As filed with the Securities and Exchange Commission on September 16, 1999
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
PLAY CO. TOYS & ENTERTAINMENT CORP.
(Name of Small Business Issuer in Its Charter)
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Delaware 2330 95-3024222
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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550 Rancheros Drive, San Marcos, California 92069, (760) 471-4505
(Address and Telephone Number of Principal Executive Offices)
(Address of Principal Place of Business or Intended Principal Place of Business)
CT Corp., 1209 Orange Street, Wilmington, DE 19801, (302) 658-7581
(Name, Address and Telephone Number of Agent for Service)
Copies to: Marie Elena Cocchiaro, Esq.
Millennium Ventures Law Group
113 Crosby Court, Suite 2
Walnut Creek, California 94598
(925) 934-9531
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Title Of Each Class Proposed Maximum Proposed
Of Securities Amount To Be Aggregate Price Maximum Aggregate Amount Of
To Be Registered Registered Per Unit1 Offering Price1 Registration Fee
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Common Stock, par value
$0.01 per share2
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1,500,000 $ 1.11 $1,665,000 $574.10
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Common Stock, par value
$0.01 per share3
350,000 $3.004 $1,050,000 $362.04
-
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Total........... $2,715,000 $936.14
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(1) Total estimated solely for the purpose of determining the registration
fee.
Shares into which 750,000 shares of Series F Preferred Stock, par value
$0.01 (the "Series F Stock"), are convertible, the price for which is based on
the average of the bid and asked price per share of Common Stock on August 26,
1999. Shares issuable upon the exercise of options (the "Options") issued in
accordance with the Securities Purchase Agreement entered into by and between
the Company and the Selling Securityholders, together with such indeterminate
number of securities as may be issuable by reason of anti-dilution provisions
contained therein. Represents the exercise price of the Options.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended (the "Act"), or until the Registration
Statement shall become effective on such date as the Commission, acting pursuant
to said Section 8(a), may determine .
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Cross Reference Sheet Pursuant to Rule 404(a)
Showing the Location In Prospectus of
Information Required by Items of Form SB-2
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Item in Form SB Prospectus Caption
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1. Front of Registration Statement and Outside Cover Page and Cover Page of Registration Statement
Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of Continued Cover Page, Table of Contents
Prospectus
3. Summary Information and Risk Factors Prospectus Summary, The Offering, Summary Financial Data,
Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Risk Factors, Dilution
7. Selling Securityholders Selling Securityholders
8. Plan of Distribution Cover Page, Plan of Distribution for the Securities of
the Selling Securityholders
9. Legal Proceedings Business of the Company
10. Directors, Executive Officers, Promoters and Control Persons Management
11. Security Ownership of Certain Beneficial Owners and Management Principal Securityholders
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Interest of Named Experts and Counsel
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities Management and Item 24. Indemnification of
Directors and Officers
15. Organization Within Last Five Years Prospectus Summary, Business of the Company,
Principal Securityholders, Certain Relationships
and Related Transactions, Risk Factors
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Item in Form SB (cont'd) Prospectus Caption (cont'd)
16. Description of Business Business of the Company
17. Management's Discussion and Analysis or Plan of Operation Management's Discussion and Analysis of
Financial Condition and Results of Operations
18. Description of Property Business of the Company
19. Certain Relationships and Related Transactions Certain Relationships and Related Transactions
20. Market for Common Equity and Related Stockholder Matters Market for Common Equity and Related Stockholder Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements
with Accountants and Financial Discosure Not Applicable
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<PAGE>
Preliminary Prospectus subject to completion, dated September 16, 1999
PROSPECTUS
PLAY CO. TOYS & ENTERTAINMENT CORP.
1,500,000 Shares of Common Stock Offered by Selling Securityholders
350,000 Shares of Common Stock Underlying Options
Offered by Selling Securityholders
This Prospectus relates to the resale by certain selling
securityholders (the "Selling Securityholders") of an aggregate of 1,850,000
shares (the "Shares") of Play Co. Toys & Entertainment Corp. (the "Company")
common stock, par value $0.01 per share (the "Common Stock"), 1,500,000 of which
Shares are issuable upon the conversion of 750,000 shares of Series F Preferred
Stock (the "Series F Stock") and 350,000 of which Shares are issuable upon the
exercise of options (the "Options"). Each share of Series F Stock is convertible
into two shares of Common Stock, at the option of the holder, on the date this
Registration Statement is declared effective by the Securities and Exchange
Commission. The Series F Stock shall convert automatically on the earlier of two
years after issuance or in the event the Common Stock achieves a closing price
of $5.00 for 30 consecutive days. Collectively, the Shares, Options, and Shares
underlying the Options are referred to as the "Securities."
The Series F Stock offered herein were issued on May 27, 1999 in a
private placement exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Act"), in accordance with ss.4(2) thereof and Rule
506 of the General Rules and Regulations Under the Securities Act of 1933 (the
"Securities Act Rules"), and are subject to the terms and conditions of a
Securities Purchase Agreement entered into by and between the Company and (i)
David Stefansky, (ii) Aaron Stefansky, (iii) Solomon Libenthal, (iv) Samuel
Krieger, (v) Birdie Capital Corp., (vi) Harbourcreek Investments, Ltd., and
(vii) Valentia Properties, Inc. The Options offered herein are subject to the
terms and conditions of the Option Agreements entered into by and between the
Company and (i) Robb Peck McCooey Clearing Corporation ("RPMCC"), (ii) Redwood
Capital Partners, Inc., (iii) Gushnut Consulting, Inc., (iv) Vince Calicchia,
and (v) Don Sinsabaugh. None of the aforesaid individuals or entities is
affiliated with the Company. The owners of the Securities offered hereby for
resale are collectively referred to herein as the Selling Securityholders. The
Securities are being offered by the Selling Securityholders and may be sold from
time to time in negotiated transactions, at fixed prices (which may be changed),
and at market prices prevailing at the time of sale, or a combination thereof.
The Company's Common Stock, on September 15, 1999, closed at $1.06 per share.
The Company will not receive any of the proceeds from the resale of any
Securities sold by the Selling Securityholders but shall receive proceeds from
the exercise of any Options. See "Plan of Distribution for the Securities of the
Selling Securityholders."
The Company's Common Stock, Series E Preferred Stock ("Series E
Stock"), and Series E Preferred Stock Redeemable Purchase Warrants ("Series E
Warrants") are quoted on the over-the-counter market on the OTC Bulletin Board
under the symbols "PLCO," "PLCOP," and PLCOW," respectively. Quotation on the
OTC Bulletin Board does not imply that there is a meaningful sustained market
for the Company's Securities or that if one develops, it will be sustained for
any period of time.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION; NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is September 16, 1999.
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Prior to this Offering, there has been a limited public market for the
Company's Common Stock, Series E Stock, and Series E Warrants. There can be no
assurance (i) that any meaningful market for the Company's Securities will
develop or (ii) that if one does develop, it will be sustained for any period of
time. Quotation on the OTC Bulletin Board, Nasdaq, or on any exchange does not
imply that a meaningful sustained market for the Company's Securities will
develop or that if developed, such market will be sustained for any period of
time.
Until September 24, 1997, the Company's Common Stock was listed on the
Nasdaq SmallCap Stock Market ("Nasdaq") under the symbol "PLCO." Effective with
the close of business on September 23, 1997, the Company's Common Stock was
delisted from trading on Nasdaq. The Company appealed an earlier Nasdaq
determination and presented its argument in August 1997 at an oral hearing
before the Nasdaq Qualifications Panel (the "Panel"). On September 23, 1997, the
Company received a decision from the Panel that based its decision to delist on
its belief that the Company did not meet the stockholders' equity maintenance
requirement of $1 million and based on transactions it deemed "detrimental to
the investing public and the public interest" concerning transactions undertaken
in February 1996 with respect to options issued to an investor which provided a
$2 million letter of credit ("L/C") as security for a credit line the Company
maintained with Congress Financial Corporation (Western) ("Congress," the
"Congress Financing"). The Company appealed this matter to the Nasdaq Listing
and Hearing Review Committee (the "Review Committee") which, on October 29,
1997, remanded the Panel's determination for reconsideration by a new Nasdaq
analyst and a new Panel due in part to the Company's allegations of bias.
In December 1997, the Company presented written evidence to the new
Panel which, in a determination dated January 20, 1998, affirmed the delisting.
The Company appealed this determination to the Review Committee. In a decision
dated May 21, 1998, the Review Committee affirmed the delisting citing as its
basis therefor, inter alia, as follows: ". . . given the Company's history of
losses, we do not have confidence in the Company's ability to maintain
compliance [with the capital and surplus requirement] for the long term." In
addition, the Review Committee determined that "substantial dilution to the
public shareholders by stock issuance . . . and by the conversion of preferred
stock issued . . . at prices substantially below the market price" supported the
Review Committee's argument of purported affiliate self-dealing. In further
support of its determination, the Review Committee cited the Company's failure
to provide information requested with respect to entities which were not
affiliated with the Company. (In response to the Review Committee's request for
such information, the Company informed same that it did not believe it
appropriate to make representations regarding the transactions or the
composition of any entities with which it was not affiliated and recommended
that the Review Committee redirect such inquiries directly to such entities.)
The Company sought all administrative remedies available from Nasdaq
and believes that Nasdaq erred in its determination. Given the extreme cost
associated with appealing Nasdaq's decision to the Securities and Exchange
Commission, however, the Company decided not to file such an appeal.
1
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AVAILABLE INFORMATION
For further information with respect to the Company and the Securities
offered hereby, reference is made to the Public Reference Section of the
Securities and Exchange Commission (the "Commission") at its principal office at
450 Fifth Street, N.W., Washington, D.C., 20549. The Commission maintains a web
site that contains reports, proxy and information statements, and other
information which is filed electronically through the Commission's Edgar system,
all of which may be viewed through accessing the Commission's web site located
at http://www.sec.gov.
The Company's fiscal year end is March 31. The Company is subject to
the informational reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and in accordance therewith, files periodic
reports, proxy statements, and other information with the Commission. In the
event the Company's obligation to file such periodic reports, proxy statements,
and other information is suspended, the Company will voluntarily continue to
file such information with the Commission. The Company will distribute to its
stockholders annual reports containing audited financial statements, together
with an opinion by its independent auditors. In addition, the Company may, in
its discretion, furnish quarterly reports to stockholders containing unaudited
financial information for the first three quarters of each year.
2
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PROSPECTUS SUMMARY
The following summary is intended to set forth certain pertinent facts
and highlights from material contained in the body of this Prospectus. The
summary is qualified in its entirety by the detailed information and financial
statements appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information in this Prospectus gives effect to the 1 for 3 reverse stock
split in July 1997.
Play Co. Toys & Entertainment Corp. (the "Company"), a Delaware
corporation, was founded in 1974, at which time it operated one store under the
name Play Co. Toys in Escondido, California. At present, the Company and its
subsidiary, Toys International.COM, Inc. ("Toys," formerly known as Toys
International, Inc.), operate an aggregate of twetny-seven stores throughout
Southern California (in the Los Angeles, Orange, San Diego, Riverside, and San
Bernardino Counties) and in (i) Tempe, Arizona, (ii) Las Vegas, Nevada, (iii)
Dallas, Texas, (iv) Auburn Hills, Michigan, and (v) Chicago, Illinois. The
Company intends to expand its operations geographically and in accordance
therewith has executed leases to open nine additional stores by the end of
calendar year 2000. These stores shall be located in California (San Ysidro and
Mission Viejo), Nevada (Las Vegas), Texas (Houston), North Carolina (Charlotte),
Tennessee (Nashville), and Illinois (Schaumberg). The Company and its
subsidiaries are hereinafter referred to in the aggregate as the "Company"
except as otherwise required for clarity.
Approximately 75% of the Company's stores offer educational, new electronic
interactive, and specialty and collectible toys and items for sale and are
strategically located in highly trafficked, upscale malls. The remaining 25%
sell traditional toys and games and are located in strip shopping centers. Given
the favorable results obtained from a two year market test of the sale of
children's swimwear in its stores, the Company recently expanded its product mix
and now offers a limited number of children's swimwear and accessories for sale
in many of its stores.
Since 1997, the Company has embraced and implemented a new store design
and layout, remodeled most of its older stores, closed non-profitable stores,
and expanded its geographic market from exclusively Southern California to the
mid-western United States. Since 1996, the Company has opened fourteen stores
(inclusive of the three it purchased in January 1997) and remodeled one store,
all of which are considered by management to be high-end retail toy and
educational, electronic interactive stores. These outlets, and those the Company
expects to open in the future, offer items comparable in quality and choice to
those offered by FAO Schwarz, Warner Brothers, and Disney Stores and are
expected to attract clientele similar to those attracted by such stores.
In April 1999, the Company debuted the first of three dedicated
electronic commerce web sites. This site, www.ToysWhyPayRetail.com, represents a
new trade name for the Company and allows consumers to purchase, at near
wholesale prices, overstocks, special buys, and overruns on mostly name-brand
toys purchased by the Company out of season. The Company plans to offer
approximately 1000 items for sale on the web site. The second and third
electronic commerce web sites are currently being developed to a
state-of-the-art standard in conjunction with two Internet consulting firms.
These sites will offer collectible and imported specialty merchandise such as
die-cast cars, dolls, plush toys, trains, and collectible action figures and are
expected to open in the late fall of 1999. In conjunction with the web site
launch, the Company plans to place computer kiosks in several of its retail
locations in order to permit customers to place orders on the web site for goods
otherwise not sold in such store.
Because the Company's new and newly remodeled stores focus on the sale
of educational and electronic interactive games and toys, specialty products,
and collector's toys which generally carry higher gross margins than traditional
toys, such stores have shown and are expected to continue to show higher gross
profits than the Company's older stores (which focused primarily on the sale of
traditional toys).
In May 1999, pursuant to ss.506 of Regulation D of the Securities Act
Rules, the Company sold 750,000 shares of Series F Stock at a purchase price of
$1.00 per share, through RPMCC as placement agent. The Company received $750,000
for the sale less (i) legal and administrative expenses, (ii) the placement
agent's 10% commission, and (iii) a 1% nonaccountable expense allowance. Each
share of Series F Stock is convertible into two fully paid and non-assessable
shares of Common Stock, at the option of the holder, on the date this
Registration Statement is declared effective by the Commission. The Series F
Stock shall convert automatically on the earlier of two years after issuance or
in the event the Common Stock achieves a closing price of $5.00 for 30
consecutive days.
This Prospectus covers the resale of the 1,500,000 shares of Common
Stock underlying the Series F Stock sold in the above described private
placement and an additional 350,000 shares of Common Stock underlying Options
which were granted to the placement agent and its designees as part of the
private placement.
The Company's executive offices are located at 550 Rancheros Drive, San
Marcos, California 92069; the Company's phone number is (760) 471-4505.
3
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THE OFFERING1
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Securities Offered: 1,850,000 Shares of Common Stock being sold by the
Selling Securityholders. The Shares offered hereby will be
tradable immediately upon issuance.
Price Per Share: Not applicable
Securities Outstanding Prior to the Offering
Common Stock2: 5,548,857 shares
Series E Preferred Stock3: 5,833,903 shares
Series F Preferred Stock4: 750,000 shares
Securities Outstanding After the Offering 23.
Common Stock5: 7,398,857 shares
Series E Preferred Stock3: 5,833,903 shares
Series F Preferred Stock6: 0 shares
Use of Proceeds: The Company will receive no proceeds from the sale
of the Common Stock offered for resale hereby. The
net proceeds of the Company's sale of the 750,000
shares of Series F Stock, aggregating $657,500,
have been used for general working capital. See
"Use of Proceeds."
Risk Factors: An investment in the Securities offered hereby
is highly speculative and involves potentially
substantial dilution. The statements contained
in this Prospectus which are not historical
facts contain forward looking information with
respect to plans, projections, or future
performances of the Company, the occurrences of
which involve certain risks and uncertainties
as detailed herein. See "Risk Factors."
Symbols7: Common Stock.............PLCO
Series E Stock...............PLCOP
Series E Warrants..........PLCOW
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(footnotes from previous page)
(1) Unless otherwise indicated, no effect is given in this Prospectus to
(i) the 2,000,000 shares of Series E Stock reserved for issuance upon exercise
of the Series E Warrants and the 12,000,000 million shares of Common Stock into
which said Series E Stock is convertible or (ii) 35,003,418 shares of Common
Stock into which the 5,833,903 shares of Series E Stock outstanding are
convertible.
(2) Does not include (i) the 35,003,418 shares of Common Stock into which
the 5,833,903 shares of Series E Stock currently outstanding are convertible,
(ii) the 12,000,000 shares of Common Stock into which the 2,000,000 million
shares of Series E Stock underlying the 2,000,000 Series E Warrants currently
outstanding are convertible, (iii) the 1,500,000 shares of Common Stock into
which the Series F Stock are convertible, or (iv) the 350,000 shares of Common
Stock underlying the Options.
(3) Does not include the 2,000,000 shares of Series E Stock underlying the
2,000,000 Series E Warrants outstanding.
(4) Each share of Series F Stock is convertible into two shares of Common
Stock on effectiveness of this Registration Statement. The Series F Stock shall
convert automatically on the earlier of two years after issuance or in the event
the Common Stock achieves a closing price of $5.00 for 30 consecutive days.
(5) Includes the 1,500,000 shares of Common Stock into which the Series F
Stock are convertible on effectiveness of this Registration Statement and the
350,000 shares of Common Stock underlying the Options.
(6) On effectiveness of this Registration Statement, each share of Series F
Stock is convertible, at the option of the holder, into two shares of Common
Stock, which Common Stock is registered hereby. Given that the Company's Common
Stock is listed on the OTC Bulletin Board, while the Series F Stock is not
listed at all, it is highly probable that the holders of the Series F Stock will
convert such shares into Common Stock immediately on effectiveness hereof.
(7) Until September 24, 1997 the Company's Common Stock was listed on
Nasdaq. The Company's Common Stock, Series E Stock, and Series E Warrants
(collectively, the "Securities") are now listed on the OTC Bulletin Board.
Quotation thereon does not imply that a meaningful, sustained market for the
Company's Securities has developed or will, in fact, develop. See "Risk Factors"
and "Market for Common Equity and Related Stockholder Matters."
4
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SUMMARY FINANCIAL DATA
The following table summarizes certain selected financial data and is
qualified in its entirety by the more detailed financial statements contained
elsewhere in this document. The selected operating data for the three month
periods ended June 30, 1998 and 1999 and balance sheet data as of June 30, 1999
are derived from the Company's unaudited financial statements. Operating results
for the three month period ended June 30, 1999 are not necessarily indicative of
the results that may be expected for any other interim period or for the year
ending March 31, 2000.
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March 31, June 30,
1998 1999 1999
---- ---- ----
Balance Sheet Data:
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Working capital $4,452,481 $5,832,145 $4,760,003
Total assets 14,139,887 21,150,392 22,745,250
Total current liabilities 4,581,831 7,558,647 9,550,538
Long term obligations 7,055,549 8,527,116 8,966,084
Redeemable preferred stock --- --- --
Stockholders' equity 2,502,507 5,064,629 4,228,628
Common stock dividends --- --- --
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Year Ended March 31, Three Months Ended June 30,
1998 1999 1998 1999
---- ---- ---- ----
Operating Data:
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Net sales $22,568,527 $34,371,230 $6,357,395 $6,508,565
Gross profit 8,878,928 14,780,446 2,651,064 2,745,351
Gross margin 39.3% 43.0% 41.7% 42.2%
Total operating expenses 10,119,430 13,672,377 2,672,188 3,979,558
Net income (loss) before taxes (2,054,470) 143,018 (186,776) (1,549,601)
Net income (loss) (2,054,470) 140,868 (186,776) (1,549,601)
Net income (loss) applicable to common shares
(3,528,276) (1,566,857) (460,582) (2,090,074)
Income (loss) per common share (0.86) (.34) (0.11) (.38)
Weighted average shares outstanding
4,098,971 4,590,642 4,103,525 5,525,936
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5
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RISK FACTORS
The Securities offered hereby are speculative and involve a high degree
of risk. In addition to the other information contained in this Prospectus, the
following factors regarding risks associated with the Company's business and
risks related to the Offering should be carefully considered before purchasing
the Securities offered by this Prospectus. The purchase of Securities should not
be considered by anyone who cannot afford the risk of loss of his entire
investment. The statements contained in this Prospectus which are not historical
facts contain forward looking information with respect to plans, projections, or
future performances of the Company, the occurrences of which involve certain
risks and uncertainties as detailed herein. No assurance can be made that this
plan or projections will be realized or that if realized, such plan or
projections will produce the results anticipated by the Company.
1. Instability of Revenues; History of Operating Losses; Retained Earnings
Deficit. While the Company's revenues for the years ended March 31, 1998 and
1999 increased by $11,802,703 to $34,371,230 and $2,944,251 to $22,568,527,
respectively, its revenues for the years ended March 31, 1995, 1996, and 1997
steadily declined from $25,374,722 to $21,230,853 to $19,624,276, respectively.
The decrease in revenues during 1995, 1996, and 1997 was primarily the result of
a general economic downturn in the southern California economy, increased
competition, and the closing by the Company of non-profitable stores. While the
Company generated net income of $140,868 for the year ended March 31, 1999,
during each of the fiscal years ended March 31, 1998, 1997, and 1996, the
Company suffered net losses of $2,054,470, $3,584,881, and $3,542,715,
respectively. In addition, for the quarter ended June 30, 1999, the Company
sustained a net loss of $1,549,601 as compared to a net loss of $186,776 during
the corresponding 1998 period. This increase in net loss is due primarily to a
51.2% increase in operating expenses and a 90.4% increase in interest expense
during the June 30, 1999 quarter as compared to the June 30, 1998 quarter.
While the Company's recent (within the last three fiscal years)
implementation of a new store design and layout, the remodeling of most of its
older stores, the closing of its non-profitable stores, and the expansion of its
geographic market from exclusively Southern California to the mid-western United
States is showing positive results in terms of an increase in revenues and a
decrease in net loss such that fiscal year 1999 resulted in net income for the
Company, such income was nominal and the Company posted a net loss of $1,549,601
in its first fiscal quarter of 2000, and there can be no assurance that the
Company's revenues or results of operations will continue to increase and not
decline. In addition, the Company may sustain additional losses or be unable to
fund such losses.
At June 30, 1999 and 1998, the Company had (i) working capital of
$4,688,839 and $5,096,166, respectively; (ii) an accumulated deficit of
$18,097,753 and $14,901,404, respectively; and (iii) stockholders' equity of
$4,228,628 and $3,860,002, respectively. The accumulated deficit could adversely
affect the Company's ability to conduct its operations.
2. Future Losses and Negative Cash Flow. The Company has executed leases to
open an additional nine stores by the end of calendar year 2000. The
construction costs associated with opening such stores have averaged, during the
last two fiscal years, approximately $300,000 per store, an amount which does
not account for the inventory required to be purchased for each location or the
salaries of the employees to be hired to operate each location. In addition, the
Company expects to incur approximately $1.5 million in expenses over the next
sixteen months in developing its marketing and web site operations and expanding
its product offerings and web site content.
As a result of the above factors, the Company expects a significant
negative cash flow for the next sixteen months. Therefore, the Company's
operating losses are expected to increase considerably, or at a minimum, not to
decrease at all in the near future. Since cash flow is expected to remain
negative, the Company believes it will require additional capital, in the way of
subsequent equity financing, within the next sixteen months. In the event the
Company cannot obtain such financing or such financing is insufficient to offset
the Company's expenses, the Company's net loss during any given period could be
greater than expected and the market price of the Company's stock could decline.
See "Dilution" and Risk Factor No. 18 "Possible Future Dilution."
<PAGE>
3. Decrease in Same Store Sales. The Company's same store sales declined by
27% for the period ended June 30, 1999. The Company believes that its same store
sales showed a decline after a period of two years of continuous increases
because in the three months ended June 30, 1999, the flow of allocated or "hot"
selling merchandise is being spread over 25% more stores. This shortfall in
inventory is a result of the current credit lines that the Company has with some
of its vendors. The Company is working to increase its lines of credit with its
vendors to more adequately address not only the past growth but its expected
future growth as well. There can be no assurance, however, that the vendors will
increase the Company's lines of credits or increase them sufficiently.
4. Unpredictable Operating Results. The Company's operating results have
fluctuated in the past and may fluctuate significantly in the future due to a
variety of factors, many of which are outside of the Company's control. Because
such results are volatile and difficult to predict, quarter-to-quarter
comparisons of same are not a good indication of future performance. It is
likely that in some future quarter, the Company's operating results may fall
below the expectations of securities analysts and investors. In this event, the
trading price of the Company's Common Stock may decline significantly. Factors
that may harm the Company's business or cause operating results to fluctuate
include the following: the inability to obtain new customers at reasonable cost,
to retain existing customers, or to encourage repeat purchases; an inability to
convert web site visitors into customers; a change in the mix of toys, video
games, software, plush toys, and other products sold by the Company; the
seasonality of the toy industry; the inability to manage inventory levels or
control inventory theft or to manage distribution operations; the inability to
adequately maintain, upgrade, and develop the web sites or the systems used to
process customer orders and payments; the ability of competitors to offer new or
enhanced web sites, services, or products; price competition; an increase in the
number of product returns; fluctuations in the demand for children's products
associated with movies, television, and other entertainment or recreational
trends; the inability to obtain fashionable children's toys and hobby products
from vendors; fluctuations in the dollar amount of consumer spending on
children's toys and hobby products; the amount and timing of operating costs and
capital expenditures relating to expansion of the Company's operations;
unexpected increases in shipping costs or delivery times, particularly during
the holiday season; technical difficulties or internet or system downtime;
government regulations related to use of the internet for commerce or for sales
and distribution of toys and hobby products; and economic conditions which might
otherwise result in decreased expendable income per household.
A number of factors will cause the Company's gross margins to fluctuate in
future periods, including the mix of toys and hobby products sold, inventory
management, inbound and outbound shipping and handling costs, the level of
product returns, and the level of discount pricing. Any change in one or more of
these factors could reduce gross margins in future periods.
5. Change in Business Focus. In 1996, management realized the need to
change the Company's focus, finding there was a large demand for educational and
promotional toys and collectibles, and thus decided to change its business plan
to focus on these markets. Accordingly, the Company developed a new store
design, marketing format, and product mix and decided to redesign some of its
existing stores and open new stores under this format. The marketing format
calls for the opening of new stores in malls rather than in strip centers where
most of the Company's older stores are located. While the Company believes this
change in focus was necessitated by the then and now prevailing children's
entertainment trends and is a positive step which increases the likelihood of
profitability for the Company, there can be no assurance that this new direction
and marketing focus will be successful in the long run or that the Company will
have the funding to continue to implement its business plan.
6. Dependence on Specialty Toys; Changes in Consumer Preferences; Limited
Suppliers. The Company's increase in same store sales and gross margins is
largely due to the Company's post-1996 commencement of the sale of specialty
toys, including educational, electronic interactive, and collectible toys. As
children's consumer preferences and tastes continually change, the Company's
success depends on its ability also to change and adapt to new trends and to
supply merchandise then in demand. Because the Company does not have long-term
or exclusive vendor contracts, it may be unable to purchase sufficient
quantities of product in a timely manner and thus may lose customers. Moreover,
since children's entertainment products are often characterized by fads of
limited life cycles, there can be no assurance that the Company accurately will
be able to forecast such preferences in a timely fashion. If the Company cannot
so forecast or provide its customers with products then in demand, profit
margins will be significantly adversely affected.
<PAGE>
In addition to the foregoing, the Company cannot guarantee that specialty
toys will continue to have higher profit margins. Moreover, most of the
companies with which the Company competes have more extensive research and
development, marketing, and customer support capabilities and greater financial,
technological, and other resources than the Company. There can be no assurance
that the Company will be able to distinguish itself from such larger, more well
known entities or that it will be successful. Moreover, the Company does not
believe there are any significant barriers to entry which might otherwise
discourage new companies from entering the specialty toy industry and competing
with the Company for business, and there can be no assurance that the Company's
competitors will not also embrace the Company's business concept and vary their
product mix so as to compete directly with the Company. See "Risk Factor No. 11
- - Competition."
7. Inventory Risk. The Company currently holds approximately $4.4 million
in inventory for distribution to its twetny-seven stores across the United
States and approximately $7.7 million in inventory in such stores. Since
consumer demand can change for products between the time the Company orders such
products and the time it receives them, the rapidly changing trends in consumer
tastes in the market for children's entertainment products subjects the Company
to significant inventory risk. The Company must accurately predict these trends
and not overstock unpopular products. The Company is particularly exposed to
this risk because it derives a majority of its net sales in the fourth calendar
quarter of each year. Any failure to sufficiently stock popular toys and other
products in advance of such quarter would harm the Company's operating results
for the entire fiscal year. Furthermore, in the event that one or more products
do not achieve widespread consumer acceptance, the Company may be required to
take significant inventory markdowns, which could reduce net sales and gross
margins. This risk may be greatest in the first calendar quarter of each year,
after the Company has significantly increased inventory levels for the holiday
season. This risk likely will increase as new inventory is purchased or as the
Company becomes more involved in web site sales due to the lack of experience in
purchasing products for these categories. In addition, to the extent that demand
for the Company's products increases over time, the Company may be forced to
increase inventory levels which would subject the Company to additional
inventory risks.
8. Dependence on Supplier Credit and Short-Term Loans. The Company
purchases a significant portion of its products from approximately five
manufacturers and ships them to its stores from its distribution center. There
are no written contracts and/or agreements with any individual manufacturer or
supplier, except for Shopnet.com, Inc. ("Shopnet," see "Certain Relationships
and Related Transactions"); rather, all orders are on a purchase order basis
only. The Company requires certain lines of credit and banking relations to
conduct its business. The Company relies on credit terms from its suppliers and
manufacturers to purchase nearly all of its inventory. Credit terms vary from
company to company and are based upon many factors including the ordering
company's financial condition, account history, type of product, and the time of
year the order is placed. Such credit arrangements vary for reasons both within
and outside the control of the Company. Prior to fiscal 1998, the Company's
credit lines decreased due to the Company's then poor financial condition. While
the Company's credit lines recently increased based on its improved financial
condition, due to its expansion, the Company remains unable to keep current with
its accounts payable. Therefore, there can be no assurance that the Company's
credit lines or the terms thereof will not once again be reduced or terminated
altogether in the future. The reduction or termination of existing credit lines
or the loss of major suppliers would have a material adverse effect on the
Company's business.
The Company's dependence on its principal suppliers involves risk, and if
there is a disruption in supply from a principal supplier or distributor, the
Company's business could be adversely affected. Business could also be adversely
affected if key specialty suppliers sell more products through mass market
retailers. Many of the Company's suppliers currently provide the Company with
certain incentives including volume purchasing allowances and cooperative
advertising. A reduction or discontinuation of these incentives could have a
material adverse effect on the Company's business.
<PAGE>
Since the beginning of fiscal year 1999, the Company has entered into
approximately twelve financing agreements for the leasing of fixtures for its
remodeled and new stores. These agreements were entered into with various
entities, none of which is affiliated with the Company, and bear terms of
between three and five years. The agreements are payable monthly and provide
fixture financing in the approximate aggregate amount of $1,112,000. All such
financings are secured by the Company's store fixtures and equipment. The
Company is currently negotiating additional financing of this type, though there
can be no assurance that the Company will obtain such additional financing or
that if it does obtain same, it will generate revenues sufficient to make the
payments thereon in a timely fashion. See Risk Factor No. 14 - "Need for
Additional Financing."
The Company also relies on short-term loans in order to meet its cash flow
needs. Between January and April 1999, the Company borrowed an aggregate of
$400,000 from an unaffiliated entity and $300,000 from an affiliate, pursuant to
promissory notes executed therewith. The Company has repaid these notes in full.
In November 1998, the Company entered into an agreement with each of (i)
Frampton Industries, Ltd. ("Frampton"), an affiliate under the common control of
Europe American Capital Foundation ("EACF"), an entity which beneficially
controls the Company, and (ii) EACF to secure additional financing. Pursuant to
the respective agreements, Frampton loaned $500,000 and EACF loaned $150,000,
each loan in the form of a convertible, subordinated debenture due December 31,
1999. The debentures bear a 5% interest rate and initially were convertible into
Series E Stock at a price of $0.10 per share at Frampton's and EACF's respective
options. This price represents a 50% discount from the then current (November
10, 1998) market price reflecting a discount for the illiquidity of the shares,
which do not carry any registration rights. In May 1999, Frampton and EACF each
agreed to amend such conversion price to $0.20 per share, which represents the
full market price on the date of the original transaction. There can be no
assurance that additional short-term funds will be available to the Company.
9. Dependence on FINOVA Credit Line (Secured by all of the Company's
Assets). On January 21, 1998, the Company entered into a $7.1 million secured,
revolving Loan and Security Agreement (the "FINOVA Agreement") with FINOVA
Capital Corporation ("FINOVA"). The credit line offered under the FINOVA
Agreement replaced the $7 million credit line the Company previously had with
Congress Financial Corporation (Western) ("Congress"). Neither FINOVA nor
Congress is affiliated with the Company. The Company repaid the Congress loan on
February 3, 1998. The FINOVA credit line is secured by substantially all of the
Company's assets and expires on August 3, 2000. The FINOVA Agreement is
guaranteed by United Textiles & Toys Corp. ("United Textiles"), the Company's
parent, and accrues interest at a rate of floating prime plus one and one-half
percent. Effective July 30, 1998, the Company and FINOVA amended the Agreement
to increase the maximum level of borrowings thereunder from $7.1 million to $7.6
million. Effective September 24, 1998, the Company and FINOVA entered into a
second amendment to increase the maximum level of borrowings thereunder from
$7.6 million to $8.6 million through December 31, 1998. As of January 1, 1999,
the maximum level of borrowings returned to the $7.6 million level. In December
1998, the FINOVA Agreement was amended a third time to reflect FINOVA's taking
of a subordinate position with respect to its lien on only such equipment as has
been leased by the Company from Phoenix Leasing, Inc. In November 1998, pursuant
to an agreement with ZD Group, L.L.C. ("ZD") - a related New York limited
liability company, the beneficiary of which is a member of the family of the
Company's chairman - ZD issued a $700,000 irrevocable standby L/C in favor of
FINOVA. As consideration for its issuance of the L/C, ZD is entitled (i) to a
one-third profit percentage after application of corporate overhead beginning
April 1, 1999 through the end of the terms of the store leases from three of the
Company's stores (Woodfield Mall in Schaumburg, Illinois, now scheduled to open
in the late fall of 1999; Auburn Hills, Michigan; and Gurnee, Illinois) and (ii)
to nominate and appoint one-third of the Company's directors during the
aforesaid store lease terms (but in no event later than fiscal year end 2013).
Such stores did not generate a profit after application of corporate overhead in
the three-month period ended June 30, 1999, thus, no payments have accrued or
been made to ZD to date. As a result of the L/C, FINOVA lent a matching $700,000
to the Company in the form of a term loan, pursuant to a fourth amendment to the
<PAGE>
FINOVA Agreement entered into on February 11, 1999. The term loan from FINOVA
expires on August 3, 2000 and bears interest at prime plus one percent. In March
1999, the Company and FINOVA entered into a Fifth Amendment to Loan and Security
Agreement which stretches the agreed upon (in the FINOVA Agreement) decrease in
advance rate against the Company's cost value of its inventory over a five month
period. In August 1999, the Company and FINOVA entered into a Sixth Amendment to
Loan and Security Agreement pursuant to which the Company's maximum level of
borrowings was increased to $11.3 million. The amendment also (1) increased the
minimum net worth financial covenant from $750,000 to $2.9 million as of June
30, 1999 with the $2.9 million threshold increasing by 60% of any equity raised
by the Company and by 60% of any annual profits generated by the Company; (2)
allows the Company to sell a minority equity interest (up to 49%) in its Toys
subsidiary; and (3) increased the maximum levels of capital expenditures,
capital leases and unsecured debt allowed under the financing agreement.
Under the FINOVA Agreement, the Company is able to borrow against the cost
value of eligible inventory. Since February 1999, pursuant to the Agreement, the
Company's allowed borrowing has increased by $100,000 to $2.5 million against a
combination of $3 million in standby L/Cs in favor of FINOVA and restricted cash
provided by a subordinated loan. $1.5 million of the $3 million in additional
borrowing support from the standby L/Cs was provided by an institutional
investor in the form of a subordinated loan, $1.0 million was provided in the
form of a standby L/C issued by Multimedia Concepts International, Inc.
("Multimedia," an affiliate of the Company by virtue of its 78.5% ownership of
United Textiles, the Company's parent), and the other $500,000 was provided by
the Company.
During fiscal year 1999, the Company breached two negative covenants in the
FINOVA Agreement by exceeding maximum levels of capital expenditures, unsecured
debt, and lease financing. FINOVA waived such defaults. The Company may require
an additional increase in its line of credit. There can be no assurance,
however, that FINOVA (i) will be amenable to such a credit line increase or (ii)
will provide such an increase under terms the Company deems reasonable. A
refusal by FINOVA to provide the requested increase would have a material
adverse effect on the Company's business and operations. See "Business of the
Company" and "Certain Relationships and Related Transactions."
10. Inventory Shrinkage and Theft. Within the last twelve months, the
Company hired a Director of Security to analyze and increase security measures
in its stores and warehouse. The Company has experienced an increasing amount of
employee theft from its stores and is taking steps to monitor its stores more
closely. In addition, the Company is prosecuting all who are caught stealing to
the fullest extent under the law. While the Company has security alarms and
surveillance monitors in its warehouse and in all its stores, the Company has
discovered that employees are disengaging the monitors in an attempt to steal
products. There can be no assurance that the Company will be able to deter such
thefts in the future, its preventive security measures notwithstanding.
Considerable inventory theft will adversely affect the Company's gross profit
margins.
11. Competition. The toy and hobby products market is highly competitive.
Though the Company's newer stores offer a combination of traditional,
educational, new electronic interactive, specialty, and collectible toys and
items, the Company remains in direct competition with local, regional, and
national toy retailers and department stores. The toy and hobby retail industry
faces a number of potentially adverse business conditions including price and
gross margin pressures and market consolidation. The Company competes with a
variety of mass merchandisers, superstores, and other toy retailers, including
Toys R Us and Kay Bee Toy Stores. Competitors that emphasize specialty and
educational toys include Disney Stores, Warner Bros. Stores, Learning Smith,
Lake Shore, Zainy Brainy, and Noodle Kidoodle. The Company also competes both
through its electronic commerce operations and through its stores against
internet oriented toy retailers such as eToys, Inc. There can be no assurance
that the Company's business strategy will enable it to compete effectively in
the toy industry. The toy market is particularly characterized by large
retailers and discount stores with intensive advertising and marketing campaigns
and with deeply discounted pricing of such products. The Company competes as to
price, personnel, service, speed of delivery, and breadth of product line. There
can be no assurance that the Company can succeed in such competition, however,
and an inability of the Company to provide merchandise and service of, at the
very least, comparable quality would have a material adverse effect on the
Company.
<PAGE>
Given that children's consumer preferences and tastes continually change
and children's entertainment products are often characterized by fads of limited
life cycles, the Company's success depends on its ability also to change and
adapt to new trends and to supply merchandise then in demand. There can be no
assurance, however, that the Company will be able to recognize such trends in
the time required to prepare for same or supply merchandise then in demand.
Combining the traditional and educational toy segments of the market into one
retail location is believed to be a unique concept that should prove to
differentiate the Company's stores from those of its larger or similar size
competitors. However, while management has been unable to locate any other
retailer currently using this combined marketing concept, the Company competes
for the educational toy customer with the specialty stores indicated above, and
there can be no assurance that such competitors will not also embrace this
concept or a variation of same and vary their product mix so as to compete
directly with the Company. In addition, the Company may not be able to capture
and/or maintain a profitable share of the retail toy market.
Furthermore, most of the companies with which the Company competes have
more extensive research and development, marketing, and customer support
capabilities and greater financial, technological, and other resources than
those of the Company, and there can be no assurance that the Company will be
successful in competing against such companies or in distinguishing itself from
larger, more well known entities. In addition, the Company does not believe
there are any significant barriers to entry which might otherwise discourage new
companies from entering the specialty toy industry and competing with the
Company for business. See Risk Factor No. 8 - "Dependence on Supplier Credit and
Short-Term Loans."
In addition to the above issues concerning competition, the Company faces
new and as yet unchartered competition from its foray into the business of
internet commerce. The online commerce market is new, rapidly evolving, and
intensely competitive. Increased competition is likely to result in price
reductions, reduced gross margins, and loss of market share, any of which could
harm net sales and results of operations. Competition in the industry is
expected to intensify as current and new competitors can enter the market with
little difficulty and launch new web sites at relatively low cost.
12. Potential Rescission of Investment in Toys International.COM, Inc. On
July 20, 1999, the Company and Toys entered into an investment agreement whereby
an unaffiliated investment bank and a British Virgin islands corporation of
which Moses Mika, a director of the Company, is a shareholder (collectively, the
"Toys Investors") each purchased 330,000 shares (or 3.3%) of Toys common stock
for an aggregate of $2.8 million as a bridge financing to a proposed public
offering. (This placement of securities reduced the Company's ownership of Toys
from 100% to 93.4%.) Pursuant to the agreement, if the public offering price for
the shares is less than the $2.8 million the Toys Investors collectively paid
for their shares, the Toys Investors will receive from Toys, at the closing of
the offering, either additional shares or cash to cover the difference. In the
event this is required, Toys, and hence, the Company, could incur a potentially
considerable operating loss which might reduce the Company's profits
significantly. See "Business of the Company - Recent Developments" and "Certain
Relationships and Related Transactions."
<PAGE>
In addition, the agreement allows the Toys Investors to rescind the
agreement and recover their respective $1.4 million investments if (i) for
reasons within the control of the Company or Toys, Toys is unable to raise funds
in the public offering by April 1, 2000, (ii) Toys breaches certain
representations or warranties under the agreement, (ii) Toys' actual quarterly
financials deviate by 30% or more from the financials comprising its business
plan, (iii) the market valuation of the Company at the public offering is less
than $50 million, or (iv) the $2.8 million in proceeds of the investment are not
utilized according to certain agreed upon terms. In the event the Toys Investors
rescind the agreement, Toys would be required to repurchase the shares for $2.8
million in cash which could be extremely difficult to obtain. Toys' only options
to raise such funds would be to offer equity in a private sale, on terms likely
to be extremely disadvantageous to Toys, or to seek a loan from the Company in
which event the Company would be compelled to sell additional equity at terms
likely to be extremely disadvantageous to it. Moreover, there can be no
assurance that either Toys or the Company would locate investors willing to
engage at all in a private offering of securities. If neither Toys nor the
Company were able to raise the funds required for the share repurchase, the Toys
Investors could commence suit against both companies or seek to place same in
involuntary bankruptcy.
13. Narrow Profit Margins and Need to Control Expenses and Other Charges.
The Company's operating history has been characterized by narrow profit margins,
though recently its margins have increased through the refocus of its product
mix. Nonetheless, the Company's earnings will continue to depend significantly
on its ability to (i) purchase product on favorable terms; (ii) obtain store
locations on favorable price and credit terms; (iii) retail a large volume and
variety of products efficiently; and (iv) provide quality support services.
Moreover, small increases in expenses or other charges to income could have a
material adverse effect on the Company's results of operations. There can be no
assurance that the Company will be able to generate sufficient revenues or
maintain sufficient control over expenses and other charges to increase
profitability. Though the Company has, within the past fiscal year, increased
gross profit margins and posted a net profit of $140,868 for the fiscal year
ended March 31, 1999, such income is nominal, and the Company posted a net loss
of $1,549,601 for the quarter ended June 30, 1999. There can be no assurance
that the Company will be able to increase its gross profit margins or post
income, as opposed to a loss, in the future.
14. Need for Additional Financing. In order to continue its growth, the
Company will require funds to (i) open new stores; (ii) redesign one or two
existing stores; and (iii) finance its losses, if any. If, for any reason, the
Company cannot obtain such funds, the Company's only recourse - outside its
existing $11.3 million line of credit with FINOVA and such loans as are set
forth in Risk Factor No. 8 - will be to seek additional financing via the sale
of equity or debt securities in a future public or private offering. There can
be no assurance, however, that such financing will be available or that it will
be available at prices and/or on terms acceptable to the Company. See Risk
Factor No. 8 -- "Dependence on Supplier Credit and Short-Term Loans" and Risk
Factor No. 9 -- "Dependence on FINOVA Credit Line (Secured by all of the
Company's Assets)."
15. Seasonality. The Company's business is highly seasonal with a large
portion of its revenues (approximately 30-40% of the Company's annual net sales)
and profits being derived during the months of October through December.
Accordingly, the Company's quarterly operating results fluctuate significantly.
