock
with a beneficial conversion feature. No dividends in the form of securities or
other assets were actually paid out. For the December 1997 period, the net loss
of $(868,917) was reduced by non- cash dividends of $1,200,000 to determine the
net loss applicable to common shares in a restated calculation of the diluted
income (loss) per common share.
The basic loss per share for the nine months ended December 31, 1998 was
$(0.05) compared to a net loss per share of $(0.50) for the nine months ended
December 31, 1997. The weighted average number of common shares outstanding
increased from 4,096,974 in the December 1997 period to 4,291,883 in the
December 1998 period.
The diluted loss per share for the nine months ended December 31, 1998 was
$(0.01). The diluted loss per share for the nine months ended December 31, 1997
was not calculated as the effect of share equivalents was anti-dilutive. The
weighted average number of common shares outstanding in the December 1998 period
was 39,820,796.
Liquidity and Capital Resources
At December 31, 1998, the Company had a working capital position of
$7,486,687 compared to a working capital position of $4,452,481 at March 31,
1998. The primary factors in the $3,034,206 increase in working capital were a
$1,238,957 growth in the Company's net investment in inventories (increase in
inventories less increase in accounts payable), which was financed through a
$2,309,017 increase under the Company's financing agreement, a long term
liability, and a $1,302,841 increase in other current assets.
The Company has generated operating losses for the past several years and
has historically financed those losses and its working capital requirements
through loans and sales of the Company's equity securities, primarily through
the sale of the Company's Series E convertible preferred stock. There can be no
assurance that the Company will be able to generate sufficient revenues or have
sufficient controls over expenses and other charges to achieve profitability.
During the nine-month period ended December 31, 1998, the Company used
$852,162 of cash in its operations compared to $317,151 used in operations in
the nine-month period ended December 31, 1997. The Company's net income (loss)
was $1,008,143 and $(868,917), respectively, in those periods. The primary
reason the Company used cash in its operating activities during the nine-month
period ended December 31, 1998 was its net investment (increase in inventories
less increase in accounts payable) in inventories of $1,238,957 and an increase
in other current assets of $1,302,841. The largest single component of the
increase in other current assets was approximately $580,000 in tenant
improvement allowances due to the Company from several of the owners of the
malls in which the Company opened stores in December 1998.
<PAGE>
The Company used $1,917,810 of cash in its investing activities during the
nine-month period ended December 31, 1998 compared to $853,072 in the nine-month
period ended December 31, 1997. Investing activity consisted of the purchase of
equipment and fixtures for new stores.
The Company generated $3,340,975 of cash from its financing activities in
the nine-month period ended December 31, 1998 compared to the generation of
$3,820,236 from financing activities in the nine-month period ended December 31,
1997. The primary contributors to the Company's financing activities were
borrowings on the Company's line of credit and under notes payable. Those
proceeds were used to finance the Company's working capital requirements and
capital expenditures during the nine-month period ended December 31, 1998. The
primary factor in the prior period was $3,629,470 in proceeds from the sale of
preferred and common stock.
As a result of the above factors, the Company had a net increase in cash of
$571,003 in the nine-month period ended December 31, 1998 compared to a net
increase in cash of $2,650,013 in the nine-month period ended December 31, 1997.
During the three-month period ended December 31, 1998, the Company opened
four new stores. Those stores were all located in high traffic shopping malls.
The stores were located in Thousand Oaks and Orange (both located in
California), Auburn Hills, Michigan and in Gurnee, Illinois. These four stores
represented an aggregate capital investment of approximately $1.1 million, net
of landlord tenant improvement ("Landlord TI") contributions.
The Landlord TI contributions related to those four stores equal $587,440.
The Company has not yet received those contributions. The Company expects to
receive those contributions before the end of its fiscal year.
The Company had planned to finance the costs of opening those new stores
through a combination of capital lease financing, use of the Company's working
capital, and the sale of additional equity. The Company received approximately
$420,000 in lease financing on December 30, 1998 and recently received another
$150,000 in commitments for lease financing. The Company continues to seek
additional capital lease financing.
On November 24, 1998, Breaking Waves, Inc. ("B.W."), a wholly-owned
subsidiary of Hollywood Productions, Inc. ("Hollywood"), a related party,
purchased 1.4 million unregistered shares of the Company's common stock in a
private transaction. The President of Hollywood is also the Chairman of the
Company. Hollywood is a publicly traded company. The shares purchased by B.W.
represent approximately 25.4% of the total common stock issued and outstanding
after the transaction.
The consideration for the stock was $505,000, which represented a price of
$0.36 per share. This price was a 50% discount from the then current market
price reflecting a discount for the illiquidity of the shares, which do not
carry any registration rights. $300,000 of the consideration was in cash and the
remaining $205,000 was in product from B.W., primarily girl's swimsuits. The
Company had previously carried swimsuits from B.W. in its stores on a trial
basis.
In November 1998, the Company entered into agreements ZD Group, L.L.C.
("ZD"), a related party, and Frampton Industries, Ltd. ("Frampton"), an
unaffiliated British Virgin Islands company, to secure additional financing. ZD
is a New York trust, the beneficiary of which is a member of the family of the
Company's Chairman.
Pursuant to the ZD agreement, ZD issued a $700,000 irrevocable standby
letter of credit ("L/C") in favor of FINOVA Capital Corp ("FINOVA"), the
Company's working capital lender. FINOVA then lent a matching $700,000 to the
Company in the form of a term loan. The term loan expires on August 3, 2000 and
bears interest at prime plus one percent. As consideration for its issuance of
the L/C, ZD will receive a profit percentage after application of corporate
overhead from three of the Company's stores.
<PAGE>
Under the Frampton agreement, Frampton will loan $500,000 in the form of a
convertible, subordinated debenture due December 31, 1999. The debenture will
bear a 5% interest rate and will be convertible into the Company's Series E
preferred stock at a price of $0.10 per share at Frampton's option. This price
was a 50% discount from the then current market price (November 13, 1998)
reflecting a discount for the illiquidity of the shares, which do not carry any
registration rights.
The Company has entered into leases to open eight new stores in calendar
year 1999. The Company anticipates that the cost of opening those new stores
will be approximately $3,000,000, net of landlord TI contributions. The Company
plans to finance the costs of opening those new stores through a combination of
capital lease financing, use of the Company's working capital, and the sale of
additional equity. In January 1999, the Company and Frampton executed a letter
agreement pursuant to which Frampton has agreed to act as the exclusive
placement agent and financial advisor for the Company in connection with a
proposed offering of $5 million in convertible subordinated debentures on terms
similar to the debenture discussed above. The agreement is for a term of six
months (with a potential two month extension at Frampton's option) and provides
that Frampton shall be provided an investment banking fee of 8% of the face
amount of each debenture funded. There can be no assurance that the Company will
be able to obtain sufficient financing to successfully open the planned new
stores.
Year 2000
In 1998, the Company developed a plan to upgrade its existing management
information system ("MIS") and computer hardware and to become year 2000
compliant. The Company has now purchased the necessary hardware and software and
is in the process of installing the software. The Company has completed the
hardware upgrade and has installed a year 2000 compliant upgrade to its
accounting software. The Company expects to finish the year 2000 compliance work
in the first half of 1999.
To finance the cost of the new hardware in the computer upgrade project,
the Company entered into a lease in the amount of $82,472 bearing an interest
rate of 10.8%. The total cost of the hardware and software purchased for the
project was approximately $100,000.
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. Management has reviewed its
significant vendors' (i.e., Mattel, Inc. and Hasbro, Inc.) and financing arm's
(FINOVA) recent SEC filings vis-a-vis year 2000 risks and uncertainties and, on
the basis thereof, is confident that the steps the Company has taken to become
year 2000 compliant are sufficient. In continuation of this review, the Company
shall continue to monitor or otherwise obtain confirmation from the aforesaid
entities - and such other entities as management deems appropriate - as to their
respective degrees of preparedness. To date, nothing has come to the attention
of the Company that would lead it to believe that its significant customers,
vendors, and/or service providers will not be year 2000 ready.
Year 2000 readiness is a priority of the Company. The Company believes that
it is taking such reasonable and prudent steps as are necessary to mitigate the
risks associated with potential year 2000 difficulties; however, the effect, if
any, of year 2000 problems on the Company's results of operations if the
Company's or its customers, vendors, or service providers are not fully
compliant cannot be estimated with any degree of certainty. Nonetheless, the
most likely impact on the Company would be a reduced level of activity in the
fourth quarter of the fiscal year ended March 31, 2000, a time at which, as a
result of the seasonality of the Company's business, its activities in sales and
sourcing of products, are at their low.
<PAGE>
Trends Affecting Liquidity, Capital Resources and Operations
As a result of its current merchandise mix which emphasizes specialty and
educational toys, the Company enjoyed significant sales and gross profits in the
nine months ended December 31, 1998. This mix of specialty and educational toys
includes collectible die cast cars, specialty yo-yo's, Rokenbok and Learning
Curve toys, and Beanie Babies(R) and other plush and many educational toys.
There can be no assurance that these particular specialty toys will continue to
contribute strongly to the Company' sales and gross profits. The history of the
toy industry, however, indicates that there is generally at least one or more
highly popular toy every year.
The Company's current sales efforts focus primarily on a defined geographic
segment consisting of the southern California area and the southwestern and
midwestern United States. The Company's future financial performance will depend
upon (i) continued demand for high-end specialty, educational, and traditional
toys and management's ability to adapt to continuously changing consumer
preferences and the market for such items, (ii) general economic conditions
within the Company's geographic market area, as same may be expanded, (iii) the
Company's ability to choose locations for new stores, (iv) the Company's ability
to purchase products at favorable prices and on favorable terms, and (v) the
effects of increased competition.
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, Kay Bee Toy Stores,
Walmart and Kmart. Competitors that emphasize specialty and educational toys
include Disney Stores, Warner Bros. Stores, Learning Smith, Lake Shore, Zany
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 or
that the Company will be able to generate sufficient revenues or have sufficient
control over expenses and other charges to increase profitability.
Inflation and Seasonality
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.
The Company's operations are highly seasonal with approximately 30-40% of
its net sales historically falling within the Company's third quarter, which
coincides with the Christmas selling season. The Company intends to open 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>
PART II
Item 1. Legal Proceedings
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, in the approximate amount of $300,000. 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 2. Changes in Securities and Use of Proceeds: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this Form 10-QSB for the quarter
ended December 31, 1998 except those designated by an asterisk (*) which shall
be filed by amendment hereto: <TABLE> <CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10.111 Agreement by and between the Company and ZD Group, L.L.C., dated November 11, 1998.
10.112 Intercreditor and Subordination Agreement by and between ZD Group, L.L.C. and FINOVA Capital Corporation, dated
February 11, 1999.
10.113 5% Convertible Secured Subordinated Debenture in favor of Frampton Industries, Ltd., dated November 11, 1998.
10.114 Subordinated Security Agreement by and between the Company and Frampton Industries, Ltd., dated November 11,
1998.
10.115 Intercreditor and Subordination Agreement by and between Frampton Industries, Ltd. and FINOVA Capital
Corporation, dated February 11, 1999.
10.116 Third Amendment to Loan and Security Agreement by and between the Company and FINOVA Capital Corporation, dated
February 11, 1999.
10.117 Letter of Intent by and between the Company and Frampton Industries, Inc., dated January 4, 1999.
27.01 Financial Data Schedule
</TABLE>
(b) During the quarter ended December 31, 1998, no reports on Form 8-K were
filed with the Securities and Exchange Commission.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, this 19th day of February 1999.
PLAY CO. TOYS & ENTERTAINMENT CORP.
By: /s/ Richard L. Brady
Richard L. Brady
President and Chief Executive Officer
By: /s/ James B. Frakes
James B. Frakes
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
FINANCIAL DATA SCHEDULE
ARTICLE 5 OF REGULATION S-X
This schedule contains summary financial information extracted from Balance
Sheet, Statement of Operations, Statement of Cash Flows and Notes thereto
incorporated in Part 1, Item 1, of this Form 10-QSB 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> dec-31-1998
<CASH> 1,219,989
<SECURITIES> 0
<RECEIVABLES> 110,734
<ALLOWANCES> 0
<INVENTORY> 10,824,770
<CURRENT-ASSETS> 13,892,262
<PP&E> 8,464,616
<DEPRECIATION> (4,121,412)
<TOTAL-ASSETS> 20,620,493
<CURRENT-LIABILITIES> 6,405,575
<BONDS> 0
0
0
<COMMON> 55,035
<OTHER-SE> 5,661,633
<TOTAL-LIABILITY-AND-EQUITY> 20,620,493
<SALES> 27,171,662
<TOTAL-REVENUES> 27,171,662
<CGS> 15,665,721
<TOTAL-COSTS> 15,665,721
<OTHER-EXPENSES> 9,853,192
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 664,606
<INCOME-PRETAX> (221,609)
<INCOME-TAX> 0
<INCOME-CONTINUING> (221,609)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (221,609)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.01)
</TABLE>
Exhibit 10.111
AGREEMENT
AGREEMENT made this 11th day of November, 1998, by and between PLAY CO.