During the fourth calendar quarter, the Company employs a considerable number of
temporary employees to assist its permanent staff and purchases considerably
more inventory. The Company must obtain substantial short-term borrowings during
the first three quarters of the calendar year to purchase inventory and finance
capital and operating expenditures. Historically, these borrowings have been
repaid after the fourth quarter. Factors that could negatively affect the
Company during the fourth quarter include adverse weather conditions,
unfavorable economic conditions, an inability to hire adequate temporary
personnel, an inability to maintain appropriate inventory levels, and a late
Thanksgiving which reduces the number of days between Thanksgiving and
Christmas.
<PAGE>
16. Reliance Upon Management. The Company depends upon the continued
personal efforts and abilities of its management, none of whom has an employment
agreement with the Company. The loss of services of Richard Brady (chief
executive officer and a founder of the Company), James Frakes (chief financial
officer and secretary), or Harold Rashbaum (the Company's chairman of the board)
would adversely affect the business of the Company. The Company recently
obtained "key-man" life insurance policies, each in the amount of $5 million, on
Richard Brady and Ilan Arbel, president of United Textiles, the Company's
parent.
17. Possible Inability to Utilize Benefit of Tax Loss Carryforwards. At
March 31, 1999, the Company had net operating loss carryforwards ("NOLs") of
approximately $9.4 million for federal purposes and approximately $5 million for
state purposes. Such carryforwards may be utilized to offset future taxable
income subject to the limitations set forth in the Internal Revenue Code ("IRC")
ss.382. Specifically, IRC ss.382 limits NOLs after an ownership change to an
annual amount equal to the value a company's outstanding stock immediately
before the date of the ownership change multiplied by the federal long-term
tax-exempt rate. While the Company's federal NOLs are available to offset future
taxable income and expire at various dates through March 31, 2013 and the state
NOLs are available and expire at various dates through March 31, 2003, a portion
of the NOLs is subject to provisions of IRC ss.382 which limits use thereof when
changes of more than 50% of a company's stock ownership occur during a three
year testing period.
During the years ended March 31, 1994 and 1995, the Company's ownership
changed by more than 50% as a result of the May 1993 acquisition of a majority
interest in the Company and the Company's November 1994 completion of an initial
public offering of its Common Stock. Further changes in Common and Preferred
Stock ownership during each of the years ended March 31, 1997 through 1999 have
also potentially limited the use of NOLs. The effect of such limitations has yet
to be determined. NOLs could be limited further by (i) the exercise of
outstanding Options and Series E Warrants, (ii) the May 1999 private issuance of
Series F Stock, (iii) grants of options under the Company's 401(k) Employee
Stock Option Plan (the "Plan" or the "ESOP") or Stock Option Plan (the "SOP"),
or (iv) a consistent achievement of profitable operations. Any significant
limitation on the utilization of NOLs will increase the Company's tax liability
and reduce income and available cash resources.
18. Possible Future Dilution. The Company has authorized capital stock of
190,500,000 shares consisting of 160 million shares of Common Stock, 25 million
shares of Series E Stock, and 5,500,000 shares of Series F Stock. Inasmuch as
the Company may use authorized but unissued shares of Common Stock and/or Series
E or F Stock without shareholder approval, there may be further dilution of
shareholders' interests. The Company may additionally sell equity and/or debt
securities in a future public offering or private transaction to raise
additional capital which may dilute the interests of potential investors in this
Offering. In addition, the Company may, in the future, donate shares of its
Common Stock to its ESOP plan, which donation may dilute the interests of
potential investors in this Offering. There are 5,833,903 shares of Series E
Stock currently outstanding. Of same, 4,683,903 shares are restricted, and
4,200,570 shares are convertible into Common Stock commencing December 29, 1999
(until December 29, 2002). Each share of Series E Stock is convertible, at the
option of the holder, into six shares of Common Stock commencing two years after
issuance for a period of three years. Conversion of the Series E Stock or
exercise of the Company's 2 million outstanding Series E Warrants will decrease
the net tangible book value per share of Common Stock.
There are 750,000 shares of Series F Stock currently outstanding, all of
which are restricted, and each of which is convertible, at the option of the
holder, into two shares of Common Stock commencing the date the Commission
declares this Registration Statement effective. The Series F Stock shall convert
automatically on the earlier of two years after issuance or in the event the
Common Stock achieves a closing price of $5.00 for 30 consecutive days. The
conversion of the Series F Stock will decrease the net tangible book value per
share of Common Stock.
<PAGE>
In the event the price of the Series E Stock rises above $5.00 per share,
the 2 million outstanding Series E Warrants likely will be exercised and thus
converted into 2 million shares of Series E Stock, each share of which is then
convertible into six shares of Common Stock. Accordingly, in the event (i) the
Series E Warrants are exercised and the Series E Stock underlying same are
issued and converted (any time two years after issuance) into Common Stock (12
million shares), and (ii) the currently outstanding 5,833,903 shares of Series E
Stock are converted (any time after December 29, 1999) into Common Stock
(35,003,418 shares), the Company will be required to issue 47,003,418 shares of
Common Stock. In addition, given that the Company has issued debentures to
Frampton and EACF in consideration of an aggregate $650,000 loan made by same to
the Company, and given that such debentures are convertible into Series E Stock
at a price of $0.20 per share (at Frampton's and EACF's respective options), the
Company may be required to issue an additional 3,250,000 shares of Series E
Stock pursuant to the debentures whereupon any time two years after issuance of
the Series E Stock, same are convertible into an aggregate of 19,500,000 shares
of Common Stock. See "Dilution."
The tangible net book value as of June 30, 1999 is $4,171,436, or
approximately $0.75 per outstanding share of Common Stock of which there are
5,548,857 shares outstanding as of June 30, 1999. On a pro forma basis, assuming
the immediate conversion of the 5,833,903 outstanding shares of Series E Stock
into 35,003,418 shares of Common Stock, the 750,000 outstanding shares of Series
F Stock into 1,500,000 shares of Common Stock, and the ultimate conversion of
the Frampton and EACF debentures into 19,500,000 shares of Common Stock, the
tangible net book value per share of Common Stock would be $0.07 based on the
$4,171,436 tangible net book value and the 61,552,275 shares of Common Stock
outstanding on a pro forma basis. This represents an immediate dilution of $0.68
per share of Common Stock. Outstanding Series E Warrants and stock options have
not been included in the pro forma calculation as the Series E Warrants are not
"in the money" and outstanding stock options are not significant.
19. Dilutive Effect of Employee Stock Ownership Plan. In May 1994, the
Company adopted resolutions approving the ESOP which covers substantially all
employees of the Company. The Plan includes provisions for both an ESOP and a
401(k) Plan. The ESOP allows only contributions by the Company, which
contributions can be made annually at the discretion of the Company's board of
directors. The ESOP has been designed to invest primarily in the Company's
stock. The 401(k) portion of the Plan is contributed to by the employees of the
Company through payroll deductions. The Company does not match contributions to
the 401(k). Contributions to the ESOP may result in an expense resulting in a
reduction in earnings and may dilute the ownership interests of persons who
acquire Securities in this Offering.
20. Limited Market for Securities; Unpredictable Trading. At present, there
is a limited market for the Company's Common Stock, Series E Stock, and Series E
Warrants and no market for the Company's Series F Stock. There is no assurance
that a regular trading market will develop for such Securities or that if one
does develop, it will be sustained; therefore, purchasers may be unable to
resell the Securities offered herein at or near their original offering price or
at any price. Furthermore, it is unlikely that a lending institution will accept
the Company's Securities as pledged collateral for loans even if a regular
trading market for such Securities does develop.
Since inception, the Company's Securities have exhibited significant
volatility with respect to bid, ask, close, and sales prices. The Company
believes that such volatility is affected by shareholder responses to events
both within and without the Company's control, i.e., variations in periodic
operating results, announcements of technological innovations or new products or
services by the Company or its competitors, changes in financial estimates by
securities analysts, conditions or trends in the industry, changes in the
economic performance and/or market valuations of other retail companies, release
of lock-up or other transfer restrictions on outstanding Securities or sales of
additional Securities, and actual and potential litigation. In the past,
following periods of volatility in the market price of their stock, many
companies have been the subject of securities class action litigation. If the
Company were sued in such an action, it could result in substantial costs and a
diversion of management's attention and resources and would cause the Company's
Securities prices to fall.
<PAGE>
21. No Dividends and None Anticipated. The Company has not paid any
dividends; nor, because of its present financial status, does it have any
intention to issue any dividends in the future. The Company expects that it will
reinvest any profits in its business.
22. Significant Ownership by Principal Stockholder. United Textiles owns
approximately 44.9% of the Company's Common Stock. Breaking Waves, Inc.
("Breaking Waves"), a wholly-owned subsidiary of Shopnet, owns approximately
25.2% of the Company's Common Stock. The president of both Breaking Waves and
Shopnet is the father-in-law of the president of United Textiles who is the also
the president of European Ventures Corp., the parent company of Shopnet. As a
result, United Textiles and its management, through their Common Stock holdings,
are able to exercise control over the policies and direction of the Company. The
following chart depicts the Company's ownership structure:
Europe American Capital Foundation
Frampton Industries, Ltd. (100%) American Telecom PLC (80%) ABC Fund, Ltd.(100%)
(100%)
U.S. Stores Corp.
(67.7%)
Multimedia Concepts International, Inc.
(78.5%)
United Textiles & Toys Corp.
(44.9%)
Play Co. Toys & Entertainment Corp.
The Company has two subsidiaries: Toys, of which the Company owns 93.4%,
and Play Co. Toys Canyon Country, Inc. ("Canyon"), which is wholly-owned by the
Company. Toys is the only operating subsidiary, operating nineteen stores, one
of which is the Santa Clarita store which Canyon recently assigned to Toys. See
"Business of the Company - Ownership of the Company."
23. Future Sales of Stock by Stockholders. The Company's outstanding
capital stock consists of 5,548,857 shares of Common Stock, 5,833,903 shares of
Series E Stock, 2,000,000 Series E Warrants, and 750,000 shares of Series F
Stock. In accordance with the Company's Series E Offering in December 1997, all
Securities held by the Company's officers, directors, and principal stockholders
are subject to a two year lock-up agreement with the underwriter of the
Company's offering: the lock-up expires on December 29, 1999. All "restricted
securities" as that term is defined under the Securities Act, in the future, may
be sold only if the holder is in compliance with Rule 144 promulgated under the
Securities Act or pursuant to an effective registration statement. Except for
the Securities subject to the lock-up referenced above, most Securities issued
were issued in excess of one year ago and may be sold in accordance with Rule
144. The sale of Securities by current stockholders, whether pursuant to Rule
144 or otherwise, may have a depressing effect upon the market price of the
Company's Securities.
24. Penny Stock Regulation. The Commission has adopted regulations that
generally define a "penny stock" to be any equity security that has a market
price of less than $5.00 per share or an exercise price of less than $5.00 per
share, other than a security whose issuer has (a) net tangible assets of at
least $2 million, if such issuer has been in continuous operation for three
years; (b) net tangible assets of at least $5 million, if such issuer has been
in continuous operation for less than three years; or (c) average revenues of at
least $6 million for the preceding three years or that is (a) registered or
approved for registration and traded on a national securities exchange that
meets Commission requirements or (b) authorized for quotation on an automated
quotation system sponsored by a registered securities association which system
was operating prior to 1990 and meets Commission requirements or (c) issued by
<PAGE>
an investment company registered under the Investment Company Act of 1940 or (d)
excluded, on the basis of exceeding a minimum price, net tangible assets of the
issuer, or other relevant criteria, from the designation of such term by rule or
regulation which the Commission shall prescribe or (e) exempted, in whole or in
part, conditionally or unconditionally, from the definition of such term by the
Commission. Since the Company has had more than $6 million in revenues for the
preceding three years, its Securities are not designated penny stocks. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a risk disclosure schedule explaining
the penny stock market and the risks associated therewith. If the Company's
Securities were to become subject to the regulations applicable to penny stocks,
the market liquidity for the Securities would be severely affected, limiting the
ability of broker-dealers to sell the Securities and the ability of purchasers
in this Offering to sell their Securities in the secondary market. There is no
assurance that trading in the Company's Securities will not be subject to these
or other regulations that would adversely affect the market for such Securities.
25. Indemnification of Officers and Directors. As permitted under the
Delaware General Corporation Law, the Company's Certificate of Incorporation
provides for the indemnification and elimination of the personal liability of
the directors to the Company or any of its shareholders for damages related to
breaches of their fiduciary duties as directors. As a result of the inclusion of
such provision, shareholders may be unable to recover damages against directors
for actions taken by them which constitute negligence or gross negligence or
that are in violation of their fiduciary duties. The inclusion of this provision
in the Company's Certificate of Incorporation may reduce the likelihood of
derivative litigation against directors and other types of shareholder
litigation.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, and controlling persons of the Company
pursuant to any charter, provision, by-law, contract, arrangement, statute, or
otherwise, the Company has been advised that in the opinion of the Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer, or controlling person of the Company in the
successful defense of any such action, suit, or proceeding) is asserted by such
director, officer, or controlling person of the Company in connection with the
Securities being registered pursuant to this Registration Statement, the Company
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication by such
court of such issue.
26. Litigation. The Company is currently in litigation in connection with
the August 1997 closing of its Rialto store. If the court finds in favor of
plaintiff, the outcome could have an adverse effect on the Company and its
operations. Such outcome could affect the Company's implementation of its
business plan. If the Company's funds are insufficient to meet an adjudicated
financial obligation, the Company may be forced to seek additional financing to
implement its business plan. The Company is engaged in settlement negotiations
with plaintiff in this matter; however, the action may not settle, in which case
trial has been scheduled for September 1999.
27. Year 2000. In 1998, the Company developed a plan to upgrade its
existing management information system and computer hardware and to become year
2000 compliant. The Company has completed the hardware upgrade and has installed
a year 2000 compliant upgrade to its accounting software. At present, the
Company cannot place orders for delivery after December 31, 1999 as no purchase
order can be generated for such order until the year 2000 computer issue has
been completely resolved. The Company expects to finish the year 2000 compliance
work in the September quarter of 1999, though there can be no assurance that
this problem will be eradicated thereby. The total cost of the hardware and
software purchased for the project was approximately $100,000.
<PAGE>
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. Although management has
reviewed its significant vendors' and financing arm's 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, unexpected year 2000 system difficulties may arise and materially
adversely affect the Company. In addition, while 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, there can be no assurance that all relevant information will be
available to the Company to permit same to adequately assess such additional
steps as may be warranted under the circumstances. To date, nothing has come to
the attention of the Company that would lead it to believe that its significant
vendors and/or service providers will not be year 2000 ready. 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. It is nonetheless
possible that year 2000 problems could have a material adverse effect in that
holiday 1999 purchases may be stunted due to consumer uncertainty and that the
overall business environment may be disrupted in the Company's fourth fiscal
quarter.
28. Physical Location of the Company's Warehouse and Stores. The majority
of the Company's stores and its warehouse are located in Southern California and
thus are vulnerable to natural disasters such as earthquakes and fire and other
unexpected problems. The occurrence of a natural disaster or other unexpected
problems could cause interruption or delay in the Company's business, loss of
data, or render the Company unable to accept and fulfill customer orders. The
Company has no formal disaster recovery plan and its business interruption
insurance may not adequately compensate the Company for losses that may occur.
29. Potential Internet Security and Credit Card Fraud. The Company's
relationships with its customers may be adversely affected if the security
measures it utilizes on its web sites to protect personal information (such as
credit card numbers) are ineffective. If the Company loses customers as a result
of ineffective security measures, its net sales and gross margins could decrease
and its reputation could be materially adversely affected. The Company relies on
security and authentication technology it licenses from third parties. With this
technology, the Company performs real-time credit card authorization and
verification with its bank. The Company cannot predict whether events or
developments will result in a compromise or breach of the technology the Company
uses to protect its customers' personal information. Furthermore, servers may be
vulnerable to computer viruses, physical or electronic break-ins, and similar
disruptions. The Company may need to expend significant additional capital and
other resources to protect against a security breach or to alleviate problems
caused by any breaches and cannot assure that it can prevent all security
breaches.
In addition to the foregoing, the Company's net sales and reputation could
be materially adversely affected if the Company experiences significant credit
card fraud. A failure to adequately control fraudulent credit card transactions
would reduce net sales and gross margins because the Company does not carry
insurance against this risk. The Company has developed technology to help it
detect the fraudulent use of credit card information. Nonetheless, to date, the
Company has suffered losses as a result of orders placed with fraudulent credit
card data even though the associated financial institution approved payment of
the orders. Under current credit card practices, the Company is liable for
fraudulent credit card transactions because it does not obtain a cardholder's
signature.
<PAGE>
30. Rapid Technological Change. The Company's business, both online and in
its stores, is subject to rapid technological advancement. If the Company cannot
maintain an edge on the market and continue to adapt with technological
advancements, especially computerized change, the Company's services could
become commonplace and the Company could lose customers. If the Company faces
material delays in introducing new services, products, and enhancements,
customers may leave the Company and purchase products sold by the Company's
competitors. In order to remain competitive, therefore, the Company must
continue to enhance and improve the functionality and features of its online and
physical stores, which task requires significant capital. The Company expects to
expend approximately $1.5 million in developing, enhancing, and marketing its
internet and physical store sites during fiscal year 2000. Such task entails
significant technical and business risks. The Company may use new technologies
ineffectively or may fail properly to adapt its web site or the systems it uses
to process customer orders and payments and to customer requirements or emerging
industry standards. As the internet and the online commerce industries are
rapidly changing, if competitors introduce new products and services embodying
new technologies, or if new industry standards and practices emerge, the
Company's existing web sites and proprietary technology and systems may not
sufficiently address such change.
31. Government Regulation. The adoption or modification of laws or
regulations relating to the internet could adversely affect the manner in which
the Company conducted its business. In addition, the growth and development of
the market for online commerce may lead to more stringent consumer protection
laws, both in the United States and abroad, that may impose additional burdens
on the Company. Laws and regulations directly applicable to communications or
commerce over the internet are becoming more prevalent. The United States
Congress recently enacted internet laws regarding children's privacy,
copyrights, taxation, and the transmission of sexually explicit material. The
European Union recently enacted its own privacy regulations. The law of the
internet, however, remains largely unsettled, even in areas in which there has
been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy, libel, and
taxation apply to the internet. In order to comply with new or existing laws
regulating online commerce, the Company (i) may need to spend time and money
revising the process by which it fulfills customer orders to ensure that such
shipments comply with applicable laws or (ii) may need to hire additional
personnel to monitor compliance with applicable laws or (iii) may need to modify
its software to protect customers' personal information.
In addition to the foregoing, as a publisher of online content, the Company
faces potential liability for defamation, negligence, copyright, patent, or
trademark infringement or other claims based on the nature and content of
materials published or distributed. If the Company faces such liability, then
its reputation and business may suffer. In the past, plaintiffs have brought
these types of claims and sometimes successfully litigated them against online
services. Although the Company carries general liability insurance, such
insurance does not cover claims of these types. There can be no assurance that
the Company will be able to obtain insurance to protect against such liability
in the future or that same will be adequate to indemnify the Company for all
liability that may be imposed thereon.
32. Sales And Other Taxes. The Company has recently been notified by the
State of Arizona that it requires that the Company assess sales tax on internet
orders purchased by Arizona residents. If more states or any foreign countries
successfully assert that the Company should collect such or other taxes on the
sales of its products, the Company's net sales and results of operations could
be harmed. Prior hereto, the Company did not collect sales or other similar
taxes for physical shipments of goods into states other than California. If the
Company becomes obligated to collect sales taxes, it will need to update the
system that processes customer orders to calculate the appropriate sales tax for
each customer order and then remit the collected sales taxes to the appropriate
authorities. These upgrades will increase operating expenses and may discourage
customers from purchasing products from the Company because they have to pay
sales tax. As a result, the Company may need to lower prices to retain these
customers.
<PAGE>
33. Lease Commitment and Liability. The Company is party to or the
guarantor of twetny-seven store leases, averaging ten to fifteen years in length
and having approximate base rentals of $83,000 to $450,000 per year. Given the
length and expense associated with such leases, the Company may face significant
pecuniary penalty in the event it or its subsidiary(ies) seek(s) to terminate
such leases, good cause notwithstanding. In the event the Company is unable to
generate sufficient revenue from a particular store location, given the terms of
the lease with the landlord thereof, the Company may find it difficult to close
such location without significant cost or litigation expense. See "Business of
the Company - Description of Property."
34. Forward Looking Statements. The statements contained herein that are
not historical facts are "forward-looking statements" which can be identified by
the use of forward looking terminology such as "believes," "expects," "may,"
"will," "should," or "anticipates," the negatives or other variations thereof,
or comparable terminology and include statements as to the intent, belief, or
current expectations of the Company and its directors, officers, and management
with respect to the future operations, performance, or position of the Company.
These forward looking statements are predictions. No assurances can be given
that the future results indicated, whether expressed or implied, will be
achieved. While sometimes presented with numerical specificity, these forward
looking statements are based upon a variety of assumptions relating to the
business of the Company, which, although considered reasonable by the Company,
may not be realized. Because of the number and range of the assumptions
underlying the Company's forward looking statements, many of which are subject
to significant uncertainties and contingencies beyond the reasonable control of
the Company, some of the assumptions inevitably will not materialize, and
unanticipated events and circumstances may occur subsequent to the date herein.
These forward looking statements are based on current information and
expectations, and the Company assumes no obligation to update. Therefore, the
actual experience of the Company and results achieved during the period covered
by any particular forward looking statement may differ materially from those
anticipated. Consequently, the inclusion of forward looking statements should
not be regarded as a representation by the Company or any other person that
these estimates will be realized, and actual results may vary substantially.
There can be no assurance that any of these expectations will be realized or
that any of the forward looking statements contained herein will prove accurate.
USE OF PROCEEDS
The Company will not generate any revenue from this Offering, as the
Securities registered herein are to be sold not by the Company but by the
Selling Securityholders. The Company shall generate revenue, however, from the
exercise of the Options issued pursuant to the private placement, unless the
exercise price of such Options ($3.00 per share) remains less than the sales
price of the Common Stock.
The Company raised $657,500 from the May 1999 private placement of 750,000
shares of Series F Stock, after deducting underwriting commissions and legal and
administrative expenses. All of such proceeds, and any proceeds generated by the
exercise of the Options, shall be used by the Company for general working
capital. Such proceeds may be used to fund the remodeling or opening of stores,
to purchase inventory, or for general corporate purposes such as to pay salary,
lease, or other administrative expenses. No proceeds will be paid to any officer
or director of the Company, to any Company affiliates or associates as
reimbursement for expenses of the Offering, or for any type of fee or
remuneration other than as indicated herein. The Company does not intend to use
any of the proceeds from the private placement to merge or acquire the assets of
another company and has no plans, commitments, or agreements nor is involved in
any discussions with regards to any such acquisition or merger.
<PAGE>
The Company believes that the proceeds generated by (i) the Series F Stock
private placement, (ii) the exercise by Tudor Technologies, Inc. ("Tudor") of
its option to purchase 25% of Toys common stock from the Company, (iii) the
private sale of 6.6% of the common stock of Toys, and (iv) the cash flow from
operations and currently available financing sources will suffice to meet the
Company's anticipated cash requirements for a period of twelve months following
completion of this Offering. See "Business of the Company" and "Certain
Relationships and Related Transactions." The Company does not believe it will
require additional capital during such time. If such belief proves incorrect,
however, the Company may be forced to seek additional financing, and there can
be no assurance that same will be available to the Company, or that if it is
available, it will be on terms acceptable to the Company. The problems,
expenses, and complications sometimes encountered by a relatively small
business, as well as changes in economic conditions, the regulatory environment,
or the Company's operations, may make shifts in the allocation of funds
necessary or desirable.
Any of the Offering proceeds apportioned to working capital, while not
being used as described above, will be deposited in interest-bearing bank or
money market accounts or held as short-term United States Government securities
or bank certificates of deposit. No other type of investment will be made with
such proceeds.
DILUTION
The Company has authorized capital stock of 190,500,000 shares consisting
of 160 million shares of Common Stock, 25 million shares of Series E Stock, and
5,500,000 shares of Series F Stock. Inasmuch as the Company may use authorized
but unissued shares of Common Stock and/or Series E or F Stock without
shareholder approval, there may be further dilution of shareholders' interests.
The Company may additionally sell equity and/or debt securities in a future
public offering or private transaction to raise additional capital which may
dilute the interests of potential investors in this Offering. In addition, the
Company may, in the future, donate shares of its Common Stock to its ESOP plan,
which donation may dilute the interests of potential investors in this Offering.
There are 5,548,857 shares of Common Stock, 2 million Series E Warrants,
and 5,833,903 shares of Series E Stock currently outstanding. Of the Series E
Stock outstanding, 4,683,903 are restricted. Each share of Series E Stock is
convertible, at the option of the holder, into six shares of Common Stock
commencing two years after issuance for a period of four years. Approximately
2,550,570 shares of Series E Stock are subject to a two-year lock-up until
December 29, 1999. Notwithstanding the foregoing, conversion of the Series E
Stock (or exercise of the Company's 2 million outstanding Series E Warrants)
will decrease the net tangible book value per share of Common Stock.
In addition to the foregoing securities, there are 750,000 shares of Series
F Stock currently outstanding, all of which are restricted, and each of which is
convertible, at the option of the holder, into two shares of Common Stock
commencing the date the Commission declares this Registration Statement
effective. The Series F Stock shall convert automatically on the earlier of two
years after issuance or in the event the Common Stock achieves a closing price
of $5.00 for 30 consecutive days. The conversion of the Series F Stock will
decrease the net tangible book value per share of Common Stock.
In the event the price of the Series E Stock rises above $5.00 per share,
the 2 million outstanding Series E Warrants likely will be exercised and thus
converted into 2 million shares of Series E Stock, each share of which is then
convertible into six shares of Common Stock. Accordingly, in the event (i) the
Series E Warrants are exercised and the Series E Stock underlying same are
issued and converted (any time two years after issuance) into Common Stock (12
million shares), and (ii) the currently outstanding 5,833,903 shares of Series E
Stock are converted (any time after December 29, 1999) into Common Stock
(35,003,418 shares), the Company will be required to issue 47,003,418 shares of
Common Stock. In addition, given that the Company has issued debentures to
Frampton and EACF in consideration of an aggregate $650,000 loan made by same to
the Company, and given that such debentures are convertible into Series E Stock
at a price of $0.20 per share (at Frampton's and EACF's respective options), the
Company may be required to issue an additional 3,250,000 shares of Series E
Stock pursuant to the debentures whereupon any time two years after issuance of
the Series E Stock, same are convertible into an aggregate of 19,500,000 shares
of Common Stock. See Risk Factor No. 18 - "Possible Future Dilution."
<PAGE>
The tangible net book value as of June 30, 1999 is $4,171,436, or
approximately $0.75 per outstanding share of Common Stock of which there are
5,548,857 shares outstanding as of June 30, 1999. On a pro forma basis, assuming
the immediate conversion of the 5,833,903 outstanding shares of Series E Stock
into 35,003,418 shares of Common Stock, the 750,000 outstanding shares of Series
F Stock into 1,500,000 shares of Common Stock, and the ultimate conversion of
the Frampton and EACF debentures into 19,500,000 shares of Common Stock, the
tangible net book value per share of Common Stock would be $0.07 based on the
$4,171,436 tangible net book value and the 61,552,275 shares of Common Stock
outstanding on a pro forma basis. This represents an immediate dilution of $0.68
per share of Common Stock. Outstanding warrants and stock options have not been
included in the pro forma calculation as the warrants are not "in the money" and
outstanding stock options are not significant.
SELLING SECURITYHOLDERS
The following table sets forth the identities of the individuals and/or
entities - none of whom has had any material position, office, or affiliation
with the Company or its predecessors or affiliates within the past three years -
who were issued securities in the Company's May 1999 private placement offering
and their respective holdings thereof:
<TABLE>
<CAPTION>
SHARES OF
SHARES OF COMMON
COMMON STOCK PERCENTAGE
SHARES OF STOCK INTO OFFERED OWNERSHIP
SERIES F WHICH SERIES FOR AFTER RESALE
STOCK F STOCK ARE OPTIONS RESALE HEREBY
ISSUED 1 CONVERTIBLE 2 ISSUED 3 HERBY
<S> <C> <C> <C> <C> <C>
Birdie Capital Corp. ........... 100,000 200,000 -- 200,000 --
Harbourcreek Investments Ltd. .. 100,000 200,000 -- 200,000 --
Valentia Properties Inc. ....... 200,000 400,000 -- 400,000 --
David Stefansky ................ 130,000 260,000 -- 260,000 --
Aaron Stefansky ................ 50,000 100,000 -- 100,000 --
Solomon Liebenthal ............. 155,000 310,000 -- 310,000 --
Samuel Krieger ................. 15,000 30,000 -- 30,000 --
Robb Peck McCooey Clearing Corp. -- -- 140,000 140,000 --
Gushnut Consulting, Inc. ....... -- -- 32,500 32,500 --
Redwood Capital Partners, Inc. . -- -- 167,500 167,500 --
Donald Sinsabaugh .............. -- -- 5,000 5,000 --
Vincent Calicchia .............. -- -- 5,000 5,000 --
TOTAL .......................... 750,000 1,500,000 350,000 1,850,000 --
</TABLE>
1 The Series F Stock were purchased by the selling Securityholders at a
price of $1.00 per share. The Private Placement closed on May 27, 1999,
providing net cash proceeds of $667,500 to the Company before legal and other
administrative expenses.
2 Each share of Series F Stock is convertible, at the option of the holder,
into two shares of Common Stock commencing the date the Commission declares this
Registration Statement effective. The Series F Stock shall convert automatically
on the earlier of two years after issuance or in the event the Common Stock
achieves a closing price of $5.00 for 30 consecutive days.
3 As part of the Private Placement, the Company granted Options to the
Placement Agent and its assignees to purchase an aggregate of 350,000 shares of
Common Stock, at an exercise price of $3.00 per share until May 26, 2003.
Additionally, as commission, the Placement Agent received a 10% fee, or $75,000,
and a 1% fee, or $7,500, to cover administrative expenses.
<PAGE>
PLAN OF DISTRIBUTION FOR THE SECURITIES
OF THE SELLING SECURITYHOLDERS
This Prospectus covers the resale of 1,850,000 shares of Common Stock owned
by the Selling Securityholders designated herein and shall be delivered by said
Selling Securityholders upon their sale of such Shares. The Shares in this
Offering are not being sold through an underwriter and may be sold from time to
time by the Selling Securityholders, in negotiated transactions, at fixed prices
which may be changed, and at market prices prevailing at the time of sale, or in
a combination thereof. Such sales or even the potential of such sales at any
time may have an adverse effect on the market prices of the Securities offered
hereby. See "Risk Factors."
The Selling Securityholders may effect such transactions by selling
directly to purchasers or to or through broker-dealers which may act as agents
or principals, including via block trade transactions in which the broker or
dealer will attempt to sell the Securities as agent but may position and resell
a portion of the block as principal to facilitate the transactions or purchases
by a broker or dealer as principal and resale by such broker or dealer for its
own account pursuant to this Prospectus, or in ordinary brokerage transactions
and transactions in which the broker solicits purchasers. In effecting sales,
brokers or dealers engaged by the Selling Securityholders may arrange for other
brokers or dealers to participate, and such broker-dealers may receive
compensation in the form of discounts, concessions, or commissions from the
Selling Securityholders and/or the purchasers of the Securities, as applicable,
for which such broker-dealers may act as agents or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer might be
in excess of customary commissions). The Selling Securityholders and any
broker-dealers that act in connection with the sale of the shares of Common
Stock by the Selling Securityholders might be deemed to be "underwriters" within
the meaning of Section 2(11) of the Act. In that connection, the Company has
agreed to indemnify the Selling Securityholders, and the Selling Securityholders
have agreed to indemnify the Company against certain civil liabilities including
liabilities under the Act.
At the time a particular offer of Securities is made by or on behalf of the
Selling Securityholders, to the extent required, a Prospectus Supplement will be
distributed which will set forth the number of shares of Common Stock being
offered and the terms of the offering, including the name(s) of any
underwriter(s), dealer(s), or agent(s); the purchase price paid by any
underwriter(s) for shares purchased from the Selling Securityholders; any
discounts, commissions, or concessions allowed or reallowed or paid to dealers;
and the proposed selling price to the public.
Under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules and regulations thereunder, any person engaged in a distribution
of the Securities offered by this Prospectus may not simultaneously engage in
market-making activities with respect to such Securities during the applicable
"cooling off" period (nine days) prior to the commencement of such distribution.
In addition, and without limiting the foregoing, the Selling Securityholders
will be subject to applicable provisions of the Exchange Act and rules and
regulations thereunder, including without limitation, Rules 10b-6 and 10b-7, in
connection with transactions in such securities, which provisions may limit the
timing of purchases and sales of Securities by the Selling Securityholders.
<PAGE>
The following table sets forth all estimated expenses of the Offering other
than underwriting discounts and commissions:
<TABLE>
<CAPTION>
<S> <C>
Registration fees 936.14
Federal taxes and fees --
State taxes and fees --
Trustees' fees --
Transfer agents' fees --
Printing and engraving fees 2,500
Legal fees 25,000
Accounting fees 10,000
Listing fees --
</TABLE>
Premiums paid by the Company or any Selling
Securityholder on any policy to indemnify directors and
officers against liabilities from the registration,
Offering, or sale of the Securities --
Total $38,436.14
PRINCIPAL SECURITYHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's outstanding Common Stock as of September 15, 1999 by
(i) each beneficial owner of 5% or more of the Company's Common Stock; (ii) each
of the Company's executive officers, directors, and key employees; and (iii) all
executive officers, directors, and key employees as a group:
<TABLE>
<CAPTION>
Name and Address Number of Shares of Common Stock
of Beneficial Owner Beneficially Owned1 Percent of Common Stock
Beneficially Owned2,3
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harold Rashbaum 4
c/o Play Co. Toys & Entertainment Corp.
550 Rancheros Drive -- --
San Marcos, CA 92069
- ------------------------------------------------------------------------------------------------------------------------------------
Richard Brady
c/o Play Co. Toys & Entertainment Corp.
550 Rancheros Drive 25,587 *
San Marcos, CA 92069
- ------------------------------------------------------------------------------------------------------------------------------------
James B. Frakes 5
c/o Play Co. Toys & Entertainment Corp.
550 Rancheros Drive 20,000 --
San Marcos, CA 92069
- ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
(table continued from previous page)
- ------------------------------------------------------------------------------------------------------------------------------------
Name and Address Number of Shares of Common Stock
of Beneficial Owner Beneficially Owned1 Percent of Common Stock
Beneficially Owned2,3
- ------------------------------------------------------------------------------------------------------------------------------------
Moses Mika
c/o Play Co. Toys & Entertainment Corp.
550 Rancheros Drive -- --
San Marcos, CA 92069
- ------------------------------------------------------------------------------------------------------------------------------------
Breaking Waves, Inc. 4
112 West 34th Street 1,400,000 25.2
New York, New York 10120
- ------------------------------------------------------------------------------------------------------------------------------------
Shopnet.com, Inc. 4
14 East 60th Street, Suite 402 1,400,000 25.2
New York, New York 10022
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United Textiles & Toys Corp. 6
1410 Broadway, Suite 1602 2,489,910 44.9
New York, NY 10018
- ------------------------------------------------------------------------------------------------------------------------------------
Multimedia Concepts International, Inc.7
1410 Broadway, Suite 1602 2,489,910 44.9
New York, NY 10018
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Stores Corp. 8
1385 Broadway, Suite 814 2,489,910 44.9
New York, New York 10018
- ------------------------------------------------------------------------------------------------------------------------------------
American Telecom, PLC 9
8-13 Chiswell Street 2,489,910 44.9
London EC 1Y 4UP
- ------------------------------------------------------------------------------------------------------------------------------------
Europe American Capital Foundation 10
c/o Vermogenstreuhand GMBH 2,489,910 44.9
14 Kaiser Street
Bregenz, Austria A-6900
- ------------------------------------------------------------------------------------------------------------------------------------
Officers and Directors as a Group
(4 persons)4,5 35,587 *
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Less than 1%
1 Unless otherwise noted, all of the shares shown are held by individuals
or entities possessing sole voting and investment power with respect to such
shares. Shares not outstanding but deemed beneficially owned by virtue of the
right of an individual or entity to acquire them within 60 days, whether by the
exercise of options or warrants, are deemed outstanding in determining the
number of shares beneficially owned by such person or entity.
2 The "Percent of Common Stock Beneficially Owned" is calculated by
dividing the "Number of Shares Beneficially Owned" by the sum of (i) the total
outstanding shares of Common Stock of the Company, and (ii) the number of shares
of Common Stock that such person or entity has the right to acquire within 60
days, whether by exercise of options or warrants. The "Percent of Common Stock
Beneficially Owned" does not reflect shares beneficially owned by virtue of the
right of any person, other than the person named and affiliates of said person,
to acquire them within 60 days, whether by exercise of options or warrants.
(footnotes continued from previous page)
<PAGE>
3 Does not include 35,003,418 shares of Common Stock issuable upon the
conversion (any time two years from issuance) of 5,833,903 shares of Series E
Stock outstanding.
4 Mr. Rashbaum, the Company's chairman of the board, is also the president
and the sole director of Breaking Waves which is a wholly-owned subsidiary of
Shopnet, a publicly traded company. Mr. Rashbaum is also the president and a
director of Shopnet. By virtue of its ownership of Breaking Waves, Shopnet may
be deemed the beneficial owner of the Company's Common Stock owned by Breaking
Waves.
5 Represents those shares underlying an option which have vested. The final
10,000 shares underlying such option shall vest on July 1, 2000.
6 Does not include 1,950,000 shares of Common Stock issuable upon the
conversion (any time two years from issuance) of 325,000 shares of Series E
Stock. The president of United Textiles, a publicly traded company which is the
Company's parent, is Ilan Arbel who is also the president, chief executive
officer, and a director of Multimedia, a publicly traded company which is the
parent company of United Textiles (owning approximately 78.5% of same).
Multimedia is owned approximately 67.7% by U.S. Stores Corp. ("U.S. Stores"), a
company of which Mr. Arbel is the president and a director. U.S. Stores is owned
100% by American Telecom, PLC ("ATPLC"), a British corporation. By virtue of its
ownership of United Textiles, Multimedia may be deemed a beneficial holder of
the Company's Common Stock held by United Textiles.
7 Does not include 4,818,420 shares of Common Stock issuable upon the
conversion (any time two years from issuance) of 803,070 shares of Series E
Stock. By virtue of its ownership of United Textiles, Multimedia may be deemed a
beneficial owner of the Company's Common Stock held by United Textiles.
8 By virtue of its ownership of Multimedia, U.S. Stores may be deemed a
beneficial owner of the Company's Common Stock.
9 By virtue of its ownership of U.S. Stores, ATPLC may be deemed a
beneficial owner of the Company's Common Stock.
10. Does not include 11,535,000 shares of Common Stock issuable upon the
conversion (any time two years from issuance) of 1,922,500 shares of Series E
Stock. By virtue of its ownership of ATPLC, EACF may be deemed a beneficial
owner of the Company's Common Stock.
DESCRIPTION OF SECURITIES
The Company has authorized capital stock of 190,500,000 shares consisting
of 160 million shares of Common Stock, 25 million shares of Series E Stock, and
5.5 million shares of Series F Stock. As of September 15, 1999, there were
5,548,857 shares of Common Stock, 5,833,903 shares of Series E Stock, 2 million
Series E Warrants, and 750,000 shares of Series F Stock issued and outstanding,
all of which Securities were fully paid and non-assessable. The following
summary description of the Common Stock, Series E Stock, Series E Warrants, and
Series F Stock is qualified in its entirety by reference to the Company's
Certificate of Incorporation and all amendments thereto.
Common Stock
The Company has authorized 160 million shares of Common Stock, of which
5,548,857 shares are outstanding. Holders of Common Stock are entitled to one
vote for each share held. They do not have the right to cumulate their votes in
the election of directors; accordingly, holders of more than 50% of all the
shares outstanding can elect all directors, except that as consideration for
ZD's issuance of the L/C to FINOVA, ZD is entitled to nominate and appoint
one-third of the Company's directors during the terms of the three store leases
from which ZD is entitled to a profit percentage (but in no event later than
fiscal year end 2013). See Risk Factor No. 9 - "Dependence on FINOVA Credit Line
(Secured by all of the Company's Assets)," "Business of the Company," and
"Certain Relationships and Related Transactions." Such stores did not generate a
profit after application of corporate overhead in the three-month period ended
June 30, 1999, thus, no payments have accrued or been made to ZD to date.
<PAGE>
Subject to the liquidation rights of the Company's Series F Stock, holders
of Common Stock are entitled to such dividends as may be declared by the board
of directors out of assets legally available therefor. They are not entitled to
any preemptive, subscription, conversion, or redemption rights. The Company's
Certificate of Incorporation, as amended, contains no provision to delay, defer,
or prevent a change in control of the Company.
Series E Warrants
The Company has 2 million Series E Warrants outstanding, each of which
entitles the holder thereof to purchase one share of Series E Stock (which share
and the shares of Common Stock underlying same were registered in the Company's
December 1997 public offering) at an exercise price of $5.00 per share from
December 29, 1998 until December 29, 2002. Unexercised Warrants automatically
expire at the end of such four year period. Although the Company has no
intention of decreasing the exercise price or extending the exercise period of
the Series E Warrants, it is possible that either or both of such changes may be
effected by resolution of the board of directors in the future. In the event
that the exercise price of the Series E Warrants is reduced or the exercise
period of the Series E Warrants is extended, the Company will be required to
file a post-effective amendment which must be declared effective by the
Commission before the Series E Warrants can be exercised.
The Series E Warrants are redeemable by the Company at any time, commencing
December 29, 1998, upon 30 days' prior notice, at a redemption price of $0.05
each, provided that the closing bid quotation of the Series E Stock for at least
20 consecutive trading days, ending on the third day prior to the date on which
the Company gives notice, has been at least 170% of the exercise price of the
Series E Warrants being redeemed. The Series E Warrants will remain exercisable
during the 30 day notice period. In the event the Company decides to redeem the
Series E Warrants, the Company shall notify all warrantholders thereof by mail
and shall publish a Notice of Redemption in the Wall Street Journal as to the
date of redemption. Redemption of the Series E Warrants could cause the holders
thereof to exercise same at an exercise price which may be disadvantageous for
the holders, to sell the Series E Warrants at the then current market price when
they might otherwise wish to continue to hold the Series E Warrants, or to
accept the redemption price, which is likely to be substantially less than the
market value of the Series E Warrants at the time of redemption. The Company
will not redeem the Series E Warrants at any time in which its registration
statement is not current, enabling investors to exercise their Series E Warrants
during the 30 day notice period in the event of such a redemption. The exercise
price and the number of shares or other securities purchasable upon exercise of
any Series E Warrants are subject to adjustment upon the occurrence of certain
events, including the issuance of shares of Series E Stock as a dividend and any
recapitalization, reclassification, or split-up or reverse split of the Series E
Stock. No adjustment in the exercise price will be required to be made with
respect to the Series E Warrants until cumulative adjustments amount to $0.01 or
more per Series E Warrant; however, any such adjustment not required to be made
at any given time due to such exception will be carried forward and taken into
account in any subsequent adjustment.
In the event of any reclassification, capital reorganization, or other
similar change of outstanding Series E Stock, any consolidation or merger
involving the Company (other than a consolidation or merger which does not
result in any reclassification, capital reorganization, or other similar change
in the outstanding Series E Stock), or a sale or conveyance to another
corporation of the property of the Company as, or substantially as, an entirety,
each Series E Warrant will thereupon become exercisable only for the kind and
number of shares of stock or other securities, assets, or cash to which a holder
of the number of shares of Series E Stock purchasable (at the time of such
reclassification, reorganization, consolidation, merger or sale) upon exercise
of such Series E Warrant would have been entitled upon such reclassification,
reorganization, consolidation, merger, or sale. In the case of a cash merger of
the Company into another corporation or any other cash transaction of the type
mentioned above, the effect of these provisions would be that the holder of a
Series E Warrant would thereafter be limited to exercising such Series E Warrant
at the exercise price in effect at such time for the amount of cash per share
that the holder would have received had he exercised such Series E Warrant and
received shares of Series E Stock immediately prior to the effective date of
such cash merger or transaction. Depending upon the terms of such cash merger or
transaction, the aggregate amount of cash so received could be more or less than
the exercise price of the Series E Warrant.
<PAGE>
Warrantholders, by virtue of their ownership of Series E Warrants alone,
have no right to vote on matters submitted to the Company's stockholders or to
receive dividends; nor are they entitled to share in the Company's assets in the
event of dissolution, liquidation, or winding up.
In order for a warrantholder to exercise his Series E Warrant, the Company
must have a current Registration Statement on file with the Commission and,
unless otherwise exempt, the State Securities Commission of the state in which
the warrantholder resides. Accordingly, the Company would be required to file
post-effective amendments to its Registration Statement when subsequent events
require such amendments in order to continue the registration of the Series E
Stock underlying the Series E Warrants. Although the Company has undertaken and
intends to keep its Registration Statement current, there can be no assurance
that the Company will keep its Registration Statement current and, if for any
reason it is not kept current, the Series E Warrants will not be exercisable and
will lose all value. The Company's transfer agent has also been appointed as its
warrant agent responsible for all record keeping and administrative functions in
connection with the Series E Warrants.
Series E Preferred Stock
The Company has authorized 25 million shares of Series E Stock, of which
5,833,903 shares are outstanding. Each share of Series E Stock is convertible,
at the option of the holder, into six fully paid and non-assessable shares of
Common Stock commencing two years after issuance for a period of three years
(terminating five years from issuance). Holders of Series E Stock possess no
voting rights, except as provided by law with respect to altering the rights and
preferences of the Series E Stock, and are not entitled to dividends. In the
event of any voluntary or involuntary liquidation, dissolution, or winding up of
the affairs of the Company, holders of Series E Stock are entitled to a $1.00
per share liquidation preference. The Series E Stock is not redeemable by the
Company but is subject to certain anti-dilution provisions in the case of any
recapitalization, merger, or acquisition.
Series F Preferred Stock
The Company has authorized 5.5 million shares of Series F Stock, of which
750,000 shares are outstanding. Each share of Series F Stock is convertible, at
the holder's option, into two fully paid and non-assessable shares of Common
Stock, at any time commencing on the date the Commission declares this
Registration Statement effective. Each outstanding share of Series F Stock, by
virtue of and simultaneously with the occurrence of the earlier of either of the
following events and without any action on the part of the holder thereof, shall
convert automatically into shares of Common Stock: (i) two years from issuance
or (ii) in the event the closing price per share of Common Stock has been at
least $5.00 for a consecutive 30 day period.
Holders of Series F Stock possess no voting rights, except as provided by
law with respect to altering the rights and preferences of the Series E Stock.
Holders are entitled to receive, when and as declared by the board of directors,
out of funds legally available for the payment of dividends, cumulative
dividends at $0.08 per share payable upon conversion of the shares in preference
to dividends on junior securities (i.e., Common Stock). Dividends may be paid in
cash or in kind (i.e., in shares of Series F Stock) at the discretion of the
Company and shall be fully cumulative and shall accrue (whether or not
declared), without interest, from the date they are payable.
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the affairs of the Company, holders of Series F Stock are entitled
to be paid out of the assets of the Company available for distribution to its
stockholders an amount in cash equal to $0.50 per share. The Series F Stock,
with respect to rights on liquidation, winding up, and dissolution, ranks junior
to the Series E Stock and senior to the Common Stock. The Series F Stock is not
redeemable by the Company.
<PAGE>
Dividend Policy
The Company has not paid cash dividends on any of its Securities and is
prohibited from doing so pursuant to the terms of its financing agreement with
FINOVA. The Company intends to retain earnings, if any, in the foreseeable
future for use in its activities. Future payment of cash dividends is wholly
dependent upon the Company's earnings, financial condition, capital
requirements, and other factors deemed relevant by the board of directors. It is
not likely that such dividends will be paid in the foreseeable future.
Transfer Agent and Warrant Agent
The Company's transfer and warrant agent for its Common Stock, Series E
Stock, and Series E Warrants is Continental Stock Transfer & Trust Company, New
York, New York.
INTEREST OF NAMED EXPERTS AND COUNSEL
No expert or counsel (i) was hired by the Company on a contingent basis or
(ii) will receive a direct or indirect interest in the Company or (iii) was a
promoter, underwriter, voting trustee, director, officer, or employee of the
Company.
Legal matters relating to the shares of Common Stock offered hereby will be
passed on for the Company by its general counsel, Millennium Ventures Law Group,
Walnut Creek, California.
The financial statements of the Company as of and for the years ended March
31, 1999 and 1998 have been audited by Haskell & White LLP, Independent
Certified Public Accountants, to the extent and for the period set forth in
their report appearing elsewhere herein and are included in reliance upon such
report given upon the authority of that firm as experts in giving said reports.
<PAGE>
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Until September 24, 1997, the Company's Common Stock was quoted on the
Nasdaq SmallCap Stock Market ("Nasdaq"). The following table sets forth
representative high and low bid quotes as reported by the OTC Bulletin Board,
whereon the Company's securities are quoted, during the periods stated below.
Bid quotations reflect prices between dealers, do not include resale mark-ups,
mark-downs, or other fees or commissions, and do not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
Calendar Series E (2) Series E (2)
Period Common Stock (1) Warrants (1) Preferred Stock Warrants
------ ---------------- ------------ ------------- --------
Low High Low High Low High Low High
--- ---- --- ---- --- ---- --- ----
1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
01/01/96 - 03/31/96 7/8 2 3/8 1/8 1/4
04/01/96 - 06/30/96 1 1/8 3 1/8 1/4
07/01/96 - 09/30/96 3/4 21/2
10/01/96 - 12/31/96 1 1/8 1 3/8
(table continued from previous page)
Calendar Series E (2) Series E (2)
Period Common Stock (1) Warrants (1) Preferred Stock Warrants
------ ---------------- ------------ ------------- --------
Low High Low High Low High Low High
--- ---- --- ---- --- ---- --- ----
1997
01/01/97 - 03/31/97 1 1 1/4 1 1 1/4
04/01/97 - 06/30/97 1 1 1/8
07/01/97 - 09/23/97(3) 1 1 1/8
10/14/97 - 12/31/97 2 3
1998
01/01/98 - 03/31/98 .67 1.25 1 4.75 .5 1.75
04/01/98 - 06/30/98 .58 1.75 .87 3.5 .5 1.25
07/01/98 - 09/30/98 .75 1.56 .31 3.5 .12 1.12
10/01/98 - 12/31/98 .56 1.22 .20 .67 .01 .37
1999
01/01/99 - 03/31/99 .75 2.56 .20 1.72 .03 .25
04/01/99 - 06/30/99 1.06 2.03 .50 3.37 .10 .58
07/01/99 - 08/20/99 .97 1.59 .97 1.62 .15 .29
- ---------------------
</TABLE>
(1) The Common Stock and Warrants issued in the Company's initial public
offering in November 1994 started to trade separately on February 6, 1995. The
Warrants expired in February 1997. (2) The Company consummated an offering of
its Series E Stock and Series E Warrants in December 1997. These securities
commenced trading on the OTC Bulletin Board on January 5, 1998. (3) The
Company's Common Stock was delisted from Nasdaq effective with the close of
business on September 23, 1997. It began trading on the OTC Bulletin Board in
October 1997.
<PAGE>
As of September 15, 1999, there were approximately 408 holders of record of
the Company's Common Stock, although the Company believes that there are
approximately 650 additional beneficial owners of shares of Common Stock held in
street name. As of September 15, 1999, the number of outstanding shares of the
Company's Common Stock was 5,548,857 (This number is subject to change,
nominally, as the pre-July 1997 reverse split shares which have not been
exchanged as yet are offered for such exchange by the Company's shareholders.)
Effective with the close of business on September 23, 1997, the Company's
Common Stock was delisted from trading on Nasdaq. The Company appealed an
earlier Nasdaq determination and presented its argument in August 1997 at an
oral hearing before the Nasdaq Qualifications Panel (the "Panel"). On September
23, 1997, the Company received a decision from the Panel that based its decision
to delist on its belief that the Company did not meet the stockholders' equity
maintenance requirement of $1 million and based on transactions it deemed
"detrimental to the investing public and the public interest" concerning
transactions undertaken in February 1996 with respect to options issued to an
investor which provided a $2 million L/C as security for a credit line the
Company maintained with Congress Financial Corporation (Western) ("Congress,"
the "Congress Financing"). The Company appealed this matter to the Nasdaq
Listing and Hearing Review Committee (the "Review Committee") which, on October
29, 1997, remanded the Panel's determination for reconsideration by a new Nasdaq
analyst and a new Panel due in part to the Company's allegations of bias.
In December 1997, the Company presented written evidence to the new Panel
which, in a determination dated January 20, 1998, affirmed the delisting. The
Company appealed this determination to the Review Committee. In a decision dated
May 21, 1998, the Review Committee affirmed the delisting citing as its basis
therefor, inter alia, as follows: ". . . given the Company's history of losses,
we do not have confidence in the Company's ability to maintain compliance [with
the capital and surplus requirement] for the long term." In addition, the Review
Committee determined that "substantial dilution to the public shareholders by
stock issuance . . . and by the conversion of preferred stock issued . . . at
prices substantially below the market price" supported the Review Committee's
argument of purported affiliate self-dealing. In further support of its
determination, the Review Committee cited the Company's failure to provide
information requested with respect to entities which were not affiliated with
the Company. (In response to the Review Committee's request for such
information, the Company informed same that it did not believe it appropriate to
make representations regarding the transactions or the composition of any
entities with which it was not affiliated and recommended that the Review
Committee redirect such inquiries directly to such entities.)
The Company sought all administrative remedies available from Nasdaq and
believes that Nasdaq erred in its determination. Given the extreme cost
associated with appealing Nasdaq's decision to the Securities and Exchange
Commission, however, the Company decided not to file such an appeal.
<PAGE>
MANAGEMENT
Directors, Executive Officers, Promoters and Control Persons
The following table sets forth the names, ages, and titles of all
directors and officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Harold Rashbaum 73 Chairman of the Board
Richard Brady 47 Chief Executive Officer, President, and Director
James Frakes 42 Chief Financial Officer, Secretary, and Director
Moses Mika 78 Director
</TABLE>
All directors are elected at an annual meeting of the Company's
shareholders and hold office for a period of one year or until the next annual
meeting of stockholders or until their successors are duly elected and
qualified. Vacancies on the board of directors may be filled by the remaining
directors. Officers are appointed annually by, and serve at the discretion of,
the board of directors. There are no family relationships between or among any
officers or directors of the Company except that Mr. Rashbaum is the
father-in-law of Ilan Arbel, Mr. Mika's son.
As permitted under the Delaware General Corporation Law, the Company's
Certificate of Incorporation eliminates the personal liability of the directors
to the Company or any of its shareholders for damages caused by breaches of said
directors' fiduciary duties. As a result of such provision, stockholders may be
unable to recover damages against directors for actions which constitute
negligence or gross negligence or are in violation of their fiduciary duties.
This provision in the Company's Certificate of Incorporation may reduce the
likelihood of derivative and other types of shareholder litigation against
directors.
Richard Brady is a co-founder of the Company and has acted as the Company's
chief executive officer and president since December 1995. Mr. Brady was the
executive vice president, secretary, and a director from the Company's inception
in 1974 until December 1996. He was re-elected director of the Company in
January 1998. Mr. Brady has been the president of Toys since January 1997 and a
director thereof since May 1998.
Harold Rashbaum has been the chairman of the board of directors since
September 10, 1996. Mr. Rashbaum was a management consultant to the Company from
July 1995 to September 10, 1996. In May 1998, he was elected as a director of
Toys. Mr. Rashbaum has been the president, chief executive officer, and a
director of Shopnet since January 1997. From May 1996 to January 1997, Mr.
Rashbaum served as secretary and treasurer of Shopnet. Since May 1999, he has
also been the president and a director of Hollywood Productions, Inc.
("Hollywood," a wholly-owned subsidiary of Shopnet) and since September 1996, he
has been the president, secretary, and sole director of Breaking Waves (also a
wholly-owned subsidiary of Shopnet). Since February 1996, Mr. Rashbaum has been
the president and a director of H.B.R. Consultant Sales Corp. ("HBR"), of which
his wife is the sole shareholder. Prior thereto, from February 1992 to June
1995, Mr. Rashbaum was a consultant to 47th Street Photo, Inc., an electronics
retailer. Mr. Rashbaum held this position at the request of the bankruptcy court
during the time 47th Street Photo, Inc. was in Chapter 11. From January 1991 to
February 1992, Mr. Rashbaum was a consultant for National Wholesale Liquidators,
Inc., a major retailer of household goods and housewares.
<PAGE>
James Frakes was appointed chief financial officer and secretary of the
Company in July 1997. In August 1997, he was elected as a director of the
Company. In January 1998, Mr. Frakes was appointed secretary and chief financial
officer of Toys. He was elected as a director thereof in May 1998. In January
1998, Mr. Frakes was elected as a director of Shopnet. From June 1990 to March
1997, Mr. Frakes was chief financial officer of Urethane Technologies, Inc.
("UTI") and two of its subsidiaries, Polymer Development Laboratories, Inc.
("PDL") and BMC Acquisition, Inc. These were specialty chemical companies, which
focused on the polyurethane segment of the plastics industry. Mr. Frakes was
also vice president and a director of UTI during this period. In March 1997,
three unsecured creditors of PDL filed a petition for the involuntary bankruptcy
of PDL. This matter is pending before the United States Bankruptcy Court,
Central District of California. From 1985 to 1990, Mr. Frakes was a manager for
Berkeley International Capital Corporation, an investment banking firm
specializing in later stage venture capital and leveraged buyout transactions.
In 1980, Mr. Frakes obtained a Masters in Business Administration from
University of Southern California. He obtained his Bachelor of Arts degree in
history from Stanford University, from which he graduated with honors in 1978.
Moses Mika was appointed as a director of the Company in March 1998 and was
elected a director of Toys in May 1998. Mr. Mika was appointed director of
United Textiles in March 1998. He is also the president of H.D.S. Capital Corp.
and the majority shareholder of European Ventures Corp. Mr. Mika has been
retired since 1989.
Significant Employees of the Company
Howard Labow has been the vice president of advertising of the Company (a
non-executive officer position) since June 1998. He has been employed by the
Company since 1977.
Donna Hogan has been the vice president of merchandising of the Company (a
non-executive officer position) since June 1998. She has been employed by the
Company since 1983.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's officers,
directors, and persons who beneficially own more than ten percent of a
registered class of the Company's equity securities to file reports of
securities ownership and changes in such ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors, and greater than ten percent
beneficial owners also are required by rules promulgated by the SEC to furnish
the Company with copies of all Section 16(a) forms they file.
No person ("a Reporting Person") who during the fiscal year ended March 31,
1999 was a director, officer, or beneficial owner of more than ten percent of
the Company's Common Stock or Series E Stock [which are the only classes of
equity securities of the Company registered under ss.12 of the Exchange Act],
failed to file on a timely basis reports required by ss.16 of the Act during the
most recent fiscal year except as follows: (i) Richard Brady failed to timely
file a Form 4 and remedied same by a Form 5, (ii) Moses Mika failed to file
Forms 3 and 5, (iii) Harold Rashbaum failed to timely file a Form 4 and remedied
same by filing a Form 5, (iv) Shopnet failed to timely file a Form 3 and has
since filed same, (v) EACC failed to file Forms 3, 4, and 5, and (vi) EACF
failed to file Forms 3 and 5. The foregoing is based solely upon a review by the
Company of (i) Forms 3 and 4 during the most recent fiscal year as furnished to
the Company under Rule 16a-3(e) under the Act, (ii) Forms 5 and amendments
thereto furnished to the Company with respect to its most recent fiscal year,
and (iii) any representation received by the Company from any reporting person
that no Form 5 is required, except as described herein.
<PAGE>
Commission Position on Indemnification for Securities Act Liabilities
As permitted under the Delaware General Corporation Law, the Company's
Certificate of Incorporation and By-Laws provide for indemnification of a
director or officer under certain circumstances against reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of an action brought against him by reason of his being a director
or officer. In addition, the Company's charter documents provide for the
elimination of directors' liability to the Company or its stockholders for
monetary damages except in certain instances of bad faith, intentional
misconduct, a knowing violation of law, or illegal personal gain.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the Company
pursuant to any charter, provision, by-law, contract, arrangement, statute, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer, or controlling
person of the Company in the successful defense of any such action, suit, or
proceeding) is asserted by such director, officer, or controlling person of the
Company in connection with the Securities being registered pursuant to this
Registration Statement, the Company will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication by such court of such issue.
Executive compensation
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and Non-Plan
(as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded or paid
by the Company during the years ended March 31, 1999, 1998, and 1997 to each of
the named executive officers of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Name and Principal
Position Year Salary Bonus All Other Restricted Securities
($) ($)(1) Compen- Stock Underlying
sation Award(s) Options/ All Other
SARs LTIP Compen
($) (#) Payouts -sation
($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard Brady 1999 124,500 -- 8,579 (2) -- -- -- --
President, CEO,
and Director
1998 120,000 -- 8,579 (2) 25,000(3) -- -- --
1997 108,000 -- 6,179 (2) -- -- -- --
</TABLE>
1 No bonuses were paid during the periods herein stated.
2 Includes an automobile allowance of $7,200 for each of 1999 and 1998 and
$4,800 for 1997, and the payment of life insurance premiums of $1,379 for each
of 1999, 1998 , and 1997.
3 Mr. Brady received 25,000 shares of Series E Stock as a bonus in March
1998: these shares vested equally over a 12 month period commencing in April
1998 and were returned to the Company by Mr. Brady in April 1999.
<PAGE>
During fiscal 1999, Harold Rashbaum, the Company's chairman of the board,
received an aggregate of $33,000 in compensation from the Company in
consideration of the consulting services he provided therefor. In March 1998,
the Company issued 25,000 shares of Series E Stock, subject to a vesting
schedule, to each of Mr. Brady and Mr. Rashbaum: these shares were returned to
the Company by Messrs. Brady and Rashbaum in early April 1999. Mr. Rashbaum
devotes a significant portion of his time to the Company. Among other things, he
reviews potential store sites, assists in strategic planning, reviews all cash
outflows, and otherwise works closely with management in further developing and
implementing the Company's ongoing business strategy.
1994 Stock Option Plan
In 1994, the Company adopted a Stock Option Plan (the "SOP"). The board
believes that SOP is desirable to attract and retain executives and other key
employees of outstanding ability. Under the SOP, options to purchase an
aggregate of not more than 50,000 shares of Common Stock may be granted from
time to time to key employees, officers, directors, advisors, and independent
consultants to the Company and its subsidiaries. The Company granted to James
Frakes, chief financial officer and secretary, pursuant to his hire, an option
to purchase 30,000 shares of Common Stock at an exercise price of $3.25 per
share, vesting at the rate of 10,000 shares per annum in each of July 1998,
1999, and 2000. On June 17, 1998, the board elected to adjust the exercise price
of the option to $1.15, representing approximately 110% of the closing price of
the Common Stock on said date.
The board of directors is charged with administration of the SOP and is
generally empowered to interpret the SOP, prescribe rules and regulations
relating thereto, determine the terms of the option agreements, amend them with
the consent of the Optionee, determine the employees to whom options are to be
granted, and determine the number of shares subject to each option and the
exercise price thereof. The per share exercise price for incentive stock options
("ISOs") will not be less than 100% of the fair market value of a share of the
Common Stock on the date the option is granted (110% of fair market value on the
date of grant of an ISO if the Optionee owns more than 10% of the Common Stock
of the Company).
Options will be exercisable for a term (not less than one year)
determined by the board. Options may be exercised only while the original
grantee has a relationship with the Company or at the sole discretion of the
board, within ninety days after the original grantee's termination. In the event
of termination due to retirement, the Optionee, with the consent of the board,
shall have the right to exercise his option at any time during the thirty-six
month period following such retirement. Options may be exercised up to
thirty-six months after the death or total and permanent disability of an
Optionee. In the event of certain basic changes in the Company, including a
change in control of the Company as defined in the SOP, in the discretion of the
board, each option may become fully and immediately exercisable. ISOs are not
transferable other than by will or by the laws of descent and distribution.
Options may be exercised during the holder's lifetime only by the holder or his
guardian or legal representative.
Options granted pursuant to the SOP may be designated as ISOs with the
attendant tax benefits provided therefor pursuant to Sections 421 and 422A of
the Internal Revenue Code of 1986. Accordingly, the SOP provides that the
aggregate fair market value (determined at the time an ISO is granted) of the
Common Stock subject to ISOs exercisable for the first time by an employee
during any calendar year (under all plans of the Company and its subsidiaries)
may not exceed $100,000. The board may modify, suspend, or terminate the SOP,
provided, however, that certain material modifications affecting the SOP must be
approved by the shareholders, and any change in the SOP that may adversely
affect an Optionee's rights under an option previously granted under the SOP
requires the consent of the Optionee.
<PAGE>
1994 401(k) Employee Stock Option Plan ("ESOP")
In May 1994, the Company adopted corporate resolutions approving a
401(k) Employee Stock Ownership Plan (the "401(k) ESOP Plan") which covers
substantially all employees of the Company. The 401(k) ESOP Plan was filed on
July 14, 1995 with the Internal Revenue Service and includes provisions for both
employee stock ownership and a 401(k) Plan. The 401(k) ESOP Plan allows
contributions only by the Company: these can be made annually at the discretion
of the Company's board of directors. The 401(k) ESOP Plan has been designed to
invest primarily in the Company's stock. The employees of the Company will
contribute to the 401(k) portion of the Plan through payroll deductions. The
Company does not intend to match contributions to the 401(k). Contributions to
the 401(k) ESOP Plan may result in an expense, resulting in a reduction in
earnings, and may dilute the ownership interests of persons who currently own
securities of the Company. On January 26, 1995, Messrs. Brady and Tom Davidson
(a founder of the Company and the Company's former president) and the Company's
then parent company contributed an aggregate of 15,333 shares of the Company's
Common Stock to the 401(k) ESOP Plan. In August 1998, pursuant to the ESOP
portion of the plan, the Company issued 5,673 shares of Common Stock to certain
former employees.
BUSINESS OF THE COMPANY
General
The Company was founded in 1974, at which time it operated one store under
the name Play Co. Toys in Escondido, California. At present, the Company and its
subsidiary, Toys, operate an aggregate of twetny-seven stores throughout
Southern California (in the Los Angeles, Orange, San Diego, Riverside, and San
Bernardino Counties) and in (i) Tempe, Arizona, (ii) Las Vegas, Nevada, (iii)
Dallas, Texas, (iv) Auburn Hills, Michigan, and (v) Chicago, Illinois. The
Company intends to expand its operations geographically and in accordance
therewith has executed leases to open nine additional stores by the end of
calendar year 2000. These stores shall be located in California (San Ysidro and
Mission Viejo), Nevada (Las Vegas), Texas (Houston), North Carolina (Charlotte),
and Tennessee (Nashville), and Illinois (Schaumberg).
Approximately 75% of the Company's stores offer educational, new electronic
interactive, and specialty and collectible toys and items for sale and are
strategically located in highly trafficked, upscale malls. The remaining 25%
sell traditional toys and games and are located in strip shopping centers. Given
the favorable results obtained from a two year market test of the sale of
children's swimwear in its stores, the Company recently expanded its product mix
and now offers a limited number of children's swimwear and accessories for sale
in many of its stores.
Since 1997, the Company has embraced and implemented a new store design and
layout, remodeled most of its older stores, closed non-profitable stores, and
expanded its geographic market from exclusively Southern California to the
mid-western United States. Since 1996, the Company has opened eight stores which
are considered by management to be high-end retail toy and educational,
electronic interactive stores. These outlets, and those the Company expects to
open in the future, offer items comparable in quality and choice to those
offered by FAO Schwarz, Warner Brothers, and Disney Stores and are expected to
attract clientele similar to those attracted by such stores.
In April 1999, the Company debuted the first of three dedicated electronic
commerce web sites. This site, www.ToysWhyPayRetail.com, represents a new trade
name for the Company and allows consumers to purchase, at near wholesale prices,
overstocks, special buys, and overruns on mostly name-brand toys purchased by
the Company out of season. The Company plans to offer approximately 1000 items
for sale on the web site.
<PAGE>
The second and third electronic commerce web sites are currently being
developed to a state-of-the-art standard in conjunction with two Internet
consulting firms. These sites will offer collectible and imported specialty
merchandise such as die-cast cars, dolls, plush toys, trains, and collectible
action figures and are expected to open in the late fall of 1999. In conjunction
with the web site launch, the Company plans to place computer kiosks in several
of its retail locations in order to permit customers to place orders on the web
site for goods otherwise not sold in such store.
Because the Company's new and newly remodeled stores focus on the sale of
educational and electronic interactive games and toys, specialty products, and
collector's toys which generally carry higher gross margins than traditional
toys, such stores have shown and are expected to continue to show higher gross
profits than the Company's older stores (which focused primarily on the sale of
traditional toys).
Acquisition of Toys International.COM, Inc. f/k/a Toys International, Inc.
In January 1997, the Company acquired substantially all of the assets of
Toys. The acquisition, in principal, included the assignment to the Company of
the three store leases then held by Toys and Toys' entire inventory. As part of
the purchase agreement, the Company obtained the rights to the "Toys
International" and "Tutti Animali" operating name trademarks and also assumed
the existing leases at Toys' three store locations: two of such locations
operate under the tradename "Toys International," and the third operates under
the "Tutti Animali" tradename. The total purchase price was $1,024,184 which
consisted mainly of inventory and certain prepaid expenses and deposits. The
purchase price was tendered in the form of a $759,184 cash payment remitted in
January 1997 and the execution of two promissory notes, aggregating $265,000,
payable over a two year period. Both promissory notes were repaid in full under
agreed terms. In order to ensure a smooth transition in operations, the former
president of Toys, Mr. Gayle Hoepner, continued his relationship as a consultant
to the Company through April 1997, during which time he advised the Company
regarding Toys' then operations, vendors, policies, employees, etc. 3. Ownership
of the Company
At September 15, 1999, approximately 44.9% of the outstanding shares of the
Company's Common Stock, were owned by United Textiles, the Company's parent
corporation. United Textiles is a Delaware corporation and public company which
was organized in March 1991 and commenced operations in October 1991. It
formerly designed, manufactured, and marketed a variety of lower priced women's
dresses, gowns, and separates (blouses, camisoles, jackets, skirts, and pants)
for special occasions and formal events. In April 1998, United Textiles ceased
all operating activities; it now operates solely as a holding company. The
president and a director of United Textiles is Mr. Ilan Arbel who is also the
president, chief executive officer, and a director of Multimedia, the parent
company of United Textiles. Multimedia owns approximately 78.5% of United
Textiles common stock and is, in turn, owned approximately 67.7% by U.S. Stores,
a company of which Mr. Arbel is the president and a director. U.S. Stores is
owned 100% by ATPLC, a British public corporation, which is owned approximately
80% by EACF, a Swiss foundation which is the parent corporation also of Frampton
and ABC Fund, Ltd. ("ABC") , entities affiliated with the Company under common
control.
The following chart depicts the Company's ownership structure:
Europe American Capital Foundation
Frampton Industries, Ltd.(100%) American Telecom PLC (80%) ABC Fund, Ltd. (100%)
(100%)
U.S. Stores Corp.
(67.7%)
Multimedia Concepts International, Inc.
(78.5%)
United Textiles & Toys Corp.
(44.9%)
Play Co. Toys & Entertainment Corp.
<PAGE>
The Company has two subsidiaries: Toys, of which the Company owns 93.4%,
and Canyon, which is wholly-owned by the Company. Toys is the only operating
subsidiary, operating nineteen stores, one of which is the Santa Clarita store
which Canyon recently assigned to Toys.
Product Lines
The Company's older stores, which are located in strip shopping centers,
sell children's and adult toys, games, bicycles and other wheel goods, sporting
goods, puzzles, Nintendo and Sony electronic game systems (and cartridges
therefor), cassettes, and books. These stores offer in excess of 15,000 items
for sale, most of which are major brand name toys and hobby products.
The Company's new (post 1996) and remodeled stores, while also offering the
aforesaid products for sale, stock a mix of educational toys, specialty stuffed
animals such as Steiff and North America Bears, Small World toys, LBG trains,
CD-ROMs, computer software games, and Learning Curve and Ty products. The
Company's Tutti Animali store, located in the Crystal Court Mall in Costa Mesa,
California, primarily sells stuffed animals.
The Company periodically reviews each individual store's sales history and
prospects on an individual basis to decide on the appropriate product mix to
stock thereat. During calendar years 1997 and 1998, the Company market tested
the sale in its stores of a limited number of pieces of children's swimwear
manufactured by Breaking Waves, an affiliate. The Company's chairman is also the
president of Shopnet, Breaking Waves' parent. Those market tests proved
successful. As a result, in November 1998, the Company entered into a sales
agreement with Breaking Waves pursuant to which Breaking Waves agreed to sell to
the Company on a wholesale basis, and the Company agreed to purchase from
Breaking Waves, during each season during which swimwear is purchased, an agreed
upon number of pieces of merchandise for its retail locations. The Company
further agreed to provide advertising, promotional materials, and ads of the
merchandise in all of its brochures, advertisements, catalogs, and all other
promotional materials, merchandising programs, and sales promotion methods, in
all mediums utilized by same. The Company's swimwear sales comprise a small
portion (less than 1%) of its total sales.
Suppliers and Manufacturers
The Company purchases a significant portion of its products from
approximately five manufacturers and ships them to its stores from its warehouse
distribution center. There are no written contracts and/or agreements with any
individual manufacturer or supplier; rather, all orders are on a purchase order
basis only. The Company relies on credit terms from suppliers and manufacturers
to purchase nearly all of its inventory. Credit terms vary from company to
company and are based upon many factors, including the ordering company's
financial condition, account history, type of product, and the time of year the
order is placed. Such credit arrangements vary for reasons both within and
outside the control of the Company.
Merchandising Strategy
Store Design
The Company believes it important to offer an environment that is less
intimidating and more "user friendly" than the environments provided by some of
the larger toy retailers whose businesses compete with the Company. In view of
this belief, the Company actively embraces a policy of affording its customers
courtesy, respect, and ease of convenience. The Company provides trained store
clerks to assist customers with all of their shopping needs and stocks its
merchandise at eye level for its patrons' convenience.
In 1996, management determined that current and prospective consumers,
whose needs and desires are influenced by prevailing musical, fashion,
recreational, and entertainment trends, require variety and demand in addition
to traditional products; namely, they desire the most fashionable products. In
<PAGE>
an effort to meet the rapidly changing needs of its consumers, the Company
designed new outlets which provide a combination of (i) new educational,
electronic interactive, specialty, hobby, and collectible toys and goods and
(ii) traditional toys and games. In addition, it sought out, has opened, and
continues to open outlets located in highly trafficked malls, rather than in the
strip shopping centers where it originally opened its stores. In addition, the
Company developed a new store design and marketing format which provides an
interactive setting together with a retail operation. This format and design has
formed the foundation for the Company's future direction and growth plans,
thereby allowing the Company to meet current and imminent industry demands.
On June 17, 1999, the Company opened its 26th store in the Venetian Hotel
in Las Vegas, Nevada. During fiscal year 1999, the Company opened six new
stores. By the end of calendar year 2000, the Company intends to open nine
additional stores.
Product and Trend Analysis
The Company continually assesses trends and demands in the industry,
refines its store formats and/or product lines as needed, and analyzes and
evaluates markets for future store openings, merchandise lines, and marketing
strategies. The Company operates its stores under the names "Play Co. Toys,"
"Toys International," "Toy Co.," and "Tutti Animali" depending upon the product
mix and location.
The Company offers a broad in-stock selection of products at prices
generally competitive within the industry. While the Company does not stock the
depth or breadth of selection of toys for its stores as some of its larger
competitors do, the Company does strive to stock all basic categories of toys
and all television advertised items. The Company continues to emphasize
specialty and educational toys in its stores.
Termination of Military Base Sales
In June 1994, the Company began to sell toy and hobby items on a wholesale
basis to military bases located in Southern California. In accordance with its
new corporate focus, and given that wholesale sales to military bases were
minimal in fiscal year 1998 (2% of sales) and fiscal year 1997 (3% of sales),
the Company ceased such sales as of July 1998. Wholesale sales to military bases
were approximately 1% of sales in fiscal year 1999.
Seasonality
Since inception, the Company's business has been highly seasonal, with the
majority of its sales and profits being generated in the fourth calendar quarter
of the year, particularly during the November and December holiday season.
Competition
The toy market is highly competitive. Though the Company's new stores offer
a combination of traditional, educational, new electronic interactive,
specialty, and collectible toys and items, the Company remains in direct
competition with local, regional, and national toy retailers and department
stores, including Toys R Us, Kay Bee Toy Stores, K-Mart, and Wal Mart. Most of
the Company's larger competitors are located in free-standing stores rather than
in malls. Kay Bee stores, however, are located in malls, though their product
line is different than the Company's. The Company also competes with on-line toy
retailers, such as eToys Inc. The toy market is particularly characterized by
large retailers and discount stores with intensive advertising and marketing
campaigns and with deeply discounted pricing of such products. The Company
competes as to price, personnel, service, speed of delivery, and breadth of
product line.
As a result of the continually changing nature of children's consumer
preferences and tastes, the success of the Company is dependent on its ability
to change and adapt to new trends and to supply the merchandise then in demand.
Children's entertainment products are often characterized by fads of limited
life cycles. Combining the traditional and educational toy segments of the
market into one retail location is believed to be a unique concept that should
prove to differentiate the Company's stores from those of its larger or similar
size competitors. Management has been unable to locate any other retailer
currently using this combined marketing concept. The Company will compete for
the educational toy customer with other specialty stores such as Disney Stores,
Warner Bros. Stores, Learning Smith, Lake Shore, Zainy Brainy, and Noodle
Kidoodle.
<PAGE>
Most of the companies with which the Company competes have more extensive
research and development, marketing, and customer support capabilities and
greater financial, technological, and other resources than those of the Company.
There can be no assurance that the Company will be successful or that it will be
able to distinguish itself from such larger, better known entities. In addition,
the Company does not believe there are any significant barriers to entry to
discourage new companies from entering into this industry.
Warehousing, Shipping and Inventory Systems
The Company's stores are serviced from one distribution facility which is
approximately 37,000 square feet. Inventory and shipment of products continues
to be monitored by a computerized point-of-sale system. The point-of-sale system
is a sophisticated scanning, inventory control, purchasing, and warehouse system
which allows each store manager to monitor sales activity and inventory at each
store and enables the Company's officers to obtain reports on all stores. It
monitors sales at all store locations and automatically notifies the warehouse
and shipping department each time stock of a particular item is low or out,
depending upon the item and the instructions programmed into it. Through this
system, the Company analyzes product sales and adjusts product mix in order to
maximize return and effectively manage its retail space.
The Company's stores generally are restocked on a weekly basis, although
certain stores and certain items may be restocked at more frequent intervals. In
addition, restocking of products is increased in the fourth calendar quarter,
during the holiday season, during which period some stores are restocked on a
daily basis. The Company ships to its stores in California by its own leased
vehicles. The Company ships to stores located outside of California via truck
load or less than truck load independent trucking companies.
Trademarks
In 1976, 1994, and 1998, the Company received federal registrations for the
trademarks "Play Co. Toys," "TKO" and "Toy Co." respectively. Play Co. Toys and
Toy Co. are trademarks utilized by the Company in connection with its certain of
its stores. "TKO" was used for certain items the Company previously
manufactured. The Company also utilizes the tradenames "Toys International" and
"Tutti Animali."
Employees
At September 15, 1999, the Company had three executive officers,
approximately 155 full time employees, and approximately 352 part time
employees. None of the employees of the Company is represented by a union, and
the Company considers employee relations to be good. Each store employs a store
manager, an assistant manager, and between fifteen to twenty-five full-time and
part-time employees. Each of the Company's store managers reports to the
Company's vice president of retail operations and vice president of
merchandising who in turn report directly to the Company's executive officers.
3. 3. Financing through FINOVA Capital Corporation
On January 21, 1998, the Company entered into a $7.1 million secured,
revolving Loan and Security Agreement with FINOVA. The credit line offered under
the FINOVA Agreement replaced the $7 million credit line the Company previously
had with Congress. Neither FINOVA nor Congress is affiliated with the Company.
The Company repaid the Congress loan on February 3, 1998.
The FINOVA credit line is secured by substantially all of the Company's
assets and expires on August 3, 2000. The FINOVA Agreement is also guaranteed by
United Textiles. It accrues interest at a rate of floating prime plus one and
one-half percent. Effective July 30, 1998, the Company and FINOVA amended the
FINOVA Agreement to increase the maximum level of borrowings under the agreement
from $7.1 million to $7.6 million. Effective September 24, 1998, the Company and
FINOVA entered into a second amendment to the FINOVA Agreement to increase the
maximum level of borrowings thereunder from $7.6 million to $8.6 million through
December 31, 1998. As of January 1, 1999, the maximum level of borrowings
<PAGE>
returned to the $7.6 million level. In December 1998, the FINOVA Agreement was
amended a third time to reflect FINOVA's taking of a subordinate position with
respect to its lien on only such equipment as has been leased by the Company
from Phoenix Leasing, Inc.
In November 1998, pursuant to an agreement with ZD - a related New York
limited liability company, the beneficiary of which is a member of the family of
the Company's Chairman - ZD issued a $700,000 L/C in favor of FINOVA. FINOVA
then lent a matching $700,000 to the Company in the form of a term loan,
pursuant to a fourth amendment to the FINOVA Agreement entered into on February
11, 1999. The term loan from FINOVA expires on August 3, 2000 and bears interest
at prime plus one percent. In March 1999, the Company and FINOVA entered into a
Fifth Amendment to Loan and Security Agreement which stretches the agreed upon
(in the FINOVA Agreement) decrease in advance rate against the Company's cost
value of its inventory over a five month period. In August 1999, the Company and
FINOVA entered into a Sixth Amendment to Loan and Security Agreement pursuant to
which the Company's aggregate credit facility increased from $8.3 million to
11.3 million. This amendment also (i) increased the minimum net worth financial
covenant from $750,000 to $2.9 million as of June 30, 1999 with the $2.9 million
threshold increasing by 60% of any equity raised by the Company and by 60% of
any annual profits generated by the Company; (2) allows the Company to sell a
minority equity interest (up to 49%) in its Toys subsidiary; and (3) increased
the maximum levels of capital expenditures, capital leases and unsecured debt
allowed under the financing agreement. See Risk Factor No. 9 - "Dependence on
FINOVA Credit Line (Secured by all of the Company's Assets)" and "Certain
Relationships and Related Transactions."
Under the FINOVA Agreement, the Company is able to borrow against the cost
value of eligible inventory. Since February 1999, pursuant to the Agreement, the
Company's allowed borrowing has increased by $100,000 to $2.5 million against a
combination of $3 million in standby letters of credit in favor of FINOVA and
restricted cash provided by a subordinated loan. $1.5 million of the $3 million
in additional borrowing support from the standby letters of credit was provided
by an institutional investor in the form of a subordinated loan, $1.0 million
was provided in the form of a standby letter of credit issued by Multimedia (an
affiliate of the Company by virtue of its 78.5% ownership of United Textiles,
the Company's parent), and the other $500,000 was provided by the Company.
During fiscal year 1999, the Company breached two negative covenants in the
FINOVA Agreement by exceeding maximum levels of capital expenditures and
unsecured and lease financing. FINOVA waived such defaults. The Company may
require an additional increase in its line of credit. There can be no assurance,
however, that FINOVA (i) will be amenable to such a credit line increase or (ii)
will provide such an increase under terms the Company deems reasonable. A
refusal by FINOVA to provide the requested increase would have a material
adverse effect on the Company's business and operations.
Trade Financing
The Company relies on credit terms from its suppliers and manufacturers to
purchase nearly all of its inventory. Credit arrangements vary for reasons both
within and outside the control of the Company. See "-- Suppliers and
Manufacturers."
Fixture Financing
Since the beginning of fiscal year 1999, the Company has entered into
approximately twelve financing agreements for the leasing of fixtures for its
remodeled and new stores. These agreements were entered into with various
entities, none of which is affiliated with the Company, and bear terms of
between three and five years. The agreements are payable monthly and provide
fixture financing in the approximate aggregate amount of $1,112,000. All such
financings are secured by the Company's store fixtures and equipment. The
Company is currently negotiating additional financing of this type.
<PAGE>
Former Financing through Congress Financial Corporation (Western)
In February 1996, pursuant to the terms of the Congress Financing, Europe
American Capital Corporation ("EACC"), an affiliate of the Company, delivered a
$2 million L/C to Congress. The Congress Financing was also guaranteed by United
Textiles, the majority shareholder of the Company. As compensation for the
issuance of the L/C, the Company granted to EACC options, subject to shareholder
approval, (i) to purchase up to an aggregate of 1,250,000 shares of Common Stock
at a purchase price of 25% of the closing bid price for the Common Stock on the
last business day prior to exercise, for a period of six months from issuance
(this option expired unexercised); and (ii) to purchase up to an aggregate of 20
million shares of the Company's Series E Preferred Stock (the "Series E Stock").
From April 1996 to June 1997, EACC exercised its options and purchased an
aggregate of 3,562,070 shares of the Company's Series E Stock for $3,562,070. An
aggregate of 361,500 of such shares were converted into Common Stock. In March
1997, EACC issued an additional $1 million L/C to Congress in order for the
Company to obtain additional financing from Congress. This L/C enabled the
Company to receive additional advances of up to $1 million from Congress. EACC
did not receive any compensation for the issuance of this L/C. With the closing
of the Company's December 1997 offering of Series E Stock, EACC's option to
purchase shares of Series E Stock (granted in accordance with the Congress
Financing) terminated. The proceeds of the funds received from EACC's investment
enabled the Company (i) to acquire the assets of Toys (a three store chain) in
January 1997, (ii) to finance the openings of the Santa Clarita, Arizona Mills,
Redondo Beach, Ontario Mills, and Clairemont Mesa stores, (iii) to redesign four
store locations, and (iv) to support the Company's operations during the
Company's business turnaround.
Recent Developments
On July 20, 1999, the Company and Toys entered into an investment agreement
whereby an unaffiliated investment bank and CDMI Capital Corp. ("CDMI"), a
British Virgin islands corporation of which Moses Mika, a director of the
Company, is a shareholder each purchased 330,000 shares (or 3.3%) of Toys common
stock for an aggregate of $2.8 million as a bridge financing to a proposed
public offering (to raise approximately $20-25 million in the fall of 1999 via
the sale of a minority interest of Toys common stock). This placement of
securities reduced the Company's ownership of Toys from 100% to 93.4%. Pursuant
to the agreement, if the public offering price for the shares is less than the
$2.8 million the Toys Investors collectively paid for their shares, the Toys
Investors will receive from Toys, at the closing of the offering, either
additional shares or cash to cover the difference. In the event this is
required, Toys, and hence, the Company, could incur a potentially considerable
operating loss which might reduce the Company's profits significantly. See Risk
Factor No. 12 - "Potential Rescission of Investment in Toys International.COM,
Inc."
The agreement also allows the Toys Investors to rescind the agreement and
recover their respective $1.4 million investments if (i) for reasons within the
control of the Company or Toys, Toys is unable to raise funds in the public
offering by April 1, 2000, (ii) Toys breaches certain representations or
warranties under the agreement, (ii) Toys' actual quarterly financials deviate
by 30% or more from the financials comprising its business plan, (iii) the
market valuation of the Company at the public offering is less than $50 million,
or (iv) the $2.8 million in proceeds of the investment are not utilized
according to certain agreed upon terms. In the event the Toys Investors rescind
the agreement, Toys would be required to repurchase the shares for $2.8 million
in cash. See Risk Factor No. 33. - "Potential Rescission of Investment in Toys
International.COM, Inc."
In May 1999, the Company sold 750,000 shares of Series F Stock, at a
purchase price of $1.00 per share, in a private placement. The Company received
$657,500 in net proceeds from the sale.
In March 1999, the Company borrowed an aggregate of $400,000 from Full Moon
Development, Inc., a corporation not affiliated with the Company, pursuant to
two promissory notes, each in the amount of $200,000. The Company has repaid
both notes.
<PAGE>
In February 1999, the Company entered into a one year agreement with
Typhoon Capital Consultants, LLC ("Typhoon") pursuant to which Typhoon is to
provide financial consulting services and other consulting services encompassing
assistance in the production of a summary business plan and corporate profile,
the creation of an advisory committee to assist the Company in assessing certain
proposed actions, and the marketing of the Company's web sites. In exchange for
Typhoon's services, the agreement provides for the grant of an option to
purchase an aggregate of 150,000 shares of Common Stock, exercisable at $1.75
per share until their expiration on August 30, 2001. The Company terminated this
agreement in August 1999 due to Typhoon's breach of its obligations thereunder.
In November 1998, the Company borrowed $250,000 from Amir Overseas Capital
Corp. ("Amir"), a corporation not affiliated with the Company, under a
promissory note which bore interest at 12%. The note was repaid in January 1999.
In September 1998, the Company borrowed $1,000,000 from Amir, under a promissory
note which bore interest at 12%. This note was repaid in December 1998.
In July 1998, the Company entered into a Lead Generation/Corporate
Relations Agreement with Corporate Relations Group, Inc. ("CRG"), a Florida
corporation not affiliated with the Company, pursuant to which CRG is to provide
investor and public relations services to the Company for a period of five
years. Under the terms of the Agreement, the Company paid $100,000 to CRG upon
execution of the agreement, and a Company shareholder remitted 50,000 shares of
the Company's Series E Stock as a reimbursement for expenses. In addition, in
exchange for CRG's services, the agreement provided for the grant to CRG and
four of its principals options to purchase an aggregate 450,000 shares of Common
Stock at an exercise price of $0.78125 per share and an aggregate 700,000 shares
of Series E Stock at an exercise price of $2.25 per share. In connection with
these options, the Company recorded approximately $35,000 in compensation
($10,000 for the Series E Stock options and $25,000 for the Common Stock
options) based on an option pricing model which considered the volatility of the
securities' stock prices, and the short life of the options, 2/3 of which are
exercisable for a two month period and the remaining 1/3 of which are
exercisable for an eight month period.