TOYS & ENTERTAINMENT CORP. ("Play Co."), a Delaware corporation, having a
principal place of business at 550 Rancheros Drive, San Marcos, California 92069
and ZD GROUP L.L.C. ("ZD"), a New York limited liability company, having an
address at Suite 1602, 1410 Broadway, New York, New York 10018.
R E C I T A L S :
A. Play Co. is the owner and operator of a chain of retail toy stores which
is currently expanding by the opening of new stores.
B. Play Co. has insufficient credit in the market to obtain sufficient
merchandise to properly stock all of its stores in order to generate the maximum
potential.
C. Play Co. believes that if it could obtain an additional $700,000 over
its current credit line, credit lines would open, it would be able to purchase
and pay for merchandise on a prompt basis thus permitting Play Co. to maximize
the potential of its stores.
D. Play Co. can only obtain secured financing, which is not available to it
because of the prior lien of FINOVA Capital, however, if the loan is secured by
a third party it can be obtained.
E. Play Co. cannot obtain a stand-by letter of credit in the amount of
$700,000 without collateral of an equal amount.
F. ZD is prepared to provide Play Co. with a $700,000 stand-by letter of
credit to be used to secure such loan but only on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises herein contained
the parties agree as follows:
1. All of the Recitals are incorporated in the body of this Agreement as if
more fully set forth herein.
2. Issuance of Letter of Credit:
2.1. Subject to the terms and conditions of this Agreement, ZD
shall cause to be delivered to Play Co. a $700,000 Stand-By Letter of
Credit from a bank or a financial institution acceptable reasonably to
Play Co. upon such terms and conditions as are satisfactory to ZD as
soon as practicable after the signing of this Agreement (the date on
which the L/C is delivered and accepted shall be the Closing Date).
The L/C shall extend from the date of issuance for a period of three
(3) years.
2.2. Play Co. agrees to use the L/C to secure a loan to be made
to it by a financial institution for the purpose of obtaining funds to
assist it in purchasing merchandise to stock its stores and for
general operating purposes.
2.3. The L/C shall be assignable and transferable to any lender
lending to $700,000 or at the option of Play Co. the L/C shall name as
beneficiary said lender and shall be in such reasonable form as said
lender requires.
<PAGE>
2.4. In the event the L/C is called by the lender or any assignee
thereof Play Co. shall forthwith and upon demand repay to ZD an amount
equal to the sums paid by the issuing bank or financial institution on
the L/C or at ZD's request Play Co. shall promptly pay to the issuing
bank or financial institution the amount paid by such issuing bank on
the L/C. Play Co. shall also pay to ZD upon demand any fees, charges,
expenses, attorneys' fees and the like incurred by ZD or the issuing
bank at the time of such draw on the L/C.
3. Guarantee Fee:
3.1. As compensation to ZD for posting the L/C, ZD shall, for the
Payment Period receive one-third of "four wall" profits on three
stores planned to be opened by Play Co. on or after November 10, 1998.
ZD shall advise Play Co. in writing on or prior to December 31, 1998
of which three new stores it desires to participate in profits.
3.1.1. "Payment Period" shall mean for each such store
selected the length of the current lease plus any renewals
thereof, but in no event after the end of Fiscal Year 2013.
3.1.2 In the event any one of the stores closes for any
reason, ZD shall have the right to select another store in its
place and shall promptly advise Play Co. thereof, except where
such closing was due to the affirmative act of Play Co., in
exercising a performance clause in the lease..
3.2. "Four wall" profits shall mean store profit before
depreciation and amortization but shall include a pro-rata share of
corporate cash overhead expenses, excluding depreciation and
amortization plus interest computed by dividing said sum by the total
number of stores then operated by Play Co. The Guarantee Fee shall be
computed monthly commencing with April 1999 and monthly thereafter and
shall be due and payable on the 30th day of the succeeding month, thus
the first payment of the Guarantee Fee will be due on May 30th for
April 1999 "four wall" profits. The monthly fee shall be reasonably
estimated by Play Co. based on "four wall" profits. Play Co.'s outside
certified public accountant shall annually at the end of each Play Co.
fiscal year, applying generally accepted accounting principles in a
consistent manner certify as to sums due to ZD. All additional sums
due and owing will be paid by Play Co. to ZD within forty-five (45)
days subsequent to the end of Play Co.'s fiscal year. At the time of
payment an accounting shall be provided by Play Co. to ZD setting
forth how the amount is computed. If ZD does not contest the amount
and the computations thereof within twenty (20) days of receipt
thereof said computations shall be final, binding and conclusive upon
both parties absent actual fraud. In the event ZD contests the amount
computed to be due, ZD shall give written notice thereof to Play Co.
setting forth its reasons, Play Co. shall forthwith deposit with ZD
any amount it admits to be due and the balance shall be subject to
arbitration under the rules of the American Arbitration Association,
which arbitration shall take place in the City and State of New York,
the cost to be shared equally between the parties.
4. Representations and Warranties of Play Co.:
4.1. Play Co. hereby warrants and represents to ZD that:
4.1.1 Play Co. is a corporation duly organized and validly
existing and in good standing under the laws of the State of
Delaware and has all requisite power and authority to carry on
its business as now conducted and as proposed to be conducted and
is qualified as a foreign corporation in each jurisdiction where
the failure to do so would have a material adverse effects on its
business;
<PAGE>
4.1.2. All corporate action on the part of Play Co., its
officers and directors necessary for the authorization,
execution, delivery of performance of all obligations of Play Co.
under this Agreement and the Exhibits have been taken;
4.1.3. Play Co. is not in material default under any other
loan agreement with any third party lender which has been acted
upon by such lender.
4.2. So long as the Guarantee Fee is due, ZD shall have the right
to nominate and appoint one-third of Play Co.'s Board of Directors.
Such nomination and appointment shall be made in writing by ZD
addressed to Play Co. and the Chairman of its Board of Directors.
5. Miscellaneous:
5.1. Entire Agreement: Except as specifically referenced herein
this Agreement and the Exhibits constitute the entire agreement
between the parties concerning the subject matter hereof. Any previous
agreements relating to the transactions herein set forth are
superseded hereby. The terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective parties,
their successors and assigns.
5.2. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
5.3. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
6. Survival: The warranties and representations of Play Co. shall survive
the execution and delivery of this Agreement and closing hereunder.
7. Default: The occurrence of one or more of the following events shall, at
the sole election of ZD, constitute an Event of Default hereunder:
7.1. Non-payment of any sums due pursuant to this Agreement when
due.
7.2. The entry of a decree or order by a court having
jurisdiction adjudging Play Co. a bankrupt or insolvent or approving
as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of Play Co. under the
Federal Bankruptcy Code or any other applicable federal or state law
or the appointment of a receiver, liquidator, assignee or trustee of
Play Co. or any substantial portion of its property or ordering the
winding up or liquidation of its affairs and the continuance of such
decree or order unstayed and in effect for a period of thirty (30)
consecutive days.
7.3. The institution by Play Co. of proceedings to be adjudicated
a bankrupt or insolvent or the consent by it to the institution of
bankruptcy or insolvency proceeding against it or the filing by it of
a petition or answer or consent seeking reorganization or relief under
the Bankruptcy Code or other applicable federal or state law, or the
consent by it to the filing of any such petition or the appointment of
a receiver, liquidator, assignee or trustee for all or any part of its
profit or the making by it of an assignment for the benefit of
creditors.
7.4. Default in the obligation of Play Co. to any other party
including, but not limited to, FINOVA Capital Corporation for borrowed
money which shall continue for a period of three (3) days after the
expiration of any "cure period" and is acted upon by said lender.
<PAGE>
7.5. At the option of ZD and without demand, in the event of a
default as set forth above, all principal and other unpaid sums shall
be immediately due and payable.
8. Notice: All notices and demands by any party hereunder must be in
writing and personally delivered or sent by certified mail, postage prepaid,
return receipt requested, or a prepaid telex, facsimile, telecopier or other
method of electronic communication or by recognized overnight carrier as
follows:
To Play Co.: Play Co. Toys & Entertainment Corp.
550 Rancheros Drive
San Marcos, California 92069
Attention: Mr. James Frakes
To ZD: ZD Group L.L.C.
1410 Broadway - #1602
New York, New York 10018
Attention: Mr. Ilan Arbel
With copies of all notices to: Todtman, Nachamie, Spizz &
Johns, P.C.
425 Park Avenue
New York, New York 10022
Attention: Barton Nachamie, Esq.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed and
executed the day and year first above written.
PLAY CO. TOYS & ENTERTAINMENT CORP.
By___________________________________
ZD GROUP L.L.C.
By__________________________________
Exhibit 10.112
INTERCREDITOR AND SUBORDINATION AGREEMENT
THIS INTERCREDITOR AND SUBORDINATION AGREEMENT (the "Agreement"), dated as
of February 11, 1999 is entered into by and between ZD GROUP. L.L.C., a New York
limited liability company ("Subordinating Lender"), and FINOVA CAPITAL
CORPORATION, a Delaware Corporation ("Senior Lender"), with reference to the
following facts:
RECITALS
A. Play Co. Toys & Entertainment Corp., a Delaware corporation
("Borrower"), has entered into the Junior Debt Documents (as defined below) with
Subordinating Lender, pursuant to which subordinating Lender has extended
certain financial accommodations to Borrower on the terms and conditions set
forth in such Junior Debt Documents.
B. Borrower has requested that Senior Lender enter into various agreements
with Borrower, including that certain Loan and Security Agreement and related
agreements, documents and instruments, dated as of January 21, 1998, as amended
or modified from time to time (collectively, the "Senior Loan Agreement"),
pursuant to which Senior Lender would extend certain revolving loans to
Borrower.
C. Senior Lender is unwilling to enter into the Senior Loan Agreement with
Borrower and to extend to Borrower the loans contemplated thereunder unless
Subordinating Lender enters into this Agreement.
D. Subordinating Lender is interested in the financial success of Borrower
and will benefit by the loans which Senior Lender proposes to extend to Borrower
under the Senior Loan Agreement
E. Accordingly, to induce Senior Lender to enter into the Senior Loan
Agreement with Borrower and to extend to Borrower the loans contemplated
thereunder Subordinating Lender is willing to enter into this Agreement with
Senior Lender.
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
1. Certain Defined Terms.
a. General: When used in this Agreement, the following terms have the
following respective meanings:
"Agreement" has the meaning set forth in the introduction hereto.
"Borrower" has the meaning set forth in the recitals of this Agreement.
"Junior Debt" means all present and future indebtedness and other
obligations (direct or indirect) owing by Borrower to Subordinating Lender.
"Junior Debt" includes (without limitation) indebtedness owed under the Junior
Debt Documents, together with any other debts, demands, monies, indebtedness,
liabilities, and obligations now or hereafter owed by Borrower to Subordinating
Lender, including interest, principal, costs, and other charges, together with
all claims, rights, causes of action, judgments, decrees and other obligations
"Junior Debt Documents" means all instruments and agreements evidencing the
Junior Debt, including that certain Agreement, dated November 11, 1998 between
Borrower and Subordinating Lender, a copy of which is attached hereto as Exhibit
A and incorporated herein by reference.
"Senior Debt" has the meaning set forth in Section 3(a) of this Agreement.
<PAGE>
"Senior Lender" has the meaning set forth in the introduction of this
Agreement.
"Senior Loan Agreement" has the meaning set forth in the recitals of this
Agreement.