In June 1998, ABC, a Belize corporation and an affiliate of the Company
under common control, the holder of a 5% convertible secured subordinated
debenture - dated January 21, 1998 and due August 15, 2000 - offered to amend
the terms of the debenture to enable the conversion of the principal amount and
accrued interest thereon, into shares of Series E Stock, at a conversion price
of $1.00 per share. Management agreed to convert the debenture since the
conversion of the debt into equity would result in a strengthened equity
position which management believed would provide confidence to the Company's
working capital lender, FINOVA, and trade creditors. Further, converting the
debt to equity eliminated on-going interest expense requirements as well as the
cash flow required to repay the debenture. Simultaneously with its offer to
amend the debenture, ABC elected to convert same as of June 30, 1998, whereby,
$1.5 million in principal amount and $33,333 in accrued interest were converted
into 1,533,333 shares of Series E Stock. ABC did not receive any registration
rights regarding the shares. Simultaneously, ABC terminated the Subordinated
Security Agreement between the parties and the Intercreditor and Subordination
Agreement, dated January 21, 1998, by and between ABC and FINOVA.
The debenture provided for the conversion of same, at ABC's option, into
shares of common stock of either (i) a subsidiary which the Company intended to
form for the purpose of acquiring those stores operated by the Company (or its
subsidiaries) which conduct business as "Toys International," or (ii) any other
subsidiary (such as Toys) which might acquire a portion of the assets and
business of the Company. This option to convert was exercisable at the net book
value of the subsidiary's shares on the date ABC exercised the option with a
limitation on such share ownership being 25% of the total outstanding shares of
said subsidiary. In September 1998, in accordance with the terms of the
debenture, ABC assigned its option to Tudor, an entity of which Mr. Moses Mika
(a director of the Company) is a shareholder. On July 15, 1999, Tudor elected to
exercise its right to purchase the Toys common stock and requested that the
exercise price be amended to reflect the book value of Toys at the most recent
fiscal quarter, June 30, 1999. The Company agreed to Tudor's request and, on
September 15, 1999, provided Tudor with a compilation of the Toys June 30, 1999
financial statements as the formal basis for the exercise price. Tudor has not
yet provided the Company with the appropriate consideration for the option
exercise.
<PAGE>
In May 1998, the Company commenced an offering of units, each unit
comprising one share of Series F Stock and one Series F Preferred Stock Purchase
Warrant (the "Series F Warrants"), at a purchase price of $3.00 per unit,
through Morgan Grant Capital Group, Inc. as placement agent. The Company
terminated the offering in June 1998, and no funds were raised thereby.
In July 1997, the Company effected a 1 for 3 reverse split of its Common
Stock. To date, not all shareholders have exchanged their pre-reverse split
shares for post-reverse split shares; therefore, the number of shares
outstanding as of the date set forth herein is subject to change, nominally, as
such shareholders submit their shares for exchange.
Description of Property
Until recently, the Company's stores were serviced from two adjacent
distribution facilities (one 37,000 square feet in size, the other 18,000 square
feet in size) encompassing an aggregate of approximately 55,000 square feet, at
550 Rancheros Drive, San Marcos, California. As of April 15, 1997, however, the
Company returned approximately 15,400 feet of the 18,000 square foot warehouse
space to the landlord. The Company now leases (i) 40,000 square feet of combined
office and warehouse space (approximately 3,000 square feet is office space, and
the remaining 37,000 square feet is warehouse space) and (ii) approximately
2,600 square feet of separate space which houses defective merchandise until
same is either returned to the manufacturers or the Company is authorized by the
manufacturers to destroy the goods. The former space is leased at an approximate
annual cost of $247,000, from a partnership of which one of the partners is
Richard Brady, the president and a director of the Company. The lease expires in
April 2000, and the Company believes that it is on terms no more or less
favorable than terms it might otherwise have negotiated with an unaffiliated
party. The latter space is leased at an approximate annual cost of $31,572, from
Dunlop/Townley Holdings. The lease expires in March 2000. From October 1998
through April 1999, the Company leased an additional 4,200 square feet of
warehouse space for $2,300 per month. This space was leased to store overflow
inventory from the Company's primary warehouse.
The following table sets forth the leased properties on which the Company's
currently operating stores (aggregating 26) are located:
<TABLE>
<CAPTION>
===============================================================================================================================
SIZE IN SQUARE FEET
LEASE BASE RENT
STORE LOCATION EXPIRATION ANNUAL COST
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Play Co. Toys 12,000 July 2006 $108,000.00
Santa Clarita
19232 Soledad Canyon Rd
Santa Clarita, CA 91351
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 7,800 January 2001 $84,840.00
Santa Margarita
27690-B Santa Margarita
Mission Viejo, CA 92691
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 8,250 December 1999 $87,549.72
Chula Vista
1193 Broadway
Chula Vista, CA 91911
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,030 June 2000 $127,880.64
El Cajon
327 N. Magnolia
El Cajon, CA 92020
===============================================================================================================================
<PAGE>
(table continued from previous page)
==============================================================================================================================
SIZE IN SQUARE FEET
LEASE BASE RENT
STORE LOCATION EXPIRATION ANNUAL COST
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 11,323 November 1999 $95,040.48
Simi Valley
1117 E. Los Angeles, Suite C
Simi Valley, CA 93065
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,000 September 2005 $110,753.88
Encinitas
280 N. El Camino Real
Encinitas, CA 92024
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 9,800 December 2004 $117,330.72
Pasadena
885 S. Arroyo Parkway
Pasadena, CA 91105
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 13,125 January 2000 $96,360.00
Orange
1349 E. Katella
Orange, CA 92513
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,478 Month to Month $95,941.80
Redlands
837 Tri-City
Redlands, CA 92373
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,156 August 2002 $88,053.00
Clairemont
4615-A Clairemont Drive
San Diego, CA 92117
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 11,597 March 2004 $91,020.00
Rancho Cucamonga
9950 W. Foothill Blvd, Suite U
Rancho Cucamonga, CA 91730
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,000 October 2004 $64,926.60
Corona
1210 W. Sixth Street
Corona, CA 91720
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 9,400 December 2003 $178,980.00
Woodland Hills
19804 Ventura Blvd., #366
Woodland Hills, CA 91364
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 5,183 January 2004 $159,900.00
South Coast Plaza, Ste. 1020
3333 Bristol Street, Suite 1030
Costa Mesa, CA 92626
===============================================================================================================================
<PAGE>
(table continued from previous page)
===============================================================================================================================
SIZE IN SQUARE FEET
LEASE BASE RENT
STORE LOCATION EXPIRATION ANNUAL COST
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 3,869 January 2001 $145,920.00
Century City
10250 Santa Monica Blvd
Los Angeles, CA 90067
- -------------------------------------------------------------------------------------------------------------------------------
Tutti Animali 1,220 January 2000 5% of Sales
Crystal Court
3333 Bear Street
Cost Mesa, CA 92626
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 3,620 August 2007 $83,260.08
Galleria at South Bay
1815 Hawthorne Blvd., #366
Redondo Beach, CA 90278
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 5,642 January 2003 $112,840.00
Ontario Mills
One Mills Circle, #302
Ontario, CA 91764
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 7,103 October 2002 $163,369.00
Arizona Mills
5000 Arizona Mills Circle, #689
Tempe, AZ 85282
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 7,002 May 2008 $175,483.32
Fashion Outlet of Las Vegas
32100-320 Las Vegas Blvd. So.
Primm, NV 89019
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 9,369 May 2003 $175,483.32
Grapevine Mills
3000 Grapevine Mills Pkwy, Ste. 312
Grapevine, TX 76051
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 5,339 December 2008 $133,475.04
Thousand Oaks
208 W. Hillcrest Drive
Thousand Oaks, CA 91360
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 10,000 May 2008 $195,000.00
Great Lakes Crossing
4236 Baldwin Rd., #551
Auburn Hills, MI 48326
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 12,496 July 2003 $168,696.00
Gurnee Mills Mall
06170 W. Grand Ave., Sp. #559
Gurnee, IL 60031
===============================================================================================================================
<PAGE>
(table continued from previous page)
===============================================================================================================================
SIZE IN SQUARE FEET
LEASE BASE RENT
STORE LOCATION EXPIRATION ANNUAL COST
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 9,400 March 2008 $221,424.00
The Block
20 City Dr. West, Ste. 203
Orange, CA 92868
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 7,002 June 2004 $450,000.00
The Venetian Resort & Casino
3311 Las Vegas Blvd. South, Ste.1212
Las Vegas, NV 89109
===============================================================================================================================
</TABLE>
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 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. The Company is engaged in settlement negotiations with plaintiff in
this matter; however, the action may not settle, in which case trial has been
scheduled for September.
Neither the Company's officers, directors, affiliates, nor owners of record
or beneficially of more than five percent of any class of the Company's Common
Stock is a party to any material proceeding adverse to the Company or has a
material interest in any such proceeding adverse to the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
Prospectus.
The following table summarizes certain selected financial data and is
qualified in its entirety by the more detailed financial statements contained
elsewhere in this document. The selected operating data for the three month
periods ended June 30, 1998 and 1999 and balance sheet data as of June 30, 1999
are derived from the Company's unaudited financial statements. Operating results
for the three month period ended June 30, 1999 are not necessarily indicative of
the results that may be expected for any other interim period or for the year
ending March 31, 2000.
<TABLE>
<CAPTION>
March 31, June 30,
1998 1999 1999
---- ---- ----
Balance Sheet Data:
<S> <C> <C> <C>
Working capital $4,452,481 $5,832,145 $4,760,003
Total assets 14,139,887 21,150,392 22,745,250
Total current liabilities 4,581,831 7,558,647 9,550,538
Long term obligations 7,055,549 8,527,116 8,966,084
Redeemable preferred stock --- --- --
Stockholders' equity 2,502,507 5,064,629 4,228,628
Common stock dividends --- --- --
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31, Three Months Ended June 30,
1998 1999 1998 1999
---- ---- ---- ----
Operating Data:
<S> <C> <C> <C> <C>
Net sales $22,568,527 $34,371,230 $6,357,395 $6,508,565
Gross profit 8,878,928 14,780,446 2,651,064 2,745,351
Gross margin 39.3% 43.0% 41.7% 42.2%
Total operating expenses 10,119,430 13,672,377 2,672,188 3,979,558
Net income (loss) before taxes (2,054,470) 143,018 (186,776) (1,549,601)
Net income (loss) (2,054,470) 140,868 (186,776) (1,549,601)
Net income (loss) applicable to common shares
(3,528,276) (1,566,857) (460,582) (2,090,074)
Income (loss) per common share (0.86) (.34) (0.11) (.38)
Weighted average shares outstanding
4,098,971 4,590,642 4,103,525 5,525,936
</TABLE>
<PAGE>
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.
Results of Operations
The Company's operations are substantially controlled by United Textiles &
Toys Corp. ("United Textiles"), the Company's parent. United Textiles currently
owns approximately 44.9% of the issued and outstanding shares of the Company's
Common Stock. United Textiles is a Delaware corporation and public company which
was organized in March 1991 and commenced operations in October 1991. It
formerly designed, manufactured, and marketed a variety of lower priced women's
dresses, gowns, and separates (blouses, camisoles, jackets, skirts, and pants)
for special occasions and formal events. In April 1998, United Textiles ceased
all operating activities; it now operates solely as a holding company.
The Company has two subsidiaries: Toys International.COM, Inc. ("Toys"), of
which the Company owns 93.4%, and Play Co. Toys Canyon Country, Inc. ("Canyon"),
which is wholly-owned by the Company. Toys is the only operating subsidiary,
operating nineteen stores, one of which is the Santa Clarita store which Canyon
recently assigned thereto.
For the three months ended June 30, 1999 compared to the three months ended
June 30, 1998
The Company generated net sales of $6,508,565 in the three months ended
June 30, 1999. This represented an increase of $151,170, or 2.4%, from net sales
of $6,357,395 in the three months ended June 30, 1998. All of this sales growth
came from the Company's new stores as same store sales declined by 27% for the
period.
The Company believes that its same store sales showed a decline after a
period of two years of continuous increases because the flow of allocated or
"hot" selling merchandise is being spread over 25% more stores. This shortfall
in allocated or "hot" selling inventory is a result of the current credit lines
that the Company has with some of its vendors. The Company is working to
increase its lines of credit with its vendors to more adequately address not
only the past growth but its expected future growth as well.
In addition, the Company held back a substantial amount of critical
inventory from its existing stores for the openings of its Toys International
stores located in the Venetian Resort and Casino (the "Venetian") in Las Vegas
and at Pier 39 in San Francisco. The Venetian store opened in mid-June, a full
two months late; due to major site construction delays, the Company currently
expects to open Pier 39 in early September, four months late.
The Company posted a gross profit of $2,745,351 in the three months ended
June 30, 1999, reflecting an increase of $94,287, or 3.6%, from the gross profit
of $2,651,064 in the three months ended June 30, 1998. 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 42.2% in the June 1999 period was 0.5% higher than
the Company's gross margin of 41.7% in the June 1998 period. This gross margin
improvement was the result of the continuing change in the Company's
merchandising mix to augment its historical product base of lower margin
traditional toys with educational and specialty toys which generally produce
better margins than traditional toys. This change in merchandising mix has been
the centerpiece of the Company's business plan for approximately the past three
business years.
Operating expenses (excluding depreciation and amortization expenses) for
the three months ended June 30, 1999 were $3,755,090. This represented a
$1,271,319, or 51.2%, increase over the Company's operating expenses of
$2,483,771 in the three months ended June 30, 1998. The primary reasons for the
operating expense increase were an increase in payroll and related expenses of
$436,000 and an increase in rent expense of $548,000. 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.
<PAGE>
During the three months ended June 30, 1999, the Company recorded non-cash
depreciation and amortization expense of $224,468, a $36,051, or 19.1%, increase
from $188,417 in the period ended June 30, 1998. Total operating expenses
(operating expenses combined with depreciation and amortization) in the June
1999 period were $3,979,558, representing a $1,307,370, or 48.9%, increase from
total operating expenses of $2,672,188 in the June 1998 period.
As a result of the $94,287 increase in gross profit less the $1,307,370
increase in total operating expenses, the Company's operating loss increased by
$1,213,083 from $(21,124) during the three months ended June 30, 1998 to
$(1,234,207) during the three months ended June 30, 1999.
Interest expense totaled $315,394 for the three months ended June 30, 1999.
This represented a $149,742, or 90.4%, increase from interest expense of
$165,652 for the three months ended June 30, 1999. The primary reason for the
increased level of interest expense was a higher level of borrowings in the
three months ended June 30, 1999 than in the June 1998 period.
As a result of the above-mentioned factors, the Company recorded a net loss
of $(1,549,601) for the three months ended June 30, 1999. This represented a
$1,362,825 increase over the net loss of $(186,776) recorded in the three months
ended June 30, 1998.
For the three months ended June 30, 1999, the net loss of $(1,549,601) was
reduced by non-cash dividends of $540,473 in order to determine the net loss
applicable to common shares. This compares with $273,806 of non-cash dividends
recorded in the three month period ended June 30, 1998. The non-cash dividends
represent amortization of the discount recorded upon issuance of Series E
Preferred Stock ("Series E Stock") and Series F Preferred Stock ("Series F
Stock") with a beneficial conversion feature.
The basic and diluted loss per share for the three months ended June 30,
1999 was $(0.38) compared to basic and diluted loss per share of $(0.11) for the
three months ended June 30, 1998. The weighted average number of common shares
outstanding increased from 4,103,525 in the June 1998 period to 5,525,936 in the
June 1998 period.
For the year ended March 31, 1999 as compared to the year ended March 31,
1998
The Company generated net sales of $34,371,230 in the year ended March 31,
1999 (also referred to as fiscal year 1999). This represented an increase of
$11,802,703, or 52.3%, over net sales of $22,568,527 in the year ended March 31,
1998 (also referred to as fiscal year 1998). Approximately $7.6 million of this
sales growth came from new stores, and the remaining $4 million came from a
21.3% increase in same store sales. Sales from the Company's wholesale
operations were insignificant in both fiscal years.
The Company ended fiscal year 1999 with 25 retail locations in six states,
compared to 19 retail locations in two states at the end of fiscal year 1998.
During fiscal year 1999, the Company opened six new stores.
The Company posted a gross profit of $14,780,446 in the year ended March
31, 1999. This represented an increase of $5,901,518, or 66.5%, over the gross
profit of $8,878,928 in the year ended March 31, 1998. The gross profit increase
was due to the above noted growth in net sales and to an improvement in the
Company's gross margin from 39.3% in fiscal year 1998 to 43% in fiscal year
1999. This 3.7% gross margin improvement was the result of a change in the
Company's merchandising mix to augment its historical product base of lower
margin traditional toys with educational and specialty toys which generally
produce better margins than traditional toys. This change in merchandising mix
has been the centerpiece of the Company's business plan for fiscal years 1997,
1998, and 1999.
<PAGE>
Operating expenses (total operating expenses less litigation related
expenses and depreciation and amortization) in the year ended March 31, 1999
were $12,658,376. This represented a $3,793,769, or 42.8%, increase over the
Company's operating expenses of $8,864,607 in the year ended March 31, 1998. The
primary reasons for the operating expense increase were a growth in rent expense
of approximately $673,000 and in payroll and related expenses of $1,770,000. The
increases in rent and salary expenses were largely due to the opening of the six
new stores in fiscal year 1999. As a percentage of sales, operating expenses
decreased by 2.5% to 36.8% of net sales for fiscal year 1999 from 39.3% in
fiscal year 1998.
The Company incurred $27,659 of litigation related expenses in fiscal year
1999 compared to $583,541 of litigation related expenses in fiscal year 1998.
The expenses in fiscal year 1998 were associated with the closure of five store
locations and related subsequent litigation. This expense includes settlement
amounts relating to four of the five closed locations and the related legal fees
and costs. The Company remains in litigation regarding the fifth closed store
and the $27,659 of litigation related expenses in fiscal year 1999 are largely
related to that matter.
Depreciation and amortization expense in the year ended March 31, 1999 was
$986,342. This represented a $315,060, or 46.9%, increase over the Company's
depreciation and amortization expense of $671,282 in the year ended March 31,
1998. Depreciation and amortization are non-cash charges. The primary reason for
the depreciation and amortization expense increase was the depreciation related
to the fixed assets purchased for the six new stores opened during fiscal year
1999.
Total operating expenses (the sum of operating expenses, litigation related
expenses, and depreciation and amortization expense) in the year ended March 31,
1999 were $13,672,377. This represented a $3,552,947, or 35.1%, increase over
the Company's total operating expenses of $10,119,430 in the year ended March
31, 1998. The reasons for this increase are noted in the three preceding
paragraphs.
The Company recorded operating income of $1,108,069 in fiscal year 1999
compared to an operating loss of $(1,240,502) in fiscal year 1998. This
represented an improvement of $2,348,571. This improvement was a result of the
$5,901,518 increase in gross profit being partially offset by the $3,552,949
increase in total operating expenses.
Total interest expense amounted to $965,051 in the year ended March 31,
1999. This represented a $151,083, or 18.6%, increase over the Company's
interest expense of $813,968 in fiscal year 1998. The primary reason for the
increased level of interest expense was a higher level of borrowings in fiscal
year 1999 than in fiscal year 1998.
In fiscal year 1999, the Company recorded income tax expense of $2,150,
representing various state income taxes. The Company's net operating loss
carryforwards sheltered the Company from federal income taxes in fiscal year
1999.
In fiscal year 1998, the Company recorded net income tax provisions
consisting only of the current portion of the minimum income taxes required by
various jurisdictions including the States of California and Delaware; such
amounts were immaterial and are included in operating expenses. Changes in
deferred taxes were offset dollar for dollar by adjustments to the Company's
valuation allowance which has reduced its net deferred tax assets to zero as of
March 31, 1999 and 1998 and resulted in a net zero dollar provision for deferred
income taxes for each of the years ended March 31, 1999 and 1998.
As a result of the above-mentioned factors, the Company recorded a net
income of $140,868 for the fiscal year ended 1999 compared to a net loss of
$(2,054,470) for the fiscal year ended March 31, 1998.
In fiscal year 1999, the net income of $140,868 was reduced by non-cash
dividends of $1,707,725 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 Stock with a beneficial conversion feature.
No dividends in the form of securities or other assets were actually paid out. A
non-cash dividend of $1,473,806 was recorded for fiscal year 1998. As a result,
the net loss applicable to common shares was $(1,566,857), or $(.34) per share,
for the year ended March 31, 1999 and $(3,528,276), or $(.86) per share, for the
year ended March 31, 1998.
<PAGE>
Liquidity and Capital Resources
At June 30, 1999, the Company had a working capital position of $4,760,003
compared to a working capital position of $5,832,143 at March 31, 1999. The
primary factors in the $1,072,140 decrease in working capital were a $1,579,092
reduction in the Company's net investment in inventories (increase in
inventories less increase in accounts payable).
The Company believes that its same store sales showed a decline after a
period of two years of continuous increases because the flow of allocated or
"hot" selling merchandise is being spread over 25% more stores. This shortfall
in allocated or "hot" selling inventory is a result of the current credit lines
that the Company has with some of its vendors. The Company is working to
increase its lines of credit with its vendors to more adequately address not
only the past growth but its expected future growth as well.
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 three-month period ended June 30, 1999, the Company used
$227,489 of cash in its operations compared to $958,117 used in operations in
the three-month period ended June 30, 1998. The Company's net loss was
$1,549,601 and $186,776, respectively, in those periods. The primary reason the
Company used a far lower level of cash in its operating activities than its loss
was due to a decrease in its net investment (increase in inventories less
increase in accounts payable) in inventories of $1,579,092.
The Company used cash in its operating activities in fiscal year 1999
because of a $1,162,268 growth in the Company's net investment in inventories
(increase in inventories less increase in accounts payable). The Company has
invested in its inventory position to supply its growing number of stores and
its increased level of sales.
The Company used $196,653 of cash in its investing activities during the
three-month period ended June 30, 1999 compared to $377,028 in the three-month
period ended June 30, 1998. Investing activity consisted of the purchase of
equipment and fixtures for new stores.
The Company used $2,799,819 of cash in its investing activities during
fiscal year 1999 compared to $3,273,273 in fiscal year 1998. All but $100,000 of
the cash used in investing activities represented purchases of property and
equipment. These purchases primarily related to the six new stores the Company
opened in fiscal year 1999. The $2,799,819 represents capital expenditures net
of landlord tenant improvement contributions and of capital lease financing.
In fiscal year 1998, $2,250,000 of the investing activities related to the
purchase of restricted certificates of deposit. Of that amount, $2,000,000 was
used to collateralize a letter of credit ("L/C") in the same amount in favor of
FINOVA Capital Corp. ("FINOVA" - see below), the Company's working capital
lender. The other $250,000 is collateral for a facility for L/Cs. The remaining
$1,023,273 of investing activities related to purchases of property and
equipment, largely at four new stores that the Company opened.
The Company generated $690,920 of cash from its financing activities in the
three-month period ended June 30, 1999 compared to the generation of $975,614
from financing activities in the three-month period ended June 30, 1998. The
primary contributors to the Company's financing activities in the 1999 period
were $657,500 in proceeds from the sale of preferred stock and net borrowings on
the Company's line of credit. Those proceeds were used to finance the Company's
working capital requirements and capital expenditures during the three-month
period ended June 30, 1999. The primary factor in the prior period was
$1,076,497 in net borrowings on the Company's line of credit.
<PAGE>
The Company generated $3,507,917 from its financing activities in the year
ended March 31, 1999 compared to the generation of $6,033,273 from financing
activities in the year ended March 31, 1998. The largest contribution to the
Company's financing activities in the 1999 fiscal year was from net borrowings
under the Company's financing agreement. The largest contributions to the
Company's financing activities in the 1998 fiscal year were the receipt of
$3,390,450 of net proceeds from the sale of preferred stock through a
combination of public and private offerings and $1,750,000 in proceeds from
notes payable.
As a result of the above factors, the Company had a net increase in cash of
$266,778 in the three-month period ended June 30, 1999 compared to a net
decrease in cash of $359,531 in the three-month period ended June 30, 1998. The
Company had a net decrease in cash of $523,019 in fiscal year 1999 compared to a
net increase in cash of $471,264 in fiscal year 1998.
In November 1998, the Company entered into an agreement with ZD Group,
L.L.C. ("ZD"), a related party, 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
L/C in favor of FINOVA. 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 is entitled (i) to a one-third profit percentage after application of
corporate overhead beginning April 1, 1999 from three of the Company's stores
(Woodfield Mall in Schaumburg, Illinois, now scheduled to open in the late fall
of 1999; Auburn Hills, Michigan; and Gurnee, Illinois) and (ii) to nominate and
appoint one-third of the Company's directors during the aforesaid store lease
terms (but in no event later than fiscal year end 2013). As those stores did not
generate a profit after application of corporate overhead in the three-month
period ended June 30, 1999, no payments were accrued or made to ZD during the
June period.
During fiscal 1999, the Company opened six new stores in high traffic
shopping malls for a total cost (excluding inventory) of approximately $3.4
million. The stores are located in Primm (near Las Vegas), Nevada; Gurnee (near
Chicago), Illinois; Auburn Hills (near Detroit), Michigan; Grapevine (near
Dallas), Texas; Thousand Oaks and Orange (both near Los Angeles), California.
The following transactions entered into over the second half of fiscal year
1999 were equity and debt transactions structured to help the Company with the
cost of the capital expenditures associated with opening the six new stores.
On November 24, 1998, Breaking Waves, Inc. ("Breaking Waves"), a
wholly-owned subsidiary of Shopnet.com, Inc. ("Shopnet," formerly known as
Hollywood Productions, Inc.), an affiliate, purchased 1.4 million unregistered
shares of the Company's Common Stock in a private transaction. The president of
Shopnet and Breaking Waves is also the chairman of the Company. Shopnet is a
publicly traded company. The shares purchased by Breaking Waves represent
approximately 25.4% of the total Common Stock issued and outstanding after the
transaction.
The consideration for the Common Stock was $665,000, which represented a
price of $0.475 per share. The price represented an approximate 33% discount
from the then current market price of $.718 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 $365,000 was in product from
Breaking Waves, primarily girl's swimsuits. The $365,000 value of the swimsuit
inventory was determined by the Company based on its analysis of the net
realizable value of the inventory received. The Company had previously carried
swimsuits from Breaking Waves in its stores on a trial basis.
In November 1998, the Company entered into agreements with ZD (a related
party - see discussion above), Frampton Industries, Ltd. ("Frampton," an
affiliate under common control), and Euorpe American Capital Foundation ("EACF,"
an entity which beneficially controls the Company) to secure additional
financing. Frampton is a British Virgin Islands company.
<PAGE>
Under the Frampton and EACF agreements, Frampton lent $500,000 and EACF
lent $150,000 in the form of a convertible, subordinated debenture due December
31, 1999. The debentures each bear a 5% interest rate and are convertible into
the Company's Series E Stock at the lenders' respective options. The conversion
price initially was $0.10 per share. That price was discounted 50% from the then
current market price (November 10, 1998) reflecting a discount for the
illiquidity of the shares, which do not carry any registration rights.
Subsequently, in May 1999, the lenders agreed to amend the conversion price to
$0.20 per share, which represented the full market price of the shares on the
date of the original business transaction.
Planned new store openings remain a significant capital commitment of the
Company. The Company has entered into leases to open eight new stores by the end
of calendar year 1999. he Company expects that the costs of building those new
stores net of landlord tenant improvement contributions and of inventory
requirements will be approximately $2.8 million. 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.
The first of those stores opened in June in the Venetian in Las Vegas,
Nevada. The costs of opening that store (excluding inventory) were approximately
$825,000. This store was projected to be the most capital intensive of all the
stores scheduled to be opened this fiscal year.
The following transactions entered into after April 1, 1999 were equity and
debt transactions structured to help the Company with the cost of the capital
expenditures associated with opening the total of eight new stores in 1999.
The Company received approximately $263,000 in lease financing in the three
month period ended June 30, 1999. The Company continues to seek additional
capital lease financing.
In May 1999, pursuant to ss.506 of Regulation D, the Company sold 750,000
shares of Series F Stock, at a purchase price of $1.00 per share, through Robb
Peck McCooey Clearing Corporation as placement agent. The Company received
$657,500 in net proceeds from the sale, after deduction of all investment
banking and legal and administrative fees. Each share of Series F Stock is
convertible, at the holder's option, into two fully paid and non-assessable
shares of Common Stock, at any time commencing on the date the registration
statement registering the Series F Stock and Common Stock underlying same is
declared effective by the Securities and Exchange Commission. Each share of
Series F Stock shall convert automatically on the occurrence of the earlier of
either of the two following events, without action on the part of the holder
thereof: (i) two years from issuance or (ii) in the event the closing price per
share of Common Stock has been at least $5.00 for a consecutive 30 day period.
Due to the beneficial conversion feature of the Series F Stock, the
proceeds have initially been recorded as additional paid in capital which will
amortize over a 12-month period in the form of a non-cash dividend.
On July 15, 1999, Tudor Technologies, Inc. ("Tudor") - an entity of which
Mr. Moses Mika (a director of the Company) is a shareholder - as the assignee of
an option to acquire 25% of the outstanding shares of the Company's Toys
subsidiary, which shares were then owned by the Company and which option price
was set at Toys' book value on the date of election to exercise the option,
elected to exercise its right to purchase the stock and requested that the
exercise price be amended to reflect the book value of Toys at the most recent
fiscal quarter, June 30, 1999. The Company agreed to Tudor's request and, on
September 15, 1999, provided Tudor with a compilation of the Toys June 30, 1999
financial statements as the formal basis for the exercise price. Tudor has not
yet provided the Company with the appropriate consideration for the option
exercise.
<PAGE>
This option arose out of the June 30, 1998 conversion, by ABC Fund, Inc.
("ABC," an affiliate of the Company), of a $1.5 million debenture to Series E
Stock as of June 30, 1998. Pursuant to the terms of the debenture, in September
1998, ABC assigned its right to purchase the Toys common stock to Tudor.
On July 20, 1999, the Company sold a 6.6% interest in its Toys subsidiary
to two investors for $2.8 million in gross proceeds in a private transaction.
The investors were an unaffiliated investment banking firm and CDMI Capital
Corporation ("CDMI"), a British Virgin Islands corporation. Mr. Moses Mika is a
shareholder of CDMI. Each party invested $1.4 million in the transaction.
On August 4, 1999, the Company entered into a sixth amendment to its Loan
and Security Agreement with FINOVA. As a result of this amendment, the Company's
aggregate credit facility with FINOVA increased from $8.3 million to $11.3
million.
The amendment also (1) increased the minimum net worth financial covenant
from $750,000 to $2.9 million as of June 30, 1999 with the $2.9 million
threshold increasing by 60% of any equity raised by the Company and by 60% of
any annual profits generated by the Company; (2) allows the Company to sell a
minority equity interest (up to 49%) in its Toys subsidiary; and (3) increased
the maximum levels of capital expenditures, capital leases and unsecured debt
allowed under the Financing Agreement.
The FINOVA Agreement is guaranteed by United Textiles and is secured by
substantially all the assets of the Company and $3,700,000 in L/Cs. Of the $3.7
million in L/Cs, $2 million is collateralized by amounts held in a restricted
certificate of deposit. Multimedia Concepts International, Inc. ("Multimedia"),
an affiliate under common control, has provided a $1 million L/C and ZD provided
a $700,000 L/C as noted above.
During fiscal year 1999, the Company breached two negative covenants in the
FINOVA Agreement by exceeding maximum levels of capital expenditures and
unsecured and lease financing. FINOVA subsequently waived those defaults.
Electronic commerce represents another area that may result in significant
capital expenditures for the Company in fiscal 2000. It is also a major focus
for management. In April 1999, the Company debuted the first of three dedicated
electronic commerce web sites. This site, www.ToysWhyPayRetail.com, represents a
new trade name for the Company and allows consumers to purchase, at near
wholesale prices, overstocks, special buys, and overruns on mostly name-brand
toys purchased by the Company out of season. The Company plans to offer
approximately 1000 items for sale on the web site.
The second and third electronic commerce web sites are currently being
developed to a state-of-the-art standard in conjunction with two Internet
consulting firms. These sites will offer collectible and imported specialty
merchandise such as die-cast cars, dolls, plush toys, trains, and collectible
action figures and are expected to open in the late fall of 1999. In conjunction
with the web site launch, the Company plans to place computer kiosks in several
of its retail locations in order to permit customers to place orders on the web
site for goods otherwise not sold in such store.
The Company has entered into a letter of intent with an investment banking
firm to raise additional equity in the approximate amount of $20-25 million
through the public sale of a minority interest in the Company's Toys subsidiary.
This public offering is expected to close in 1999. This investment banking firm
also participated in the $2.8 million private placement in July 1999.
The Company is pursuing this opportunity and is continuing to seek
additional lease financing. There can be no assurance that the Company will be
able to obtain sufficient financing to successfully open the planned new stores.
Additionally, the Company has incurred significant capital expenditures over the
past twelve months. To date, the Company has deployed its working capital to
cover a significant portion of these capital expenditures. As a result, the
Company is also seeking additional working capital from the above-mentioned
equity offerings. Should the Company be unable to raise sufficient working
capital, it may be unable to purchase product directly from factories at
advantageous pricing, thereby resulting in a negative impact on gross margins
and results of operations.
<PAGE>
Year 2000
In 1998, the Company developed a plan to upgrade its existing management
information system and computer hardware and to become year 2000 compliant. 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 September quarter of 1999. 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 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. 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. It is nonetheless possible that year
2000 problems could have a material adverse effect in that holiday 1999
purchases may be stunted due to consumer uncertainty and that the overall
business environment may be disrupted in the Company's fourth fiscal quarter.
Trends Affecting Liquidity, Capital Resources and Operations
The Company believes that its same store sales in the quarter ended June
30, 1999 showed a decline after a period of two years of continuous increases in
same store sales (21.3% in the 1999 fiscal year and 3.7% in the 1998 fiscal
year) because the flow of allocated or "hot" selling merchandise is being spread
over 25% more stores. This shortfall in allocated or "hot" selling inventory is
a result of the current credit lines that the Company has with some of its
vendors. The Company is working to increase its lines of credit with its vendors
to more adequately address not only the past growth but its expected future
growth as well. As noted above, the Company has significantly strengthened its
balance sheet by raising approximately $3.5 million in additional equity over
the past three months, which should result in expended lines of credit with its
trade vendors.
The Company believes that its growth and the availability of "hot" or
allocated merchandise within certain sectors of its core business such action
figures, video games, and collector plush could have an impact on continuing
store sales in the future. The Company is working diligently to address this
issue.
The Company's future financial performance will depend upon continued
demand for toys and the Company's ability to choose locations for new stores,
the Company's ability to purchase product at favorable prices and on favorable
terms, and the effects of increased competition and changes in consumer
preferences.
The toy and hobby retail industry faces a number of potentially adverse
business conditions including price and gross margin pressures and market
consolidation. The Company competes with a variety of mass merchandisers,
superstores, and other toy retailers, including Toys R Us and Kay Bee Toy
Stores. Competitors that emphasize specialty and educational toys include Disney
Stores, Warner Bros. Stores, Learning Smith, Lake Shore, Zainy Brainy, and
Noodle Kidoodle. The Company also competes both through its electronic commerce
operations and through its stores against Internet oriented toy retailers such
as eToys, Inc. There can be no assurance that the Company's business strategy
will enable it to compete effectively in the toy industry.
<PAGE>
Seasonality
The Company's operations are highly seasonal with approximately 30-40% of
its net sales falling within the Company's third quarter, which coincides with
the Christmas selling season. The Company intends to open new stores throughout
the year, but generally before the Christmas selling season, which will make the
Company's third quarter sales an even greater percentage of the total year's
sales.
Impact of Inflation
The impact of inflation on the Company's results of operations has not been
significant. The Company attempts to pass on increased costs by increasing
product prices over time.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Shopnet.com, Inc.
In January 1999, the Company borrowed $100,000 from Shopnet under an
unsecured note, with interest at 9%. In each of April and May 1999, the Company
borrowed an additional $100,000 under unsecured notes, with interest at 9% and
maturity on August 31, 1999 and September 30, 1999, respectively. These notes
were repaid in full in July 1999.
Breaking Waves, Inc.
On November 24, 1998, pursuant to a sales agreement entered into by and
between the Company and Breaking Waves, Breaking Waves purchased 1.4 million
unregistered shares of the Company's Common Stock in a private transaction. The
shares purchased by Breaking Waves represent approximately 25.2% of the total
Common Stock currently issued and outstanding. The consideration for the stock
was $665,000, which represents a price of $0.475 per share. The price represents
an approximate 33% discount from the then current market price of $0.718
reflecting a discount for the illiquidity of the shares, which do not carry any
registration rights. $300,000 of the consideration was remitted in cash, and the
remaining $365,000 consisted of product from Breaking Waves (primarily girl's
swimsuits). The $365,000 value of the swimsuit inventory was determined by the
Company based on its analysis of the net realizable value of the inventory
received. The Company had previously carried swimsuits from Breaking Waves in
its stores on a trial basis.
Pursuant to the sales agreement (which has a term of one year and
automatically extends for one year terms unless terminated by either of the
parties), the Company agreed to purchase a minimum of 250 pieces of merchandise
for each of its retail locations and to provide advertising promotional
materials and ads of the merchandise in all of its brochures, advertisements,
catalogs, and all other promotional materials, merchandising programs, and sales
promotion methods.
On July 15, 1998, the Company borrowed $300,000 from Breaking Waves and
issued an unsecured promissory note (at 9% interest per annum) to same in
exchange therefor. The note called for five monthly installments of principal
and interest commencing August 15, 1998 and ending December 30, 1998 and has
been repaid in full.
On March 1, 1998, the Company borrowed $250,000 from Breaking Waves and
issued an unsecured promissory note (at 15% interest per annum) to same in
exchange therefor. The note called for ten monthly installments of principal and
interest commencing on March 31, 1998 and ending on December 31, 1998 and has
been repaid in full.
ZD Group, L.L.C.
In November 1998, pursuant to an agreement with ZD - a related New York
limited liability company, the beneficiary of which is a member of the family of
the Company's chairman - ZD issued a $700,000 irrevocable standby L/C in favor
of FINOVA. As consideration for its issuance of the L/C, ZD is entitled (i) to a
one-third profit percentage after application of corporate overhead beginning
April 1, 1999 from three of the Company's stores (Woodfield Mall in Schaumburg,
Illinois, now scheduled to open in the late fall of 1999; Auburn Hills,
Michigan; and Gurnee, Illinois) and (ii) to nominate and appoint one-third of
the Company's directors during the aforesaid store lease terms (but in no event
later than fiscal year end 2013). Such stores did not generate a profit after
application of corporate overhead in the three-month period ended June 30, 1999,
thus, no payments have accrued or been made to ZD to date. FINOVA then lent a
matching $700,000 to the Company in the form of a term loan, pursuant to a
fourth amendment to the FINOVA Agreement entered into on February 11, 1999. The
term loan from FINOVA expires on August 3, 2000 and bears interest at prime plus
one percent. See "Risk Factors" and "Business of the Company - Financing through
FINOVA Capital Corporation."
<PAGE>
Frampton Industries, Ltd.
In January 1999, the Company and Frampton, an affiliated British Virgin
Islands company, under the common control of EACF, an entity which beneficially
controls the Company, 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, which provides that Frampton shall be provided an
investment banking fee of 8% of the face amount of each debenture funded,
initially bore a six month term and was extended on mutual agreement until March
31, 2000.
In November 1998, the Company entered into agreements with each of (i)
Frampton and (ii) EACF to secure additional financing. Pursuant to the
agreements, Frampton loaned $500,000 to the Company and EACF loaned $150,000 to
the Company, each loan in the form of a convertible, subordinated debenture due
December 31, 1999. The debentures bear a 5% interest rate and initially were
convertible into Series E Stock at a price of $0.10 per share at Frampton's and
EACF's respective options. This price represents a 50% discount from the then
current (November 10, 1998) market price reflecting a discount for the
illiquidity of the shares, which do not carry any registration rights. In May
1999, Frampton and EACF each agreed to amend such conversion price to $0.20 per
share, which represents the full market price on the date of the original
transaction.
Europe American Capital Foundation
See "-- Frampton Industries, Ltd."
United Textiles & Toys Corp.
The Company's parent, United Textiles, has guaranteed the Company's loan
from FINOVA.
The president of United Textiles, Ilan Arbel, in a letter dated May 15,
1998, has represented, generally, his intent and ability to provide working
capital to the Company, should same be necessary, through September 30, 1999.
On July 27, 1998, the Company sold 100,000 shares of Series E Stock to
United Textiles, the Company's parent, for $100,000. In determining the purchase
price paid by United Textiles, the trading price of the Company's Series E Stock
- - along with the applicable discounts for illiquidity, lack of marketability,
and lack of registration rights - were considered. The trading price of
approximately $2.00 per share was discounted by 50% for the above reasons.
ABC Fund, Ltd.
In June 1998, ABC, a Belize corporation and an affiliate of the Company
under common control, the holder of a 5% convertible secured subordinated
Debenture - dated January 21, 1998 and due August 15, 2000 - offered to amend
the terms of the Debenture to enable the conversion of the principal amount and
accrued interest thereon, into shares of Series E Stock, at a conversion price
of $1.00 per share. Management agreed to convert the Debenture since the
conversion of the debt into equity would result in a strengthened equity
position which management believed would provide confidence to the Company's
working capital lender, FINOVA, and trade creditors. Further, converting the
debt to equity eliminated on-going interest expense requirements as well as the
cash flow required to repay the Debenture. Simultaneously with its offer to
amend the Debenture, ABC elected to convert same as of June 30, 1998, whereby,
$1.5 million in principal amount and $33,333 in accrued interest were converted
into 1,533,333 shares of Series E Stock. ABC did not receive any registration
rights regarding the shares. Simultaneously, ABC terminated the Subordinated
Security Agreement between the parties and the Intercreditor and Subordination
Agreement, dated January 21, 1998, by and between ABC and FINOVA.
<PAGE>
The Debenture provided for the conversion of same, at ABC's option, into
shares of common stock of either (i) a subsidiary which the Company intended to
form for the purpose of acquiring those stores operated by the Company (or its
subsidiaries) which conduct business as "Toys International," or (ii) any other
subsidiary (such as Toys) which might acquire a portion of the assets and
business of the Company. This option to convert was exercisable at the net book
value of the subsidiary's shares on the date ABC exercised the option with a
limitation on such share ownership being 25% of the total outstanding shares of
said subsidiary. In September 1998, in accordance with the terms of the
Debenture, ABC assigned its option to Tudor, an entity of which Mr. Moses Mika
(a director of the Company) is a shareholder. On July 15, 1999, Tudor elected to
exercise its right to purchase the Toys common stock and requested that the
exercise price be amended to reflect the book value of Toys at the most recent
fiscal quarter, June 30, 1999. The Company agreed to Tudor's request and, on
September 15, 1999, provided Tudor with a compilation of the Toys June 30, 1999
financial statements as the formal basis for the exercise price. Tudor has not
yet provided the Company with the appropriate consideration for the option
exercise.
CDMI Capital Corporation
On July 20, 1999, the Company and Toys entered into an investment agreement
whereby an unaffiliated investment bank and CDMI, a British Virgin islands
corporation of which Moses Mika, a director of the Company, is a shareholder
each purchased 330,000 shares (or 3.3%) of Toys common stock for an aggregate of
$2.8 million as a bridge financing to a proposed public offering (to raise
approximately $20-25 million in the fall of 1999 via the sale of a minority
interest of Toys common stock). This placement of securities reduced the
Company's ownership of Toys from 100% to 93.4%. Pursuant to the agreement, if
the public offering price for the shares is less than the $2.8 million the Toys
Investors collectively paid for their shares, the Toys Investors will receive
from Toys, at the closing of the offering, either additional shares or cash to
cover the difference. In the event this is required, Toys, and hence, the
Company, could incur a potentially considerable operating loss which might
reduce the Company's profits significantly. See Risk Factor No. 12 -- "
Potential Rescission of Investment in Toys International.COM, Inc."
The agreement also allows the Toys Investors to rescind the agreement and
recover their respective $1.4 million investments if (i) for reasons within the
control of the Company or Toys, Toys is unable to raise funds in the public
offering by April 1, 2000, (ii) Toys breaches certain representations or
warranties under the agreement, (ii) Toys' actual quarterly financials deviate
by 30% or more from the financials comprising its business plan, (iii) the
market valuation of the Company at the public offering is less than $50 million,
or (iv) the $2.8 million in proceeds of the investment are not utilized
according to certain agreed upon terms. In the event the Toys Investors rescind
the agreement, Toys would be required to repurchase the shares for $2.8 million
in cash.