"Subordinating Lender" has the meaning set forth in the introduction of
this Agreement.
b. Other Terms. Unless otherwise defined in this Agreement, any and all
initially capitalized terms set forth in this Agreement shall have the meaning
ascribed thereto in the Senior Loan Agreement
2. Representations, Warranties, and Covenants. Subordinating Lender and
Borrower represent, warrant, and covenant (jointly and severally) to Senior
Lender that:
a. Junior Debt Documents. Concurrently with the execution hereof, a copy of
all Junior Debt Documents shall be delivered to Senior Lender and all Junior
Debt Documents shall be conspicuously marked with substantially the following
legend:
"Subject to that certain Intercreditor and Subordination Agreement, dated
as of February ___, 1999, between ZD Group L.L.C. and FINOVA Capital Corporation
b. No Default. Borrower is not in default under any Junior Debt Document.
c. Notice of Default. Subordinating Lender and Borrower shall each promptly
notify Senior Lender of all defaults, events of default, and events which with
the giving of notice or the passage of time, or both, would become events of
default ("unmatured events of default") under any Junior Debt Document.
d. Further Action. Upon Senior Lender's request, Subordinating Lender will
promptly take all actions which Senior Lender believes appropriate to carry out
the purposes of this Agreement
3. Subordination.
a. General. As more fully provided in the remainder of this Article 3, the
Junior Debt is hereby subordinated and made junior to all obligations now or
hereafter owing to Senior Lender by Borrower. The obligations referred to in the
preceding sentence as being owing to Senior Lender are referred to in this
Agreement as the "Senior Debt," and include the Obligations, all present and
future representations, warranties, covenants, agreements, indemnities, and
other obligations which Borrower or its successors and assigns may incur to
Senior Lender, including (without limitation) those incurred after the filing of
a bankruptcy petition or commencement of a bankruptcy case by or against
Borrower.
b. No Payments to Subordinating Lender. Borrower and Subordinating Lender
agree (and Subordinating Lender acknowledges such agreement) that Borrower shall
neither: (i) make any payments to Subordinating Lender in respect of the Junior
Debt, nor (ii) without Senior Lender's prior written consent, execute or deliver
any negotiable instruments as evidence of the Junior Debt, until such time as
the Senior Debt shall have been indefeasibly paid in full by Borrower to Senior
Lender. The foregoing notwithstanding, provided there does not at the time of
such payment exist an Event of Default or Incipient Default, Borrower may pay
and Subordinating Lender may accept those payments described on the attached
Exhibit B.
c. Priority of Interests in Collateral. Subordinating Lender holds a
subordinate security interest and lien in the Collateral as security for
Borrower's payment and performance of its obligations to Subordinating Lender
under the Junior Debt Documents. Such security interest, lien, or other right or
interest shall, at all times prior to the indefeasible payment in full of the
Senior Debt, be junior, subordinate and subject to any security interest, lien
or other right or interest Senior Lender now has or may hereafter acquire in the
Collateral. The subordination provided in this Section 3(c) shall apply
irrespective of the time or order of attachment or perfection of any security
interest, irrespective of the time or order of filing of any financing statement
or other document, and irrespective of any statute, rule, law, or court decision
to the contrary.
<PAGE>
4. Restrictions on Subordinating Lender's Actions. Unless it shall have
obtained Senior Lender's prior written consent, until the Senior Debt has been
indefeasibly paid in full, Subordinating Lender will not: (i) demand or accept
any payment upon the Junior Debt; (ii) foreclose or realize upon any collateral
hereafter securing the Junior Debt (whether such collateral constitutes part of
the Collateral or consists of other assets of Borrower), or otherwise enforce
any security agreement, mortgage, lien instrument, or other encumbrance
hereafter securing the Junior Debt; or (iii) commence, prosecute, or participate
in any administrative, legal, or equitable action that in Senior Lender's
judgment might adversely affect Borrower's business or Borrower's ability to pay
the Senior Debt.
5. Remedies. If Borrower or Subordinating Lender attempts to violate
Section 3(b) or Clause (i) of Article 4, or if Subordinating Lender in any other
manner receives any funds which by virtue of this Agreement it is precluded from
receiving, Subordinating Lender shall be deemed to hold any payment or
distribution it receives in trust for Senior Lender's benefit. In such case,
Subordinating Lender shall immediately remit such payment or distribution to
Senior Lender. If Subordinating Lender attempts to violate Clause (ii) of
Article 4, Senior Lender (in Senior Lender's or Borrower's name) or Borrower may
seek injunctive or other equitable relief to prevent or stop Subordinating
Lender's actions, it being agreed that legal remedies may be inadequate. If
Subordinating Lender attempts to violate Clause (iii) of Article 4, Borrower may
interpose as a defense or plea the making of this Agreement, and Senior Lender
may intervene and interpose such defense or plea in its own or Borrower's name.
The remedies provided in this Article 5 are not exclusive; Senior Lender shall
be entitled to all other remedies available at law or in equity.
6. No Action to Violate Senior Lender Agreements. Subordinating Lender
shall not take any action which in Senior Lender's judgment might cause Borrower
to violate the Senior Loan Agreement or any other agreement between Borrower and
Senior Lender.
7. No Amendment of Junior Debt Documents. Unless Senior Lender's prior
written consent shall have been obtained, no Junior Debt Document may be amended
or modified.
8. Extensions, Compromises, etc. Without having to obtain either Borrower's
or Subordinating Lender's consent, Senior Lender may grant to Borrower
extensions of the time of payment or performance, and may enter into compromises
(including releases of collateral and settlements) with Borrower with respect to
the Senior Debt.
9. Waiver. Subordinating Lender waives any right it may now or hereafter
have to require Senior Lender to marshall assets, to exercise rights or remedies
in a particular manner, or to forbear from exercising such rights and remedies
in any particular manner or order.
10. No Constraint on Senior Lender. Nothing contained in this Agreement
shall preclude Senior Lender from discontinuing its extension of credit to
Borrower (whether under the Senior Loan Agreement or otherwise) or from taking
(without notice to Subordinating Lender, Borrower, or any other individual or
entity) any other action in respect of the Senior Debt or the Collateral which
Senior Lender is otherwise entitled to take with respect to the Senior Debt or
the Collateral. Among the actions which Lender may take accordance with this
Article 10 are: renewing, extending, and increasing the amount of the Senior
Debt; otherwise changing the terms of the Senior Debt; settling, releasing,
compromising, and collecting on the Senior Debt; making (and refraining from
making) other secured and unsecured loans and advances to Borrower; amending any
present or future agreement between Senior Lender and Borrower; and all other
actions which Senior Lender deems advisable.
11. Impact of Bankruptcy. If a voluntary or involuntary bankruptcy petition
shall be filed respecting Borrower: (a) this Agreement (including the
subordination provisions contained in Article 3) shall continue in full force
and effect; (b) Subordinating Lender shall take no action in the bankruptcy
proceeding which might (in Senior Lender's opinion) adversely affect Senior
Lender's rights and interests respecting the Senior Debt; and (c) Subordinating
Lender shall take all actions reasonably requested by Senior Lender to protect
Senior Lender's interests during the course of such bankruptcy proceedings.
12. Miscellaneous.
a. Amendment. No amendment or waiver of this Agreement shall be effective
unless in a writing signed by each party hereto.
<PAGE>
b. Binding Effect; Governing Law; Venue. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
assigns. This Agreement shall be governed by and construed in accordance with
the internal laws of the State of Arizona. All actions and proceedings arising
in connection with this Agreement shall be tried and litigated only in state or
federal courts located in Maricopa County, Arizona, or (at Senior Lender's sole
option) in any other court in which Senior Lender may initiate legal or
equitable proceedings, so long as such court has subject matter jurisdiction.
Subordinating Lender and Borrower each waive any right it may have to plead
forum non-conveniens or otherwise to object to venue, and hereby consents to any
court-ordered relief.
c. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original and all of which together shall constitute one
agreement.
d. Headings. The headings contained in this Agreement are for convenience
only. They shall not affect the interpretation of this Agreement.
e. Attorneys' Fees; etc. In any suit or action brought by Senior Lender to
enforce this Agreement or to obtain an adjudication (declaratory or otherwise)
of rights or obligations hereunder, the Subordinating Lender shall pay to the
Senior Lender the attorneys' fees and other costs and expenses incurred by the
Senior Lender.
f. Severability. Any provision of this Agreement that is prohibited by law
or unenforceable in any jurisdiction shall be ineffective in that jurisdiction
to the extent of such prohibition or unenforceability, without invalidating the
remaining provisions thereof or affecting the validity or enforceability of such
provision in any other jurisdiction. To the extent permissible, the parties
waive any law that renders this Agreement prohibited or unenforceable.
g. Entire Agreement. This Agreement constitutes the entire agreement
between and among the parties regarding the subject matter hereof. This
Agreement supersedes all prior and contemporaneous agreements between or among
the parties with respect to the subject matter hereof.
h. Notice. All notices or demands by any party hereunder must be in writing
and personally delivered or sent by registered or certified mail, postage
prepaid, return receipt requested, or by a recognized overnight mail service as
follows:
Senior Lender: FINOVA CAPITAL CORPORATION
355 South Grand Avenue
Los Angeles, California 90017
Subordinating Lender: ZD GROUP L.L.C.
Suite 1602
1410 Broadway
New York, New York 10018
Borrower: PLAY CO. TOYS & ENTERTAINMENT CORP.
550 Rancheros Drive
San Marcos, California 92069
Attn.: Chief Financial Officer
with a copy to: TODTMAN, NACHAMIE,
HENDLER & SPIZZ, P.C.
425 Park Avenue
New York, New York 10022
Attn.: Barton Nachamie, Esq.
The parties may change the address at which they receive notice by giving
notice to each other in the foregoing manner. Notices or demands sent in
accordance with this Section shall be deemed to be received on the earlier of
the date of actual receipt or five (5) calendar days after deposit in the United
States mail.
<PAGE>
i. Termination. This Agreement shall continue in full force and effect
until Borrower has satisfied in full the Senior Debt.
j. Rules of Construction. As used in this Agreement, the singular includes
the plural; the plural includes the singular. References to one gender include
all genders. Unless otherwise specified, references to Articles, Sections,
Exhibits, and parties refer to Articles, Sections, Exhibits, and parties of or
to this Agreement. The words "include", "including" and similar words are not
intended to be limiting.
k. Counterparts. This Agreement may be executed in any number of separate
counterparts, all of which, when taken together, shall constitute one and the
same instrument, admissible into evidence, notwithstanding the fact that all
parties did not sign the same counterpart. Delivery of an executed counterpart
of this Agreement by telefacsimile shall be equally as effective as delivery of
a manually executed counterpart of this Agreement. Any party delivering an
executed counterpart of this Agreement by telefacsimile shall also deliver a
manually executed counterpart of this Agreement, but the failure to deliver a
manually executed counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective duly authorized officers, as of the date first above
written.
ZD GROUP L.L.C.,
a New York limited liability company
By:
Title:
FINOVA CAPITAL CORPORATION,
a Delaware corporation
By:
Title:
90885-1
<PAGE>
BORROWER'S ACKNOWLEDGMENT
The undersigned Borrower hereby approves of, and agrees and consents to,
the foregoing Intercreditor and Subordination Agreement, dated as of February
___, 1999, among ZD Group L.L.C. and FINOVA Capital Corporation (the
"Subordination Agreement"). Unless otherwise defined in this Acknowledgment,
terms defined in the Subordination Agreement have the same meanings when used in
this Acknowledgment.
Borrower agrees to be bound by the Subordination Agreement. Borrower
further agrees that the Subordination Agreement may be amended by Senior Lender
and Subordinating Lender without notice to, or the consent of, Borrower.
PLAY CO. TOYS & ENTERTAINMENT CORP., a Delaware corporation
By:
Name:
Title:
90885-1
<PAGE>
EXHIBIT A-1
TO INTERCREDITOR AND SUBORDINATION AGREEMENT
[Copy of Security Agreement]
Exhibit 10.113
NEITHER THIS DEBENTURE NOR THE UNDERLYING COMMON SHARES HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. THE CORPORATION WILL NOT TRANSFER
THIS DEBENTURE, OR ANY COMMON SHARES ISSUED PURSUANT TO ITS CONVERSION
PROVISION, UNLESS (i) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH NOTE OR
SHARES UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS,
(ii) IT FIRST RECEIVES A LETTER FROM AN ATTORNEY, ACCEPTABLE TO THE BOARD OF
DIRECTORS OR ITS AGENTS, STATING THAT IN THE OPINION OF THE ATTORNEY THE
PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933
AND UNDER ALL APPLICABLE STATE SECURITIES LAWS, OR (iii) THE TRANSFER IS MADE
PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OF 1933.
PLAY CO. TOYS & ENTERTAINMENT CORP.
a Delaware Corporation
5% CONVERTIBLE SECURED SUBORDINATED
DEBENTURE DUE DECEMBER 31, 1999
Section 1. Terms: PLAY CO. TOYS & ENTERTAINMENT CORP., a Delaware
corporation ("Corporation") for value received, hereby promises to pay to
FRAMPTON INDUSTRIES, LTD., a British Virgin Islands corporation ("Holder"), or
subject to Section 6 herein the Holder's assigns, the principal sum of FIVE
HUNDRED THOUSAND and 00/100 ($500,000.00) DOLLARS on December 31, 1999, and on
the 1st day of March 1999 and every month thereafter, to pay all accrued but as
yet unpaid interest on such outstanding principal, accrued as of the end of the
preceding month, until this Debenture has been paid in full or converted
pursuant to Section 6 hereto. Interest on the outstanding principal amount shall
accrue at the rate of five (5%) percent per annum from the Funding Date.
1.1. Holder, by signing this Debenture, agrees to fund the Five Hundred
Thousand and 00/100 ($500,000.00) Dollars on or before January 29, 1999 (the
"Funding Date").
Section 2. Payments: Payments of interest shall be made in lawful money of
the United States of America to Holder at the address provided by the Holder, as
appears on this instrument below or at such other addresses as sent by Holder to
the Corporation by certified United States mail at least ten (10) days before
said payment date.