Officers and Directors
The Company leases 40,000 square feet of combined office and warehouse
space (approximately 3,000 square feet is office space, and the remaining 37,000
square feet is warehouse space), at an approximate annual cost of $247,000, from
a partnership of which one of the partners is Richard Brady, the president and a
director of the Company. The lease expires in April 2000, and the Company
believes that it is on terms no more or less favorable than terms it might
otherwise have negotiated with an unaffiliated party.
In early April 1999, each of Messrs. Brady and Rashbaum returned his 25,000
shares of Series E Stock which were issued to same by the Company in March 1998
as bonuses in recognition of their efforts to further the Company's turnaround
toward profitability.
<PAGE>
During fiscal 1999, the Company remitted an aggregate of $33,000 to Mr.
Rashbaum in consideration of the consulting services he provided therefor. Mr.
Rashbaum received $2,500 per month for the first nine months of the fiscal year,
and commencing January 1, 1999, his consulting fee increased to $3,500 per
month. Mr. Rashbaum devotes a significant portion of his time to the Company.
Among other things, he reviews potential store sites, assists in strategic
planning, reviews all cash outflows, and otherwise works closely with management
in further developing and implementing the Company's ongoing business strategy.
Pursuant to the Company's SOP, in July 1997, the Company granted to James
Frakes (chief financial officer and secretary), pursuant to his hire, an option
to purchase 30,000 shares of Common Stock at an exercise price of $3.25 per
share, vesting at the rate of 10,000 shares per annum in July 1998, 1999, and
2000. On June 17, 1998, the board elected to adjust the exercise price of the
option to $1.15, representing 110% of the closing price of the Common Stock on
said date. No portion of the option has been exercised.
Multimedia Concepts International, Inc.
In January 1998, in accordance with certain financing provided by FINOVA,
the Company received $3.0 million in standby L/Cs. Of same, $2 million was
established by the Company and was secured by a $2 million certificate of
deposit which was acquired with $1.5 million in proceeds from a subordinated
debt arrangement and $500,000 from the proceeds of the Company's December 1997
public offering of Series E Stock. The remaining $1 million was provided by
Multimedia, an affiliate of the Company by virtue of its 78.5% ownership of
United Textiles, the Company's parent.
Europe American Capital Corporation
From April 1996 to June 1997, EACC, an entity of which Ilan Arbel and/or
his relatives is/are officer(s) and/or director(s), exercised its options and
purchased an aggregate of 3,562,070 shares of the Series E Stock for $3,562,070.
An aggregate of 361,500 shares were converted to Common Stock which, inclusive
of the 250,000 shares of Series E Stock issued in June 1997, constituted an
aggregate of 3,450,570 shares of Series E Stock outstanding prior to the Series
E Stock public offering in December 1997. The proceeds of the funds received
from this investment enabled the Company (i) to acquire the assets of Toys (a
three store chain) in January 1997, (ii) to finance the openings of the Santa
Clarita, Arizona Mills, Redondo Beach, Ontario Mills, and Clairemont Mesa
stores, (iii) to redesign four store locations, and (iv) to support the
Company's operations during the Company's business turnaround.
Toys International Inc. Consulting Agreement
In January 1997, the Company entered into a consulting agreement with Gayle
Hoepner, a selling stockholder and former chief executive officer of Toys. Mr.
Hoepner was not an affiliate of the Company. The term of the agreement commenced
on January 16, 1997, expired on April 16, 1997, and called for three monthly
payments of $10,000 each. Pursuant to the consulting agreement, Mr. Hoepner,
among other things, (i) advised the Company on specialty toys purchasing, (ii)
introduced management to his contacts in the specialty toy industry and
accompanied management to the Nurnberg, Germany toy show, and (iii) advised
management on potential store sites. The Company believes that this agreement
was on terms no less favorable than terms it might otherwise have negotiated
with any other unrelated third party.
American Toys, Inc. Spin-Off
On January 30, 1996, pursuant to the requirements of the Company's loan
agreement with Congress, American Toys, Inc. (the Company's former parent)
converted all $1.4 million of debt owed by the Company into equity. Congress is
not affiliated with the Company. In exchange for the debt, American Toys, Inc.
agreed to receive from the Company one share of Series D Preferred Stock with
the right to elect 2/3 of the Company's board of directors upon stockholder
approval. In August 1996, the one share of Series D Preferred Stock was
converted into 385,676 shares of the Company's Common Stock based on the initial
amount of the debt divided by the average price of the shares for a 90 day
period prior to the conversion. This was performed in order for American Toys,
Inc. to spin such shares off to its stockholders and divest its interest in the
Company.
<PAGE>
See "Management " for a description of the Company's compensation of its
officers and directors.
FINANCIAL STATEMENTS
See attached Financial Statements.
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheets at March 31, 1998 and 1999, and June 30, 1999 (unaudited) F-3
Statements of Operations and Comprehensive Net Income (Loss) for the Years
Ended March 31, 1998 and 1999, and the Three
Months Ended June 30, 1998 and 1999 (unaudited) F-5
Statements of Stockholders' Equity for the Years Ended March 31, 1998
and 1999, and the Three Months Ended June 30, 1999 (unaudited) F-6
Statements of Cash Flows for the Years Ended March 31, 1998 and 1999,
and the Three Months Ended June 30, 1998 and 1999 (unaudited) F-7
Notes to Financial Statements F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Play Co. Toys & Entertainment Corp.
We have audited the accompanying balance sheets of Play Co. Toys &
Entertainment Corp. (a subsidiary of United Textiles & Toys Corp.) as of March
31, 1999 and 1998 and the related statements of operations and comprehensive net
income (loss), stockholders' equity, and cash flows for each of the two years in
the period ended March 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Play Co. Toys &
Entertainment Corp. at March 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the two years in the period ended
March 31, 1999 in conformity with generally accepted accounting principles.
HASKELL & WHITE LLP
Newport Beach, California
June 24, 1999
F-2
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
<TABLE>
<CAPTION>
Balance Sheets
ASSETS (Note 4)
June 30, 1999 March 31,
(unaudited) 1999 1998
Current
<S> <C> <C> <C>
Cash ................................. $ 392,745 $ 125,967 $ 648,986
Restricted certificates of deposit
(Notes 2 and 4) .................... 350,000 350,000 250,000
Accounts receivable .................. 131,836 98,276 78,594
Merchandise inventories .............. 12,247,019 11,506,284 7,872,804
Other current assets ................. 1,188,941 1,310,263 183,928
----------- ----------- -----------
Total current assets .... 14,310,541 13,390,790 9,034,312
Property and equipment, net of
accumulated depreciation and
amortization of $4,283,071, $4,058,603
and $3,414,235, respectively (Note 3) 5,511,871 5,348,175 2,782,386
Restricted certificate of deposit
(Notes 2 and 4) ...................... 2,000,000 2,000,000 2,000,000
Deposits and other assets (Note 4) ........ 922,838 411,427 323,189
----------- ----------- -----------
$22,745,250 $21,150,392 $14,139,887
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
<TABLE>
<CAPTION>
Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
1998
June 30, 1999 Restated
(unaudited) 1999 (Note 11)
Current
<S> <C> <C> <C>
Accounts payable .................................... $ 7,931,270 $ 5,611,442 $ 3,505,230
Accrued expenses and other liabilities .............. 407,180 595,008 726,601
Current portion of capital lease obligations (Note 5) 262,088 227,197 --
Current portion of notes payable (Note 6) ........... 950,000 1,125,000 350,000
----------- ----------- -----------
Total current liabilities .............. 9,550,538 7,558,647 4,581,831
Borrowings under financing agreement (Note 4) ............ 8,263,713 7,814,666 5,445,198
Capital lease obligations, net of current portion (Note 5) 572,838 585,681 --
Notes payable, net of current portion (Note 6) ........... -- -- 1,500,000
Deferred rent liability (Note 9) ......................... 129,533 126,769 110,351
----------- ----------- -----------
Total liabilities ...................... 18,516,622 16,085,763 11,637,380
----------- ----------- -----------
Commitments and contingencies
(Notes 2, 4, 5, 6, 7, 9, 10 and 13)
Stockholders' equity (Note 11)
Series E convertible preferred stock, $1 par value,
25,000,000 shares authorized as of June 30, 1999;
5,833,903, 5,833,903 and 4,200,570 shares outstanding,
respectively, full liquidation value of $5,833,903,
$5,833,903 and $4,200,570, net of unamortized
discount of $1,364,279, $1,842,252 and $1,916,644
for beneficial conversion feature, respectively
(Note 11) 6,160,074 5,682,101 3,974,376
Series F convertible preferred stock, $.01 par value,
5,500,000 shares authorized, 750,000 shares outstanding 62,500 - -
Common stock, $.01 par value, 160,000,000 shares
authorized as of June 30, 1999; 5,548,852, 5,503,519
and 4,103,519 shares outstanding, respectively 55,488 55,035 41,035
Additional paid-in capital 16,048,319 15,335,172 12,927,918
Accumulated deficit (18,097,753) (16,007,679) (14,440,822)
------------- ----------- ---------------
Total stockholders' equity 4,228,628 5,064,629 2,502,507
------------- ----------- ----------------
$ 22,745,250 $21,150,392 $14,139,887
============= =========== ================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
<TABLE>
<CAPTION>
Statements of Operations and Comprehensive Net Income (Loss)
Three Months Ended June 30, Years Ended March 31,
1998
1999 1998 Restated
(unaudited) (unaudited) 1999 (Note 11)
----------------- --------------- ---------- -----------------
<S> <C> <C> <C> <C>
Net sales ............................................... $ 6,508,565 $ 6,357,395 $ 34,371,230 $ 22,568,527
Cost of sales ........................................... 3,763,214 3,706,331 19,590,784 13,689,599
------------ ------------ ------------ ------------
Gross profit .......................... 2,745,351 2,651,064 14,780,446 8,878,928
------------ ------------ ------------ ------------
Operating expenses
Operating expenses (Notes 9 and 10) ................ 3,649,774 2,460,959 12,658,376 8,864,607
Litigation related expenses (Note 7) ............... 105,316 22,812 27,659 583,541
Depreciation and amortization ...................... 224,468 188,417 986,342 671,282
------------ ------------ ------------ ------------
Total operating expenses .............. 3,979,558 2,672,188 13,672,377 10,119,430
------------ ------------ ------------ ------------
Operating income (loss) ................................. (1,234,207) (21,124) 1,108,069 (1,240,502)
------------ ------------ ------------ ------------
Interest expense (Note 4)
Interest and finance charges ....................... 284,664 138,452 796,202 525,323
Amortization of debt issuance costs ................ 30,730 27,200 168,849 288,645
------------ ------------ ------------ ------------
Total interest expense ................ 315,394 165,652 965,051 813,968
------------ ------------ ------------ ------------
Net income (loss) before income taxes ................... (1,549,601) (186,776) 143,018 (2,054,470)
Provision for income taxes (Note 8) ..................... -- -- 2,150 --
------------ ------------ ------------ ------------
Net income (loss) ....................................... (1,549,601) (186,776) 140,868 (2,054,470)
Other items of comprehensive income (loss) .............. -- -- -- --
------------ ------------ ------------ ------------
Comprehensive net income (loss) ......................... $ (1,549,601) $ (186,776) $ 140,868 $ (2,054,470)
============ ============ ============ ============
Calculation of basic and diluted income (loss) per share:
Net income (loss) .................................. (1,549,601) (186,776) $ 140,868 $ (2,054,470)
Effects of non-cash dividends on convertible
preferred stock (Note 11) ....................... (540,473) (273,806) (1,707,725) (1,473,806)
------------ ------------ ------------ ------------
Net loss applicable to common shares .................... $ (2,090,074) $ (460,582) $ (1,566,857) $ (3,528,276)
============ ============ ============ ============
Basic and diluted income (loss) per common share
and share equivalents .............................. $ (.38) $ (.11) $ (.34) $ (.86)
============ ============ ============ ============
Weighted average number of common shares
and share equivalents outstanding .................. 5,525,936 4,103,525 4,590,642 4,098,971
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Statements of Stockholders' Equity
Years Ended March 31, 1999 and 1998 and Three Months
Ended June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Preferred Stock Additional Total
Series E Series F Common Stock Paid-In Accumulated Stock
Shares Amount Shares Amount Shares Amount Capital Deficit holders'
Balance, Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
April 1, 1997 .................2,500,570 $2,500,570 -- -- 4,083,519 $40,835 $ 9,374,177 $(10,912,546) $1,003,036
Issuance of Common
Stock for cash ...... -- -- -- -- 20,000 200 300 -- 500
Issuance of Series
E Preferred Stock
for cash ...................... 950,000 -- -- -- -- -- 1,200,000 -- 1,200,000
Issuance of Series
E warrants for cash . _ _ -- -- -- -- 50,000 -- 50,000
Issuance of Series
E Preferred Stock
and warrants for cash,
net of offering expenses ...... 750,000 -- -- -- -- -- 2,303,441 -- 2,303,441
Non-cash dividend to amortize
discount on Series E (Note 11). -- 1,473,806 -- -- -- -- -- (1,473,806) --
Net loss for the year ......... -- -- -- -- -- -- -- (2,054,470) (2,054,470)
--------- --------- ------- ------ --------- ------ ---------- ------------ ------------
Balance,
March 31, 1998 ................4,200,570 3,974,376 -- -- 4,103,519 41,035 12,927,918 (14,440,822) 2,502,507
Conversion of
debt and accrued
interest to Series
E Preferred Stock 1,533,333 -- -- -- -- -- 1,533,333 -- 1,533,333
Issuance of Series
E Preferred Stock
for cash ..................... 100,000 -- -- -- -- -- 100,000 -- 100,000
Issuance of Series E
Preferred Stock and
options to consultants ....... -- -- -- -- -- -- 78,750 -- 78,750
Issuance of Common Stock for cash
and inventories .............. -- -- -- -- 1,400,000 14,000 651,000 -- 665,000
Non-cash dividend to amortize
discount on Series E (Note 11) -- 1,707,725 -- -- -- -- -- (1,707,725) --
Issuance of stock options to
consultants -- -- -- -- -- -- 44,000 -- 44,000
Miscellaneous adjustments .... -- -- -- -- -- -- 171 -- 171
Net income for the year ...... -- -- -- -- -- -- -- 140,868 140,868
--------- --------- ------- ------ --------- ------ ---------- ------------ ------------
Balance, March 31, 1999 ...... 5,833,903 5,682,101 -- -- 5,503,519 55,035 15,335,172 (16,007,679) 5,064,629
Issuance of Series F Stock ... -- -- 750,000 -- -- -- 657,500 -- 657,500
Issuance of Common Stock ..... -- -- -- -- 45,333 453 55,647 -- 56,100
Net loss for the quarter ..... -- -- -- -- -- -- -- (1,549,601) (1,549,601)
Non-cash dividend to amortize
discount on Series E (Note 11) -- 477,973 -- -- -- -- -- (477,973) --
Non-cash dividend to amortize
discount on Series F ......... -- -- -- 62,500 -- -- -- (62,500) --
--------- --------- ------- ------ --------- ------ ---------- ------------ ------------
Balance, June 30, 1999
(unaudited) ..... 750,000 $ 62,500 5,883,903 $6,160,074 5,548,852 $55,488 $16,048,319 $18,097,753 $4,228,628
--------- --------- ------- ------ --------- ------ ---------- ------------ ------------
</TABLE>
<PAGE>
See accompanying notes to financial statements.
F-6
<PAGE>
Statements of Cash Flows (Note 12)
<TABLE>
<CAPTION>
Three Months Ended June 30, Years Ended March 31,
1999 1998
(unaudited) (unaudited) 1999 1998
---------------- ----------- ---------- ------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income (loss) ............................ $(1,549,601) $ (186,776) $ 140,868 $(2,054,470)
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Depreciation and amortization ............ 224,468 188,417 983,459 671,282
Loss on abandonment of assets ............ -- -- -- 45,255
Amortization of debt issuance costs ...... 43,100 27,200 109,977 196,849
Deferred rent ............................ 2,764 4,552 16,418 (16,574)
Amortization of stock options ............ -- -- 122,921 --
Stock compensation ....................... 56,100 10,938 -- --
Increase (decrease) from changes in:
Accounts receivable ...................... (33,560) 26,618 (19,682) (18,388)
Merchandise inventories .................. (740,735) (1,503,233) (3,268,480) (1,779,874)
Other current assets ..................... 229,541 (154,428) (1,236,312) 63,385
Deposits and other assets ................ (511,410) (93,072) (88,238) (195,241)
Accounts payable ......................... 2,319,827 1,249,369 2,106,212 381,379
Accrued expenses and other liabilities ... (267,983) (527,702) (98,260) 417,661
----------- ----------- ----------- -----------
Cash used for operating activities . (227,489) (958,117) (1,231,117) (2,288,736)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of restricted certificates of deposit -- -- (100,000) (2,250,000)
Purchases of property and equipment .......... (196,653) (377,028) (2,699,819) (1,023,273)
----------- ----------- ----------- -----------
Cash used for investing activities . (196,653) (377,028) (2,799,819) (3,273,273)
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
Statements of Cash Flows (Note 12) (continued)
<TABLE>
<CAPTION>
Three Months Ended June 30, Years Ended March 31,
1999 1998
(Unaudited) (Unaudited) 1999 1998
---------------- ----------------- ---------- ------------
Cash flows from financing activities:
<S> <C> <C> <C> <C>
Change in bank overdraft ...................... -- -- -- (135,325)
Borrowings under financing agreements ......... 8,561,047 8,099,497 43,239,568 33,560,443
Repayments under financing agreements ......... (8,112,000) (7,023,000) (40,870,100) (32,554,120)
Proceeds from notes payable ................... 200,000 -- 2,700,000 1,750,000
Repayment of notes payable .................... (375,000) (100,000) (1,925,000) (141,666)
Repayments under capital leases ............... (240,627) (883) (36,551) --
Proceeds from issuance of common stock ........ -- -- 14,000 500
Proceeds from issuance of preferred stock ..... 657,500 -- 386,000 3,390,450
Proceeds from issuance of preferred stock
warrants .................................... -- -- -- 162,991
------------ ------------ ------------ ------------
Cash provided by financing activities 690,920 975,614 3,507,917 6,033,273
------------ ------------ ------------ ------------
Net increase (decrease) in cash .................... 266,778 (359,531) (523,019) 471,264
Cash, beginning of period .......................... 125,967 648,986 648,986 177,722
------------ ------------ ------------ ------------
Cash, end of period ................................ $ 392,745 $ 289,455 $ 125,967 $ 648,986
============ ============ ============ ============
</TABLE>
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
1. Summary of Accounting Policies
Business Organization and Revenue Recognition
Play Co. Toys & Entertainment Corp. (the "Company") is a Delaware
corporation that owns and operates retail stores which sell educational,
specialty, collectible, and traditional toys. The Company had twenty-five (25)
retail stores located within southern California, Arizona, Illinois, Michigan,
Nevada, and Texas at March 31, 1999, as compared to nineteen (19) stores located
in California and Arizona as of March 31, 1998. The Company's retail stores,
which are located in high-traffic malls and strip centers, operate under the
names "Play Co. Toys," "Toys International," and "Toy Co."
In August 1996, the Company became a subsidiary of United Textiles & Toys
Corp. ("UTTC"). As of March 31, 1999, UTTC owns approximately 45.2% of the
outstanding shares of the Company's Common Stock.
Revenues are recognized at the point of sale for retail locations and at
the shipping date for wholesale operations. Wholesale operations represent a
minor portion of the Company's operations.
Basis of Presentation - Three Months Ended June 30, 1999 and 1998
The unaudited interim financial statements for the three-month periods
ended June 30, 1999 and 1998 included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and, in the opinion of the Company, reflect all adjustments
(consisting only of normal recurring adjustments) and disclosures which are
necessary for a fair presentation. The results of operations for the three-month
period ended June 30, 1999 is not necessarily indicative of the results that may
be expected for any other interim period or for the year ending March 31, 2000.
F-9
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
1. Summary of Accounting Policies (continued)
Nature of Relationships with Affiliates
As described in the footnotes following, the Company obtains a portion of
the financing from and engages in transactions with affiliated entities, many of
which are under common control. These entities and the nature of the affiliates
are as follows:
<TABLE>
<CAPTION>
Affiliates Under Common Control
<S> <C>
Name of Entity Nature of Affiliation
United Textiles & Toys Corp. ("UTTC"): A company that held a majority of the Company's
common stock through November 1998 and 45.2%
since the Breaking Waves, Inc. investment in
Common Stock (see below and Note 11). UTTC
effectively controls the Company. The president
of UTTC is Ilan Arbel.
Multimedia Concepts: Majority stockholder in UTTC. The
International, Inc. ("MMCI") president and director of MMCI is Ilan Arbel.
Europe American Capital Foundation A Swiss foundation which is the penultimate
("EACF") control entity of Play Co. and its respective,
successive parent corporations, or the beneficial
owner of 45.2% of Play Co. shares. EACF is the
sole stockholder/ beneficiary of Frampton Industries,
Ltd. and ABC Fund, Ltd., and the majority stockholder
of American Telecom, PLC.
Europe American Capital Corporation Entity of which Ilan Arbel and/or
his ("EACC") relatives is/are officer(s) and/or director(s).
Frampton Industries, Ltd. ("Frampton") Entity which is wholly owned by EACF.
American Telecom PLC Entity 80% owned by EACF.
ABC Fund, Ltd. ("ABC") Entity which is wholly owned by EACF.
</TABLE>
<PAGE>
1. Summary of Accounting Policies (continued)
Nature of Relationships with Affiliates (continued)
<TABLE>
<CAPTION>
Other Affiliates
<S> <C>
Name of Entity Nature of Affiliation
U.S. Stores Corp. ("USSC") A private company whose president is Ilan Arbel,
who is also a director. Parent company of MMCI.
ZD Group L.L.C. ("ZD") ZD is a New York Trust, the beneficiary of which
is a member of the family of the Company's Chairman.
European Ventures Corp. ("EVC") Parent company of Shopnet.com. Ilan Arbel is the
president. Mr. Arbel's father, a director of the
Company, is the majority shareholder.
Shopnet.com ("Shopnet") The Chairman of Play Co. is the president and a
director of Shopnet.
Breaking Waves, Inc. ("BWI") This entity is a wholly owned subsidiary of
Shopnet, and also owns 25% of Play Co's Common
Stock (Note 11). The president of BWI is also
the Chairman of the Board of the Company and a
relative of Ilan Arbel.
</TABLE>
F-10
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
1. Summary of Accounting Policies (continued)
Nature of Relationships with Affiliates (continued)
100%
80%
American Telecom PLC
Europe American Capital Foundation
100%
The following chart graphically depicts the Company's ownership
structure at March 31, 1999 for those entities under common control:
Europe American Capital Foundation
80%
100% 100%
Frampton Industries, Ltd. American Telecom PLC ABC Fund, Ltd.
100%
U.S. Stores Corp.
67.7%
Multimedia Concepts International, Inc.
78.5%
United Textiles & Toys Corp.
45.2%
Play Co. Toys & Entertainment Corp.
F-11
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
1. Summary of Accounting Policies (continued)
Merchandise Inventories
Merchandise inventories are stated at the lower of cost (first-in,
first-out method - "FIFO") or market.
Concentration of Credit Risk
The Company maintains cash balances at three banks. Accounts at each bank
are insured by the Federal Deposit Insurance Corporation up to $100,000 in
aggregate. Uninsured balances are approximately $2,466,645 at June 30, 1999, and
$2,603,308 and $2,698,986 at March 31, 1999 and 1998, respectively.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives (3 -
15 years) of the related assets. Leasehold improvements are amortized over the
lesser of the related lease terms or the estimated useful lives of the
improvements. Maintenance and repairs are charged to operations as incurred.
Store Opening and Closing Costs
Costs incurred to open a new retail location such as advertising, training
expenses and salaries of newly hired employees are generally expensed as
incurred and improvements to leased facilities are capitalized. Upon permanently
closing a retail location, the costs to relocate fixtures, terminate employees
and other related costs are expensed as incurred. In addition, the unamortized
balances of any abandoned leasehold improvements are expensed.
In April 1998, the AICPA's Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities.
The SOP, which is effective for fiscal years beginning after December 15, 1998
with earlier application encouraged, requires entities to expense start-up and
organization costs for establishing new operations. The Company adopted the
provisions of this statement as of March 31, 1999 without impact given its
historical treatment of store opening costs.
F-12
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
1 Summary of Accounting Policies (continued)
Income Taxes
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Deferred income taxes are recognized based on the
differences between financial statement and income tax bases of assets and
liabilities using enacted rates in effect for the year in which the differences
are expected to reverse. Valuation allowances are established, when necessary,
to reduce the deferred tax assets to the amount expected to be realized. The
provision for income taxes represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities, including the
effect of change in the valuation allowance, if any.
Net Loss Per Share
During the three-month period ended December 31, 1997, the Company adopted
the provisions of SFAS No. 128, Earnings Per Share, which requires the
disclosure of "basic" and "diluted" earnings (loss) per share. Basic earnings
(loss) per share is computed by dividing net income (loss), after reduction for
preferred stock dividends and the accretion of any redeemable preferred stock,
by the weighted average number of common shares outstanding during each period.
Diluted earnings (loss) per share is similar to basic earnings (loss) per share
except that the weighted average number of common shares outstanding is
increased to reflect the dilutive effect of potential common shares, such as
those issuable upon the exercise of stock or warrants and the conversion of
preferred stock, as if they had been issued.
Non-cash dividends recorded to amortize the discount on Series E Preferred
Stock totaled $1,707,725 and $1,473,806 for the years ended March 31, 1999 and
1998, respectively (Note 11). Non-cash dividends recorded to amortize discounts
on preferred stock totaled $540,473 and $273,806 for the three-month periods
ended June 30, 1999 and 1998, respectively.
For each of the years ended March 31, 1999 and 1998, as well as the
three-month periods ended June 30, 1999 and 1998, there is no difference between
basic and diluted loss per common share as the effects of stock options or
warrants and conversion of preferred stock are anit-dilutive given the net loss
applicable to common shares for each year.
F-13
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
1 Summary of Accounting Policies (continued)
Net Loss Per Share (continued)
As of June 30, 1999, March 31, 1999 and 1998, potentially dilutive
securities outstanding which were not included in the calculation of basic and
diluted net loss per common share consist of the following:
<TABLE>
<CAPTION>
June 30, Potential Common Shares
1999 March 31,
(unaudited) 1999 1998
----------- ------------------- --------
Common shares issuable upon:
Conversion of Series E Preferred Stock;
5,833,903, 5,833,903 and 4,200,570
shares outstanding, respectively, each
convertible into six shares of Common
<S> <C> <C> <C>
Stock, subject to holding periods. 35,003,418 35,003,418 25,203,420
Exercise of 2,000,000 outstanding
warrants to purchase 2,000,000
shares of convertible Series E
Preferred Stock, each share of
Series E then convertible into
six shares of Common Stock,
subject to holding periods. 12,000,000 12,000,000 12,000,000
Conversion of debentures (Note 6) into
3,250,000 shares of Series E Preferred
Stock, each share of Series E then
convertible into six shares of Common
Stock, subject to holding periods. 19,500,000 19,500,000 -
Conversion of Series F Preferred Stock;
750,000 shares outstanding, each
convertible into two shares of common
stock, subject to holding 1,500,000 - -
Exercise of employee stock options 30,000 30,000 30,000
---------- ---------- ----------
68,033,418 66,533,418 37,233,420
============== ============ ==========
</TABLE>
<PAGE>
1. Summary of Accounting Policies (continued)
Statements of Cash Flows
For purpose of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, consisting of
accounts receivable, accounts payable, and borrowings, approximates their fair
value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses, and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual amounts could differ from those estimates.
Impairment of Long-Lived Assets
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For the purposes of
evaluating potential impairment, the Company's assets are grouped by physical
location, namely the corporate office/warehouse, and individual retail
locations. The Company adopted SFAS 121 effective April 1, 1997. There was no
impact of such adoption on the Company's financial condition and results of
operations. Since adopting SFAS 121 in April 1997, the Company gives
consideration to events or changes in circumstances for each of its locations
and has not identified circumstances other than the closure of retail locations
(see Note 7) which resulted in the write-off of unamortized balances of tenant
improvements for the year ended March 31, 1998. The expense related to the write
off of such assets was immaterial.
F-14
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
1. Summary of Accounting Policies (continued)
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, established
financial accounting and reporting standards for stock-based employee
compensation plans and certain other transactions involving the issuance of
stock. The Company adopted the disclosure requirements of SFAS 123 for
stock-based employee compensation effective April 1, 1996. However, the Company
continues to use the intrinsic value method for recording compensation expenses
as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees.
The fair value method prescribed by SFAS No. 123 is used to record stock-based
compensation to non-employees.
Effect of New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in an entity's
financial statements. This statement requires an entity to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional pai in-capital in the equity section of a statement of
financial position. This pronouncement, which is effective for fiscal years
beginning after December 15, 1997, was adopted by the Company during the fiscal
year ending March 31, 1999 without impact to the financial statements for either
of the years ended March 31, 1999 or 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. This statement requires public enterprises
to report financial and descriptive information about its reportable operating
segments and establishes standards for related disclosures about product and
services, geographic areas, and major customers. This pronouncement is effective
for fiscal years beginning after December 15, 1997. Management reviewed the
provision of this statement during the year ended March 31, 1999. While the
Company has expanded into several states during the year, management believes
the Company's operations to be limited to one reporting segment being a retailer
of educational, specialty, collectible, and traditional toys. All of the
Company's sales have been domestic, and there are no foreign operations.
F-15
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
2. Restricted Certificates of Deposit
At March 31, 1999 and 1998, the Company has three certificates of deposit
which are restricted as to their nature. The first, in the amount of $2,000,000,
represents collateral against a letter of credit securing financing under the
FINOVA Capital Corporation agreement ("FINOVA Financing") (Note 4) and is
classified as a non-current asset since the funds in the certificate of deposit
will remain restricted until the letter of credit expires or is released by
FINOVA Capital Corporation ("FINOVA"). The second, in the amount of $250,000, is
collateral for a facility for letters of credit. The third, in the amount of
$100,000, is to cover an increase on the previously mentioned letter of credit
facility.
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, 1999 March 31,
(unaudited) 1999 1998
<S> <C> <C> <C>
Furniture, fixtures and equipment $ 6,351,945 $ 5,968,292 $ 4,222,586
Leasehold improvements .......... 2,742,664 2,763,711 1,551,760
Signs ........................... 510,067 501,798 317,363
Vehicles ........................ 104,912 104,912 104,912
Construction in progress ........ 85,354 68,065 --
----------- ----------- -----------
9,794,942 9,406,778 6,196,621
Accumulated depreciation and
amortization .................. (4,283,071) (4,058,603) (3,414,235)
----------- ----------- -----------
$ 5,511,871 $ 5,348,175 $ 2,782,386
=========== =========== ===========
</TABLE>
The following is a summary of property and equipment held under capital
leases (Note 5):
June 30, 1999 March 31,
(unaudited) 1999 1998
Furniture and fixtures ...... $ 1,112,104 $ 849,429 $-
Less accumulated depreciation (218,257) (112,584) --
----------- ----------- --
$ 893,847 $ 736,845 $-
<PAGE>
4. Financing Agreements
On February 7, 1996, the Company borrowed, under an agreement with Congress
Financial Corporation (Western) (the "Congress Financing"), approximately
$2,243,000, the proceeds of which were used to repay the then outstanding
borrowings under a bank line of credit agreement. The Congress Financing
provided for maximum borrowings up to $7,000,000 based upon a percentage of the
cost value of eligible inventory, as defined. Outstanding borrowings bore
interest at 1.5% above the prime rate, as defined.
In connection with the Congress Financing, and the previous bank line of
credit agreement, European American Capital Corp. ("EACC"), an affiliate (Note
1), provided a $2,000,000 letter of credit for collateral. As compensation to
EACC, the Company granted EACC options ("EACC Options" - Note 11), to acquire
shares of Common Stock and Preferred Stock, the aggregate value of which was
$458,000. The aggregate $458,000 was initially included in other assets, as debt
issuance costs, and additional paid-in capital. The option values were amortized
into interest expense through the February 1, 1998 maturity of the Congress
Financing, resulting in aggregate interest charges of $196,849 for the year
ended March 31, 1998.
In March 1997, the Congress Financing was amended to provide for, among
other things, increased borrowing ratios and an additional $1,000,000 letter of
credit as collateral from EACC. Thereafter, the Congress Financing was
collateralized by an aggregate $3,000,000 in letters of credit through its
maturity on February 1, 1998.
On February 3, 1998, the Company borrowed $4,866,324 under the FINOVA
Financing, the proceeds of which were used primarily to repay the then
outstanding borrowings under the Congress Financing and to pay fees related to
the FINOVA Financing.
The FINOVA Financing, as amended currently, provides for maximum borrowings
up to $8,300,000 based on a percentage of the cost value of eligible inventory,
as defined. Outstanding borrowings bear interest at 1.5% above prime rate, as
defined (the prime rate at March 31, 1999 and 1998 was 7.75% and 8.5%,
respectively). The agreement matures on August 3, 2000 and can be renewed for
one additional year at the lender's option.
F-16
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
4. Financing Agreements (continued)
Total fees related to the FINOVA Financing aggregated approximately
$272,000 and are being amortized over the 30-month term of the agreement. The
unamortized portion of these debt issuance costs was $133,876 and $253,858, as
of March 31, 1999 and 1998, respectively, and is included in "Deposits and other
assets" in the balance sheets. Additional costs were incurred and capitalized
during the year relating to amendments to the agreement that increased the
borrowing capacity.
The FINOVA Financing includes a financial covenant requiring the Company to
maintain, at all times, net worth, as defined, of $750,000. At March 31, 1999
and 1998, the Company was in compliance with this financial covenant.
The FINOVA Financing also includes various other covenants, two of which
the Company violated during the year by exceeding the specified maximum levels
of capital expenditures and debt financing. The Company has received a waiver of
these defaults.
The FINOVA Financing is guaranteed by UTTC and is secured by substantially
all of the assets of the Company and $3,000,000 in letters of credit. Of the
$3,000,000 in letters of credit, $2,000,000 is collateralized by amounts held in
a restricted certificate of deposit (Note 2). The remaining $1,000,000 letter of
credit, has been provided by MMCI, an affiliate of the Company (Note 1).
At March 31, 1999, the Company also has $700,000 included in its borrowings
from FINOVA under a term loan due concurrently with the overall FINOVA
Financing, with interest at prime plus one percent, secured by a letter of
credit (Note 9).
F-17
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
5. Capital Lease Obligations
During the year ending March 31, 1999, the Company entered into several
leases with financing companies that have been classified as capital lease
obligations. The amounts financed ranged from $49,901 to $232,098, with varying
monthly installment payments from $849 to $5,313, at interest rates varying from
12.6% to 19.6%. The leases, which have maturity dates ranging from October 15,
2001 to March 1, 2004, require minimum payments as follows:
Year ending
March 31,
2000 $ 249,423
2001 249,423
2002 234,658
2003 213,986
2004 152,672
-----------
Total minimum lease payments .......... 1,100,162
Less amount representing interest ..... (287,284)
-----------
Present value of minimum lease payments 812,878
Less current portion .................. (227,197)
-----------
Long-term portion ..................... $ 585,681
===========
6. Notes Payable
<TABLE>
<CAPTION>
June 30, 1999 March 31,
(unaudited) 1999 1998
Note payable to ABC, an affiliate (Note 1), bearing
interest at 5% per annum. Converted with accrued interest of
$33,333, into 1,533,333 shares of Series E Preferred Stock
<S> <C> <C> <C> <C>
(Note 11). $ - $ - $ 1,500,000
</TABLE>
<PAGE>
6. Notes Payable (continued)
<TABLE>
<CAPTION>
June 30, 1999 March 31,
(unaudited) 1999 1998
Note payable to BWI, an affiliate (Note 1), bearing
interest at 15% per annum, paid in ten monthly installments
of $25,000 plus accrued interest through maturity on
December 31, 1998. Note was subordinate to the FINOVA
<S> <C> <C> <C>
Financing (Note 4). - - 250,000
Note payable to stockholder of Toys International
non-interest bearing, guaranteed by UTTC, an affiliate (Note
1), paid in quarterly installments of $25,000 through its
maturity on January 16, 1999. - - 100,000
Note payable to Shopnet, an affiliate (Note 1), bearing
interest at 9% per annum, payable in monthly installments of
$25,000 with an original maturity of June 15, 1999. Note has been
verbally extended to July 22, 1999. 75,000 75,000 -
Note payable to Shopnet, an affiliate (Note 1), bearing
interest at 9% per annum, payable in monthly installments of
$25,000 with an original maturity of June 15, 1999. Note has
been verbally extended to July 22, 1999. 75,000 - -
</TABLE>
F-18
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
6. Notes Payable (continued)
<TABLE>
<CAPTION>
June 30, 1999 March 31,
(unaudited) 1999 1998
Note payable to Shopnet, an affiliate (Note 1), bearing
interest at 9% per annum, payable in monthly installments of
$25,000 with an original maturity of June 15, 1999. Note has
<S> <C> <C> <C>
been verbally extended to July 22, 1999. 100,000 - -
Note payable to Full Moon Development, Inc., an
unaffiliated entity, bearing interest at 12%, payable in
monthly installments of $50,000 through maturity on July 30,
1999. 50,000 200,000 -
Note payable to Full Moon Development, Inc., an
unaffiliated entity, bearing interest at 12%, payable in
monthly installments of $66,667, except for the final
installment which is due at maturity on June 30, 1999,
twenty days after previous payment. - 200,000 -
Convertible debenture to Frampton, an affiliate (Note
1), bearing interest at 5% per annum, with interest only
payments due monthly beginning March 1, 1999, convertible to
Series E Preferred Stock, due at maturity on December 31,
1999. 500,000 500,000 -
</TABLE>
F-19
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
6. Notes Payable (continued)
<TABLE>
<CAPTION>
June 30, 1999 March 31,
(unaudited) 1999 1998
Convertible debenture to EACF, an affiliate (Note 1),
bearing interest at 5% per annum, with interest only
payments due monthly beginning March 1, 1999, convertible to
Series E Preferred Stock, due at maturity on December 31,
<S> <C> <C> <C>
1999. 150,000 150,000 -
Total notes payable 950,000 1,125,000 1,850,000
Less current portion (950,000) (1,125,000) (350,000)
--------------- --------------- -----------------
Long-term portion $ - $ - $ 1,500,000
=============== =============== =================
</TABLE>
The above notes may carry interest rates that differ from prevailing
interest rates. The Company has not provided for imputed interest on rate
discounts or premiums as the effects are immaterial to the financial statements.
The above convertible debentures to Frampton and EACF are both convertible
into Series E Preferred Stock. The debenture holder has the right at any time
prior to the maturity date to convert all or part of the outstanding principal.
The conversion price is $.20 per share, i.e. for every $100,000 converted, the
holder would receive 500,000 shares. Each share of Series E Preferred Stock is
convertible into six shares of Common Stock (Note 11).
7. Closure of Retail Stores - Litigation
During the year ended March 31, 1998, the Company closed, and ultimately
vacated, five retail locations prior to the end of their lease terms. As a
result, four of the five landlords filed lawsuits against the Company to collect
unpaid rent as well as rental obligations remaining under the terms of the
respective leases.
Subsequent to the filing of actions by the landlords and through May 1998,
the Company with assistance of outside counsel reached settlement agreements
with the various landlords. These settlements aggregated $469,600, of which
$57,820 remains outstanding on one settlement.
<PAGE>
7. Closure of Retail Stores - Litigation (continued)
The statement of operations for the year ended March 31, 1999 and 1998
includes $27,659 and $583,541, respectively, of "litigation related expenses"
which comprise the settlement costs on the aforementioned leases, and legal fees
associated with the negotiations. Litigation related expenses totaled $105,316
and $22,812 for the three-month periods ended June 30, 1999 and 1998,
respectively.
The Company currently has one remaining landlord/tenant matter which has
yet to be resolved. As of March 31, 1999, the Company has accrued a liability
related to this matter, which is an estimate by management based on its
analysis. The Company's management expects this matter to be resolved without
further material effects on the financial statements.
8. Income Taxes
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998
Current:
<S> <C> <C>
Federal $ - $ -
State 2,150 -
--------------- ----------------
Total current 2,150 -
Deferred:
Federal 40,424 750,224
State 45,726 156,280
--------------- ----------------
Total deferred 86,150 906,504
--------------- ----------------
Valuation allowance (86,150) (906,504)
--------------- ---------------
Total provision for income taxes $ 2,150 $ -
=============== ================
</TABLE>
F-20
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
8. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's net deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
March 31,
1999 1998
<S> <C> <C>
Inventories $ (329,264) $ (227,696)
AMT tax credits (23,260) (23,260)
Accrued expenses 72,760 (19,779)
--------------- ----------------
Current portion of net deferred income
tax (assets) liabilities (279,764) (270,735)
--------------- ----------------
Depreciation and amortization (211,108) (28,388)
Loss on disposal of assets 127,043 25,926
Net operating loss carryforwards (3,471,124) (3,652,294)
Deferred rent liability (50,099) (43,891)
Income taxes 794 508
Amortization of stock options (200,520) (202,049)
--------------- ----------------
Long-term portion of net deferred
income tax (assets) liabilities (3,805,014) (3,900,188)
--------------- ----------------
Total net deferred income tax (assets) liabilities (4,084,778) (4,170,923)
---------------- -------------------
Valuation allowance 4,084,778 4,170,923
--------------- ----------------
Net deferred income taxes $ - $ -
=============== ================
</TABLE>
At March 31, 1999 and 1998, a 100% valuation allowance has been provided on
the net deferred income tax assets since the Company can not determine that it
is "more likely than not" to be realized.
F-21
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
8. Income Taxes (continued)
The reconciliation of income taxes computed at the federal statutory tax
rate to income taxes at the effective income tax rate in the statements of
operations is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998
<S> <C> <C>
Federal statutory income tax (benefit) rate 34.0% (34.0)%
Permanent adjustments 4.4 -
State income taxes, net of federal benefit 1.5 0.1
Change in valuation allowance (38.4) 33.9
--------- --------------
Effective income tax rate 1.5% -%
</TABLE>
At March 31, 1999, the Company has net operating loss (NOL) carryforwards
of approximately $9,400,000 for federal purposes and approximately $5,000,000
for state purposes. The federal NOLs are available to offset future taxable
income and expire at various dates through March 31, 2013 while the state NOLs
are available and expire at various dates through March 31, 2003.
A portion of the NOLs described above are subject to provisions of the
Internal Revenue Code ss.382 which limits use of net operating loss
carryforwards when changes of ownership of more than 50% occur during a three
year testing period. During the years ended March 31, 1994 and 1995, the
Company's ownership changed by more than 50% as a result of the May 1993
acquisition of a majority interest in the Company and the Company's November
1994 completion of an initial public offering of its Common Stock. Further
changes in Common and Preferred Stock ownership during each of the years ended
March 31, 1997 through 1999, as described in Note 11, have also potentially
limited the use of NOLs. The effect of such limitations has yet to be
determined. NOLs could be further limited upon the exercise of outstanding stock
options and stock purchase warrants or as a result of the May 1999 private
offering of Series F Preferred Stock (Note 13).
F-22
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
9. Commitments and Contingencies
Operating Leases
The Company leases its retail store properties under noncancelable
operating lease agreements which expire through June 2009 and require various
minimum annual rentals. Several of the leases provide for renewal options to
extend the leases for additional five or ten-year periods. Certain store leases
also require the payment of property taxes, normal maintenance and insurance on
the properties and additional rents based on percentages of sales in excess of
various specified retail sales levels.
During the years ended March 31, 1999 and 1998, the Company incurred rental
expense under all operating leases of $4,104,073 and $3,112,822, respectively.
Contingent rent expense was insignificant during the years ended March 31, 1999
and 1998. Rent expense totaled $1,325,761 and $1,056,951 for the three-month
period ended June 30, 1999 and 1998.
At March 31, 1999, the aggregate future minimum lease payments due
under these noncancelable leases, including approximately $448,000 for the
remaining term of the lease for the closed Rialto, California retail location
(Note 7) through November 2003, are as follows:
<TABLE>
<CAPTION>
Related
Party
Office/
Year Ending Warehouse Retail
March 31, (Note 10) Locations Total
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
2000 $ 247,289 $ 5,148,190 $ 5,395,479
2001 20,624 4,952,250 4,972,874
2002 - 4,536,291 4,536,291
2003 - 4,374,766 4,374,766
2004 - 3,472,774 3,472,774
Thereafter - 7,447,655 7,447,655
--------------- --------------- ----------------
Total minimum lease payments $ 267,913 $ 29,931,926 $ 30,199,839
============= =============== ===================
</TABLE>
F-23
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
9. Commitments and Contingencies (continued)
Operating Leases (continued)
As of the date of this report the Company has executed leases for the
opening of ten (10) additional stores in California, Nevada, North Carolina,
Texas, Illinois, and Tennessee. The stores are expected to open on various dates
in August 1999 through November 2000, and have varying expiration dates through
2010. The new leases will require expected minimum rental payments aggregating
approximately $27,434,000 over the life of the leases. Accordingly, existing
minimum lease commitments as of March 31, 1999, plus those expected minimum
commitments for the proposed retail locations would aggregate minimum lease
commitments of approximately $57,634,000.