Section 3. Default: The occurrence of one or more of the following events
shall constitute an event of default:
3.1. Continued nonpayment of the interest due on this Debenture for more
than thirty (30) days beyond the payment date when due.
3.2. The nonpayment of the principal of this Debenture when the same shall
have become due and payable.
3.3. The entry of a decree or order by a court having jurisdiction in the
premises adjudging the Corporation a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment, or
composition of or in respect of the Corporation under the Federal Bankruptcy Act
or any other applicable federal or state law, or appointing a receiver,
liquidator, assignee, or trustee of the Corporation, or any substantial part of
its property, or ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a period of
sixty (60) consecutive days.
3.4. The institution by the Corporation of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under the Federal Bankruptcy Act or
any other applicable federal or state law, or the consent by it to the filing of
any such petition or to the appointment of a receiver, liquidator, assignee, or
trustee of the Corporation, or of any substantial part of its property, or the
making by it of an assignment for the benefit of creditors, or the admission by
it in writing of its inability to pay its debts generally as they become due, or
the taking of corporate action by the Corporation in furtherance of any such
action.
<PAGE>
3.5. Default in the obligation of the Corporation to any lender for
borrowed money, other than this Debenture, which shall continue for a period of
three (3) days after the expiration of any "cure period", or a default under the
Security Agreement securing this Debenture, which default is acted upon by such
lender.
Section 4. Acceleration: At the option of the Holder, and without demand or
notice, all principal and any unpaid interest shall become immediately due and
payable upon a default as set forth in Section 3 above, subject to the
provisions of Section 4 hereof.
Section 5. Subordination:
5.1. The rights of the Holder under the terms of this Debenture shall be
subordinated to:
5.1.1. Any sums due or to become due to Finova Capital Corporation its
successors or assigns pursuant to a certain Loan and Security Agreement executed
on January 21, 1998 and the secured debt due The Hoepner Corporation.. The
Holder of this Debenture agrees to enter into any reasonable Intercreditor
Agreement proposed by Finova Capital Corporation.
5.1.2. Modifications, renewals, extensions, and refundings of any such
indebtedness, liabilities or obligations; unless, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such indebtedness, liabilities or obligations or such modification,
renewal, extension or refunding thereof are not superior in right of payment to
this Debenture.
5.2. The rights of the Holder, under the terms of this Debenture shall be
superior to any obligation due any holder of the common shares of the
Corporation arising solely out of the fact that such person is an owner of the
common shares of the Corporation and the claims of unsecured creditors except as
specifically provided for above.
5.3. All sums due to the Holder pursuant to this Debenture shall be secured
by a lien on all of the assets of the Corporation pursuant to a certain
Subordinated Security Agreement entered into simultaneously herewith and shall
be subject to the provisions of the aforesaid Intercreditor and Subordination
Agreement between Holder and Finova Capital Corporation.
Section 6. Conversation Privilege and Call Provision:
6.1. The Holder is hereby granted the right to purchase up to such number
of shares of Series E Preferred Stock ("Series E Shares") as the amount of this
Debenture multiplied by .10 shall equal (20 cents being the closing bid price of
such shares on the date of approval of this loan by Holder, i.e., November 13,
1998 and .10 being fifty (50%) percent thereof). The option is exercisable at
any time prior to December 31, 1999 at an exercise price set forth above, i.e.,
10 cents per share. The Holder may convert all or part of the principal and
accrued but unpaid interest at the conversion date. In order to convert, the
Holder must surrender this Debenture to the Corporation at the Corporation's
principal office and the Corporation shall, as promptly as practicable after the
surrender, deliver to the Holder a certificate or certificates representing the
number of fully paid and nonassessable Series E Shares of the Corporation into
which this Debenture may be converted and if appropriate issue a check in good
funds to the Holder for any sum which may remain due under this Debenture and
has not been used to buy Series E Shares as hereinabove set forth.
6.2. No payment or adjustment shall be made upon any conversion with
respect to any interest accrued on any debenture surrendered for conversion
prior to an interest payment date or to any dividend on the common stock
delivered upon conversion.
<PAGE>
Section 7. Early Demand for Payment:
7.1. Provided that this Debenture has not been converted pursuant to
Section 6 hereof, on or after the termination of the Finova Capital Corporation
Loan and Security Agreement, and the payment in full of all obligations due
Finova, its successors or assigns, the Holder of this Debenture may notify the
Corporation of such Holder's desire to be paid all outstanding principal and
interest. The Corporation shall pay such Holder all such principal and interest
within ten (10) days of such demand notice. The outstanding balance shall
continue to bear interest at the rate of eighteen (18%) percent per annum until
paid commencing ten (10) days after such demand notice (the "Default Rate").
7.2. Upon delivery of such notice by the Holder to the Corporation,
Holder's right to convert pursuant to Section 6 hereof shall cease. Upon receipt
of the final payment hereon, the Holder shall immediately deliver this Debenture
to the Corporation marked "paid-in-full."
Section 8. OMITTED INTENTIONALLY
Section 9. Effect of Mergers, etc. on Conversion Privilege: In case of any
capital reorganization, or of any reclassification of the Series E Shares of the
Corporation or in case of the consolidation or merger of the Corporation with or
into any other corporation or of the sale, lease or other disposition of the
properties and assets of the Corporation as, or substantially as, an entirety to
any other corporation, there shall be no adjustment of the conversion ratio
hereof but the Debenture shall, after such capital reorganization,
reclassification of Series E Shares, consolidation, merger or sale, lease, or
other disposition, be convertible into the kind and amount of shares or other
securities or property (including cash) to which the holder of the number of
Series E Shares deliverable (immediately prior to the time of such capital
reorganization, reclassification of Series E Shares, consolidation, merger,
sale, lease or other disposition) upon conversion of the Debenture would have
been entitled upon such capital reorganization, reclassification of Series E
Shares, consolidation, merger, sale, lease or other disposition.
Section 10. Corporation to Reserve Common Shares: 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 Series E Shares, or
its issued Series E Shares held in its treasury, or both, for the purpose of
effecting conversion of the Debentures, the full number of Series E Shares of
then deliverable upon the conversion of the Debentures not theretofore
converted; and if at any time the number of authorized but unissued Series E
Shares shall not be sufficient to effect the conversion of all Debentures, the
Corporation will take such corporate action as may in the opinion of its counsel
be necessary to increase its authorized but unissued Series E Shares to such
number of shares as shall be sufficient for that purpose.
Section 11. Laws: The Laws of the State of Delaware shall apply in
construing this Debenture.
Section 12. Fractional Shares: Fractional Shares or script representing
Fractional Shares may be issued upon the exercise of this Debenture.
Section 13. Assignment, Exchange, or Loss of Debenture:
13.1. Subject to the restrictions appearing at the start of this Debenture,
upon presentation and surrender of this Debenture to the Corporation at its
principal office or at the office of its stock transfer agent, if any, with the
assignment form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Corporation shall, without charge, execute and deliver a new
debenture in the name of the assignee named in such instrument of assignment and
this Debenture shall promptly be cancelled.
13.2. This Debenture is exchangeable, without expense, at the option of the
Holder, upon presentation and surrender hereof to the Corporation at its
principal office, or at the office of its stock transfer agent, if any, for
other debentures of different denominations entitling the Holder to purchase, in
the aggregate, the same number of Shares purchasable hereunder.
<PAGE>
13.3. Upon receipt by the Corporation of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Debenture, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and (in
the case of mutilation) upon surrender and cancellation of this Debenture, the
Corporation will execute and deliver a new debenture, which shall constitute an
additional contractual obligation on the part of the Corporation, whether or not
this Debenture is lost, stolen, destroyed or mutilated shall be at any time
enforceable by anyone.
Section 14. Rights of the Holder: The Holder shall not, by virtue hereof,
be entitled to any rights of a shareholder in the Corporation, either at law or
equity. The rights of the Holder are limited to those expressed in this
Debenture and are not enforceable against the Corporation except to the extent
set forth herein. The Holder shall, however, possess the same right to inspect
the books and records of the Corporation, including financial records, as is
provided by Delaware law to a shareholder of the Corporation.
Section 15. OMITTED INTENTIONALLY
Section 16. OMITTED INTENTIONALLY
Section 17. OMITTED INTENTIONALLY
Section 18. Restrictions on Amendments to Articles of Incorporation: The
Corporation hereby agrees that for so long as this Debenture is issued and
outstanding, and the Holder has not made an early demand for payment pursuant to
Section 7 hereof, and the Holder has not exercised the Holder's conversion
privilege to Section 6 hereof, that the Corporation will not cause its Articles
of Incorporation to be amended or restated without the express written consent
of the Holder hereof.
Section 19. Restrictions on Transfer: This Debenture has not been
registered under the Securities Act of 1933. This Debenture, or any right
hereunder, may not be enforced against the Corporation by any Holder, except the
original Holder herein, (i) unless there is an effective registration covering
such note or underlying right under the Securities Act of 1933 and applicable
state securities laws, (ii) unless the Corporation receives an opinion of an
attorney, licensed to practice within the United States, that the transfer of
the Debenture, or any underlying right, complies with the requirements of the
Securities Act of 1933 and any relevant state securities law, or (iii) unless
the transfer is made pursuant to Rule 144 under the Securities Act of 1933.
Section 20. Any place the word "Corporation" is used in this Debenture it
shall refer to PLAY CO. TOYS & ENTERTAINMENT CORP. and any subsidiary or
affiliated corporation formed by it to acquire a portion of the assets and
business of PLAY CO. TOYS & ENTERTAINMENT CORP. to operate as an independent
chain of retail stores under the name "Toys International" or such other name as
may be chosen from time to time by the Corporation.
Section 21. Notices: Any notices permitted or required under this Agreement
shall be deemed given upon the date of personal delivery or forty-eight (48)
hours after deposit in the United States mail, postage fully prepaid, return
receipt requested, addressed:
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
to the Corporation at: 550 Rancheros Drive
San Marcos, CA 92069
to the Holder at: P.O. Box 120
Zurich, Switzerland 8034
With Copies to: Todtman, Nachamie, Spizz & Johns, P.C.
425 Park Avenue
New York, New York 10022
Attention: Barton Nachamie, Esq.
</TABLE>
or at any other address as any party may, from time to time, designate by notice
given in compliance with this Section.
Section 22. Pronouns: Any masculine personal pronoun shall be considered to
mean the corresponding feminine or neuter personal pronoun, as the context
requires.
Section 23. Titles and Captions: All section titles or captions contained
in this Agreement are for convenience only and shall not be deemed part of the
context nor effect the interpretation of this Agreement.
Section 24. Computation of Time: In computing any period of time pursuant
to this Agreement, the day of the act, event or default from which the
designated period of time begins to run shall be included, unless it is a
Saturday, Sunday or a legal holiday, in which event the period shall begin to
run on the next day which is not a Saturday, Sunday or legal holiday, in which
event the period shall run until the end of the next day thereafter which is not
a Saturday, Sunday or legal holiday.
Section 25. Presumption: This Agreement or any section thereof shall not be
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section 26. Further Action: The parties hereby shall execute and deliver
all documents, provide all information and take or forbear from all such action
as may be necessary or appropriate to achieve the purposes of this Agreement.
Section 27. Parties in Interest: Nothing herein shall be construed to be to
the benefit of any third party, nor is it intended that any provision shall be
for the benefit of any third party.
Section 28. Attorney Fees: If suit or action is instituted in connection
with any controversy arising out of this Debenture, or in the enforcement of any
rights hereunder, the prevailing party shall be entitled to recover, in addition
to costs, such sums as the Court may adjudge as reasonable attorney fees,
including attorney fees of any appeal.
Section 29. The Corporation acknowledges and agrees to use the funds
provided to it by Holder for the sole purpose of acquiring Inventory and for
working capital purposes.
IN WITNESS WHEREOF, PLAY CO. TOYS & ENTERTAINMENT CORP., has executed this
Debenture to be effective as of the 11th day of November, 1998.
PLAY CO. TOYS & ENTERTAINMENT CORP.
A Delaware Corporation
By____________________________________
AGREED TO:
FRAMPTON INDUSTRIES, LTD.
By_______________________________
90885-1
Exhibit 10.114
SUBORDINATED SECURITY AGREEMENT
SUBORDINATED SECURITY AGREEMENT dated as of November 11, 1998, by and
between PLAY CO. TOYS & ENTERTAINMENT CORP., a Delaware corporation (the
"Debtor") and FRAMPTON INDUSTRIES, LTD. (hereinafter called the "Secured
Party").
RECITALS
This Subordinated Security Agreement is executed and delivered by
Debtor to Secured Party for the purpose of securing all Obligations of Debtor to
Secured Party for any sums due or to become due to Secured Party from Debtor,
now or hereafter under a certain 5% Secured Subordinated Debenture dated of even
date hereof in the principal sum of $500,000 (the "Debenture") and granting a
security interest to Secured Party in the Collateral Security (as hereafter
defined). Capitalized terms not otherwise defined herein shall have the meanings
given to them under the Note.
AGREEMENT
In consideration of the foregoing and the mutual promises, covenants, terms
and conditions contained herein, and of other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, it is agreed as
follows:
1. Grant of Security Interest. As security for the full payment and
performance of Debtor to Secured Party of all Obligations arising out of the
Debenture (the "Obligation"), Debtor hereby grants to Secured Party a lien upon
and a continuing security interest subject and subordinate only to Permitted
Senior Liens including the lien of Finova Capital Corporation in:
(a) All inventory now owned or hereafter acquired by Debtor, wherever
located (as defined in the Finova Loan and Security Agreement);
(b) All accounts, including accounts receivable, contract rights and other
rights to the payment of money, now or hereafter existing, now owned or
hereafter acquired by Debtor ("Accounts"), all cash and deposit accounts
including deposits with Banks in connection with credit card accounts;
(c) All furniture, fixtures, equipment and other tangible personal property
in all of its forms, wherever located, now or hereafter existing, now owned or
hereafter acquired by Debtor;
(d) All right, title and interest of Debtor as licensee under any license
agreements now existing or hereafter acquired subject to the terms thereof;
(e) To the extent not otherwise included in the Collateral, all books,
correspondence, credit files, customer lists, computer software, data bases,
records and other documents relating to the above-described types of property,
including, without limitation, all tapes, cards, runs and other papers,
documents and computer storage media in the possession or control of any of the
undersigned, or any affiliate or subsidiary of the undersigned, or any computer
service bureau, wherever any of the foregoing may be located and whether the
same are owned by the undersigned on the date hereof or are hereafter acquired
or created by the undersigned;
(f) To the extent not otherwise included in the Collateral, all rights in,
to and under policies of insurance of every kind and nature covering any
Collateral, including, without limitation, claims or rights to payment and
proceeds heretofore or hereafter arising therefrom with respect to the
above-described types of property, whether the same are owned by the undersigned
on the date hereof or are hereafter acquired or created;
<PAGE>
(g) To the extent not otherwise included in the Collateral, including
general intangibles (as defined in the Delaware Uniform Commercial Code)
including trademarks, tradenames, tax refunds, contract rights, trade secrets,
licensing agreements, royalty payments, copyrights, service marks, logos,
goodwill, rights of indemnification, and all other personal property, of any
kind or nature of any of the undersigned, now or hereafter existing, now owned
or hereafter acquired or created;
(h) To the extent not otherwise included in the Collateral, all real
property fixtures and rental income, wherever located, now or hereafter
existing, now owned or hereafter acquired; and
(i) To the extent permitted under any leases under which the Debtor is a
tenant, all interest of the Debtor in such leases and the proceeds of the sale
thereof;
(j) All substitutions, proceeds and products of any and all of the
foregoing Collateral (including leases, subleases and license agreements),
proceeds from the sale thereof, cash and non-cash, and all cash collateral now
owned or hereafter acquired by Debtor and, to the extent not otherwise included,
all payments under insurance (whether or not Secured Party is the payee
thereof), all payment paid pursuant to settlements, judgments, or compromises
entered or entered into as a result of disputes or causes of action to which
Debtor is a party, or any indemnity, warranty or guaranty, payable by reason of
loss or damage to or otherwise with respect to any of the foregoing Collateral.
All of the above described property (a-j) whether now owned, now due, or in
which the Debtor has an interest, or hereafter, at any time in the future,
acquired, arising, to become due, or in which the Debtor obtains an interest.
All products, proceeds, and accessions of all of the above described
property.
The property described in paragraphs (a) through (j) above and the proceeds
thereof are hereinafter referred to as the "Collateral Security".
2. Representations. The Debtor hereby represents and warrants to Secured
Party as follows:
(a) To the best of its knowledge, there are no liens, pledges, security
interests or other encumbrances on any of the Collateral Security which are
prior to the security interests granted hereunder, except as set forth on
Exhibit A-1 (Permitted Senior Liens).
(b) As to the Collateral Security: (i) the Collateral Security is presently
located at Debtor's locations as set forth on Exhibit B and Debtor will notify
Secured Party in writing thirty (30) days prior to the movement of the
Collateral Security to any new location; (ii) Debtor will at its own cost and
expense keep the Collateral Security in good repair (reasonable wear and tear
excepted); (iii) Debtor will not sell, exchange, lease, or otherwise dispose of
the Collateral Security except in the ordinary course of business; (iv) Debtor
will insure the Collateral Security and if Debtor fails to do so, Secured Party
may procure such insurance and charge the cost to Debtor; and (v) Debtor shall
comply in all material respects with the terms and conditions of any leases
covering the premises where the Collateral Security is located and any orders,
ordinances, laws or statutes of any state or municipal or governmental
department having jurisdiction with respect to such premises or the conduct of
business thereon; the failure to comply with which would have an Adverse Effect.
(c) The Debtor's places of business are presently located as set forth on
Exhibit B, and Debtor will notify Secured Party promptly of any change in the
location of the Debtor's places of business.
3. Covenants.
3.1 Debtor agrees to take such further action and to execute such
additional agreements, documents and instruments as Secured Party shall
reasonably request to effectuate or confirm the security interests granted
hereunder. Secured Party will at its own expense from time to time execute, file
and record such financing statements and documents and take such action,
including without limitation segregation of records, as Secured Party shall
reasonably determine to create and maintain the priority and status of the
security interests created hereunder. Debtor will defend the Collateral Security
against dilution and all claims and demands of all persons and will keep the
Collateral Security free and clear of all attachments, levies, taxes, liens,
security interests and encumbrances of any kind and nature except for Permitted
Senior Liens.
<PAGE>
3.2 During the term of this agreement and until the Obligations have been
paid in full pursuant to the Note, the Debtor shall not grant any security
interest in any Collateral to anyone other than Secured Party, FINOVA or other
Permitted Senior Liens nor permit any liens to be outstanding except as
aforesaid. The Debtor will not change its name, identity or structure without
giving Secured Party thirty (30) days prior written notice thereof, and shall,
in connection with any such change, execute and deliver to Secured Party all
such additional agreements, financing statements and other documents as Secured
Party shall reasonably require. This provision shall not be deemed to constitute
consent to any change of identity or structure.
4. Remedies. If the Obligations have become due and payable in full under
this Agreement or the Debenture, and all notice periods have expired, the
Secured Party itself or by its attorney may exercise with respect to the
Collateral Security all of the rights and remedies set forth in clauses (a)
through (f) below or elsewhere herein or otherwise available to a secured party
under the applicable provisions of the Uniform Commercial Code or any other
applicable law (including, without limitation, the right to appoint a receiver
to take possession of the Collateral Security and, without notice to or demand
upon any Debtor, to make such payments and do such acts as Secured Party
considers necessary or reasonable to protect its security interest in the
Collateral Security) and (in conjunction with or in addition to such rights and
remedies) may, to the extent permitted by applicable law, with or without
process of law and without liability for loss or damage, sell or dispose of all
or any part of the Collateral Security, free and clear of all claims, as
hereinafter provided. The following provisions shall govern the right of Secured
Party to so realize upon the Collateral Security, in addition to any rights and
remedies available at law or in equity or otherwise provided under this
agreement:
(a) Marshaling, etc. Secured Party shall not be required to make any demand
upon or pursue any of its rights or remedies against Debtor or others with
respect to the payment or performance of the Obligations secured hereby, or to
pursue or exhaust any of its rights or remedies with respect to any of the
Collateral Security. Secured Party shall not be required to marshal the
Collateral Security or secured obligations or to resort to the Collateral
Security in any particular order and all of its rights hereunder shall be
cumulative. To the extent not prohibited by applicable law, Debtor hereby agrees
to waive and relinquish the benefit and advantage of, and hereby covenants not
to assert against Secured Party, any present or future valuation, stay,
appraisement, extension or redemption laws which, but for this provision, might
be applicable to any sale or assignment made under any judgment, order or decree
of any court, or privately under the power of sale and assignment conferred by
this agreement or in respect of any of the Collateral Security. Without limiting
the generality of the foregoing, Debtor hereby agrees that it will not invoke or
utilize and hereby waives any law which may delay or impede the enforcement of
Secured Party's rights under this agreement. In addition, to the extent not
prohibited by applicable law, Debtor hereby waives any right to prior notice
(except to the extent expressly provided in this agreement) or judicial hearing
in connection with the taking possession or the disposition of any of the
Collateral Security. Debtor waives any obligation of Secured Party to post any
bond or security in order to enforce any rights or remedies required hereunder
notwithstanding any provisions of law to the contrary.
(b) Sales and Assignments of the Collateral Security. Any item of
Collateral Security may be sold or assigned for cash or other value in any
number of lots at public or private sale without demand, advertisement or notice
(excepting only that Secured Party shall give Debtor ten (10) days' prior
written notice of the time and place of any public sale or of the time after
which a private sale may be made, which notice Debtor hereby agrees is
reasonable). At any sale or sales of the Collateral Security (except at private
sale) Secured Party may bid for and purchase the whole or any part of the
property and rights so sold and upon compliance with the terms of such sale may
hold, exploit and dispose of such property and rights without further
accountability to Debtor except for the proceeds of such sale or sales. Debtor
will execute and deliver, or cause to be executed and delivered, such
instruments, documents, assignments, waivers, certificates and affidavits and
supply or cause to be supplied such further information and take such further
action as Secured Party shall require in connection with such sale or
assignment.
<PAGE>
(c) Application of Proceeds. The proceeds of all sales and collections, and
any other monies the application of which is not otherwise herein provided for,
shall be applied, at the election of the Secured Party, as follows:
i) First, to the payment of the costs and expenses of such sale or sales
and collections and the reasonable expenses of Secured Party and of its counsel;
ii) Second, any surplus then remaining to principal then due and payable;
iii) Third, to the payment of any other amounts required by applicable law,
including without limitation, Section 9.504(1) (c) of the Uniform Commercial
Code; and
iv) Fourth, any surplus then remaining shall be paid over (subject to the
rights of third parties) to the Debtor or for its account.
(d) (Omitted Intentionally).
(e) Possession and Assembly. Secured Party shall have the right without
posting any bond to take possession of the Collateral Security (and of the
indicia of the Collateral Security, in the case of intangibles) and maintain
such possession on Debtor's premises, or to remove the Collateral Security or
any part thereof to such other premises as Secured Party may desire. Upon
Secured Party's request, Debtor shall assemble the Collateral Security and make
it available to Secured Party. All costs and expenses incurred by Secured Party
in connection with the foregoing shall be charged to Debtor's account, shall be
added to the Obligations and shall be secured by the Collateral Security.
(f) Secured Party's rights and remedies under this agreement and all other
agreements shall be cumulative. Secured Party shall have all other rights and
remedies not inconsistent here with as provided under the Uniform Commercial
Code, by law, or in equity. No exercise by Secured Party of one right or remedy
shall be deemed an election, and no waiver by Secured Party of any default on
Debtor's part shall be deemed a continuing waiver. No delay by Secured Party
shall constitute a waiver, election or acquiescence by it.
Each of the following shall constitute an "Event of Default" hereunder (if
the same is continuing when the event of default declaration notice specified
below is given and when the notice period, if any, specified below expires): the
occurrence or existence of an Event of Default under Debtor's Loan and Security
Agreement with Finova or if (a) the Debtor shall fail to pay when due or
punctually perform any of the Obligations; or (b) any warranty, representation,
or material statement made or furnished to Secured Party by Debtor or on
Debtor's behalf was false in any material respect when made or furnished or
deemed made; or (c) any event shall occur which results in the acceleration of
the maturity of any debt of any Debtor to others,and such event shall have an
Adverse Effect; or (d) any of the Collateral Security shall be lost, stolen or
damaged and such occurrence shall have an Adverse Effect; or (e) there shall be
a levy upon, seizure or attachment of any of the Collateral Security; or (f)
Debtor shall cease operations, be dissolved or terminate its existence; or (g)
the entry of any judgment in excess of $250,000 against the Debtor, which
judgment is not satisfied (if a money judgment) or appealed from (with execution
or similar process stayed) within sixty (60) days of its entry; or (h) any act
by, against, or relating to the Debtor, or its property or assets, which act
constitutes the application for, consent to, or sufferance of the appointment of
a receiver, trustee, or other similar fiduciary, pursuant to Court action or
otherwise, over all, or any part of the Debtor's property; the granting of any
trust mortgage or execution of an assignment for the benefit of the creditors of
the Debtor, or the occurrence of any other voluntary or involuntary liquidation
or extension of debt agreement for the Debtor; or the offering by or entering
into by the Debtor of any composition, extension, or any other arrangement
seeking relief from or extension of the debts of the Debtor, or the initiation
of any other judicial or non-judicial proceeding or agreement by, against, or
including the Debtor which seeks or intends to accomplish a reorganization or
arrangement generally with creditors; or (i) the entry of an order for relief or
similar order with respect to the Debtor in any proceeding pursuant to the
Bankruptcy Code or any other federal bankruptcy law; the filing of any
complaint, application or petition against the Debtor initiating any matter in
which the Debtor is or may be granted any relief from the debts of the Debtor
pursuant to the Bankruptcy Code or any other insolvency statute or procedure,
which complaint, application, or petition is not timely contested by the Debtor
or, if so timely contested, is not dismissed within sixty (60) days of when
filed; or (j) failure to perform under and/or committing any breach of this
agreement, the Reimbursement Agreement; or (k) change of control of Debtor; or
(m) sale of all or substantially all of the assets of the Debtors.