4. Delisting of Securities
Until September 24, 1997, the Company's Common Stock was quoted on the
NASDAQ SmallCap Stock Market.
Since September 24, 1997, the Company's Common Stock, as well as its Series
E Preferred Stock and Series E Preferred Stock purchase warrants sold in a
public offering completed in December 1997, have been quoted over-the-counter on
the OTC Bulletin Board.
Dependence on Suppliers
For the years ended March 31, 1999 and 1998, approximately forty-one (41%)
and thirty-one percent (31%) of the Company's inventory purchases were made
directly from five (5) manufacturers. The Company typically purchases products
from its suppliers on credit arrangements provided by the manufacturers. The
termination of a credit line or the loss of a major supplier or the
deterioration of the Company's relationship with a major supplier could have a
material adverse effect on the Company's business.
401(k) Employee Stock Ownership Plan
In May 1994, the Company adopted a 401(k) Employee Stock Ownership Plan
(the "Plan") which covers substantially all employees of the Company. The Plan
includes provisions for both an Employee Stock Ownership Plan ("ESOP") and a
401(k) Plan.
F-24
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
9. Commitments and Contingencies (continued)
401(k) Employee Stock Ownership Plan (continued)
The ESOP allows only contributions by the Company which can be made
annually at the discretion of the Company's Board of Directors. The ESOP is
designed to invest primarily in the Company's Common Stock. Through March 31,
1999, there had been no transactions with regards to the ESOP.
The 401(k) portion of the Plan is contributed to by the employees of the
Company through payroll deductions. The Company makes no matching contributions
to the 401(k) portion of the Plan.
Financing Agreement
In November 1998, the Company entered into an agreement with ZD, a related
party (Note 1), to secure additional financing. Pursuant to this agreement, ZD
issued a $700,000 irrevocable standby letter of credit ("L/C") in favor of
FINOVA, the Company's working capital lender. FINOVA then lent a matching
$700,000 to the Company in the form of a term loan (Note 4). 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 payments
representing one-third (33%) of the net profits from three stores, Great Lakes
Crossing, Gurnee Mills, and Woodfield Mall (scheduled to open late summer 1999).
The net profit of each store will include an appropriate allocation of corporate
overhead. The expense related to the net profits interest due to ZD will be
accrued beginning April 1, 1999, the effective date of the agreement. The
duration of the agreement with ZD is equal to the current lease term of each of
the stores, including any renewals, but in any event not beyond the Company's
fiscal year ending March 31, 2013. The store leases currently expire, including
options for renewal, at various dates through June 2009. The Company will
categorize this expense as (effective) interest since these costs represent
compensation to secure additional financing. As these stores did not generate a
profit after application of corporate overhead in the three-month period ended
June 30, 1999, no payments were earned or made to ZD during this period.
Additionally, as long as the agreement is in effect, ZD will have the right
to nominate and appoint one-third of the Company's Board of Directors.
F-25
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
9. Commitments and Contingencies (continued)
1994 Stock Option Plan
In June 1994, the Company adopted a Stock Option Plan (the "Plan") which
provides for options to purchase an aggregate of not more than 50,000 shares of
Common Stock as may be granted from time to time by the Company's Board of
Directors. Pursuant to the hire of the Company's current Chief Financial Officer
and Secretary, the Company granted an option to purchase 30,000 shares of Common
Stock at an exercise price of $3.25 per share was authorized, vesting at the
rate of 10,000 shares per annum in each of July 1998, 1999 and 2000. In June
1998, the Board of Directors adjusted the exercise price of the option to $1.15
per share. As of March 31, 1999, no portion of the option to purchase Common
Stock had been exercised.
Seasonality
The Company's business is highly seasonal with a large portion of its
revenues and profits being derived during the months of November and December.
Accordingly, in order for the Company to operate, it must obtain substantial
short-term borrowings from lenders and the Company's suppliers during the first
three-quarters of each fiscal year to purchase inventory and for operating
expenditures. Historically, the Company has been able to obtain such credit
arrangements and substantially repay the amounts borrowed from suppliers and
reduce outstanding borrowings from its lender during the fourth quarter of its
fiscal year.
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 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 by the end of September 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. This lease is included with the capital
lease obligations described in Note 5.
F-26
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
9. Commitments and Contingencies (continued)
Year 2000 (continued)
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' and financial institution's 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 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.
10. Related Party Transactions
Office and Warehouse Lease
The Company leases an office/warehouse building from Davidson, Welker, &
Brady, a partnership of which one of the partners, Richard Brady, is the
Company's Chief Executive Officer and Director. The original lease was executed
in October 1986. The lease term was for a 10-year period, with increases in the
monthly rent tied to the CPI, adjusted every three years. The lease was amended
in 1993 to extend the term through April 2000 (Note 9), with an option to extend
for a period of five years under the same terms and conditions of the lease.
Rent expense under this lease totaled $247,289 for each of the years ended March
31, 1999 and 1998 and $61,822 for each of the three-month periods ended June 30,
1999 and 1998.
F-27
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
10. Related Party Transactions (continued)
Consulting Fees
The Company made payments aggregating $33,000 and $25,000 to the Chairman
of the Board of Directors for various consulting services during the years ended
March 31, 1999 and 1998, respectively, and $10,500 and $6,250 during the
three-month periods ended June 30, 1999 and 1998, respectively.
Commitment of Financing
The individual, beneficial majority stockholder of UTTC, in a letter dated
May 15, 1998, has represented his intent and ability to provide additional
working capital to the Company, should such be necessary, through September
1999.
11. Equity Transactions
Capital Structure
The following summarizes the Company's capital structure as of March 31,
1999, as amended in April 1998, and the subsequent change thereto approved at
the annual meeting of its shareholders on May 5, 1999 and effected May 12, 1999:
<TABLE>
<CAPTION>
March 31, May 12,
1999 1999
Common Stock
Authorized shares of $.01 par value
<S> <C> <C>
common stock 51,000,000 160,000,000
Preferred Stock
Authorized 15,500,000 shares of preferred stock designated as:
$1.00 par convertible Series E 10,000,000 25,000,000
$.01 par convertible Series F 5,500,000 5,500,000
</TABLE>
11. Equity Transactions (continued)
Capital Structure (continued)
Each share of Series E Preferred Stock ("Series E Stock") is convertible
into six shares of Common Stock at the option of the holder commencing two years
from the date of issuance for a period of five years. The Series E Stock has a
liquidation preference of $1.00 per share. Prior to June 30, 1997, the Series E
Stock was convertible into 20 shares of Common Stock upon issuance.
<PAGE>
Each share of Series F Preferred Stock ("Series F Stock") is convertible
into two shares of Common Stock at the option of the holder commencing at any
time following the date the registration statement is declared effective.
Holders of Series F Stock are also entitled to, when and as declared by the
Board of Directors, cumulative dividends at $.08 per share. Dividends are fully
cumulative and accrue (whether or not declared), without interest, from the date
such dividends are payable. The Series F Stock will automatically convert on the
earlier of two years after issuance or in the event the Company's Common Stock
has a closing price of at least $5.00 per share for a consecutive thirty-day
period. The Series F Stock has a liquidation preference of $0.50 per share,
subject only to the Series E Stock preference.
Issuance of Common Stock
In November 1998, the Company issued 1,400,000 shares of Common Stock to
Breaking Waves, Inc., an affiliate (Note 1), in consideration for cash and
inventory. The Company received $300,000 in cash and inventory valued at
$365,000 based upon the Company's analysis of the net realizable value of the
inventory received.
F-28
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
11. Equity Transactions (continued)
EACC Options
In connection with the Congress Financing (Note 4), and the previous bank
line of credit agreement, EACC provided a $2,000,000 letter of credit for
collateral. As compensation to EACC, the Company granted EACC options ("EACC
Options") to acquire shares of 350,000 Common Stock, the value of such options
estimated at $224,000 by the Company; and options to acquire (i) up to an
additional 1,250,000 shares of Common Stock at a purchase price of 25% of the
closing bid price for the Company's Common Stock on the last business day prior
to exercise for a period of six months commencing February 1996, the value of
such options was considered to be insignificant, and (ii) an option to purchase
up to an aggregate 20,000,000 shares of the Series E Stock at a purchase price
of $1.00 per share during the period from May 9, 1996 through January 30, 1998,
the value of such options was estimated to be $234,000 by the Company. The
aggregate value of the options, $458,000, was treated as debt issuance costs
(Note 4). All of the options to acquire shares of Common Stock expired
unexercised.
During the year ended March 31, 1997, the Company issued an aggregate
2,862,070 shares of Series E Stock for aggregate consideration of $2,862,070
upon exercise of a portion of the EACC Options on various dates. Of these
shares, EACC transferred 334,000 shares to UTTC. Subsequently, during the year
ended March 31, 1997, UTTC and EACC each converted 334,000 and 27,500 of Series
E Stock, respectively, into Common Stock at the 20 to 1 conversion rate, with no
holding requirement, provided for in the definition of the Series E Stock at the
time (7,230,000 shares of Common Stock before the retroactive effect of the July
1997 one for three reverse split), or 2,410,000 post-reverse split shares of
Common Stock.
In June 1997, the Company issued 700,000 shares of Series E Stock to EACC
which had previously advanced $700,000 in funds subsequent to March 31, 1997
against the EACC Option to acquire shares of Series E Stock. The remainder of
the EACC Options were then terminated in December 1997, upon consummation of the
Company's public offering of Series E Stock.
F-29
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
11. Equity Transactions (continued)
Issuance of Series E Stock
In an agreement dated June 30, 1997, the Company agreed to issue 250,000
shares of Series E Stock for $500,000 and 500,000 warrants to purchase shares of
Series E Stock for an additional $50,000 in a private sale. The $550,000 was
collected on August 12, 1997 and the shares and warrants were issued. The shares
of Series E Stock and warrants were registered and sold by the holder in
connection with the Company's public offering of Series E Stock, discussed
below.
On December 29, 1997, the Company completed a public offering of 750,000
shares of Series E Stock and 1,500,000 redeemable Series E Stock purchase
warrants. The gross proceeds from the offering were $3,150,000 and the net
proceeds to the Company totaled $2,303,441 after deduction of offering expenses
including such items as underwriter discounts and commissions, legal,
accounting, printing and filing fees.
On June 30, 1998, ABC offered to amend the terms of a $1.5 million
debenture (Note 6) to enable the conversion of the principal and accrued
interest into shares of Series E Stock at a conversion price of $1.00 per share.
The conversion price reflects a 33% discount to the trading price of the Series
E Stock and was determined on the basis of the trading price, the illiquidity of
the restricted Series E Stock and the absence of registration rights. The
debenture originally provided for the conversion, at the option of ABC, of the
debenture into shares of common stock of either (i) a subsidiary which the
Company intended to form for the purpose of acquiring certain stores operated by
the Company, or (ii) any other subsidiary which might acquire a portion of the
assets and business of the Company. This option to convert was exercisable at
the net book value of the subsidiary's shares with a limitation on such share
ownership being 25% of the total outstanding shares of said subsidiary. In
September 1998, in accordance with the terms of the debenture, ABC assigned its
option to Tudor Technologies, Inc., an entity of which Mr. Moses Mika (a
director of the Company) is a shareholder.
F-30
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
11. Equity Transactions (continued)
Issuance of Options
In February 1999, the Company entered into a Consulting Agreement (the
"Agreement") with Typhoon Capital Consultants, LLC ("Typhoon") pursuant to which
Typhoon is to provide financial and other consulting services. In exchange for
Typhoon's services, the Agreement provides for the grant of an option to
purchase 150,000 shares of the Company's Common Stock with an exercise price of
$1.75 per share, in the following increments: an initial increment of 50,000
options followed by five monthly increments of 20,000 options. The options will
expire on August 30, 2001. Each increment is valued by the Company using an
option valuation model. The initial values are capitalized and will be amortized
through the term of the Agreement. The initial increment of 50,000 options was
valued at $44,000, of which approximately $6,300 was expensed through March 31,
1999.
In July of 1998, the Company entered into a five-year consulting agreement
with Corporate Relations Group ("CRG") to provide corporate relations services.
As compensation for their services, CRG received $100,000 in cash upon execution
of the agreement and received 50,000 shares of Series E Stock. The Company did
not issue the shares of Series E Stock, however, such were provided to CRG by a
shareholder. In addition, in exchange for CRG's services, the agreement provided
for the grant of options to CRG and four of its principals. The options are for
an aggregate 450,000 shares of Common Stock exercisable at $.78 per share, and
an aggregate 700,000 shares of the Series E Stock exercisable at $2.25. The
options are exercisable incrementally in batches of one-third. The first
one-third is exercisable 60 days commencing with the date the securities are
registered and declared effective. The next one-third is exercisable for 60 days
commencing 60 days after the registration is declared effective. The remaining
one-third is exercisable for a period of 240 days, commencing 120 days after the
registration is declared effective.
The Company has recorded an aggregate value for this transaction of
$178,750, including the $100,000 cash payment, $43,750 for the Series E Stock
based on a closing market price on August 27, 1998 of $0.875 per share, and
$35,000 for the two sets of options ($10,000 for the Series E Stock options and
$25,000 for the Common Stock options). The option values were based upon an
option pricing model that considered the volatility of the securities' prices,
and the short life of the options. This transaction has been capitalized by the
Company, and is being pro-ratably expensed over the term of the agreement. 11.
Equity Transactions (continued)
Series E Stock Bonus
In March 1998, the Company's Board of Directors granted to its Chairman of
the Board and to its President, 25,000 shares each of its Series E Stock in
recognition of their efforts to further the Company's turnaround towards
profitability. The shares vested on a monthly basis over a one-year period
commencing April 1, 1998, being fully vested April 1999. On the date of grant
management determined the compensation value of this stock grant to be
approximately $47,000 in the aggregate, based on a closing market price of $1.86
per share which was subjected to a 50% marketability discount given the
restrictive nature and vesting requirement of the securities as well as the
relatively low trading volume. In early April 1999, the Company's Chairman of
the Board and its President returned the shares of Series E Stock to the
Company, which then reversed the compensation expense previously recorded during
the year. As a result, these shares have been excluded from the balance sheet
and statement of stockholders' equity.
<PAGE>
Series E Stock Dividends Resulting from Beneficial Conversion Feature
For the years ended March 31, 1999 and 1998, the Company recorded non-cash
dividends of $1,707,725 and $1,473,806 in applying the provisions of Topic No.
D-60 of the Emerging Issues Task Force as described below.
In April 1999, the Company filed with the Securities and Exchange
Commission restated financial statements for the year ended March 31, 1998 to
conform with Topic No. D-60 of the Emerging Issues Task Force. Topic D-60
communicated the views of the staff of the Securities and Exchange Commission
that the portion of the proceeds upon issuance of the convertible stock
allocable to the beneficial conversion feature should be recorded as additional
paid-in capital and recognized as a dividend over the minimum period in which
the preferred shareholders can realize the conversion.
The Company's Series E Stock, of which shares were issued in varying
amounts on various dates as described above, includes a beneficial conversion
feature in that each share of Series E Stock is convertible into six shares of
the Company's Common Stock at the option of the holder commencing two years from
the date of issuance. Shares of Series E Stock issued through June 30, 1997,
were originally convertible into twenty shares of Common Stock, at the option of
the holder, with no holding period requirement.
F-31
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
11. Equity Transactions (continued)
Series E Stock Dividends Resulting from Beneficial Conversion Feature
(continued)
The beneficial conversion feature is measured at the date of issuance of
the Company's Series E Stock as the difference between the conversion price and
the market value of the Common Stock into which the Series E Stock is
convertible, limited to the proceeds received from the issuance of the Series E
Stock. Based on the calculations prescribed by Topic No. D-60, all proceeds
initially received by the Company from the issuance of Series E Stock have been
initially recorded as additional paid in capital as 100% of the proceeds is
allocable to the beneficial conversion feature. Over the required holding
period, if any, a non-cash dividend is recorded reducing the retained earnings
(or increasing the accumulated deficit) and increasing the balance recorded as
Series E Stock in the balance sheet. Thus, there is no net effect on the total
stockholders' equity of the Company. Since shares of Series E Stock issued prior
to June 30, 1997, were originally convertible upon issuance, 100% of the
non-cash dividend was recorded upon issuance of the Series E Stock. Non-cash
dividends associated with shares of Series E Stock issued after June 30, 1997,
are being recorded over the required two-year holding period of the security.
However, the Company has also restated its net loss per common share as
presented in the statement of operations for the year ended March 31, 1998, as
the dividend attributable to the beneficial conversion feature of the Series E
Stock reduces the amount of net income (or increases the amount of net loss)
applicable to the common shares.
In applying the provisions of Topic No. D-60, the Company has recorded
non-cash dividends of $1,473,806 for the year ended March 31, 1998. This amount
represents $0, $1,200,000, $0, and $273,806 for each of the three-month periods
ended June 30, 1997, September 30, 1997, December 31, 1997, and March 31, 1998.
For the year ended March 31, 1999, these non-cash dividends aggregated
$1,707,725. These non-cash dividends were recorded as $273,806 in the
three-month period ended June 30, 1998 and $477,973 in each of the three-month
periods ended September 30, 1998, December 31, 1998, and March 31, 1999.
F-32
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
11. Equity Transactions (continued)
Series E Stock Dividends Resulting from Beneficial Conversion Feature
(continued)
As a result of the application of Topic No. D-60, the Company has
reclassified the initial proceeds of issuance of Series E Stock to additional
paid-in capital and the resulting non-cash dividends which affect the
accumulated deficit and the amount recorded as Series E Stock. The impact on the
financial statements for the year ended March 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
March 31, 1998
As Reported As Restated
<S> <C> <C>
Series E Stock $ 5,891,020 $ 3,974,376
Common Stock 41,035 41,035
Additional paid-in capital 6,675,398 12,927,918
Accumulated deficit (10,104,946) (14,440,822)
--------------- ----------------
Total stockholders' equity $ 2,502,507 $ 2,502,507
- =============== ================
Net loss for the year ended $ (2,054,470) $ (2,054,470)
Effects of non-cash dividends - (1,473,806)
--------------- ----------------
Net loss applicable to common shares $ (2,054,470) $ (3,528,276)
=============== ================
Basic and diluted loss per common share and share equivalent $ (.50) $ (.86)
=============== ================
</TABLE>
12. Supplemental Cash Flow Information
Cash paid for income taxes and interest was as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
1999 1998
<S> <C> <C>
Interest paid $ 809,601 $ 511,924
Income taxes $ 850 $ 800
</TABLE>
F-33
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
12. Supplemental Cash Flow Information (continued)
Non-cash investing and financing activities for the years ended March 31,
1999 and 1998 consisted of the following:
The Company acquired leasehold improvements and equipment during the year
ended March 31, 1999, by entering into capital lease obligations for $849,429
(Notes 3 and 5).
Convertible debt and accrued interest outstanding of $1,533,333 was
converted into 1,533,333 shares of Series E Stock during the year ended March
31, 1999 (Note 11).
Common Sock was issued in exchange for cash and inventory during the year
ended March 31, 1999. The inventory acquired had a value of $365,000 (Note 11).
For the years ended March 31, 1999 and 1998 non-cash dividends of
$1,707,725 and $1,473,806, respectively, were recorded to amortize the discount
recorded on Series E Sock resulting from the beneficial conversion features
(Note 11).
Non-cash investing and financing activities for the three-month periods
ended June 30, 1999 and 1998 consisted of the following:
The Company acquired leasehold improvements and equipment by entering into
capital lease obligations for $262,675 during the three months ended June 30,
1999.
In June 1998, a note payable to ABC, an affiliate, was converted with
accrued interest into 1,533,333 shares of Series E Preferred Stock (Notes 6 and
11).
In June 1998, the Company entered into a five-year capital lease for
approximately $84,000 to partially finance the improvements and relocate on of
its stores.
13. Events Subsequent to March 31, 1999
Unsecured Promissory Notes
On April 22, 1999, the Company entered into an unsecured promissory note
with Shopnet, an affiliate, (Note 1) for $100,000 at an interest rate of 9% per
annum. The principal payments and accrued interest are due monthly beginning May
31, 1999, with a maturity date of August 31, 1999.
F-34
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
13. Events Subsequent to March 31, 1999 (continued)
On May 17, 1999, the Company entered into an unsecured promissory note with
Shopnet, an affiliate (Note 1) for $100,000 at an interest rate of 9% per annum.
The principal payments and accrued interest are due monthly beginning June 30,
1999, with a maturity date of September 30, 1999.
Private Placement of Series F Stock
On May 18, 1999, the Board of Directors of the Company unanimously adopted
a Corporate Resolution to enter into a Securities Purchase Agreement (the
Private Placement) with several investors. The Private Placement was for 750,000
shares of the Company's Series F Preferred Stock ("Series F Stock"), par value
of $.01 per share, for gross proceeds of $750,000. The Company was also
authorized to amend its articles of incorporation to change the terms and
privileges of the Series F Stock. The Series F Stock is convertible into two
shares of Common Stock at any time following the effective date of the
registration statement registering the Series F Stock and underlying shares of
Common Stock for resale.
The Corporate Resolution also authorized the Company to file a Registration
Statement with the Securities and Exchange Commission for the securities under
Private Placement.
As part of the Private Placement, the Company granted an option to the
Placement Agent and its assignees to purchase an aggregate 350,000 shares of
Common Stock, with an exercise price of $3.00 per share for a period of four
years from the date of closing of the Private Placement. Additionally, as
commission, the Placement Agent received a 10% fee, or $75,000, and a 1% fee, or
$7,500, to cover administrative expenses. The Private Placement closed on May
27, 1999, providing net cash proceeds of $667,500 to the Company before legal
and other administrative expenses.
On the May 27, 1999 closing date of the Private Placement, the Company's
Common Stock had a closing price of $1.69. As such, the Series F Stock has a
beneficial conversion feature which will result in accounting treatment to
reflect non-cash dividends in future periods in a manner similar to the Series E
Stock transactions described in Note 11.
F-35
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes to Financial Statements
Years Ended March 31, 1999 and 1998
13. Events Subsequent to March 31, 1999 (continued)
13. Common Stock Compensation of Consultant
In May 1999, the Company issued 45,333 shares of Common Stock to a
consultant as compensation for site selections and negotiation of retail
location leases. These services are being provided for new Company stores
opening in fiscal 2000. This Company has valued the shares based on the May 17,
1999 closing price of $1.375 per share, less a 10% discount for marketability
restrictions for an aggregate value of approximately $56,000.
F-36
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING CONTAINED HEREIN,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY STATE TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER. THE DELIVERY OF
THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION STATED IS CORRECT AS OF THE DATE HEREOF.
1,850,000 SHARES OF
TABLE OF CONTENTS COMMON STOCK
BY SELLING SECURITYHOLDERS
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . .3 PLAY CO. TOYS &
ENTERTAINMENT CORP
PROSPECTUS SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
THE OFFERING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SUMMARY FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . 8
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
DILUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 __________, 1999
SELLING SECURITYHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . 28
PLAN OF DISTRIBUTION FOR SECURITIES
OF SELLING SECURITYHOLDERS. . . . . . . . . . . . . .. . . . . . . . . 29
PRINCIPAL SECURITYHOLDERS. . . . . . . . . . . . . .. . . . . . . . . 30
DESCRIPTION OF SECURITIES. . . . . . . . . . . . . .. . . . . . . . . 32
INTEREST OF NAMED EXPERTS AND COUNSEL. . . . . . . . . . . . . . . . . 36
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . .. . . . . . . . . 36
MANAGEMENT. . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . .38
BUSINESS OF THE COMPANY. . . . . . . . . . . . . .. . . . . . . . . . . 43
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 58
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 70
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . F-1
UNTIL 25 DAYS AFTER THE DATE OF THIS PROSPECTUS ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
As permitted under the Delaware General Corporation Law, the Company's
Certificate of Incorporation and By-Laws provide for indemnification of a
director or officer under certain circumstances against reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of an action brought against him by reason of his being a director
or officer. In addition, the Company's charter documents provide for the
elimination of directors' liability to the Company or its stockholders for
monetary damages except in certain instances of bad faith, intentional
misconduct, a knowing violation of law, or illegal personal gain.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers, and
controlling persons of the Company pursuant to any charter, provision, by-law,
contract, arrangement, statute, or otherwise, the Company has been advised that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer, or controlling person of the Company in the successful
defense of any such action, suit, or proceeding) is asserted by such director,
officer, or controlling person of the Company in connection with the Securities
being registered pursuant to this Registration Statement, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication by such court of such issue.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses incurred by the Company in the
May 1999 private placement:
Underwriter's Commission ...................... $75,000
Underwriter's Non-Accountable Expense Allowance 7,500
Legal Fees and Expenses ....................... 10,000
-------
Total ......................................... $92,500
=======
Item 26. Recent Sales of Unregistered Securities.
Except where otherwise indicated, sales of the Company's Securities
described below were exempt from registration under the Securities Act in
reliance upon the exemption afforded by ss.4(2) of the Act for transactions not
involving a public offering. All certificates evidencing such sales bear an
appropriate restrictive legend. Series F Preferred Stock
In May 1999, pursuant to ss.506 of Regulation D of the General Rules and
Regulations Under the Securities Act of 1933, as amended (the "General Rules and
Regulations"), the Company sold 750,000 shares of Series F Stock, at a purchase
price of $1.00 per share, through Robb Peck McCooey Clearing Corporation as
placement agent. The Company received $657,500 from the private placement, after
deducting underwriting commissions and legal and administrative expenses. Each
share of Series F Stock is convertible, at the holder's option, into two fully
paid and non-assessable shares of Common Stock, at any time commencing on the
date this Registration Statement is declared effective by the Commission. Each
outstanding share of Series F Stock, by virtue of and simultaneously with the
occurrence of the earlier of either of the following events and without any
action on the part of the holder thereof, shall convert automatically into
shares of Common Stock: (i) two years from issuance or (ii) in the event the
closing price per share of Common Stock has been at least $5.00 for a
consecutive 30 day period.
<PAGE>
Series E Preferred Stock
In September 1998, pursuant to ss.4(2) of the Act, the Company issued
1,533,333 shares of Series E Stock to ABC on conversion by ABC of a debenture
issued it by the Company.
In July 1998, the Company sold 100,000 shares of Series E Stock to United
Textiles, the Company's parent, for $100,000. In determining the purchase price
paid by United Textiles, the trading price of the Company's Series E Stock -
along with the applicable discounts for illiquidity, lack of marketability, and
lack of registration rights - were considered. The trading price of
approximately $2.00 per share was discounted by 50% for the above reasons.
In March 1998, pursuant to ss.4(2) of the Act, the Company issued 25,000
shares of Series E Stock to each of Richard Brady (the Company's president) and
Harold Rashbaum (the Company's chairman of the board) as bonuses in recognition
of their efforts to further the Company's turnaround toward profitability. These
shares were returned to the Company by Messrs. Brady and Rashbaum in early April
1999 and subsequently cancelled (i.e., returned to treasury as authorized but
unissued).
In July 1997, for aggregate proceeds of $550,000, the Company issued
250,000 shares of Series E Stock and 500,000 Series E Warrants to Volcano
Trading, Ltd. in a private transaction pursuant to ss.ss.4(2) and 4(6) of the
Act.
From April 1996 to June 1997, EACC exercised its option and purchased an
aggregate of 3,562,070 shares of Series E Stock. 361,500 of such shares were
converted (between September 1996 and February 1997) into 2,410,000 shares of
Common Stock. See "Business of the Company - Former Financing through Congress
Financial Corporation (Western)" and " -- Common Stock."
Each share of Series E Stock is convertible, at the option of the holder,
into six fully paid and non-assessable shares of Common Stock commencing two
years after issuance for a period of three years (terminating five years from
issuance). Common Stock
In May 1999, pursuant to ss.4(2) of the Act, the Company issued 45,333
shares of Common Stock to Brian Hunter, a real estate consultant, as
compensation for services rendered in negotiating certain commercial leases on
behalf of the Company. This transaction was valued by the Company at
approximately $56,000 based on the closing stock price on May 17, 1999 and a 10%
discount related to the unregistered nature of the Common Stock.
In November 1998, pursuant to a sales agreement entered into by and between
the Company and Breaking Waves, Breaking Waves purchased 1.4 million shares of
the Company's Common Stock in a private transaction pursuant to ss.4(2) of the
Act. The consideration for the stock was $665,000, which represents a price of
$0.475 per share. The price represents an approximate 33% discount from the then
current market price of $0.718 reflecting a discount for the illiquidity of the
shares, which do not carry any registration rights. $300,000 of the
consideration was remitted in cash, and the remaining $365,000 consisted of
product from Breaking Waves (primarily girl's swimsuits).
In August 1998, pursuant to ss.4(2) of the Act and the Company's 401(k)
ESOP Plan, the Company issued 5,673 shares of Common Stock to certain former
employees. While there existed an ESOP designated certificate [in the aggregate
amount of 15,333 shares contributed on January 26, 1995 by Messrs. Brady and Tom
Davidson (a founder of the Company and the Company's former president) and the
Company's then parent company)] at the time of such issuance, such number of
shares were inadvertently issued as new stock (rather than from said
certificate). The 5,673 shares of Common Stock have since been returned to
authorized but unissued status, and the contributed ESOP certificate has been
adjusted to reflect deduction of the 5,673 shares therefrom.
In June 1997, pursuant to ss.4(2) of the Act, the Company issued 20,000
shares of Common Stock to Klarman & Associates n/k/a Millennium Ventures Law
Group for legal fees of $500.
<PAGE>
Between September 1996 and February 1997, the Company issued 2,410,000
shares of Common Stock on conversion of Series E Stock previously issued to
EACC. See "-- Series E Preferred Stock."
In August 1996, the one share of the Company's Series D Preferred Stock was
converted into 385,676 shares of the Company's Common Stock based on the initial
amount of the debt divided by the average price of the shares for a 90 day
period prior to the conversion. This was performed in order for American Toys,
Inc., the Company's then parent corporation, to spin such shares off to its
stockholders and divest its interest in the Company.
Item 27. Exhibits.
All exhibits, except those designated with an asterisk (*) which are filed
herewith and those designated with a double asterisk (**) which shall be filed
by amendment hereto, have been filed previously with the Commission (i) in
connection with the Company's Registration Statement on Form SB-2, dated
November 2, 1994, under file No. 33-81940-NY; (ii) with the Company's
Registration Statement on Form SB-2, Registration No. 333-32051; or (iii) as
otherwise indicated and, pursuant to 17 C.F.R. ss. 230.411, are incorporated by
reference herein.
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement. See (ii) above.
3.1 Certificate of Incorporation of the Company dated June 15, 1995. See (i) above.
3.2 Amendment to Certificate of Incorporation of the Company, filed July 2, 1997. See (ii) above).
3.2(a) Amendment to Certificate of Incorporation of the Company, filed August 11, 1997. See (ii) above.
3.2(b) Amendment to Certificate of Incorporation of the Company, filed
May 9, 1996 (incorporated by reference herein to exhibit 3.2(b) of the
Company's 10-KSB for the year ended March 31, 1999).
3.2(c) Amendment to Certificate of Incorporation of the Company, filed August 13, 1996
(incorporated by reference herein to exhibit 3.2(c) of the Company's 10-KSB
for the year ended March 31, 1999).
3.2(d) Amendment to Certificate of Incorporation of the Company, filed March 24, 1997 (incorporated by reference
herein to exhibit 3.2(d) of the Company's 10-KSB for the year ended March 31,
1999).
3.2(e) Amendment to Certificate of Incorporation of the Company, filed
May 29, 1998 (incorporated by reference herein to exhibit 3.2(e) of the
Company's 10-KSB for the year ended March 31, 1999).
3.2(f) Amendment to Certificate of Incorporation of the Company, filed May 12, 1999 (incorporated
by reference herein to exhibit 3.2(f) of the Company's 10-KSB for the year
ended March 31, 1999).
3.2(g) Amendment to Certificate of Incorporation of the Company, filed May 25, 1999 (incorporated by reference
herein to exhibit 3.2(g) of the Company's 10-KSB for the year ended March 31, 1999).
3.3 By-Laws of the Company. See (i) above.
4.1 Specimen Common Stock Certificate See (i) above).
4.2 Specimen Series E Redeemable Purchase Warrant Certificate. See (ii) above
4.3 Specimen Series E Preferred Stock Certificate. See (ii) above
4.4 ESOP Plan See (i) above).
4.5 Form of Warrant Agreement between the Company, the Underwriter and Continental Stock Transfer & Trust Company.
See (ii) above.
5.0** Opinion of Millennium Ventures Law Group
10.26 Lease Agreement for Store - Chula Vista. See (i) above.
10.27 Lease Agreement for Store - El Cajon. See (i) above.
10.29 Lease Agreement for Store - Simi Valley. See (i) above.
10.30 Lease Agreement for Store - Encinitas. See (i) above.
10.34 Lease Agreement for Store - Redlands. See (i) above.
10.35 Lease Agreement for Store - Rancho Cucamonga. See (i) above.
10.36 Lease Agreement for Store - Woodland Hills. See (i) above.
10.37 Lease Agreement for Warehouse - Executive Offices. See (i) above.
10.38 Lease Agreement for Store - Pasadena. See (i) above.
10.41 The Company Incentive Stock Option. Plan See (i) above.
10.44 Lease Agreement for Store - Corona Plaza. See (i) above.
10.50 Extension of Warehouse Lease. See (i) above.
10.75 Asset Purchase Agreement for the purchase of Toys International - (incorporated by reference herein to exhibit
10.75 of the Company's 10-QSB for the period ended December 31, 1996 filed with the Commission).
10.77 Lease Agreement for Store - Santa Clarita International (incorporated by reference herein to exhibit 10.77 of
the Company's 10-KSB for the year ended March 31, 1997, filed with the Commission).
10.78 Lease Agreement for Store - South Coast Plaza International (incorporated by reference herein to exhibit
10.78 of the Company's 10-KSB for the year ended March 31,1997, filed with the Commission).
10.79 Lease Agreement for Store - Century City International (incorporated by reference herein to exhibit 10.79 of
the Company's 10-KSB for the year ended March 31, 1997, filed with the Commission).
<PAGE>
10.80 Lease Agreement for Store - Crystal Court International (incorporated by reference
herein to exhibit 10.80 of the Company's 10-KSB for the year ended March 31, 1997, filed with the Commission).
10.81 Lease Agreement for Store - Orange County (incorporated by reference herein to exhibit (i) of the Company's
10-QSB/A-1 for the period ended September 30, 1995 filed with the Commission).
10.85 Lease Agreement for Store - Mission Viejo (incorporated by reference herein to exhibit (iv) of the Company's
10-QSB for the period ended December 31, 1995).
10.86 Subscription Agreement between the Company and Volcano Trading Limited dated June 30, 1997. (incorporated by
reference herein to exhibit 10.86 to the Company's Registration Statement on Form SB-2, Registration No.
333-32051.
10.87 Lease Agreement for Store - Clairemont (incorporated by reference herein to exhibit 10.87 of the Company's
10-QSB/A-1 for the period ended September 30, 1997).
10.88 Lease Agreement for Store - Redondo Beach (incorporated by reference herein to exhibit 10.88 of the Company's
10-QSB/A-1 for the period ended September 30, 1997).
10.89 Lease Agreement for Store - Arizona Mills (incorporated by reference herein to exhibit 10.89 of the Company's
10-QSB/A-1 for the period ended September 30, 1997).
10.90 FINOVA Loan and Security Agreement (incorporated by reference herein to exhibit 10.90 of the Company's 10-QSB
for the period ended December 31, 1997)
10.91 Schedule to Loan and Security Agreement (incorporated by reference herein to exhibit 10.91 of the Company's
10-QSB for the period ended Dec. 31, 1997).
10.92 Lease Agreement for Store - City Mills (incorporated by reference herein to exhibit 10.92 of the Company's
10-KSB for the fiscal year ended March 31, 1998).
10.93 Lease Agreement for Store - Fashion Outlet of Las Vegas (incorporated by reference herein to exhibit 10.93
of the Company's 10-KSB for the fiscal year ended March 31, 1998).
10.93(a) Fixture Financing Agreements (incorporated by reference herein to exhibit 10.93(a) of the Company's 10-KSB
for the year ended March 31, 1999).
10.93(b) Letter from Ilan Arbel, dated May 15, 1998, re: funding of Company's operations (incorporated by reference
herein to exhibit 10.93(b) of the Company's 10-KSB/A-2 for the fiscal year ended March 31, 1998).
10.94 Lease Agreement for Store-Concord Mills (Play Co. Toys) (incorporated by reference herein to exhibit 10.94 of
the Company's 10-QSB for the period ended June 30, 1998).
10.95 Lease Agreement for Store-Katy Mills (Play Co. Toys) (incorporated by reference herein to exhibit 10.95 of the
Company's 10-QSB for the period ended June 30, 1998).
10.96 Lease Agreement for Store-Concord Mills (Toy Co.) (incorporated by reference herein to exhibit 10.96 of the
Company's 10-QSB for the period ended June 30, 1998).
10.97 Lease Agreement for Store-Katy Mills (Toy Co.) (incorporated by reference herein to exhibit 10.97 of the
Company's 10-QSB for the period ended June 30, 1998).
10.98 Lease Agreement for Store-Ontario Mills (Toy Co.) (incorporated by reference herein to exhibit 10.98 of
the Company's 10-QSB for the period ended June 30, 1998).
10.99 Amendment No. 1 to Finova Loan Agreement (incorporated by reference herein to exhibit 10.99 of the Company's
10-QSB for the period ended June 30, 1998).
10.100 Amendment No. 1 to Lease Agreement for Store-Rancho Cucamonga (Play Co. Toys) (incorporated by reference herein
to exhibit 10.100 of the Company's 10-QSB for the period ended June 30, 1998).
10.101 Company & Corporate Relations Group, Inc. Lead Generation/Corporate Relations Agreement, dated July 22, 1998
(incorporated by reference herein to exhibit 10.101 of the Company's 10-QSB for the period ended June 30, 1998).
10.103 Promissory Note with Amir Overseas Capital Corp. (dated September 18, 1998) (incorporated by reference herein
to exhibit 10.103 of the Company's 10-QSB for the period ended September 30, 1998).
10.104 Promissory Note with Amir Overseas Capital Corp. (dated November 9, 1998) (incorporated by reference herein to
exhibit 10.104 of the Company's 10-QSB for the period ended September 30, 1998).
10.105 Lease Agreement for Store - Dallas (incorporated by reference herein to exhibit 10.105 of the Company's 10-QSB
/A-1 for the period ended September 30, 1998).
10.106 Lease Agreement for Store - Thousand Oaks (incorporated by reference herein to exhibit 10.106 of the Company's
10-QSB/A-1 for the period ended September 30, 1998).
10.107 Lease Agreement for Store - Detroit (incorporated by reference herein to exhibit 10.107 of the Company's 10-QSB
/A-1 for the period ended September 30, 1998).
10.108 Lease Agreement for Store - Chicago (incorporated by reference herein to exhibit 10.108 of the Company's 10-
QSB/A-1 for the period ended September 30, 1998).
10.109 Lease Agreement for Store - Orange County (incorporated by reference herein to exhibit 10.109 of the Company's
10-QSB/A-1 for the period ended September 30, 1998).
10.110 Phoenix Leasing Incorporated Loan and Security Agreement and Ancillary Documents (October 1998) (incorporated
by reference herein to exhibit 10.109 of the Company's 10-QSB/A-1 for the period ended September 30, 1998).
10.111 Agreement by and between the Company and ZD Group, L.L.C., dated November 11, 1998 (incorporated by
reference herein to exhibit 10.111 of the Company's 10-QSB for the period ended December 31, 1998).
10.112 Intercreditor and Subordination Agreement by and between ZD Group, L.L.C. and FINOVA Capital Corporation, dated
February 11, 1999 (incorporated by reference herein to exhibit 10.112 of the Company's 10-QSB for the period
ended December 31, 1998).
10.113 5% Convertible Secured Subordinated Debenture in favor of Frampton Industries, Ltd., dated November 11, 1998
(incorporated by reference herein to exhibit 10.113 of the Company's 10-QSB for the period ended December 31,
1998).
<PAGE>
10.114 Subordinated Security Agreement by and between the Company and Frampton Industries, Ltd., dated November 11,
1998 (incorporated by reference herein to exhibit 10.114 of the Company's 10-QSB for the period ended December
31, 1998).
10.115 Intercreditor and Subordination Agreement by and between Frampton Industries, Ltd. and FINOVA Capital
Corporation, dated February 11, 1999 (incorporated by reference herein to exhibit 10.115 of the Company's
10-QSB for the period ended December 31, 1998).
10.115(a) Third Amendment to Loan and Security Agreement by and between the Company and FINOVA Capital Corporation,
dated December 1998 (incorporated by reference herein to exhibit 10.115(a) of the Company's 10-QSB/A-1 for the
period ended December 31, 1998).
10.116 Fourth (initially filed as "Third") Amendment to Loan and Security Agreement by and between the Company and
FINOVA Capital Corporation, dated February 11, 1999 (later renamed "Fourth" Amendment) (incorporated by
reference herein to exhibit 10.116 of the Company's 10-QSB for the period ended December 31, 1998).
10.117 Letter of Intent by and between the Company and Frampton Industries, Inc., dated January 4, 1999
(incorporated by reference herein to exhibit 10.117 of the Company's 10-QSB for the period ended December 31,
1998).
10.118 Fifth Amendment to Loan and Security Agreement by and between the Company and FINOVA Capital Corporation, dated
March 1999 (incorporated by reference herein to exhibit 10.118 of the Company's 10-QSB/A-1 for the period ended
December 31, 1998).
10.119 Typhoon Capital Consultants, LLC agreement dated February 1, 1999 (incorporated by reference herein to exhibit
10.118 of the Company's 10-QSB/A-1 for the period ended December 31, 1998).
10.120 5% Convertible Secured Subordinated Debenture in favor of Europe American Capital Foundation, dated November
11, 1998. (incorporated by reference herein to exhibit 10.120 of the Company's 10-KSB for the year ended March
31, 1999).
10.121 Amendment to Lease Agreement - Tutti Animali. (incorporated by reference herein to exhibit 10.121 of the
Company's 10-KSB for the year ended March 31, 1999).
10.122 Lease Agreement for Store - Aladdin (incorporated by reference herein to exhibit 10.122 of the Company's 10-KSB
for the year ended March 31, 1999).
10.123 Lease Agreement for Store - Pier 39 (incorporated by reference herein to exhibit 10.123 of the Company's 10-KSB
for the year ended March 31, 1999).
10.124 Lease Agreement for Store - Opry Mills (incorporated by reference herein to exhibit 10.124 of the Company's 10-
KSB for the year ended March 31, 1999).
10.125 Lease Agreement for Store - Mission Viejo (incorporated by reference herein to exhibit 10.125 of the Company's
10-KSB for the year ended March 31, 1999).
10.126 Fixture Financing Agreement with Premier Capital Corp., dated October 15, 1998 (incorporated by reference
herein to exhibit 10.126 of the Company's 10-KSB for the year ended March 31, 1999).
10.127 Lease Agreement for Store - Venetian (incorporated by reference herein to exhibit 10.127 of the Company's 10-
KSB for the year ended March 31, 1999).
10.128 Lease Agreement for Store - Woodfield Mall (incorporated by reference herein to exhibit 10.128 of the Company's
10-KSB for the year ended March 31, 1999).
10.129 Amendment to Lease Agreement - Rancho Cucamonga (incorporated by reference herein to exhibit 10.129 of the
Company's 10-KSB for the year ended March 31, 1999).
10.130 Promissory Notes - Full Moon Development, Inc. (incorporated by reference herein to exhibit 10.130 of the
Company's 10-KSB for the year ended March 31, 1999).
10.131 ABC Fund, Inc. Assignment of Debenture to Tudor Technologies, Inc. dated September 15, 1998 (incorporated
by reference herein to exhibit 10.131 of the Company's 10-QSB for the period ended June 30, 1999).
10.132 Tudor Technologies, Inc. Election to Exercise dated July 15, 1999 (incorporated by reference herein to exhibit
10.132 of the Company's 10-QSB for the period ended June 30, 1999).
10.133 Sixth Amendment to Loan and Security Agreement by and between the Company and FINOVA Capital Corporation, dated
August 1999 (incorporated by reference herein to exhibit 10.133 of the Company's 10-QSB for the period ended
June 30, 1999).