<PAGE>
No Event of Default shall be deemed to have occurred for items described in
clause (b) above unless and until Secured Party delivers (during the continuance
of such default) a written notice declaring an Event of Default to Debtor. No
Event of Default shall be deemed to have occurred for any other items described
above unless and until Secured Party delivers (during the continuance of such
default) a written notice declaring an Event of Default to the Debtor and such
default is not remedied within five (5) business days thereafter, unless a
longer period is specified above.
5. Miscellaneous.
5.1 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to be effective only if
delivered by hand, or overnight courier, or mailed by prepaid registered or
certified mail, return receipt requested, to the parties at their addresses set
forth herein, or to such other addresses as each party may specify by written
notice to the other from time to time in accordance with the provisions of this
paragraph. Such notices, requests, demands and other communications will be
deemed to have been duly given upon such personal delivery, on the next business
day after being sent by overnight courier or on the date three (3) business days
after the date postmarked by the United States Post Office, as the case may be.
<TABLE>
<CAPTION>
<S> <C>
Notices to Play Co.: Play Co. Toys & Entertainment Corp.
550 Rancheros Drive
San Marcos, CA 92069
Attention: Mr. James Frakes
Notices to Frampton: Frampton Industries, Ltd.
P.O. Box 120
Zurich, Switzerland 8034
With Copies to: Todtman, Nachamie, Spizz & Johns, P.C.
425 Park Avenue
New York, New York 10022
Attention: Barton Nachamie, Esq.
</TABLE>
5.2 Performance. If the Debtor is in default in the performance or
fulfillment of any of the terms, conditions, covenants or provisions on its part
to be performed or fulfilled hereunder, Secured Party may, at its option,
without waiving its right to enforce this agreement according to its terms
immediately or at any time thereafter and without notice to the Debtor, perform
or fulfill the same or cause the performance or fulfillment of same for the
Debtor's account, and the cost and expense thereof (including reasonable
attorneys fees) shall be added to the Obligations secured hereby and shall be
payable on demand with interest thereon at the Regular Rate.
5.3 Assignment. The terms and provisions of this agreement shall bind and
inure to the benefit of the parties hereto and their respective successors and
assigns.
5.4 Governing Law. This agreement and all rights and obligations hereunder
shall be governed by and construed in accordance with the laws of the State of
Delaware.
5.5 Waiver. No delay or failure on the part of Secured Party in exercising
any right, privilege or option hereunder shall operate as a waiver of such or of
any other right, privilege, remedy or option, and no waiver whatever shall be
valid unless in writing, signed by Secured Party and then only to the extent
therein set forth. No waiver by Secured Party of any Event of Default shall
operate as a waiver of any other Event Of Default or of the same Event of
Default on a future occasion. THE UNDERSIGNED HEREBY WAIVE ANY AND ALL RIGHTS TO
A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED HEREON.
<PAGE>
5.6 Termination. At such time as required in the Purchase Agreement the
Debtor shall completely and finally satisfy the Obligations, this Security
Agreement shall terminate and Secured Party shall execute and deliver to Debtor
all assignments, UCC termination statements and other instruments as may be
required to reflect the termination of Secured Party's interest in the
Collateral Security.
5.8 Modification. This agreement cannot be changed or terminated orally.
5.9 Subordination. This Subordinated Security Agreement is subject to that
certain Intercreditor and Subordination Agreement dated as of ________________,
1998 between Secured Party and FINOVA Capital Corporation, as amended from time
to time.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
PLAY CO. TOYS & ENTERTAINMENT CORP.
By________________________________________
Its:________________________
FRAMPTON INDUSTRIES, LTD.
By________________________________________
Its:________________________
90885-1
<PAGE>
EXHIBIT "A-1"
PERMITTED SENIOR LIENS
1. FINOVA Capital Corporation.
2. The Hoepner Corporation
3. Multimedia Concepts International, Inc.
4. Amir Overseas Capital Corp.
90885-1
Exhibit 10.115
INTERCREDITOR AND SUBORDINATION AGREEMENT
THIS INTERCREDITOR AND SUBORDINATION AGREEMENT (the "Agreement"), dated as
of February 11, 1999 is entered into by and between FRAMPTON INDUSTRIES, Ltd., a
British Virgin Island corporation ("Subordinating Lender"), and FINOVA CAPITAL
CORPORATION, a Delaware Corporation ("Senior Lender"), with reference to the
following facts:
RECITALS
A. Play Co. Toys & Entertainment Corp., a Delaware corporation
("Borrower"), has entered into the Junior Debt Documents (as defined below) with
Subordinating Lender, pursuant to which subordinating Lender has extended
certain financial accommodations to Borrower on the terms and conditions set
forth in such Junior Debt Documents.
B. Borrower has requested that Senior Lender enter into various agreements
with Borrower, including that certain Loan and Security Agreement and related
agreements, documents and instruments, dated as of January 21, 1998, as amended
or modified from time to time (collectively, the "Senior Loan Agreement"),
pursuant to which Senior Lender would extend certain revolving loans to
Borrower.
C. Senior Lender is unwilling to enter into the Senior Loan Agreement with
Borrower and to extend to Borrower the loans contemplated thereunder unless
Subordinating Lender enters into this Agreement.
D. Subordinating Lender is interested in the financial success of Borrower
and will benefit by the loans which Senior Lender proposes to extend to Borrower
under the Senior Loan Agreement
E. Accordingly, to induce Senior Lender to enter into the Senior Loan
Agreement with Borrower and to extend to Borrower the loans contemplated
thereunder Subordinating Lender is willing to enter into this Agreement with
Senior Lender.
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
1. Certain Defined Terms.
a. General: When used in this Agreement, the following terms have the
following respective meanings:
"Agreement" has the meaning set forth in the introduction hereto.
"Borrower" has the meaning set forth in the recitals of this Agreement.
"Junior Debt" means all present and future indebtedness and other
obligations (direct or indirect) owing by Borrower to Subordinating Lender.
"Junior Debt" includes (without limitation) indebtedness owed under the Junior
Debt Documents and the Debenture (as defined in the Junior Debt Documents) ,
together with any other debts, demands, monies, indebtedness, liabilities, and
obligations now or hereafter owed by Borrower to Subordinating Lender, including
interest, principal, costs, and other charges, together with all claims, rights,
causes of action, judgments, decrees and other obligations
"Junior Debt Documents" means all instruments and agreements evidencing the
Junior Debt, including that certain Subordinated Security Agreement, dated
November ____, 1998 between Borrower and Subordinating Lender, a copy of which
is attached hereto as Exhibit A and incorporated herein by reference.
<PAGE>
"Senior Debt" has the meaning set forth in Section 3(a) of this Agreement.
"Senior Lender" has the meaning set forth in the introduction of this
Agreement.
"Senior Loan Agreement" has the meaning set forth in the recitals of this
Agreement.
"Subordinating Lender" has the meaning set forth in the introduction of
this Agreement.
b. Other Terms. Unless otherwise defined in this Agreement, any and all
initially capitalized terms set forth in this Agreement shall have the meaning
ascribed thereto in the Senior Loan Agreement
2. Representations, Warranties, and Covenants. Subordinating Lender and
Borrower represent, warrant, and covenant (jointly and severally) to Senior
Lender that:
a. Junior Debt Documents. Concurrently with the execution hereof, a copy of
all Junior Debt Documents shall be delivered to Senior Lender and all Junior
Debt Documents shall be conspicuously marked with substantially the following
legend:
"Subject to that certain Intercreditor and Subordination Agreement, dated
as of February ___, 1999, between _____________, Frampton Industries, Ltd. and
FINOVA Capital Corporation
b. No Default. Borrower is not in default under any Junior Debt Document.
c. Notice of Default. Subordinating Lender and Borrower shall each promptly
notify Senior Lender of all defaults, events of default, and events which with
the giving of notice or the passage of time, or both, would become events of
default ("unmatured events of default") under any Junior Debt Document.
d. Further Action. Upon Senior Lender's request, Subordinating Lender will
promptly take all actions which Senior Lender believes appropriate to carry out
the purposes of this Agreement
3. Subordination.
a. General. As more fully provided in the remainder of this Article 3, the
Junior Debt is hereby subordinated and made junior to all obligations now or
hereafter owing to Senior Lender by Borrower. The obligations referred to in the
preceding sentence as being owing to Senior Lender are referred to in this
Agreement as the "Senior Debt," and include the Obligations, all present and
future representations, warranties, covenants, agreements, indemnities, and
other ------- obligations which Borrower or its successors and assigns may incur
to Senior Lender, including (without limitation) those incurred after the filing
of a bankruptcy petition or commencement of a bankruptcy case by or against
Borrower.
b. No Payments to Subordinating Lender. Borrower and Subordinating Lender
agree (and Subordinating Lender acknowledges such agreement) that Borrower shall
neither: (i) make any payments to Subordinating Lender in respect of the Junior
Debt, nor (ii) without Senior Lender's prior written consent, execute or deliver
any negotiable instruments as evidence of the Junior Debt, until such time as
the Senior Debt shall have been indefeasibly paid in full by Borrower to Senior
Lender. The foregoing notwithstanding, provided there does not at the time of
such payment exist an Event of Default or Incipient Default, Borrower may pay
and Subordinating Lender may accept those payments described on the attached
Exhibit B.
c. Priority of Interests in Collateral. Subordinating Lender holds a
subordinate security interest and lien in the Collateral as security for
Borrower's payment and performance of its obligations to Subordinating Lender
under the Junior Debt Documents. Such security interest, lien, or other right or
interest shall, at all times prior to the indefeasible payment in full of the
Senior Debt, be junior, subordinate and subject to any security interest, lien
or other right or interest Senior Lender now has or may hereafter acquire in the
Collateral. The subordination provided in this Section 3(c) shall apply
irrespective of the time or order of attachment or perfection of any security
interest, irrespective of the time or order of filing of any financing statement
or other document, and irrespective of any statute, rule, law, or court decision
to the contrary.
<PAGE>
4. Restrictions on Subordinating Lender's Actions. Unless it shall have
obtained Senior Lender's prior written consent, until the Senior Debt has been
indefeasibly paid in full, Subordinating Lender will not: (i) demand or accept
any payment upon the Junior Debt; (ii) foreclose or realize upon any collateral
hereafter securing the Junior Debt (whether such collateral constitutes part of
the Collateral or consists of other assets of Borrower), or otherwise enforce
any security agreement, mortgage, lien instrument, or other encumbrance
hereafter securing the Junior Debt; or (iii) commence, prosecute, or participate
in any administrative, legal, or equitable action that in Senior Lender's
judgment might adversely affect Borrower's business or Borrower's ability to pay
the Senior Debt.
5. Remedies. If Borrower or Subordinating Lender attempts to violate
Section 3(b) or Clause (i) of Article 4, or if Subordinating Lender in any other
manner receives any funds which by virtue of this Agreement it is precluded from
receiving, Subordinating Lender shall be deemed to hold any payment or
distribution it receives in trust for Senior Lender's benefit. In such case,
Subordinating Lender shall immediately remit such payment or distribution to
Senior Lender. If Subordinating Lender attempts to violate Clause (ii) of
Article 4, Senior Lender (in Senior Lender's or Borrower's name) or Borrower may
seek injunctive or other equitable relief to prevent or stop Subordinating
Lender's actions, it being agreed that legal remedies may be inadequate. If
Subordinating Lender attempts to violate Clause (iii) of Article 4, Borrower may
interpose as a defense or plea the making of this Agreement, and Senior Lender
may intervene and interpose such defense or plea in its own or Borrower's name.
The remedies provided in this Article 5 are not exclusive; Senior Lender shall
be entitled to all other remedies available at law or in equity.
6. No Action to Violate Senior Lender Agreements. Subordinating Lender
shall not take any action which in Senior Lender's judgment might cause Borrower
to violate the Senior Loan Agreement or any other agreement between Borrower and
Senior Lender.
7. No Amendment of Junior Debt Documents. Unless Senior Lender's prior
written consent shall have been obtained, no Junior Debt Document may be amended
or modified.
8. Extensions, Compromises, etc. Without having to obtain either Borrower's
or Subordinating Lender's consent, Senior Lender may grant to Borrower
extensions of the time of payment or performance, and may enter into compromises
(including releases of collateral and settlements) with Borrower with respect to
the Senior Debt.
9. Waiver. Subordinating Lender waives any right it may now or hereafter
have to require Senior Lender to marshall assets, to exercise rights or remedies
in a particular manner, or to forbear from exercising such rights and remedies
in any particular manner or order.
10. No Constraint on Senior Lender. Nothing contained in this Agreement
shall preclude Senior Lender from discontinuing its extension of credit to
Borrower (whether under the Senior Loan Agreement or otherwise) or from taking
(without notice to Subordinating Lender, Borrower, or any other individual or
entity) any other action in respect of the Senior Debt or the Collateral which
Senior Lender is otherwise entitled to take with respect to the Senior Debt or
the Collateral. Among the actions which Lender may take accordance with this
Article 10 are: renewing, extending, and increasing the amount of the Senior
Debt; otherwise changing the terms of the Senior Debt; settling, releasing,
compromising, and collecting on the Senior Debt; making (and refraining from
making) other secured and unsecured loans and advances to Borrower; amending any
present or future agreement between Senior Lender and Borrower; and all other
actions which Senior Lender deems advisable.
11. Impact of Bankruptcy. If a voluntary or involuntary bankruptcy petition
shall be filed respecting Borrower: (a) this Agreement (including the
subordination provisions contained in Article 3) shall continue in full force
and effect; (b) Subordinating Lender shall take no action in the bankruptcy
<PAGE>
proceeding which might (in Senior Lender's opinion) adversely affect Senior
Lender's rights and interests respecting the Senior Debt; and (c) Subordinating
Lender shall take all actions reasonably requested by Senior Lender to protect
Senior Lender's interests during the course of such bankruptcy proceedings.
12. Miscellaneous.
a. Amendment. No amendment or waiver of this Agreement shall be effective
unless in a writing signed by each party hereto.
b. Binding Effect; Governing Law; Venue. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
assigns. This Agreement shall be governed by and construed in accordance with
the internal laws of the State of Arizona. All actions and proceedings arising
in connection with this Agreement shall be tried and litigated only in state or
federal courts located in Maricopa County, Arizona, or (at Senior Lender's sole
option) in any other court in which Senior Lender may initiate legal or
equitable proceedings, so long as such court has subject matter jurisdiction.
Subordinating Lender and Borrower each waive any right it may have to plead
forum non-conveniens or otherwise to object to venue, and hereby consents to any
court-ordered relief.
c. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original and all of which together shall constitute one
agreement.
d. Headings. The headings contained in this Agreement are for convenience
only. They shall not affect the interpretation of this Agreement.
e. Attorneys' Fees; etc. In any suit or action brought by Senior Lender to
enforce this Agreement or to obtain an adjudication (declaratory or otherwise)
of rights or obligations hereunder, the Subordinating Lender shall pay to the
Senior Lender the attorneys' fees and other costs and expenses incurred by the
Senior Lender.
f. Severability. Any provision of this Agreement that is prohibited by law
or unenforceable in any jurisdiction shall be ineffective in that jurisdiction
to the extent of such prohibition or unenforceability, without invalidating the
remaining provisions thereof or affecting the validity or enforceability of such
provision in any other jurisdiction. To the extent permissible, the parties
waive any law that renders this Agreement prohibited or unenforceable.
g. Entire Agreement. This Agreement constitutes the entire agreement
between and among the parties regarding the subject matter hereof. This
Agreement supersedes all prior and contemporaneous agreements between or among
the parties with respect to the subject matter hereof.
h. Notice. All notices or demands by any party hereunder must be in writing
and personally delivered or sent by registered or certified mail, postage
prepaid, return receipt requested, or by a recognized overnight mail service as
follows:
Senior Lender: FINOVA CAPITAL CORPORATION
355 South Grand Avenue
Los Angeles, California 90017
Subordinating Lender: FRAMPTON INDUSTRIES, LTD.
P.O. Box 120
Zurich, Switzerland 8034
Borrower: PLAY CO. TOYS & ENTERTAINMENT CORP.
550 Rancheros Drive
San Marcos, California 92069
Attn.: Chief Financial Officer
with a copy to: TODTMAN, NACHAMIE,
HENDLER & SPIZZ, P.C.
425 Park Avenue
New York, New York 10022
Attn.: Barton Nachamie, Esq.
<PAGE>
The parties may change the address at which they receive notice by giving
notice to each other in the foregoing manner. Notices or demands sent in
accordance with this Section shall be deemed to be received on the earlier of
the date of actual receipt or five (5) calendar days after deposit in the United
States mail.
i. Termination. This Agreement shall continue in full force and effect
until Borrower has satisfied in full the Senior Debt.
j. Rules of Construction. As used in this Agreement, the singular includes
the plural; the plural includes the singular. References to one gender include
all genders. Unless otherwise specified, references to Articles, Sections,
Exhibits, and parties refer to Articles, Sections, Exhibits, and parties of or
to this Agreement. The words "include", "including" and similar words are not
intended to be limiting.
k. Counterparts. This Agreement may be executed in any number of separate
counterparts, all of which, when taken together, shall constitute one and the
same instrument, admissible into evidence, notwithstanding the fact that all
parties did not sign the same counterpart. Delivery of an executed counterpart
of this Agreement by telefacsimile shall be equally as effective as delivery of
a manually executed counterpart of this Agreement. Any party delivering an
executed counterpart of this Agreement by telefacsimile shall also deliver a
manually executed counterpart of this Agreement, but the failure to deliver a
manually executed counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective duly authorized officers, as of the date first above
written.
FRAMPTON INDUSTRIES, LTD.,
a British Virgin Island corporation
By:
Title:
FINOVA CAPITAL CORPORATION,
a Delaware corporation
By:
Title:
90885-1
<PAGE>
BORROWER'S ACKNOWLEDGMENT
The undersigned Borrower hereby approves of, and agrees and consents to,
the foregoing Intercreditor and Subordination Agreement, dated as of February
___, 1999, among Frampton Industries, Ltd. and FINOVA Capital Corporation (the
"Subordination Agreement"). Unless otherwise defined in this Acknowledgment,
terms defined in the Subordination Agreement have the same meanings when used in
this Acknowledgment.
Borrower agrees to be bound by the Subordination Agreement. Borrower
further agrees that the Subordination Agreement may be amended by Senior Lender
and Subordinating Lender without notice to, or the consent of, Borrower.
PLAY CO. TOYS & ENTERTAINMENT CORP., a Delaware corporation
By:
Name:
Title:
90885-1
<PAGE>
EXHIBIT A-1
TO INTERCREDITOR AND SUBORDINATION AGREEMENT
[Copy of Security Agreement and Debenture]
90885-1
Exhibit 10.116
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Third Amendment to Loan and Security Agreement (this "Amendment") is
entered into as of this 11th day of February, 1999 (the "Third Amendment
Effective Date"), by and between FINOVA CAPITAL CORPORATION, a Delaware
corporation ("Lender"), and PLAY CO. TOYS & ENTERTAINMENT CORP., a Delaware
corporation ("Borrower").
W I T N E S S E T H :
WHEREAS, Borrower and Lender entered into a Loan and Security Agreement
dated as of January 21, 1998 as amended by a First Amendment to the same dated
as of July 24, 1998 and further amended by a Second Amendment to the same dated
as of September 24,1998 (collectively, the "Loan Agreement"), that evidences a
loan from Lender to Borrower; and
WHEREAS, Borrower has asked Lender to modify the Loan Agreement in
accordance with the terms of, and subject to the conditions contained in, this
Amendment and Lender is willing so to amend the Loan Agreement, upon the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of these recitals, the covenants contained
in this Amendment, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Lender and Borrower agree as
follows:
1. Definitions. Unless otherwise defined in this Amendment, all capitalized
terms used herein which are defined in the Loan Agreement have the same meaning
as set forth in the Loan Agreement.
2. Schedule.
2.1 The Section of the Schedule entitled "Total Facility" shall be amended
to replace $7,600,000 with $8,300,000.
2.2 The Section of the Schedule to the Loan Agreement entitled "Loans" is
shall be amended by adding the following:
"Approved LC Loans: An Approved LC line of credit consisting of loans
against the Approved Letter of Credit in an aggregate outstanding principal
amount not to exceed the lesser of (i) $700,000, or (ii) the undrawn amount of
the Approved Letter of Credit (the "Approved LC Loan Facility").
The Approved LC Line shall be secured, in part, by a letter of credit
issued by Chase Manhattan Bank, N.A., which shall (i) be in an amount not less
than $700,000, (ii) be substantially in the form attached as Exhibit A; (iii)
name the Lender as the sole beneficiary of the same, and (iv) have an expiry
date of no earlier than October 3, 2000 ( the "Approved Letter of Credit")."
2.3 The Section of the Schedule entitled "Interest and Fees" is amended by
adding the following:
"Approved LC Line Interest: The Borrower shall pay Lender on the daily
outstanding balance of each Approved LC Line Note at a rate per annum of one
percent (1%) in excess of the Prime Rate. The interest rate chargeable under
each Approved LC Line Note shall be increased or decreased, as the case may be,
without notice or demand of any kind, upon the announcement of any change in the
Prime Rate. Each change in the Prime Rate shall be effective on the first day
following the announcement of such change, provided, that a cumulative change of
less than one fourth of one percent (0.25%) shall not be considered. Interest
charges and other charges under each Approved LC Line Note shall be computed
from the Disbursement Date on the basis of a year of 360 days and actual days
elapsed and will be payable to Lender in arrears on the first day of each
month."
<PAGE>
2.4 The Section of the Schedule entitled "Negative Covenants" shall be
amended by adding the following to the Section entitled "Indebtedness":
"Notwithstanding the foregoing, the Borrower shall be permitted during the
1999 fiscal year of the Borrower to incur up to $500,000 in convertible
subordinate debt provided such debt: (i) has a coupon rate of not more than 5%;
(ii) is payable monthly beginning in March, 1999 and is fully repaid on or
before December 31,1999; (iii) the proceeds of the debt is used solely to
provide the Borrower with working capital and funds for store expansion, and
(iv) the holders of such debt execute and deliver to Lender an agreement, in a
form acceptable to Lender, whereby the holders acknowledge that such debt and
their rights to collect the same are subordinate to the rights of Lender."
2.5 The Section of the Schedule entitled "Termination Fee" shall be amended
to add the following:
"Approved LC Line: The Termination Fee applicable to the Approved LC Line
provided for in Section 9.2(d) shall be an amount equal to one percent (1.0%) of
the average daily outstanding balance of the Obligations under the Approved LC
Line for the 180-day period (or lesser period if applicable) preceding the date
of termination."
3. Amendment Fee. In consideration of Lender's agreement to enter into this
Amendment and to the modification to the Loan Documents described herein,
Borrower agrees to pay Lender the amount of TEN THOUSAND DOLLARS ($10,000.00)
(the "Amendment Fee"). The Amendment Fee shall be entirely earned by and payable
to Lender as of the Third Amendment Effective Date.
4. Effect as an Amendment. Other than as specifically set forth in this
Amendment, the remaining terms of the Loan Agreement and the other Loan
Documents shall remain in full force and effect and shall remain unaffected and
unchanged except as specifically amended hereby. In the event of any conflict
between the terms and conditions of this Amendment and any of the other Loan
Documents, the provisions of this Amendment shall control. Each reference to in
the Loan Agreement to "this Agreement" shall be deemed to refer to the Loan
Agreement as amended through and including this Amendment, and each reference in
any other Loan Document to the Loan Agreement as amended through and including
this Amendment.
5. No Waiver. This Amendment in no way acts as a waiver by Lender of any
breach, default, Event of Default or condition which, with the giving of notice
or passing of time or both, would constitute an Event of Default, of Borrower
(whether known or unknown to Lender) or as a release or relinquishment of any of
the liens, security interests, rights or remedies securing payment and
performance of the Obligations or the enforcement thereof. Nothing contained in
this Amendment is intended to or shall be construed as relieving any person or
entity, whether a party to this Amendment or not, of any of such person's or
entity's obligations to Lender.
6. Conditions Precedent. This Amendment will not be effective unless and
until each of the following conditions precedent have been satisfied, in form,
manner and substance satisfactory to Lender prior to the Third Amendment
Effective Date:
(a) Borrower shall have delivered or caused to be delivered to Lender the
following documents, all of which shall be properly completed, executed and
otherwise satisfactory to Lender:
(i) This Amendment;
(ii) Acknowledgment of the Guarantors in the form attached hereto and
incorporated herein by this reference;
(iii) Corporate resolutions of Borrower and Guarantor, approving the
transactions contemplated hereby to which it is a party;
<PAGE>
(iv) Such other items as Lender may reasonably require or reasonably deem
necessary;
(v) the original of the Approved Letter of Credit; and
(vi) The Amendment Fee.