10.134 Fixture Financing Agreement With Longwater Capital Corporation (incorporated by reference herein to exhibit
10.134 of the Company's 10-QSB for the period ended June 30, 1999).
10.135* Lease Agreement for Store - International Gateway
10.136* Investment Agreement
21.1* Subsidiaries
23.1* Consent of Haskell & White LLP
</TABLE>
<PAGE>
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
Post-Effective Amendment to this Registration Statement:
(i) To include any Prospectus required by ss.10(a)(3) of the Act;
(ii) To reflect in the Prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
Registration Statement. Notwithstanding the foregoing, any increase or decrease
in volume of Securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
Prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement.
(iii) To include any additional or changed material information with
respect to the Plan of Distribution.
(2) To, for the purpose of determining any liability under the Act, treat
each Post-Effective Amendment as a new Registration Statement of the securities
offered and the offering of securities at the time to be the initial bona fide
offering.
(3) To file a Post-Effective Amendment to remove from registration any of
the securities which remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, and controlling persons of the Company,
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer, or
controlling person of the Company in the successful defense of any action, suit,
or proceeding) is asserted by such director, officer, or controlling person in
connection with the Securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue by such court. See Item 24.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Marcos, State of California on the 1st day of
September, 1999.
PLAY CO. TOYS & ENTERTAINMENT CORP.
By: /s/ Richard Brady
Richard Brady, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933 as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Harold Rashbaum Chairman of the Board 09/15/99
Harold Rashbaum Date
/s/ Richard Brady Chief Executive Officer, 09/15/99
Richard Brady President and Director Date
/s/ James B. Frakes Chief Financial Officer 09/15/99
James B. Frakes and Secretary Date
/s/ Moses Mika Director 09/15/99
Moses Mika Date
</TABLE>
EXHIBIT 10.135
Store Lease - International Gateway
OUTLET CENTER
AT
INTERNATIONAL GATEWAY
OF THE AMERICAS
A PROJECT BY
LANDGRANT DEVELOPMENT UNLIMITED
WITH
TOYS INTERNATIONAL, INC.
a California corporation
dba TOY CO.
<PAGE>
TABLE OF CONTENTS
Article
<TABLE>
<CAPTION>
<S> <C>
1 Fundamental Lease Provisions
2 Premises; Site Plan
3 Term of Lease
4 Rental
5 Definition of "Net Sales"
6 Possession and Use; Utilities; Hazardous Materials
7 Taxes, Insurance and Title of Premises
8 Common Area
9 Mechanics' Liens
10 Tenant's Right to Make Improvements, Property, and Fixtures
11 Repairs, Maintenance
12 Indemnity and Insurance
13 Occupancy Transactions
14 Defaults by Tenant; Remedies
15 Defaults by Landlord; Remedies
16 Abandonment
17 Bankruptcy
18 Reconstruction
19 Condemnation
20 Sale or Mortgage by Landlord
21 Subordination; Attornment
22 Quiet Enjoyment
23 Holding Over
24 Limitation of Liability
25 Notices
26 General Provisions
27 Marketing
28 Conditions to Lease
Exhibits
General Site Plan of the Property A
Description and Use of the Premises B
Provisions Relating to the Design and Construction of Tenant's Store C
Guaranty of Lease D
Tenant's Estoppel Certificate E
Sign Criteria F
Subordination Agreement G
Confirmation of Term of Lease H
</TABLE>
<PAGE>
LEASE AGREEMENT
This Lease Agreement ("Lease"), effective as of ____July 13,
________________________, 19 99 ("Effective Date"), is executed by and between
the Landlord and Tenant identified below.
IN CONSIDERATION OF THE RENTS AND COVENANTS hereinafter set forth, the
Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the
Premises upon the following terms and conditions:
ARTICLE 1
FUNDAMENTAL LEASE PROVISIONS
1.1 Parties
Landlord: The Landlord of the Premises is LANDGRANT DEVELOPMENT UNLIMITED,
a California corporation. All required notices and other communications shall be
sent to: LandGrant Development Unlimited, 12625 High Bluff Drive, Suite 212, San
Diego, California 92130. Telephone Number (619) 481-0094.
Tenant: The Tenant of the Premises is: TOYS INTERNATIONAL, INC., a
California corporation.
Tenant shall do business under the trade name of: TOY CO.
All required notices and other communications shall be sent to: Toys
International, Inc., c/o Play Co. Toys, Inc., 550 Rancheros Drive, San Marcos,
CA 92069, Attention: Rich Brady.
Telephone Number: (760) 471-4505
1.2 Premises
The Premises made subject to this Lease shall be that certain space having
approximately 10,000 square feet of Floor Area, commonly addressed as "to be
determined," sometimes referred to as Store #172 and more particularly described
in Exhibit B to this Lease. The Premises is located in the commercial center
known as the INTERNATIONAL GATEWAY OF THE AMERICAS in the City of San Diego,
County of San Diego, State of California (the "Property"). The Premises and the
Property are illustrated on Exhibits A and A-1 to the Lease.
1.3 Term
Lease Term: Ten (10) years
Commencement Date: [Section 3.1]
Rent Start Date: [Section 4.1]
Expiration Date:
Other: Two (2) five (5) year options [Addendum]
1.4 Rent
Minimum Annual Rental: The Minimum Annual Rental is One Hundred Seventy
Five Thousand Dollars ($175,000.00), which is computed as $17.50 per square
foot. Minimum Annual Rental is payable as stated in Section 4.1.
Cost of Living Adjustments: Minimum Annual Rental shall be adjusted every
twenty four (24) months of the initial Lease Term on the anniversary of the
Commencement Date, and at the beginning of the first and third year of each
Option Term, as follows:
<PAGE>
<TABLE>
<CAPTION>
Initial Lease Term
<S> <C> <C> <C>
Lease Year 3 $200,000.00 ($20.00 per square foot)
Lease Year 5 $210,000.00 ($21.00 per square foot)
Lease Year 7 $230,000.00 ($23.00 per square foot)
Lease Year 9 $240,000.00 ($24.00 per square foot)
First Option
Option Year 1 $250,000.00 ($25.00 per square foot)
Option Year 3 $280,000.00 ($28.00 per square foot)
Second Option
Option Year 1 $300,000.00 ($30.00 per square foot)
Option Year 3 $330,000.00 ($33.00 per square foot)
</TABLE>
Percentage Rental: Tenant shall pay six percent (6%) of the amount by which
Tenant's Net Sales (as defined in Section 5.1) during a particular Lease Year
(as defined in Section 4.5) exceeds the amount listed below for such Lease Year:
<TABLE>
<CAPTION>
<S> <C> <C>
Lease Years 1-2 $2,500,000.00
Lease Years 3-4 $2,900,000.00
Lease Years 5-6 $3,000,000.00
Lease Years 7-10 $3,335,000.00
Option Years 1-2 $3,833,333.00
Option Years 3-10 $4,333,333.00
</TABLE>
Additional Rental: Any and all sums of money or charges required to be paid
by Tenant pursuant to the provisions of this Lease shall be paid as "Additional
Rent" (for example: taxes, insurance, sweeping, etc.)
1.5 Marketing Charge: $15,000.00 based on $1.50 per square foot per annum
(Section 27.2, subject to annual increases per Section 27.3)
Grand Opening Assessment: $10,000.00 based on $1.00 per square foot
(Section 27.3).
1.6 Security Deposit and First Month's Minimum Annual Rental
Security Deposit: None.
Prepaid Minimum Annual Rental: Tenant shall pay Fourteen Thousand Five
Hundred Eighty Three and 33/100 Dollars ($14,583.33) upon the date Landlord
delivers to Tenant the Notice of Substantial Completion (Section 3.2), and
Landlord shall apply such amount against the first month's payment of Minimum
Annual Rental due hereunder.
1.7 General Description of Tenant's Use of Premises
Tenant shall be authorized to use the Premises only for those purposes
stated in Exhibit B.
1.8 Exhibits To Lease. The following drawings and special provisions are
attached hereto as exhibits and made a part of this Lease:
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT A - General site plan of the Property which Landlord and others intend to construct
or cause to be constructed in whole or in part on real property located in the City,
County and State described in Section 1.2 hereof.
EXHIBIT B - Description and Use of the Premises.
EXHIBIT C - Provisions Relating to the Design and Construction of Tenant's Store.
EXHIBIT D - Guaranty of Lease.
EXHIBIT E - Tenant's Estoppel Certificate
EXHIBIT F - Sign Criteria.
EXHIBIT G - Subordination Agreement
EXHIBIT H - Confirmation of Term of Lease
</TABLE>
<PAGE>
1.8 Construction of Lease Provisions. The foregoing provisions of this
Article 1 summarize for convenience only certain key terms of the Lease
delineated more fully in the Articles and Sections referenced therein. In the
event of a conflict between the provisions of this Article 1 and the balance of
the Lease, the latter shall control.
ARTICLE 2
PREMISES; SITE PLAN
2.1 Demise and Description. Landlord hereby leases to Tenant and Tenant
hereby leases from Landlord, at the rental and upon the covenants and conditions
hereinafter set forth, the commercial space referred to herein as the "Premises"
and described in Exhibit B. The Premises shall be constructed in accordance with
Exhibit C. Within sixty (60) days after the Premises are substantially complete,
Landlord shall have the right but not the obligation to have Landlord's
architect at Landlord's expense recalculate the Floor Area of the Premises, and
if the calculation shows a deviation of more than one percent (1%) from the
square footage specified in Exhibit B, and if Landlord accepts the calculation,
the Lease shall be amended so as to reflect the actual Floor Area and
corresponding Minimum Annual Rental and other amounts specified per square foot
in Article 1, and other charges which are based on Floor Area. If Landlord
chooses not to recalculate the Floor Area, then Tenant's architect at Tenant's
expense may recalculate the Floor Area of the Premises, and if the calculation,
as reasonably approved by Landlord's architect, shows a deviation of more than
one percent (1%), from the square footage specified in Exhibit B, and if
Landlord accepts the calculation, the Lease shall be amended as set forth above
in this Section 2.1.
2.2 Floor Area. The term "Floor Area" as used throughout this Lease shall
mean and include the square footage of all areas for exclusive use and occupancy
by any tenant of Landlord, measured from the exterior surface of building walls
and extensions thereof, in the case of the perimeter of the Premises, and from
the center line of demising partitions between the Premises and those adjacent
tenants. In addition, in the case of a tenant operating a restaurant or other
food service facility and utilizing outdoor seating areas, "Floor Area" shall
include the square footage of such outdoor seating area. The Floor Area shall
include, without limitation, restrooms, mezzanines, warehousing or storage
areas, clerical or office areas and any employee areas.
2.3 Site Plan; Relocation or Termination. Tenant acknowledges that the site
plan of the Property illustrated on Exhibit A hereto is for purposes of
convenience only, and that Landlord reserves the right, (a) in connection with
the initial construction of improvements at the Property, or thereafter, to
expand, reduce, remove, demolish, change, renovate or construct any existing or
planned improvements at the Property, including the Premises; or (b) in
determining the most beneficial configuration of tenant mix in connection with
the initial development of the Property, to rearrange the location of various
tenants including Tenant. Tenant further acknowledges that the Property as shown
on Exhibit A hereto or any remodeling thereof may include a variety of uses as
determined by Landlord including without limitation, retail, outlet-retail,
office, government, hotel, convention, tourist, entertainment, service,
transportation, education, or residential uses.
If in connection with any of the above-described changes, Landlord
determines that it is necessary that Tenant vacate the Premises or that the
Premises be altered in connection therewith, Landlord may require that Tenant
surrender possession of the Premises, provided Landlord, in its sole and
absolute discretion but subject to the terms of any mortgage or any other
agreement affecting the Property, either (i) amends the Lease to lease Tenant
other comparable premises within the Property on the same terms and conditions
as those contained in the Lease for the balance of the remaining Lease Term, or
(ii) terminates the Lease and, if such termination occurs following Tenant's
initial occupancy of the Premises, pays Tenant an amount equal to the yet
unamortized net cost to Tenant of its Fixtures (as defined in Section 10.4)
installed in the Premises, calculated using a straight-line amortization
schedule and an amortization period equal to the Lease Term. The relocation of
the Premises in accordance with clause (i) hereof or the payment of the
consideration, if any, in accordance with clause (ii) hereof shall be Tenant's
sole remedy in the event Tenant is required to surrender possession of the
Premises as provided in this Section.
<PAGE>
In the event the Lease is terminated without entering into a new lease for
comparable premises pursuant hereto, then Landlord shall return to Tenant any
security deposit not applied pursuant to the terms hereof, and if such
termination occurs prior to the Commencement Date of the Lease, shall return to
Tenant the first month's rent, if any, paid by Tenant to Landlord hereunder. In
the event of any such termination, neither party shall have any responsibility
for acts, events or circumstances occurring subsequent to the date of
termination unless such acts, events or circumstances are related to the
performance or non-performance of such party's duties or obligations while a
party to this Lease.
ARTICLE 3
TERM OF LEASE
3.1 Definitions. This Lease shall be effective as of the "Effective Date"
which is defined as the earlier of the date Landlord and Tenant execute the
Lease or the date Tenant enters onto the Premises with Landlord's consent. The
term of this Lease ("Lease Term") shall commence on the "Commencement Date"
defined herein and shall continue thereafter for the period specified in Article
1, unless sooner terminated as hereinafter provided in this Lease. The
"Commencement Date" means the first day of the month following the earlier of
(a) thirty (30) days after Landlord delivers to Tenant the Notice of Substantial
Completion described in Section 3.2 or (b) the date Tenant opens for business,
unless otherwise stipulated in Exhibit H. Except as otherwise specifically
stated in this Lease or in any subsequent amendments hereto, the terms and
conditions of this Lease shall remain in effect during any extension, renewal or
holdover of the original Lease Term.
3.2 Acceptance of the Premises. Landlord agrees to deliver to Tenant, and
Tenant agrees to accept from Landlord, possession of the Premises forthwith upon
substantial completion of the Premises as described in Exhibit C. The term
"substantial completion of the Premises" is defined as the date Landlord
notifies Tenant ("Notice of Substantial Completion") that the Premises are
substantially complete to the extent of Landlord's Work as specified in Exhibit
C to the point wherein Tenant's contractor may commence the construction of
Tenant's Work as specified in Exhibit C, it being understood and agreed that
Landlord may be unable to install or complete all items of Landlord's Work in
advance of Tenant's Work. In such instance Tenant shall cause its contractor to
cooperate with Landlord's contractor to complete Landlord's Work in a timely and
efficient manner. Certification by Landlord's architect ("Project Architect") of
the substantial completion of the Premises in accordance with said Exhibit C
shall be conclusive and binding upon the parties hereto. Tenant shall commence
the construction of Tenant's Work as described in Exhibit C promptly upon
substantial completion of the Premises and shall diligently prosecute such
construction to completion and shall open the Premises for business concurrently
with the date specified for commencement of Minimum Annual Rental. Tenant
acknowledges that the financial success of the Property depends, in part, on
Tenant's opening the Premises for business contemporaneously with the initial
opening of the Property and that Landlord's damages arising from Tenant's
failure to do so are extremely difficult and impracticable to fix. Therefore,
should Tenant fail to open the Premises for business upon the initial opening of
the Property Landlord may, at its option, either terminate this Lease or require
Tenant to pay to Landlord, upon receipt of invoice, the sum of Five Hundred
Dollars ($500.00) per day for each day Tenant delays its opening after and
including the initial opening date, which sum Tenant agrees is fair compensation
to Landlord for said damages.
Notwithstanding anything in this Lease to the contrary, Tenant shall not be
required to initially open for business in the Premises until 240,000 square
feet of Floor Area on the Property (including the Premises), or more, is leased
(or sold) and estimated to be ready to open within forty-five days after Tenant
opens for business. In the event less than 240,000 square feet of Floor Area of
stores in the Project (including the Premises) are open for business within
forty-five (45) days following the date Tenant opens for business in the
Premises fully stocked, staffed and fixturized, then from and after the date
which is 45 days following the date Tenant has so opened for business, the
<PAGE>
Minimum Annual Rental set forth in Article 4, Section 4.1, and in Section 1.4
shall be abated until such time as there are open for business at least 240,000
square feet of Floor Area of stores in the Project (including the store occupied
by Tenant). Notwithstanding the abatement of Minimum Annual Rental as aforesaid,
Tenant shall pay all other charges called for in the manner provided for in this
Lease except Minimum Annual Rental. The foregoing abatement shall in no event
change or modify the Rent Start Date.
3.3 Confirmation of Term of Lease; Initial Estoppel Certificate; and
Certificate of Occupancy. Tenant will execute and deliver to Landlord within ten
(10) days after Tenant opens for business certificates substantially in the form
of Exhibits E ("Tenant's Estoppel Certificate") and H (the "Confirmation of Term
of Lease"). Tenant shall make such modifications to such certificates as may be
necessary to make such certificates true and accurate, it being intended that
any such statements may be relied upon by Landlord's mortgagee, prospective
purchaser or land lessor of the Property. If Tenant fails to provide either
certificate within ten (10) days after Landlord's request therefor, Tenant shall
be deemed to have approved the contents of any such certificate submitted to
Tenant by Landlord. Within the earlier of ten (10) days after completion of
construction of Tenant's Work, as described in Exhibit C, or ten (10) days after
Tenant's opening for business, Tenant shall deliver to Landlord the Certificate
of Occupancy for the Premises issued by the appropriate governmental agency.
3.4 Surrender of the Premises. Tenant will surrender possession of the
Premises to Landlord at the expiration of the Lease Term or the earlier
termination of this Lease.
ARTICLE 4
RENTAL
4.1 Minimum Annual Rental. Tenant agrees to pay as rental for the use and
occupancy of the Premises the Minimum Annual Rental specified in Article 1.
Tenant shall pay said rental in twelve (12) equal monthly installments during
each year, in advance, on the first day of each calendar month, without setoff,
deduction, prior notice or demand, commencing on a date ("Rent Start Date")
which shall be the earlier of (a) ninety (90) days after Landlord delivers to
Tenant the Notice of Substantial Completion described in Section 3.2 or (b) the
date Tenant opens for business, unless a different date is specified in Article
1 or Exhibit H. Should the rental period commence on a day other than the first
day of a calendar month, then the rental for such first fractional month shall
be computed on a daily basis for the period from the date of commencement to the
end of such calendar month and at an amount equal to one three-hundred sixtieth
(1/360th) of the said annual rental for each such day, and thereafter shall be
computed and paid as aforesaid.
4.2 Cost Of Living Adjustments to the Minimum Annual Rental. The Minimum
Annual Rental provided for in Section 4.1 shall be subject to adjustment as
stipulated in Section 1.4 as of each twelve month anniversary of the
Commencement Date ("Adjustment Date") during the Lease Term. The following
language shall be used only for adjustments referred to in Sections 13.6(a)(iii)
and 27.2 hereof or elsewhere where specific reference is made to the Consumer
Price Index.
The base for computing the adjustment is the Consumer Price Index, Subgroup
"Urban Consumers (CPI-U)," published by the United States Department of Labor,
Bureau of Labor Statistics for San Diego, California (1982-84 = 100) ("Index"),
published immediately prior to the Commencement Date ("Beginning Index"). If the
Index for the period immediately prior to the Adjustment Date ("Extension
Index") has increased over the Index published immediately prior to the
Commencement Date (in the case of the first adjustment) or immediately prior to
the last Adjustment Date (in the case of each succeeding adjustment)
("Comparison Index"), the Minimum Annual Rental for the following twelve month
period (until the next rent adjustment) shall be the higher of: (a) the Minimum
Annual Rental for the twelve-month period immediately preceding the Adjustment
Date; or (b) the number which results by multiplying the Minimum Annual Rental
in effect prior to the Adjustment Date by a fraction, the numerator of which is
the Extension Index and the denominator of which is the Comparison Index. In no
event shall the Minimum Annual Rental after any such adjustment be less than the
Minimum Annual Rental in effect immediately preceding such adjustment.
<PAGE>
If the Index is changed so that the base year differs from that used as of
the date immediately preceding the Commencement Date, the Index shall be
converted in accordance with the conversion factor published by the United
States Department of Labor, Bureau of Labor Statistics. If the Index is
discontinued or revised during the term, such other government index or
computation with which it is replaced shall be used in order to obtain
substantially the same result as would be obtained if the Index had not been
discontinued or revised.
4.3 Operating Expenses. In addition to the Minimum Annual Rental described
above, Tenant shall pay its pro rata share of Operating Expenses in the manner
hereinafter set forth. It is understood and agreed that the phrase "Operating
Expenses" as used herein shall mean all expenses in connection with the use,
ownership, operation and maintenance of the Common Area (defined in Section 8.1
hereof), including without limitation all general maintenance and repairs deemed
necessary by Landlord or as may be required by governmental authority; work
performed by Landlord in accordance with Section 11.2; resurfacing; painting;
restriping; cleaning; trash removal; snow and ice removal; sweeping and
janitorial services; repair, maintenance and replacement of public toilets,
music program equipment and loud speakers, floors, walls, ceilings, all roofs in
the Property, skylights, windows, sidewalks, curbs, Property signs, sprinkler
systems, planting and landscaping, directional signs, and other markers and
bumpers; any fire protection, lighting, storm drainage and other utility
services and systems including the maintenance of all HVAC systems serving the
Property; and including all costs, charges, and expenses incurred by Landlord in
connection with any change of company providing utility service; personnel to
implement any of the foregoing services including, if Landlord deems necessary,
the cost of security officers; all costs and expenses pertaining to security
alarm systems; rental payments for parking structures, if any; public transit or
carpooling facilities, if any; the operation of valet parking, if any; the
administration and operation of a parking validation or parking charge program,
including amounts paid to a third party contracted to operate the parking
facilities, if any; all costs and personnel expenses of Landlord incurred in
managing the Property; all taxes, assessments or fees imposed for any reason and
levied on the improvements and land comprising said Common Area; all personal
property taxes assessed for any reason and levied on any personalty for use of
the Common Area; depreciation on maintenance and operating machinery and
equipment (if owned) and rental paid for such machinery and equipment (if
rented): public liability insurance for Landlord's operation at the Property;
All Risk insurance covering the Common Area with earthquake and flood damage
endorsements; all other insurance which Landlord is required or has the option
to maintain pursuant to Section 12.2. With respect to Landlord's replacement, in
accordance with this Section 4.3 of any capital item with a useful life in
excess of five (5) years whose replacement cost exceeds Ten Thousand Dollars
($10,000.00), the Operating Expenses for each calendar year shall include, in
lieu of the full amount of said replacement cost in any given year, at
Landlord's option, either (a) an annual amount sufficient, on the basis of
Landlord's experience or reasonable estimate, to establish in advance of the
time for such replacement a reserve to fund said cost, or (b) the total payments
of principal and interest owed for each year or partial year on any commercially
reasonable loan which is fully amortized over said useful life that Landlord may
obtain from a third party, or that Landlord may make itself, for the benefit of
Tenant and all other tenants at the Property to finance said cost; provided,
however, if Landlord shall make such a loan, Landlord shall charge interest on
the basis of actual days elapsed compared to a 360-day year, compounded monthly,
at a fixed rate which is the lesser of the maximum lawful rate or two percent
(2%) above the annual rate of yield available at the time of replacement on a
Treasury Note or Bond of the United States of America maturing at approximately
the end of said useful life. In addition, the Operating Expenses shall include
an amount payable to Landlord for accounting, bookkeeping and collection of the
Operating Expenses equal to fifteen percent (15%) of the total of the
aforementioned expenses for each calendar year. Landlord may cause any or all of
said services to be provided by an independent contractor or contractors.
<PAGE>
4.4 Method of Payment of Operating Expenses. Portions of the Property are
or will be owned or leased by Major Tenants or Pad Tenants. As used in this
Lease, Major Tenants and Pad Tenants are the occupants of those certain
buildings indicated on Exhibit A as "Major Tenants" and "Pad Tenants" or which
may be consequently added, removed or redesignated by Landlord. The
contributions of the Major Tenants and Pad Tenants toward the Operating Expenses
shall be credited toward payment of the entirety of the Operating Expenses and
the balance of such expenses shall be prorated in the following manner:
(a) Commencing on a date which shall be the earlier of (a) thirty (30) days
after Landlord delivers to Tenant the Notice of Substantial Completion or (b)
the date Tenant opens for business, and continuing throughout the balance of the
Lease Term, Tenant shall pay Landlord, on the first day of each calendar month,
an amount estimated by Landlord to be Tenant's share of the Operating Expenses.
The foregoing estimated monthly charge may be adjusted by Landlord at the end of
any calendar quarter on the basis of Landlord's experience and reasonably
anticipated costs.
(b) Following the end of each calendar quarter or, at Landlord's option,
each calendar year, Landlord shall furnish Tenant a statement covering the
calendar quarter or year just expired, certified as correct by an authorized
representative of Landlord, showing the total of the Operating Expenses, the
amount of Tenant's share of the Operating Expenses for such calendar quarter or
year, less the estimated monthly charges, with respect to such period, as set
forth in subparagraph (a) above. If Tenant's share of the Operating Expenses
exceeds Tenant's payments so made, Tenant shall pay Landlord the deficiency
within ten (10) days after receipt of such statement. If said payments exceed
Tenant's share of the Operating Expenses, Tenant shall be entitled to offset the
excess against payments next thereafter due Landlord, as set forth in
subparagraph (a) above. Tenant's share of the Operating Expenses for the
previous calendar quarter or year shall be that portion of all such expenses
equal to the proportion thereof which the number of square feet of Floor Area in
the Premises bears to the total number of square feet of Floor Area of buildings
in the Property which are occupied and open for business as of the commencement
of such calendar quarter or year, exclusive of the Floor Area occupied by the
Major Tenants and Pad Tenants. Tenant's share of the Operating Expenses for its
first and/or last calendar quarter or year, as appropriate, shall be
proportionately reduced to account for the Rent Start Date and expiration of the
Lease Term occurring on other than the first and/or last day of the appropriate
calendar quarter or year. Notwithstanding anything to the contrary in this
Lease, beginning with the second full calendar year of the Lease Term and
continuing for each subsequent year thereafter, Tenant's share of Operating
Expenses, excluding insurance and taxes, shall not increase by more than five
percent (5%) over Tenant's share of Operating Expenses, excluding insurance and
taxes, in the immediately preceding calendar year.
Notwithstanding anything herein to the contrary, Landlord may, in its sole
and absolute discretion designate specific portions of the Property as "Special
Use Zones" in which Operating Expenses which are specific to a particular group
of tenants or occupants ("Special Zone Expenses") shall be excluded from
Operating Expenses for the Property and paid by the tenants or occupants within
said zone(s). By way of example, but without limitation, Landlord may, in its
sole and absolute discretion designate a specific portion of the Common Area as
a Special Use Zone to serve as facilities to accommodate the consumption of food
and beverages by customers of food use tenants in the Property ("food court").
If Tenant is a food tenant and Landlord determines that Tenant's business
reasonably benefits from the availability of the food court, Tenant shall pay,
in addition to its share of Operating Expenses as provided hereinabove, Tenant's
share of such Operating Expenses which are attributable solely to the operation
and use of the food court for the previous calendar quarter or year. Tenant
shall pay its proportionate share of Special Zone Expenses, if applicable, at
the same time and in the same manner as Tenant is required to pay its pro rata
share of Operating Expenses as provided hereinabove, and Tenant's proportionate
share of all Special Zone Expenses shall be that proportion which the Floor Area
of the Premises bears to the Floor Area of all tenants which have been
designated by Landlord, in Landlor s sole discretion, as tenants which benefit
from the expenses incurred with respect to that Special Use Zone, and which are
occupied and open for business as of the commencement of each calendar quarter
or, if reconciliations are only done annually, averaged for that calendar year.
<PAGE>
4.5 Percentage Rental. In addition to the Minimum Annual Rental and other
sums hereinabove specified, Tenant shall pay as Percentage Rental the product of
the percentage set forth in Section 1.4 multiplied by the amount by which
Tenant's Net Sales (as the term "Net Sales" is defined in Section 5.1) made from
or upon the Premises during each Lease Year exceeds the amounts listed in
Section 1.4 (hereinafter "Breakpoint") for such Lease Year (hereinafter
"Percentage Rental"). "Lease Year" shall mean the twelve (12) consecutive
calendar months commencing on the first day of the first full calendar month of
the Lease Term, and thereafter with each succeeding anniversary thereof. If the
Commencement Date is other than the first day of a calendar month, the first
Lease Year shall include the period from the Commencement Date through the end
of the month in which the Commencement Date occurs. "Option Years" shall mean
Lease Years during the Option Term. Said Percentage Rental shall be computed
each calendar month and, on or before the twentieth (20th) day of the calendar
month immediately following the close of each calendar month, Tenant shall pay
to Landlord the product of the percentage set forth in Section 1.4 multiplied by
the amount by which Tenant's Net Sales made during such calendar month exceeds
1/12 of the Breakpoint listed in Section 1.4. Notwithstanding the foregoing, in
the event at any time during the original Lease Term or any Option Term then in
effect, Tenant is entitled to a full or partial abatement of Minimum Annual
Rental pursuant to any provisions of this Lease, then the dollar amount of the
Breakpoint shall be reduced in the same proportion that Minimum Annual Rental is
so abated.
On or before the first day of the first full calendar month following the
first anniversary of the Commencement Date, and on each anniversary thereof,
Tenant shall deliver to Landlord a statement certified by Tenant as accurate
indicating the total Net Sales of Tenant during the immediately preceding Lease
Year and the amounts paid to Landlord as Percentage Rental for such Lease Year;
and thereupon an adjustment shall be made with respect to said rental as
follows: If Tenant shall have paid to Landlord an amount greater than Tenant is
required to pay as Percentage Rental for such Lease Year under the terms hereof,
Tenant shall be entitled to a credit against Tenant's next payment of Percentage
Rental for the amount of such overpayment; or, if Tenant shall have paid an
amount less than the Percentage Rental required to be paid hereunder, then
Tenant shall pay such difference to Landlord concurrently with Tenant's delivery
of the annual statement.
Notwithstanding anything to the contrary contained in this Lease, in the
event that Tenant's Gross Sales during the fourth (4th) Lease Year do not equal
or exceed One Million Five Hundred Thousand Dollars ($1,500,000.00), Landlord or
Tenant may terminate this Lease by written notice to the other party which must
be given, if at all, within the first ninety (90) days after the end of the
fourth (4th) full Lease Year. Such termination shall be effective on the one
hundred twentieth (120th) day after such notice is given. Upon termination of
the Lease under the provisions of this Section 4.5, Tenant shall pay Landlord
the unamortized cost of the Construction Allowance as set forth in Addendum to
Exhibit C, amortized on a straight-line basis over the full Lease Term.
4.6 Statement of Net Sales. Tenant agrees to furnish or cause to be
furnished to Landlord a statement of Net Sales of Tenant within twenty (20) days
after the close of each calendar month, and an annual statement, including a
monthly breakdown of Net Sales within thirty (30) days after the close of each
calendar year. Such statements shall include, among other appropriate items,
Tenant's Gross Sales (as the term "Gross Sales" is defined in Section 5.1), and
all deductions or exclusions therefrom and Tenant's Net Sales; such statements
shall also include a statement of the number of transactions which generated the
Gross Sales, and the estimated number of potential customers that entered
Tenant's Premises during the time period(s) being reported, whether or not such
potential customers actually made purchases from the Premises. Further, if,
under "Use of Premises" in Exhibit B hereto, there is any limitation on the
percentage of Gross Sales which may be generated from any particular item listed
in said provision, Tenant shall specifically show the percentage of Tenant's
total Gross Sales which was derived from the sale of such item(s). Such
statements shall be signed by Tenant. Tenant shall record at the time of sale,
in the presence of the customer, all receipts from sales or other transactions,
<PAGE>
whether cash or credit, in a cash register or registers having a sealed and
continuous tape which cumulates and consecutively numbers all purchases. Tenant
shall keep (a) full and accurate books of account and records in accordance with
Generally Accepted Accounting Principles consistently applied, including,
without limitation, a sales journal, general ledger, and all bank account
statements showing deposits of Gross Sales revenue, (b) all such cash register
receipts with regard to Gross Sales and Net Sales, credits, refunds and other
pertinent transactions made from or upon the Premises (including the Gross Sales
of any subtenant, licensee or concessionaire) and (c) detailed original records
of any exclusions or deductions from Gross Sales (including any exclusions or
deductions from Gross Sales of any subtenant, licensee or concessionaire). Such
books, receipts and records shall be kept for a period of three (3) years after
the close of each calendar year and shall be available for inspection and audit
by Landlord and its representatives at the Premises at all times during regular
business hours. In addition, upon request of Landlord, Tenant agrees to furnish
Landlord a copy of Tenant's State and Local Sales and Use Tax Returns, if
required in the State where the Property is situated. The receipt by Landlord of
any statement or any payment of Percentage Rental for any period shall not bind
it as to the correctness of the statement or the payment. Landlord shall, within
three (3) years after the receipt of any such statement, be entitled to an audit
of such Gross Sales and Net Sales (including the Gross Sales and Net Sales of
any subtenant, licensee or concessionaire). Such audit shall be conducted either
by Landlord or by a certified public accountant to be designated by Landlord
during normal business hours at the principal place of business of Tenant. If it
shall be determined as a result of such audit that there has been a deficiency
in the payment of Percentage Rental, then such deficiency shall become
immediately due and payable with interest at the rate specified in Section 14.7
from the date when said payment should have been made. In addition, if Tenant
understates Net Sales by more than two percent (2%) and if Landlord is entitled
to any additional Percentage Rental as a result of said understatement, or if
such audit shows that Tenant has failed to maintain the books of account and
records required by this Section so that Landlord is unable to verify the
accuracy of Tenant's statement then Tenant shall pay to Landlord all reasonable
costs and expenses (including all reasonable auditor and attorney fees) which
may be incurred by Landlord in conducting such audit and collecting such
underpayment, if any. If Tenant understates Net Sales by more than six percent
(6%), then, in addition to Landlord's aforesaid rights, Landlord may terminate
this Lease. Any information gained from such statements or inspection shall be
confidential and shall not be disclosed other than to carry out the purposes
hereof; provided, however, Landlord shall be permitted to divulge the contents
of any such statements in connection with any contemplated sales, transfers,
assignments, encumbrances or financing arrangements of Landlord's interest in
the Premises or in connection with any administrative or judicial proceedings in
which Landlord is involved where Landlord may be required to divulge such
information.
4.7 Additional Rent. Tenant shall pay, as Additional Rent, all sums of
money required to be paid pursuant to the terms of this Lease, including, but
not limited to those sums referenced in Articles 4, 6, 7, 8, 11 and 27, herein
collectively referred to as "Additional Rent". If such amounts or charges are
not paid at the time provided in this Lease, they shall nevertheless be
collectible as Additional Rent with the next installment of Minimum Annual
Rental thereafter falling due, but nothing herein contained shall be deemed to
suspend or delay the payment of any amount of money or charge at the time the
same becomes due and payable hereunder or to limit any other remedy of Landlord.
All amounts of Minimum Annual Rental and Additional Rent payable in a given
month shall be deemed to comprise a single rental obligation of Tenant to
Landlord.
4.8 Failure to Pay Items Required Under Article 4. If Tenant fails to pay,
when the same is due and payable, the Minimum Annual Rental or any Additional
Rent, such unpaid amounts shall bear interest at the rate specified in Section
14.7 from the date due to the date of payment and computed on the basis of
monthly compounding with actual days elapsed compared to a 360-day year. In
addition to such interest, Tenant acknowledges that the late payment by Tenant
of any monthly rental will cause Landlord to incur certain costs and expenses
<PAGE>
not contemplated under this Lease, the exact amount of which costs being
extremely difficult or impracticable to fix. Such costs and expenses will
include, without limitation, administrative and collection costs, and processing
and accounting expenses. Therefore, if any such installment is not received by
Landlord from Tenant when due, Tenant shall immediately pay to Landlord a late
charge of Four Hundred Dollars ($400.00). Landlord and Tenant agree that this
late charge represents a reasonable estimate of such costs and expenses and is
fair compensation to Landlord for its loss caused by Tenant's nonpayment. Should
Tenant pay said late charge but fail to pay contemporaneously therewith all
unpaid amounts of Minimum Annual Rental and Additional Rent Landlord's
acceptance of this late charge shall not constitute a waiver of Tenant's default
with respect to such nonpayment by Tenant nor prevent Landlord from exercising
all other rights and remedies available to Landlord under this Lease or under
Law.
4.9 Security Deposit. On or before the Effective Date, Tenant shall deposit
with Landlord the sum specified in Article 1 as "Security Deposit". Said deposit
shall be held by Landlord without liability for interest as security for the
faithful performance by Tenant of all of its obligations under this Lease. The
Security Deposit shall not be mortgaged, assigned, transferred or encumbered by
Tenant without the prior written consent of Landlord and any such act on the
part of Tenant shall be without force and effect and shall not be binding upon
Landlord. If any of the rents herein reserved or any other sum payable by Tenant
to Landlord shall be overdue and unpaid or should Landlord make payments on
behalf of Tenant, or if Tenant shall fail to perform any of the terms of this
Lease, then Landlord may, at its option and without prejudice to any other
remedy which Landlord may have on account thereof, appropriate and apply said
entire Security Deposit or so much thereof as may be necessary to compensate
Landlord for Minimum Annual Rental or Additional Rent, loss or damage sustained
by Landlord as a result thereof, and Tenant shall forthwith upon demand restore
said Security Deposit to the original sum deposited. Should Tenant comply with
all of said obligations and promptly pay all of the rentals as they fall due and
all other sums payable by Tenant to Landlord, said Security Deposit shall be
refunded in full to Tenant within forty-five (45) days after the expiration or
earlier termination of the Lease Term. In the event of bankruptcy or other
debtor-creditor proceedings against Tenant, the Security Deposit shall be deemed
to be applied first to the payment of rent and other charges due Landlord for
all periods prior to filing of such proceedings.
Landlord may deliver the funds deposited hereunder by Tenant to the
purchaser or assignee of Landlord's interest in the Premises in the event that
such interest is transferred and thereupon Landlord shall be discharged from any
further liability with respect to such Security Deposit, and this provision
shall also apply to any subsequent transfer of Landlord's interest in the
Premises.
ARTICLE 5
DEFINITION OF "NET SALES"
5.1 Net Sales. The term "Gross Sales" of Tenant, as used in this Lease, is
defined to be the gross selling price of all merchandise or services sold in or
from the Premises by Tenant, its subtenants, licensees and concessionaires,
whether for cash or on credit and whether made by store personnel or by approved
vending, video, pinball, or gaming machines or by electronic, telephonic, video,
computer, or other technology-based system, whether existing now or developed in
the future, located at the Premises or generating orders therefrom. The term
"Net Sales" of Tenant, as used in this Lease, is defined to be Gross Sales
excluding the following provided, however, that the below listed items shall
only be deducted from Gross Sales if they were previously included in Gross
Sales.
(a) The selling price of all merchandise purchased at the Premises and
returned by customers and accepted for full credit or the amount of discounts
and allowances made thereon;
<PAGE>
(b) Goods returned to sources, or transferred to another store or warehouse
owned by or affiliated with Tenant;
(c) Sums and credits received in the settlement of claims for loss of or
damage to merchandise;
(d) The price allowed on all merchandise traded in by customers for credit
or the amount of credit for discounts and allowances made in lieu of acceptance
thereof;
(e) Alteration workroom charges and delivery charges at Tenant's cost and
collected separately from the selling price;
(f) Interest, service or sales carrying charges or other charges, however
denominated, paid by customers for extension of credit on sales and where not
included in the merchandise sales price;
(g) Receipts from public telephones, stamp machines, public toilet locks,
or vending machines installed solely for use by Tenant's employees;
(h) Sales taxes, so-called luxury taxes, consumers' excise taxes, gross
receipts taxes and other similar taxes now or hereafter imposed upon the sale of
merchandise or services, but only if collected separately from the selling price
of merchandise or services and collected from customers;
(i) Sales of fixture, equipment or property which are not stock in trade.
All sales originating at the Premises shall be considered as made and
completed therein, even though bookkeeping and payment of the account may be
transferred to another place for collection and even though actual filling of
the sale or service order and actual delivery of the merchandise may be made
from a place other than the Premises. Each sale upon installments or credit
shall be treated as a sale for the full cash price at the time of sale.
ARTICLE 6
POSSESSION AND USE; UTILITIES; HAZARDOUS MATERIALS
6.1 Permitted Uses. Tenant shall use the Premises solely for the purposes
and under the trade name specified in Exhibit B. Tenant shall at all times
operate an outlet store which shall mean a retail store selling brand name
merchandise sold in Tenant's full price retail stores, at least fifty percent
(50%) of which shall be sold at discount prices, which shall mean prices that
are at least twenty percent (20%) less than the prices charged by the majority
of the retailers in the San Diego metropolitan area who sell the same or
substantially similar merchandise at full retail markup. Tenant hereby
acknowledges that Tenant has represented to Landlord that it will operate its
business in the Leased Premises as one of the following (i) a factory direct
outlet; or (ii) a discounter; or (iii) an off-price operation, selling all its
merchandise at discount prices (as herein defined), and that such representation
was a material inducement for Landlord to enter into this Lease with Tenant on
the rental terms herein contained, which rental provisions are predicated on the
typically lower profit margins of such businesses, as compared to those selling
at full retail markup. Accordingly, in the event Tenant fails to sell its
merchandise at discount prices on a continuous basis, Landlord shall have the
right, upon ten (10) days written notice to Tenant to increase the Minimum
Annual Rent set forth in Article 1 hereof and as may have been increased
pursuant to other provisions of this Lease, by Two and 00/100ths Dollars ($2.00)
per square foot of the Floor Area of the Premises. Within forty-five (45) days
after the end of each calendar year (together with the annual statement of Net
Sales) Tenant shall provide reasonable information that Tenant has sold
substantially all of its merchandise at discount prices on a continuous basis.
Landlord may, at its option, at any time and from time to time, obtain an
independent study and review the prices charged by Tenant and the prices charged
by the majority of retailers in the San Diego metropolitan area who sell the
same or substantially similar merchandise as that sold in the Premises (herein
"Study"), and Tenant shall permit Landlord, or Landlord's consultant for
purposes of such study, access to the Premises and to Tenant's merchandise for
<PAGE>
such purpose. If a Study reveals that Tenant is failing or failed to sell its
merchandise at discount prices on a continuous basis, Tenant shall pay
Landlord's costs and expenses incurred for such Study. In the event the "Use of
Premises" described in Exhibit B hereto permits the sale of merchandise that is
not manufactured by Tenant, Tenant must either purchase any such merchandise
directly from the manufacturer or obtain the express written authority, license,
and/or other approval to sell such merchandise from the manufacturer.
6.2 Duties and Prohibited Conduct. At Tenant's sole expense, Tenant shall
procure, maintain and hold available for Landlord's inspection any governmental
license or permit required for the proper and lawful conduct of Tenant's
business. Tenant shall not use, or permit any person or persons to use, the
Premises for the sale or display of pornography, drug-oriented paraphernalia,
nudity, graphic violence or any goods and/or services which, in the sole
discretion of Landlord, are inconsistent with the image of a community or
family-oriented retail project. Tenant shall not use or suffer or permit any
person or persons to use the Premises or any part thereof as a massage parlor,
adult bookstore or second-hand store or to conduct an auction, distress, fire,
bankruptcy or going-out-of business sale. Tenant shall not use the Premises for
any use or purpose in violation of the laws of the United States of America, or
the laws, ordinances, regulations and requirements of the State, County and City
where the Property is situated, or of other lawful authorities. Tenant shall
keep the Premises, and every part thereof, in a clean and wholesome condition,
free from any objectionable noises, odors or nuisances, and shall comply with
all health and police regulations in all respects. Tenant agrees that all trash
and rubbish of Tenant shall be deposited only within receptacles provided by
Landlord or those receptacles provided by Tenant and located in the areas
designated by Landlord. If Tenant's permitted use includes the sale of and/or
preparation of food: (a) Tenant shall at all times maintain a health department
rating of "A" (or such other highest health department or similar rating as is
available); and (b) in connection with Tenant's obligations under this Lease,
Tenant shall be responsible for any and all matters related to Tenant's grease
trap(s) including without limitation contracting with a qualified service
company for routine cleaning and maintenance of any trap(s) and/or grease lines
which serve Tenant. Tenant shall provide Landlord with a copy of any contract
required hereunder within ten (10) days after the Commencement Date, and shall
provide a copy of any subsequent contracts within ten (10) days after their
execution.
Tenant may not display or sell merchandise or place carts, portable signs,
devices or any other objects outside the defined exterior walls or roof and no
aerial or antenna shall be erected on the roof or exterior walls of the Premises
without first obtaining, in each instance, the written consent of Landlord which
consent Landlord may give, withhold, or condition, in Landlord's sole
discretion. Any aerial or antenna so installed without such written consent
shall be subject to removal without notice at any time, at Tenant's expense. In
addition, Tenant shall not solicit or distribute materials in any manner in the
Common Area of the Property.