(b) There shall not then exist an Event of Default or any act or event
which with notice, passage of time, or both would constitute an Event of
Default.
(c) All the representations and warranties of each and every Loan Party
shall be true and correct, in all material respects, before and after giving
effect to the making of this Amendment.
(d) Borrower shall have paid all closing costs, recording fees and taxes,
appraisal fees and expenses, travel expenses, fees and expenses of Lender's
counsel, and all other costs and expenses incurred by Lender in connection with
the preparation of, closing of and disbursement of the advances pursuant to this
Amendment, which costs, fees and expenses may be payable from the first advance
made pursuant to this Amendment.
7. Indebtedness Acknowledged. Borrower acknowledges that the indebtedness
evidenced by the Loan Documents is just and owing and agrees to pay such
indebtedness in accordance with the terms of the Loan Documents. Borrower
further acknowledges and represents that no event has occurred and no condition
presently exists that would constitute a default or event of default by Lender
under the Loan Agreement or any of the other Loan Documents, with or without
notice or lapse of time.
8. Validity of Documents. Borrower hereby ratifies, reaffirms, acknowledges
and agrees that the Loan Agreement and the other Loan Documents represent valid,
enforceable and collectable obligations of Borrower, and that Borrower presently
has no existing claims, defenses (personal or otherwise) or rights of setoff
whatsoever with respect to the Obligations of Borrower under the Loan Agreement
or any of the other Loan Documents. Borrower furthermore agrees that it has no
defense, counterclaim, offset, cross-complaint, claim or demand of any nature
whatsoever which can be asserted as a basis to seek affirmative relief or
damages from Lender.
9. Reaffirmation of Warranties. Borrower hereby reaffirms to Lender each of
the representations, warranties, covenants and agreements of Borrower as set
forth in each of the Loan Documents with the same force and effect as if each
were separately stated herein and made as of the date hereof. Borrower
represents and warrants to Lender that with respect to the financing transaction
herein contemplated, no Person is entitled to any brokerage fee or other
commission and Borrower agrees to indemnify and hold Lender harmless against any
and all such claims.
10. Other Writings. Lender and Borrower will execute such other writings as
may be necessary to confirm or carry out the intentions of Lender and Borrower
evidenced by this Amendment.
11. Entire Agreement. The Loan Documents as modified by this Amendment
embody the entire agreement and understanding between Borrower and Lender, and
supersede all prior agreements and understandings between said parties relating
to the subject matter thereof.
12. Counterparts; Telefacsimile Execution. This Amendment (including the
consents attached hereto) may be executed in any number of separate
counterparts, all of which when taken together shall constitute one and the same
instrument, admissible into evidence, notwithstanding the fact that all parties
have not signed the same counterpart. Delivery of an executed counterpart of
this Amendment by telefacsimile shall be equally as effective as delivery of a
manually executed counterpart of this Amendment. Any party delivering an
executed counterpart of this Amendment by telefacsimile shall also deliver a
manually executed counterpart of this Amendment, but the failure to deliver a
manually executed counterpart shall not affect the validity, enforceability, and
binding effect of this Amendment.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first written above.
FINOVA CAPITAL CORPORATION, a Delaware corporation
By:
Name:
Title:
PLAY CO. TOYS & ENTERTAINMENT CORP., a Delaware corporation
By:
Name:
Title:
90885-1
<PAGE>
ACKNOWLEDGMENT
The undersigned ("Guarantor") hereby executes this Consent for the purpose
of (i) evidencing Guarantor's consent to the execution and performance of the
foregoing Third Amendment to Loan and Security Agreement (the "Third Amendment")
by Lender and Borrower, (ii) reaffirming the terms of the Continuing Guaranty
Agreement executed by Guarantor in favor of Lender, (iii) evidencing Guarantor's
agreement that the Liabilities as set forth and defined in the Continuing
Guaranty Agreement shall, for all purposes, include the Loan Documents, as
amended by the Third Amendment, and shall further include all additional amounts
which may be funded or advanced to Borrower pursuant to the Loan Agreement
described above as amended by the Third Amendment, and (iv) ratifying and
affirming all terms and provisions of the Continuing Guaranty Agreement. Except
to the extent otherwise indicated, terms used herein with initial capital
letters shall have the meanings set forth in the Loan Agreement, as amended by
the Third Amendment.
Guarantor agrees that it has no defense, counterclaim, offset,
cross-complaint, claim or demand of any nature whatsoever which can be asserted
as a basis to seek affirmative relief or damages from Lender.
IN WITNESS WHEREOF, the undersigned has hereunto executed this Consent as
of this ____ day of _____________, 1999.
UNITED TEXTILES & TOYS CORPORATION,
a Delaware corporation
By:
Name:
Title:
90885-1
Exhibit 10.117
FRAMPTON INDUSTRIES, LTD.
January 4, 1999
Mr. James Frakes
Secretary/Chief Financial Officer
Play Co. Toys & Entertainment Corp.
550 Rancheros Drive
San Marcos, California 92069
Re: Play Co. Toys & Entertainment/Frampton Industries
Dear Jim:
This Letter Agreement ("Agreement") will confirm that Frampton Industries,
Ltd. ("Frampton") intends to act as an exclusive placement agent and financial
advisor for Play Co. Toys & Entertainment Co. ("Play Co." or the "Company") in
connection with the proposed offering, on a best efforts basis, of convertible
debentures (the "Debentures") for a total amount of $5,000,000 (the
"Transaction" or the "Offering"). The terms and conditions of the Transaction
are substantially defined and set forth in Exhibit "A".
In consideration of the premises and the mutual covenants and agreements
contained herein, the parties agree as follows:
1. Engagement: Except for the provisions which are intended to apply in the
future, this Agreement shall end the earlier of (a) six (6) months from the
execution of this Agreement which, at the sole option of Frampton, may be
extended for an additional two (2) months or (b) the closing of the Transaction
(the "Engagement Period"). The Company agrees that, during the Engagement
Period, all discussions with Potential Investors shall be conducted by Frampton
and the Company shall inform Frampton of any contacts with Potential Investors.
The Company shall not sell or issue any securities of the Company of the nature
and type encompassed in the Offering during the Engagement Period without the
consent of Frampton.
It is specifically understood and agreed that the Offering shall be only to
non-US citizens and non-residents of the United States and shall be only to
those investors residing in or located in Europe and that no investor will be
accepted by the Company who is a resident of or citizen of the United States
(only such non-resident, non-citizen shall be deemed a "Potential Investor").
2. Information: In connection with Frampton's activities on behalf of the
Company, the Company will furnish Frampton with information concerning the
Company, as is reasonably required. To the best of the Company's knowledge, the
information provided in written form by the Company will be materially complete
and correct and will not contain any untrue statement of material fact or omit
to state a material fact necessary in order to make the statements therein not
misleading in light of the circumstances under which the statements are made. At
each funding an officer of the Company will deliver a signed certificate
representing the veracity of such statements.
The Company acknowledges and agrees that in rendering services hereunder,
Frampton will be using and relying solely on the information provided by the
Company without independent verification thereof by Frampton or independent
appraisal by Frampton of any of the Company's assets. Frampton does not assume
responsibility for the accuracy or completeness of any information regarding the
Company or the Offering.
3. Fees, Expenses and Additional Services: The Company agrees to pay to the
provider all out-of-pocket expenses incurred in connection with the Transaction
including, but not limited to, accounting fees, legal fees, printing, filing
fees, etc. immediately upon receipt of a bill therefor.
<PAGE>
The Company will pay Frampton one-and-one-half (1-1/2%) percent of the face
amount of each Debenture funded as a non-accountable expense allowance to cover
Frampton expenses.
On the closing of any portion of the Offering, Frampton shall receive a fee
equal to eight (8%) percent of the face amount of the Debenture funded as a
placement fee.]
4. Termination: If the Company decides not to proceed with the Offering for
any reason, or if Frampton decides not to proceed with the Offering because of a
material breach by the Company of its representations, warranties or covenants
in this Agreement or as a result of material adverse changes in the affairs of
the Company, or failure to meet the General Conditions set forth in this
Agreement, the Company will be obligated to reimburse Frampton for its
accountable expenses. Should Frampton have sold and actually received funds in
escrow any of the Debentures and the Company elects not to close on the funds,
the Company shall pay to Frampton a fee of eight (8%) percent of the amount of
funds in escrow. Frampton shall have no liability to the Company for any reason
should it choose not to proceed with the Offering contemplated hereby. In
addition, if the Company elects not to proceed with the proposed Offering on the
material terms specified herein for any reason (except Frampton's failure to
close) and subsequently engages in any public offering, private placement or
other transaction between the Company and any entity offering the same or
similar securities to the same Potential Investor within two (2) months
following the Company's election not to proceed then Frampton shall receive a
fee in connection therewith equal to eight (8%) percent of the amount raised or
consideration received in any such transaction. Furthermore, the Company agrees
to pay eight (8%) percent finder's fee to Frampton if the Company completes a
Transaction in which Frampton introduced the Company to the other party (except
for registered broker/dealers) for a period of eight (8) months from the
execution of this Agreement.]
5. Indemnification: In consideration of this Agreement the Company agrees
to indemnify and hold Frampton, its affiliates and their respective officers and
directors, employees and agents and any other person controlling Frampton or any
of its affiliates ("Indemnified Person") from and against any losses, claims,
damages or liabilities relating to or arising out of or in connection with the
Engagement and will reimburse each Indemnified Person for all expenses
(including fees and expenses of counsel) as they are incurred in connection with
investigating, preparing, pursuing or defending any action, claims, suit or
proceeding arising out of or in connection with the Engagement. The Company,
however, will not be responsible for any losses, claims, damages or liabilities
or expenses relating thereto that are finally judicially determined to have
resulted from the wilful misconduct or recklessness of a material nature of any
Indemnified Person. The Company also agrees that no Indemnified Person shall
have any liability to it, for or in connection with the Engagement except for
any such liability for losses, claims, damages or liabilities incurred that are
finally judicially determined to have resulted from the wilful misconduct or
recklessness of a material nature of such Indemnified Person. Each party agrees
to give to the other timely notice of any such claim or demand to permit the
other to conduct such defenses as are appropriate.
6. Entire Agreement: This Agreement and Exhibit "A" incorporate the entire
understanding of the parties with respect to the subject matter of this
Agreement and supersedes all previous agreements or understandings. This
Agreement may be modified only by a written agreement signed by both parties.
This Agreement may not be assigned by either party. In the event either party
shall resort to legal counsel in order to construe or enforce any rights or
obligations hereunder, the prevailing party shall be entitled to reasonable
costs and expenses, including attorneys' fees in connection therewith.
7. Resolution of Disputes: This Agreement shall be interpreted and governed
by the laws of the State of Delaware. Frampton and the Company will attempt to
settle any claim or controversy arising out of this Agreement through
consultation and negotiation in good faith and a spirit of mutual cooperation.
If those attempts fail then the dispute will be mediated by a mutually
acceptable mediator to be chosen by Frampton and the Company within fifteen (15)
days after written notice from either party demanding mediation. Neither party
may unreasonably withhold consent to the selection of a mediator, but the
parties will share the cost of the mediation equally. Any dispute which the
parties cannot resolve through negotiation or mediation within six (6) months
from the date of the initial demand for it by one of the parties, may then be
submitted to the courts for resolution. The use of mediation will not be
construed under the doctrine of laches, waiver or estoppel to adversely effect
the rights of either party. Nothing herein shall prevent either party from
resorting to judicial proceedings if (a) good faith efforts to resolve the
dispute under these procedures have been unsuccessful or (b) interim relief from
a court is necessary to prevent serious and irreparable injury.
<PAGE>
8. General Conditions: Frampton's intention as expressed in this Agreement
is subject to the following General Conditions:
(a) In its sole discretion, Frampton shall be satisfied with the results of
its due diligence of the Company;
(b) there have been no material adverse changes in the business or
financial condition of the Company. In its sole discretion Frampton shall be
satisfied with the Company's progress as well as its outlook for the future.
(c) The Company will provide financial projections that have been reviewed
and approved by both the Company and Frampton for a period to be agreed upon
between the parties.
(d) The preparation of appropriate Offering circulars at the Company's
expense for distribution to potential investors by Frampton reasonably
satisfactory to Frampton.
(e) The completion of satisfactory due diligence on the Company and its
principal managers.
Please confirm that the foregoing is in accordance with our understanding
by signing and returning to us the enclosed copy of this Agreement.
<TABLE>
<CAPTION>
<S> <C>
Yours very truly, AGREED TO THIS ___ DAY
OF JANUARY, 1999
FRAMPTON INDUSTRIES, LTD.
By__________________________ PLAY CO. TOYS & ENTERTAINMENT CORP.
By
90885-1
</TABLE>