6.3 Operating Covenants. Tenant covenants and agrees that it will
continuously and uninterruptedly from and after its initial opening for business
operate and conduct within the Premises the business which it is permitted to
operate and conduct under the provisions of this Lease, except while the
Premises are untenantable by reason of fire or other casualty. Tenant further
covenants to keep and maintain within and upon the Premises an adequate stock of
merchandise and trade fixtures to service and supply the usual and ordinary
demands and requirements of its customers. Tenant further agrees to have its
window displays, exterior signs and exterior advertising displays adequately
illuminated continuously during all hours on all days that Landlord in its sole
and absolute discretion, determines to open the Property for business to the
public.
<PAGE>
6.4 New Locations. Tenant agrees that it will not, during the first five
(5) years after Tenant opens for business, directly or indirectly, operate or
own any similar type of business (not so operated and owned on the Effective
Date of this Lease) within a radius of three (3) miles from the location of the
Premises. Without limiting Landlord's remedies in the event Tenant should
violate this covenant, Landlord may, at its option and for so long as Tenant is
operating said other business, include the net sales of such other business in
the Net Sales made from the Premises for the purpose of computing the Percentage
Rental due hereunder. Tenant will provide Landlord with a statement of Tenant's
Net Sales, in accordance with the provisions of Section 4.6, for each such
prohibited business location operated by Tenant in violation of the foregoing
radius restriction. After the aforementioned period, Tenant may operate another
business with the aforementioned radius provided: (a) Tenant gives Landlord
written notice of its intention to operate such business and the location and
anticipated opening date of such business and (b) within thirty (30) days of the
date of said written notice, Landlord and Tenant shall enter into a written
amendment to this Lease adjusting the Minimum Annual Rental payable under
Section 4.1. Said Minimum Annual Rental shall be adjusted as follows: from the
statements of Net Sales as submitted by Tenant under Section 4.6, Landlord shall
compute an amount which represents the highest amount of annual Percentage
Rental paid or payable by Tenant under Section 4.5, during any consecutive
twelve (12) month period occurring within the sixty (60) months immediately
preceding said amendment, and this amount, if any, shall be added to the amount
specified in Article 1 as Minimum Annual Rental, and this resulting sum shall
thereafter be the Minimum Annual Rental payable hereunder. The effective date
for payment of the adjusted Minimum Annual Rental shall be the first day of the
calendar month following the opening of Tenant's other business.
6.5 Deliveries. Tenant shall use its best efforts to complete, or cause to
be completed, all deliveries, loading, unloading and services to the Premises
prior to 10:00 a.m. of each day. Tenant shall attempt to prevent any delivery
trucks or other vehicles servicing the Premises from parking or standing in
front of, or at the rear of, the Premises from 10:00 a.m. to 9:00 p.m. of each
day. Landlord reserves the right to regulate further the activities of Tenant
with regard to deliveries and servicing of the Premises, and Tenant agrees to
abide by such nondiscriminatory regulations of Landlord.
6.6 Use of Name of Property. Tenant shall use the name of the Property in
which the Premises are located in all Tenant's advertising in connection with
Tenant's business at the Premises and for no other purpose, except with
Landlord's consent. Tenant shall not have or acquire any property right or
interest in the name of the Property. Landlord reserves the right to change the
name, title, or address of the Property or the address of the Premises at any
time, and Tenant waives all claims for damages caused by any such change.
6.7 Utilities.
(a) Definitions: For purposes hereof, "Utilities" shall mean the services
of electricity, natural gas (if permitted by Landlord), sewage (including
removal and treatment), water (including treatment and delivery), telephone
service and other services such as satellite data transmission,
telecommunications cell sites or antennas, cable systems and security systems,
or technological successors thereto. Landlord shall make available for the
Premises only those Utilities facilities set forth as Landlord's Work in Exhibit
C hereto and shall have no obligation whatsoever to make any other Utilities
facilities or services available for the benefit of Tenant.
Tenant shall pay, as provided hereinafter, for any and all Utilities
furnished to the Premises or otherwise for the benefit of Tenant except that
Utilities in connection with the Common Area shall be paid by Tenant as a part
of Tenant's pro rata share of Operating Expenses as more fully described in
Article 4 hereto. Landlord shall have the right, either in connection with
Tenant's initial occupancy of the Premises, or from time to time throughout the
Lease Term, beginning as of a date specified in written notice from Landlord to
Tenant, to provide certain Utilities to the Premises, or to require Tenant to
contract for Utility services with specific alternative service providers
<PAGE>
("ASP"), provided, however, that the cost to Tenant of such Landlord-designated
services shall not exceed the costs Tenant would have obtained directly from the
local public utility company or, for Utilities not provided by a public utility
company, the rate Tenant would be able to obtain on its own account. In either
such event, Tenant shall use the Utilities or the Utility services designated by
Landlord and shall not contract separately for the same without the prior
written consent of Landlord which Landlord may grant or withhold in its sole and
absolute discretion. Tenant shall install at its sole expense any separate meter
required by Landlord or Tenant for any Utilities.
In the event Landlord provides a Utility as provided hereinabove, Landlord
shall reasonably determine Tenant's share of the Utility so provided, and such
determination shall be used to calculate a "Utilities Charge" which Tenant shall
pay to Landlord as described hereafter. So long as Landlord is reasonable in its
determination of Tenant's share of the Utility, Tenant agrees that Landlord's
determination shall be binding upon Tenant. Tenant shall arrange, at Tenant's
sole cost and expense, for the local utility company to provide all Utilities
not otherwise provided or designated by Landlord as provided herein.
(b) Payment of the Utilities Charge. For any Landlord-provided Utilities,
Tenant shall pay the Utilities Charge described hereinabove, on the first day of
each month, in advance, as Additional Rent. Such charge shall include all
expenses for the repair, maintenance and replacement, as necessary, of all
meters, pipes, conduits, equipment, components and facilities used to deliver
such Utilities to the Premises. Landlord shall initially estimate the amount of
the Utilities Charge on the basis of a typical store layout comparable to
Tenant's proposed use of the Premises and shall thereafter adjust such estimate
from time to time as necessary, based on Landlord's experience and reasonably
anticipated costs.
At the end of each calendar or partial calendar year during the Lease Term,
Landlord shall compare the total of all monthly estimated Utilities Charges paid
by Tenant during said year with the total expenses incurred by Landlord in
supplying Utilities to the Premises during said year. If said total expenses
which shall constitute Tenant's actual Utilities Charge, exceed Tenant's total
estimated payments therefor, Tenant shall pay Landlord the deficiency within ten
(10) days after notice from Landlord. If Tenant's total estimated payments
exceed Tenant's actual Utilities Charge, Tenant shall offset such excess against
Tenant's Utilities Charge(s) next due.
(c) Access to the Premises. Tenant shall cooperate with Landlord, the local
public utility company, and any alternate service provider at all times and
shall allow Landlord, the local public utility company and any alternative
service provider access, as reasonably necessary, to the Property's electric
lines, feeders, risers, wiring, supply lines, transformers, pipes, conduits,
ducts, penetrations, components, appurtenances, systems, machinery, facilities,
installations, or other equipment used in or in connection with the Shopping
Center for the generation or supply of Utilities.
(d) Landlord Not Responsible for Interruption of Service. Landlord shall in
no way be liable or responsible for any loss, damage, or expense that Tenant may
sustain or incur by reason of any change, failure, interference, disruption, or
defect in the supply or character of the electric energy or other Utility
furnished to the Premises, or if the quantity or character of electric energy or
other Utility supplied by the utility service provider or any ASP is no longer
available or suitable for Tenant's requirements, and no such change, failure,
defect, unavailability, or unsuitability shall constitute an actual or
constructive eviction, in whole or in part, or entitle Tenant to any abatement
or diminution of rent, or relieve Tenant from any of its obligations under the
Lease.
6.8 Compliance with Exclusive License Agreements. Notwithstanding anything
in this Lease to the contrary, Tenant expressly understands and agrees that
Landlord intends to enter into various license agreements or other similar
agreements with third parties to allow exclusive use of certain products or
brand names that will be required to be sold within the Shopping Center (for
<PAGE>
example, but without limitation, Landlord may enter into an agreement that only
specific brand name credit cards will be used throughout the Shopping Center).
Tenant expressly agrees and acknowledges that Tenant's use of the Premises shall
at all times be subject to any such third party agreements regardless of whether
or not such agreements were entered into as of the Effective Date hereof.
Landlord agrees that Landlord shall provide Tenant with at least thirty (30)
days written notice prior to the date Tenant use will be affected by any such
agreements.
6.9 Hazardous Materials.
(a) Definitions. As used herein, "Hazardous Materials Laws" means any and
all federal, state or local laws, ordinances, rules, decrees, orders,
regulations or court decisions relating to hazardous substances, hazardous
materials, hazardous waste, toxic substances, environmental conditions on, under
or about the Premises, or soil and ground water conditions, including, but not
limited to, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"), as amended, Act, Cal. Water Code ss.13000, et. seq., any
amendments to and any regulations promulgated pursuant to the foregoing, and any
similar federal, state or local laws, ordinances, rules, decrees, orders or
regulations. As used herein, "Hazardous Materials" means any chemical, compound,
substance, pollutant, containment or other material that: (a) is defined as a
hazardous substance, hazardous material, hazardous waste or toxic substance
under any Hazardous Materials Law; or (b) is controlled or governed by any
Hazardous Materials Law or gives rise to any reporting, notice or publication
requirements thereunder.
(b) Use. Tenant shall not allow any Hazardous Material to be used,
generated, manufactured, released, stored or disposed of on, under or about, or
transported from, the Premises or the Property, unless such use is: (a)
specifically disclosed to and approved by Landlord in writing prior to such use;
(b) conducted in compliance with the provisions of this Section; and (c)
conducted in compliance with the requirements and recommendations of Landlord's
and Tenant's insurers based upon prudent industry practices regarding management
of Hazardous Materials. Landlord may approve such use subject to reasonable
conditions to protect the Premises and Landlord's interests. Notwithstanding the
foregoing, Landlord hereby consents to Tenant's use, storage or disposal of
products containing small quantities of Hazardous Materials, which products are
of a type customarily found in offices and households (such as aerosol cans
containing insecticides, toner for copies, paints, paint remover, and the like),
provided that Tenant shall handle, use, store and dispose of such Hazardous
Materials in a safe and lawful manner and shall not allow such Hazardous
Materials to contaminate the Premises. If Landlord's consent is required for an
assignment of the Lease or a sublease of the Premises, Landlord shall have the
right to refuse such consent if, in Landlord's reasonable judgment, the
possibility of a release of Hazardous Materials is materially increased as a
result of the assignment or sublease or if Landlord does not receive reasonable
assurances that the new tenant or subtenant has the experience and the financial
ability to remedy a violation of Hazardous Materials and fulfill its obligations
under this Section 6.9.
(c) Compliance With Laws. Tenant shall strictly comply with, and shall
maintain the Premises in compliance with, all Hazardous Materials Laws. Tenant
shall obtain and maintain in full force and effect all permits, licenses and
other governmental approvals required for Tenant's operations on the Premises
under any Hazardous Materials Laws and shall comply with all terms and
conditions thereof. At Landlord's request, Tenant shall deliver copies of, or
allow Landlord to inspect, all such permits, licenses and approvals. Tenant
shall, at Tenant's expense, perform any monitoring, investigation, clean-up,
removal, detoxification, preparation of closure or other required plans and any
other remedial work (collectively, "Remedial Work") required as a result of any
release or discharge of Hazardous Materials affecting the Premises or the
Property or any violation of Hazardous Materials Laws by Tenant or any assignee
or sublessee of Tenant or their respective agents, contractors, employees,
licensees or invitees. Landlord shall have the right to intervene in any
governmental action or proceeding involving any Remedial Work, and to approve
performance of the work, or, at Landlord's option, after reasonable notice to
Tenant, to remedy any violation by Tenant and require reimbursement from Tenant
for costs incurred by Landlord in connection with such remedy, in order to
protect Landlord's interests.
<PAGE>
(d) Notice; Reporting. Tenant shall notify Landlord, in writing, within
five (5) days after any of the following: (i) Tenant has knowledge, or has
reasonable cause to believe that any Hazardous Material has been released,
discharged or is located on, under or about the Premises, whether or not the
Hazardous Material is in quantities that would otherwise be reportable to a
public agency; (ii) Tenant receives any order of a governmental agency requiring
any Remedial Work pursuant to any Hazardous Materials Laws; (iii) Tenant
receives any warning, notice of inspection, notice of violation or alleged
violation, or Tenant receives notice or knowledge of any proceeding,
investigation or enforcement action, pursuant to any Hazardous Materials Laws;
or (iv) Tenant receives notice or knowledge of any claims made or threatened by
any third party against Tenant or the Premises relating to any loss or injury
resulting from Hazardous Materials. Tenant shall deliver to Landlord copies of
all test results, reports, spill prevention plans, and business or management
plans required to be filed with any governmental agency pursuant to any
Hazardous Materials Laws; however, Landlord shall have no obligation to review
the same nor shall Landlord have any liability as to the adequacy of any actions
taken by Tenant.
(e) Termination/Expiration. Upon termination or expiration of this Lease,
Tenant shall, at its sole expense, remove any equipment, improvements or storage
facilities utilized in connection with any Hazardous Materials and shall clean
up, detoxify, repair and otherwise restore the Premises to a condition free of
Hazardous Materials.
(f) Indemnity. Tenant shall indemnify, protect, defend and hold Landlord
(and its partners and their respective officers, directors, employees and
agents) harmless from and against any and all claims, costs, expenses, suits,
judgments, actions, investigations, proceedings and liabilities arising out of
or in connection with any breach of any provisions of this Section or directly
or indirectly arising out of the use, generation, storage, release, disposal or
transportation of Hazardous Materials by Tenant, or any sublessee or assignee of
Tenant, or their respective agents, contractors, employees, licensees, or
invitees, on, under or about the Premises during the Lease Term, including, but
not limited to, all foreseeable and unforeseeable consequential damages and the
cost of any Remedial Work. Neither the consent by Landlord to the use,
generation, storage, release, disposal or transportation of Hazardous Materials
nor the strict compliance with all Hazardous Materials Laws shall excuse Tenant
from Tenant's indemnification obligations pursuant to this Section. The
foregoing indemnity shall be in addition to and not a limitation of the
indemnification provisions of Section 12.1 of the Lease. Tenant's obligations
pursuant to this Section shall survive the termination or expiration of the
Lease.
ARTICLE 7
TAXES, INSURANCE, AND TITLE OF PREMISES
7.1 Title of Premises. Tenant acknowledges that as of the Effective Date
the Premises are subject to the following: (a) covenants, conditions,
restrictions, easements, mortgages or deeds of trust, any ground lease of
record, any rights-of-ways of record, and any other matters or documents of
record, (hereinafter referred to collectively as "CC&R's"), provided, however,
that the CC&R's shall not prevent Tenant from using the Premises for the
purposes specifically described in Exhibit B: (b) any law, statute, ordinance,
regulation, rule, requirement and order, court decision, or procedural
requirement of any governmental authority; and (c) general and special taxes not
delinquent. As to its leasehold estate, Tenant and all persons in possession
thereof will conform to and will not violate the terms of the aforementioned
CC&R's or said matters of record. Except as permitted by this Lease, from and
after the Effective Date, Tenant and all persons in possession of the Premises,
shall not encumber the Premises, whether involuntarily or otherwise. Tenant
acknowledges that any first mortgagee or first deed of trust trustee or
beneficiary has the right to subordinate at any time its interest in this Lease
and the leasehold estate to that of Tenant, without Tenant's consent.
<PAGE>
Tenant acknowledges that this Lease is subordinate to the CC&R's and any
amendments or modifications thereof. Notwithstanding the foregoing, if the
CC&R's are not of record as of the Effective Date, then this Lease shall
automatically become subordinate to the CC&R's upon recordation of said CC&R's,
and Tenant further agrees to execute and return to Landlord, within ten (10)
days after written demand therefor by Landlord, an agreement in recordable form
(substantially in the form of Exhibit G) subordinating this Lease to said
CC&R's.
7.2 Property Taxes and Insurance. Tenant agrees to pay, or cause to be paid
before delinquency, in the manner provided in Article 4, any and all (i)
insurance maintained by Landlord on the Premises under Article 12.2; (ii) taxes,
assessments, license fees, and public charges levied, assessed, or imposed, or
which may become payable during the term upon the Premises, the underlying
realty, and upon any fixtures, furniture, appliances, and personal property
installed or located on the Premises; (iii) transfer, transaction, sales,
rental, gross receipts, license or similar taxes or charges measured by rent
received by Landlord. Landlord shall, after receipt of any tax bill or other
notice of tax due on Premises, furnish Tenant with a copy of such bill or
notice. Tenant shall pay all of such taxes when due and, on demand, shall
furnish to Landlord receipts evidencing such payment. Alternatively, at
Landlord's option, Landlord may collect estimated monthly payments for insurance
and taxes payable by Tenant hereunder, concurrently with and in the manner
provided for Operating Expenses pursuant to Article 4. Taxes for first and last
years shall be prorated between Landlord and Tenant.
ARTICLE 8
COMMON AREA
8.1 Definition Of Common Area. The term "Common Area" shall include all
improved and unimproved areas within the boundary of the Property which are made
available from time to time for the general use, convenience, and benefit of
Landlord, other persons entitled to occupy any portion of the Property and/or
their customers, patrons, employees, and invitees, including, without
limitation, streets, driveways, all parking areas and structures, truckways,
delivery passages, loading doors, sidewalks, ramps, open and closed courts and
malls including food court seating areas, landscaped and planted areas, exterior
stairways, and retaining and decorative walls and planters. The Common Area
shall also include any public transportation facilities, and landscaped areas
and off-site areas which must be maintained by the Property owners pursuant to
governmental conditions of approval of subdivision and/or development of the
Property. Landlord reserves the right to install kiosks and other free-standing
structures within the Common Area, providing any such change does not materially
affect ingress, egress, parking or visibility of the Premises. Landlord also
reserves the right to make changes at any time and from time to time in the
size, shape, location, number and extent of the Common Area, or any of them, and
no such change shall entitle Tenant to any abatement of rent.
8.2 Operation and Maintenance of the Common Area. Landlord shall keep, or
cause to be kept, said Common Area in a neat, clean and orderly condition,
properly lighted and landscaped, and shall repair, maintain or replace all
equipment and facilities thereof as Landlord shall deem necessary. Landlord may
cause any or all of the services concerning the Common Area to be provided by an
independent contractor(s) or by an affiliate(s) of Landlord. In the event
Landlord does not maintain all of the areas in the Property because a Major
Tenant or Pad Tenant maintains its respective Common Area, then, for the length
of time such condition may exist, Landlord's responsibility shall be to maintain
and repair only those portions of the Common Area not maintained by the Major
Tenants or Pad Tenants, and Operating Expenses shall not include expenses paid
separately by such Major Tenants and Pad Tenants.
8.3 Control of Common Area. Landlord shall at all times have the right and
privilege of determining the nature and extent of the Common Area, whether the
same shall be surface, underground or multiple-deck, and of making such changes
therein and thereto from time to time which in its opinion are deemed to be
desirable and for the best interest of all persons using said Common Area,
including the location and relocation of driveways, entrances, exits, automobile
parking spaces, the direction and flow of traffic, installation of prohibited
areas, landscaped areas, utilities and all other facilities thereof.
<PAGE>
Should Landlord acquire or obtain the use of additional land not shown as
part of the Property on Exhibit A and make the same available for parking or
other Common Area purposes, then the "Operating Expenses" shall also include all
costs and expenses referred to in Section 4.3 which are incurred and paid in
connection with said additional land.
Landlord shall at all times after the Effective Date have the sole and
exclusive control of the Common Area, including, without limitation, the right
to lease space within the Common Area to tenants for the sale of merchandise
and/or services and the right to permit advertising displays, educational
displays and entertainment in the Common Area. Landlord shall also have the
right at any time and from time to time to exclude and restrain any person from
use or occupancy thereof, excepting, however, bona fide customers, patrons and
service suppliers of Tenant and other tenants of Landlord who make use of said
areas in accordance with the rules and regulations established by Landlord from
time to time with respect thereto in accordance with Section 8.4. The rights of
Tenant with respect to the Common Area shall at all times be subject to the
rights of Landlord, the other tenants of Landlord and the other owners of the
Property to use the same in common with Tenant. It shall be the duty of Tenant
to keep all of the Common Area free and clear of any obstructions created or
permitted by Tenant or resulting from Tenant's operation and to permit the use
of any of the Common Area only for normal parking and ingress and egress by the
said customers, patrons and service suppliers to and from the building occupied
by Tenant.
If in the opinion of Landlord unauthorized persons are using any of the
Common Area by reason of the presence of Tenant in the Premises, Tenant, upon
demand of Landlord, shall enforce Landlord's right to exclude or restrain all
such unauthorized persons by appropriate proceedings. Nothing herein shall
affect the rights of Landlord at any time to remove any such unauthorized
persons from the Common Area or to restrain said persons from using any of said
areas.
8.4 Rules and Regulations. Tenant shall abide by the rules and regulations
governing the Property which Landlord, in its sole discretion, may establish
and/or amend from time to time for the proper and efficient operation and/or
maintenance of the Common Area (including any enclosed mall or parking
structure) or any portion thereof. Such rules and regulations may specify,
without limitation, when the Common Area (including any enclosed mall or parking
structure) shall be open for use and when and where Tenant and its employees may
park their vehicles in the Common Area.
8.5 Employee Parking. Employees of Tenant shall not park their automobiles
in those automobile parking areas of the Common Area which Landlord may from
time to time designate for use by patrons of the Property. At all times Landlord
shall have the right to designate, or change the designation of, the particular
parking area to be used by any or all of such employees. Tenant and its
employees shall park their cars only in those portions of the Common Area, if
any, designated for that purpose by Landlord. Tenant shall furnish Landlord with
the automobile license numbers of Tenant and Tenant's employees within fifteen
(15) days after taking possession of the Premises and shall thereafter notify
Landlord of any changes thereto within five (5) days after such change occurs.
If Tenant or its employees fail to park their cars in the designated parking
areas, Landlord may charge Tenant Ten Dollars ($10.00) per car per day for each
day or partial day that any car is parked in any area other than those
designated; provided, however, Landlord agrees to give Tenant written notice of
the first violation of this provision. Tenant shall have two (2) days thereafter
within which to correct the violation; if said violation is not corrected within
said two-day period, then the aforesaid fine shall be levied and Tenant shall
pay the same. After notice of such first violation, no prior notice of any
subsequent violation shall be required. All amounts due under provisions of this
paragraph shall be payable by Tenant within ten (10) days after demand by
Landlord.
<PAGE>
8.6 Security Officers. Tenant acknowledges that if Landlord provides
security officers for the Common Area, Landlord does not represent, guarantee or
assume responsibility that Tenant will be secure from any claim, demand,
investigation, proceeding, action, suit, judgment, award, fine, lien, loss,
damage, expense, liability, charge or cost of any kind or character (including
attorney fees and court costs) relating to such security officers. Landlord
shall have no obligation to hire, maintain or provide such services, which may
be withdrawn or changed at any time with or without notice to Tenant or any
other person and without liability to Landlord.
8.7 Validated Parking. Tenant specifically acknowledges and agrees that
Landlord may, in Landlord's sole discretion. establish and amend from time to
time a parking validation program for the parking lot and any parking structures
on the Property (collectively "parking area"). Said parking validation program
may include such rules and regulations as established by Landlord. It is
expressly understood and agreed that the operator(s) of the parking areas shall,
in said operator's sole and absolute discretion, determine the amount of parking
fees and further shall have no obligation whatsoever to provide a special fee
structure for Tenant's employees or to provide parking for Tenant's employees.
ARTICLE 9
MECHANICS' LIENS
9.1 Mechanics' Liens. Tenant agrees that it will pay, or cause to be paid,
all costs for work done by it, or caused to be done by it, on the Premises, and
Tenant will keep the Premises free and clear of all mechanics' liens and other
such liens on account of work done for Tenant or persons claiming under Tenant.
Tenant agrees to and shall indemnify, defend and hold Landlord harmless from any
and all liability, loss, damage, costs, attorney fees and all other expenses on
account of claims of lien of laborers or materialmen or others for work
performed or materials or supplies furnished for Tenant or persons claiming
under Tenant.
9.2 Contest of Lien. If Tenant shall desire to contest any claim of such
mechanics' lien, it shall furnish Landlord adequate security for the value or in
the amount of the claim, plus estimated costs and interest, or a bond of a
responsible corporate surety in such amount, conditioned on the discharge of the
lien. If a final judgment establishing the validity or existence of a lien for
any amount is entered, Tenant shall immediately pay and satisfy the same.
9.3 Right to Cure. If Tenant shall be in default in paying any charge for
which a mechanics' lien claim and suit to foreclose the lien have been filed,
and shall not have given Landlord security to protect the property and Landlord
from liability for such claim of lien, Landlord may (but shall not be so
required to) pay said claim and any costs, and the amount so paid, together with
reasonable attorney fees incurred in connection therewith, shall be immediately
due and owing from Tenant to Landlord, and Tenant shall pay the same to Landlord
with interest at the rate specified in Section 14.7 from the dates of Landlord's
payments.
9.4 Notice of Lien. Should any claim of lien be filed against the Premises
or any action against the Premises or any action affecting the title to such
property be commenced, the party receiving notice of such lien or action shall
forthwith give the other party written notice thereof.
9.5 Notice of Nonresponsibility. Landlord or its representatives shall have
the right to go upon and inspect the Premises at all reasonable times and shall
have the right to post and keep posted thereon notices of nonresponsibility or
such other notices which Landlord may deem to be proper for the protection of
Landlord's interest in the Premises. Tenant shall, before the commencement of
any work which might result in any such lien, give to Landlord written notice of
its intention to do so in sufficient time to enable posting of such notices.
<PAGE>
ARTICLE 10
TENANT'S RIGHT TO MAKE IMPROVEMENTS;
PERSONAL PROPERTY; AND FIXTURES
10.1 Improvements. At Tenant's own expense, after giving Landlord notice in
writing of its intentions to do so and without limiting Tenant's right to remove
and/or replace Personal Property in accordance with Article 10, Section 10.3,
Tenant may, from time to time after completion of all work in accordance with
Exhibit C, make such permanent and nonstructural alterations, replacements,
additions, changes, and/or improvements (collectively referred to in this Lease
as "Improvements") to Tenant's Work previously completed in accordance with
Exhibit C or to prior Improvements as Tenant may find necessary or convenient
for its purposes, provided that the value of the Premises is not thereby
diminished; provided, however, no Improvements costing in excess of Twenty-Five
Hundred Dollars ($2,500.00) may be made without obtaining the prior written
approval of Landlord. In addition, no Improvements shall be made to any
storefront, mechanical, electrical or plumbing systems, the exterior walls or
roof of the Premises, nor shall Tenant erect any mezzanine or increase the size
of same, if one be initially constructed, without obtaining the prior written
approval of Landlord. In no event shall Tenant make or cause to be made any
penetration into or through the roof or floor of the Premises without obtaining
the prior written approval of Landlord. Tenant agrees to reimburse Landlord for
all costs and expenses (including, without limitation, any architect and/or
engineer fees) incurred by Landlord in approving or disapproving Tenant's plans
for Improvements. Tenant shall be liable for and shall indemnify and defend
Landlord and other tenants at the Property from any claim, demand, lien, loss,
damage or expense, including reasonable attorney fees and costs, arising from
any Improvements permitted under this Article 10. Within thirty (30) days after
completing its Improvements, Tenant shall certify to Landlord in writing
Tenant's actual cost of constructing its Improvements.
10.2 Construction Requirements. All Improvements to be made to the Premises
which require the approval of Landlord shall be made under the supervision of a
competent architect or licensed structural engineer and made in accordance with
plans and specifications prepared in conformity with the structural, mechanical,
electrical, design and quality standards, requirements and/or criteria specified
in Exhibit C and approved in writing by Landlord before commencement of the
work. In the event that Tenant retains a contractor to construct its
Improvements, Tenant shall comply with the provisions of Exhibit C, "Tenant's
Use of a Contractor Other than Landlord's Contractor". All work with respect to
any Improvements must be done in a good and workmanlike manner and diligently
prosecuted to completion to the end that the Premises shall at all times be a
complete unit except during the period of work. Upon completion of such work,
Tenant shall have recorded in the office of the County Recorder where the
Property is located a Notice of Completion, as required or permitted by law, and
Tenant shall deliver to Landlord, within ten (10) days after completion of said
work, a copy of the building permit with respect thereto. Upon the expiration or
earlier termination of this Lease, such Improvements shall not be removed by
Tenant but shall become a part of the Premises. Any such Improvements shall be
performed and done strictly in accordance with the laws and ordinances relating
thereto. In performing the work of any such Improvements, Tenant shall have the
work performed in such a manner as not to obstruct access to the premises of any
other tenant in the Property.
10.3 Personal Property. All of Tenant's trade fixtures, furniture,
furnishings, signs and other personal property not permanently affixed to the
Premises (collectively referred to as "Personal Property" in this Lease) must be
new when installed in, or attached to, the Premises by Tenant. Subject to the
provisions of Section 10.5, any such Personal Property shall remain the property
of Tenant. Provided Tenant is not in default under the terms of this Lease,
Tenant shall have the right to remove any or all of its Personal Property which
it may have stored or installed in the Premises, including, without limitation,
counters, shelving, showcases, mirrors and other movable Personal Property, so
long as Tenant shall immediately replace the same with similar Personal Property
of comparable or better quality, except Tenant shall not be obligated to replace
such Personal Property at the expiration or earlier termination of this Lease.
Tenant shall, at its expense, immediately repair any damage occasioned to the
Premises by reason of the removal of any such Personal Property.
<PAGE>
10.4 Fixtures. Tenant's Improvements (as described in Section 10.1) and
Tenant's Work (as described in Exhibit C) are collectively referred to in this
Lease as "Fixtures" and shall become the property of Landlord upon expiration or
earlier termination of this Lease; provided, however, that if Landlord so
requests, Tenant shall remove the same prior to the expiration or earlier
termination of the Lease and shall repair all damage to the Premises or the
Property caused by such removal. Tenant shall not, however, be required to
remove pipes and wires concealed in floors, walls or ceilings, provided that
Tenant properly cuts and caps the same, and seals them off in a safe, lawful and
workmanlike manner, in accordance with Landlord's reasonable requirements and
all applicable building codes. If Tenant does not remove any Fixtures when
requested by Landlord to do so, Landlord may remove the same and repair all
damage caused thereby, and Tenant shall pay to Landlord the cost of such removal
and repair immediately upon demand therefor by Landlord, plus fifteen percent
(15%) of the cost of such removal to reimburse Landlord for its administrative
expense. Tenant's obligation to observe or perform this covenant shall survive
the expiration or termination of this Lease.
10.5 Landlord's Security Interest. [Intentionally Deleted.]
10.6 Personal Property Taxes. Tenant shall pay before delinquency all taxes
(including sales and use taxes), assessments, license fees and public charges
levied, assessed or imposed upon its business operation as well as upon its
merchandise, Fixtures and Personal Property. In the event any such items of
property are assessed with property of Landlord, then, and in such event, such
assessment shall be divided between Landlord and Tenant to the extent that
Tenant shall pay only its equitable portion of such assessment.
10.7 Signs and Lighting. Tenant may, at its expense, erect on the Premises
such signs and provide such exterior lighting as shall be provided for in the
plans and specifications for the improvements mutually approved under and
contained in Exhibit F. The Tenant shall not thereafter erect or maintain any
other or additional signs or any other exterior lighting on the Premises without
the prior written approval and consent of Landlord. In the event that Landlord
develops new sign criteria in connection with a remodel of the Property , Tenant
shall, within sixty (60) days after receipt of written notice of new sign
criteria, at Tenant's expense, replace existing signs with new signs which
conform to the new criteria.
ARTICLE 11
REPAIRS; MAINTENANCE
11.1 Tenant's Obligations. Tenant agrees at all times from and after
delivery of the Premises, at its own cost and expense, to repair, maintain in
good and tenantable condition and replace, as necessary, the Premises and every
part thereof (except that portion of Premises to be maintained by Landlord under
Section 11.2), including, without limitation, the following: all meters, pipes,
conduits, equipment, components and facilities (whether or not within the
Premises) that supply the Premises exclusively with Utilities, specifically
including the repair and replacement of the HVAC system, but excluding the
maintenance of the HVAC system (except as the appropriate utility company has
assumed these duties) all Fixtures and other equipment installed in the
Premises; all exterior and interior glass installed in the Premises; all signs,
lock and closing devices; all interior window sashes, casements and frames;
doors and door frames (except for the painting of the exterior surfaces
thereof); floor coverings; and all such items of repair, maintenance,
alteration, improvement or reconstruction as may be required at any time or from
time to time by a governmental agency having jurisdiction thereof. All
replacements made by Tenant in accordance with this Section 11.1 shall be of
like size, kind and quality to the items replaced and shall be subject to
Landlord's approval. Upon surrender of the Premises, Tenant shall deliver the
Premises to Landlord in good order, condition and state of repair, but shall not
be responsible for damages resulting from ordinary wear and tear, insured
casualty losses covered by Section 18.4 of this Agreement, or any items of
repair covered by Section 11.2.
<PAGE>
11.2 Landlord's Obligations. Subject to Sections 4.3 and 11.1, Landlord
shall repair, maintain in good and tenantable condition and replace, as
necessary, the roof, exterior walls, structural parts of the Premises (including
the structural floor) and all meters, pipes, conduits, equipment, components and
facilities that supply the Premises with Utilities on a nonexclusive basis
(except as the appropriate utility company has assumed these duties); in
addition, Landlord shall maintain (but shall not be required to repair or
replace) the HVAC system provided, however, that Landlord shall have the option,
but shall not be required, to make repairs necessitated by reason of the
negligence of Tenant or anyone claiming under Tenant, or by reason of
Improvements made by Tenant or anyone claiming under Tenant, or by reason of
breaking and entering of the Premises. In the event that Landlord makes such
repairs necessitated by the negligence of Tenant or anyone claiming under
Tenant, Tenant shall pay as Additional Rent Landlord's costs plus fifteen
percent (15%) of such costs for overhead, within fifteen (15) days after
presentation of a statement therefor. As used in this Article 11, "exterior
walls" shall include exterior surfaces of storefronts, window sashes, casements
and frames. Exterior walls shall specifically exclude exterior and interior
glass. It is understood and agreed that Landlord shall be under no obligation to
repair, replace or maintain the Premises or the mechanical equipment exclusively
serving the Premises at any time, except as this Lease expressly provides.
Notwithstanding anything to the contrary contained in this Lease, Landlord shall
not in any way be liable to Tenant for failure to make repairs as herein
specifically required of it unless Tenant has previously notified Landlord, in
writing, of the need for such repairs and Landlord has failed to commence and
complete said repairs within a reasonable period of time following receipt of
Tenant's written notification.
11.3 Tenant's Failure to Maintain. If Tenant refuses or neglects to repair,
replace, or maintain the Premises, or any part thereof, in a manner reasonably
satisfactory to Landlord, Landlord shall have the right, upon giving Tenant
reasonable written notice of its election to do so, to make such repairs or
perform such maintenance on behalf of and for the account of Tenant. In such
event, Tenant shall pay the cost of such work as Additional Rent promptly upon
receipt of an invoice therefor.
11.4 Right to Enter. Tenant agrees to permit Landlord, or its authorized
representatives, to enter the Premises at all times during usual business hours
to inspect the same, to perform its duties under Section 11.2, and to perform
any work therein (a) that may be necessary to comply with any laws, ordinances,
rules or regulations of any public authority, the Insurance Service Office or
any similar body, (b) that Landlord may deem necessary to prevent waste or
deterioration in connection with the Premises if Tenant does not make, or cause
to be made, such repairs or perform, or cause to be performed, such work
promptly after receipt of written demand from Landlord, and (c) that Landlord
may deem necessary in connection with the expansion, reduction, remodeling or
renovation of any portion of the Property. Nothing herein contained shall imply
any duty on the part of Landlord to do any such work which, under any provision
of this Lease, Tenant may be required to do, nor shall Landlord's performance of
any repairs on behalf of Tenant constitute a waiver of Tenant's default in
failing to do the same. No exercise by Landlord of any rights herein reserved
shall entitle Tenant to any compensation, damages or abatement of rent from
Landlord for any injury or inconvenience occasioned thereby. If Landlord makes
or causes any such repairs to be made or performed, as provided for herein,
Tenant shall pay the cost thereof to Landlord, as Additional Rent, promptly upon
receipt of an invoice therefor, except for that work as provided in subparagraph
(c) of this Section 11.4 which shall be at the sole cost and expense of
Landlord.
<PAGE>
ARTICLE 12
INDEMNITY AND INSURANCE
12.1 Indemnity by Tenant. Landlord shall not be liable for, and Tenant
shall indemnify, hold harmless and defend Landlord from any claim, demand,
liability, judgment, award, fine, mechanics' lien or other lien, loss, damage,
expense, charge or cost of any kind or character (including actual attorney fees
and court costs) arising directly or indirectly from (a) any labor dispute
involving Tenant or its contractors and agents or (b) the construction, repair,
alteration, improvement, use, occupancy or enjoyment of the Premises or any
other portion of the Property by Tenant, Tenant's assignees and/or subtenants
and their respective contractors, agents, licensees or invitees (hereinafter
referred to as "Claims"), including without limitation, Claims caused by the
sole or concurrent negligent act or omission, whether active or passive, of
Landlord or its agents; provided, however, Tenant shall have no obligation to
defend or indemnify Landlord from Claims made by Tenant which are covered by the
public liability insurance Landlord is required to carry pursuant to Section
12.2, or caused by the willful or criminal act of Landlord or its agents.
12.2 Landlord's Insurance Obligation. At all times from and after the
Effective Date, Landlord shall maintain in effect a policy or policies of
insurance providing protection for the following liabilities and/or risks: (a)
public liability for bodily injury and property damage arising from Landlord's
ownership and/or operation of the Property with coverage limits at least equal
to those Tenant is required to maintain in accordance with Section 12.3 (a), and
(b) any peril, in Landlord's sole discretion, insurable under an All Risk policy
covering the building of which the Premises are a part, exclusive of any item
insured by Tenant pursuant to Section 12.3 (e), in an amount which is the
greater of eighty percent (80%) of its full replacement cost (exclusive of the
cost of excavations, foundations and footings) or such amount as Landlord's
mortgagee or beneficiary may require Landlord to maintain. Landlord's obligation
to carry the All Risk insurance provided for in this Section 12.2 may be
satisfied by inclusion of said building within the coverage of any so-called
blanket policy or policies of insurance carried and maintained by Landlord,
provided that the coverage afforded will not be reduced or diminished by reason
of the use of such blanket policies of insurance. Landlord may, at Landlord's
sole discretion, maintain during the Lease Term, at Tenant's expense, a policy
of rental income insurance covering a period of one year, with loss payable to
Landlord in an amount equal to one year's Minimum Annual Rental plus estimated
property taxes, insurance premiums, and Operating Expenses payable by Tenant.
12.3 Tenant's Insurance Obligation. Tenant further covenants and agrees
that from and after the earlier of substantial completion of the Premises or
Tenant's entry onto the Premises with Landlord's consent, Tenant will carry and
maintain, at its sole cost and expense, the following types of insurance, in the
amounts specified and in the form hereinafter provided for:
(a) PUBLIC LIABILITY. Comprehensive general liability insurance for bodily
injury and property damage with coverage limits of not less than Two Million
Dollars ($2,000,000) combined each occurrence and in the aggregate insuring
against any and all liability of the insured with respect to said Premises or
arising out of the maintenance, use or occupancy thereof; if Tenant is permitted
to sell alcoholic beverages pursuant to the provisions of this Lease, such
liability insurance shall specifically include liquor liability insurance
covering consumption of alcoholic beverages by customers of Tenant. All such
bodily injury liability insurance and property damage liability insurance shall
specifically insure Tenant's performance of the indemnity provisions of this
Lease, but the amount of such insurance shall not limit Tenant's liability nor
relieve Tenant of any obligation hereunder.
(b) WORKER'S COMPENSATION. Statutory amount of workers' compensation
insurance required by the State in which the Property is located for the benefit
of Tenant's employees.
(c) PLATE GLASS. Insurance covering full replacement cost of all plate
glass on the Premises. Tenant shall have the option either to insure
commercially or to self-insure the risk.
<PAGE>
(d) EQUIPMENT. Machinery insurance on all air conditioning equipment and
systems exclusively serving the Premises. If said equipment and the damage it
may cause are not covered by Tenant's "All Risk" insurance (as specified in
subparagraph (e), below), then the insurance specified in this subparagraph (d)
shall be in an amount not less than One Hundred Thousand Dollars ($100,000). If
Tenant requires boilers or other pressure vessels to serve the Premises, they
shall also be insured in the amount required by this subparagraph (d).
(e) TENANT'S IMPROVEMENTS. Insurance covering Tenant's (1) merchandise, (2)
"Fixtures" as defined in Article 10, Section 10.4), including the items
specified as "Tenant's Work" in Exhibit C, (3) "Improvements" (as defined in
Article 10, Section 10.1), permitted under Article 10, and (4) "Personal
Property" (as defined in Article 10, Section 10.3) from time to time, in, on or
upon the Premises, in an amount not less than ninety percent (90%) of their full
replacement cost from time to time after the Effective Date, providing
protection against any peril included within the classification "All Risk,"
including, without limitation, coverage for sprinkler and flood damage and
theft. Any policy proceeds shall be used for the repair or replacement of the
property damaged or destroyed unless this Lease shall cease and terminate under
the provisions of Article 18.
All policies of insurance provided for herein shall be issued by insurance
companies with a general policyholder's rating of not less than A and a
financial rating of not less than Class X as rated in the most current available
"Best's" Insurance Reports, qualified to do business in the State where the
Property is located. All such policies shall be issued in the name of the
Landlord, Landlord's property manager, Tenant, and Landlord's mortgagees or
beneficiaries, which policies shall be for the mutual and joint benefit and
protection of Landlord, Landlord's property manager, Tenant and said mortgagees
or beneficiaries. Executed copies of such policies of insurance or certificates
thereof shall be delivered to Landlord within ten (10) days after the earlier of
delivery of the Premises, or Tenant's entry onto the Premises with Landlord's
consent, and thereafter copies of renewal policies or certificates thereof shall
be delivered to Landlord within thirty (30) days prior to the expiration of the
term of each such policy. As often as any such policy shall expire or terminate,
renewal or additional policies shall be procured and maintained by Tenant in
like manner and to like extent. All policies of insurance delivered to Landlord
must contain a provision that the company writing said policy will give to
Landlord twenty (20) days' notice in writing in advance of any cancellation,
lapse, reduction or other adverse change respecting such insurance. All public
liability, property damage and other casualty policies shall be written as
primary policies, not contributing with or secondary to coverage which Landlord
may carry.
Tenant's obligations to carry the insurance provided for above may be
satisfied by inclusion of the Premises within the coverage of a so-called
blanket policy or policies of insurance carried and maintained by Tenant;
provided, however, that Landlord and Landlord's mortgagees or beneficiaries
shall be named as additional insureds thereunder as their interests may appear
and that the coverage afforded Landlord will not be reduced or diminished by
reason of the use of such blanket policies of insurance, and provided further
that the requirements set forth herein are otherwise satisfied. Tenant agrees to
permit Landlord at all reasonable times to inspect any policies of insurance of
Tenant which Tenant has not delivered to Landlord.
12.4 Mutual Waivers of Rights. Landlord (for itself and its insurer, and to
the extent and on condition that Tenant carries and maintains the insurance at
all times required under Section 12.3) hereby waives any rights, including
rights of subrogation, and Tenant (for itself and its insurer, and to the extent
and on the condition that Landlord carries and maintains the insurance at all
times required under Section 12.2) hereby waives any rights, including rights of
subrogation, each may have against the other, and Tenant (for itself and its
insurer) hereby waives any rights, including rights of subrogation, it may have
against any of the parties to the CC&R's referred to in Article 7 and against
other tenants of the Property (provided such other tenants have waived such
rights against Tenant) for compensation of any loss or damage occasioned to
<PAGE>
Landlord or Tenant, as the case may be, with regard to their respective
property, the Premises, its contents or portions of the Property, arising from
any risk generally covered by All Risk insurance Landlord and Tenant shall carry
and maintain under Section 12.2 and 12.3. Each party shall cause each insurance
policy obtained by it to provide that the insurer waives all right of recovery
by way of subrogation against the other party in connection with any damage
covered by such policy. The foregoing waivers shall be operative only so long as
available in the State where the Property is located and so long as no policy is
invalidated thereby.
12.5 Insurance Use Restrictions. Tenant agrees that it will not carry any
stock or goods or do anything in or about the Premises which will in any way
tend to increase the insurance rates upon the building of which the Premises are
a part. Tenant agrees to pay to Landlord forthwith upon demand the amount of any
increase in premiums charged to Landlord for insurance carried by Landlord
pursuant to Section 12.2, which increase results from Tenant's violation of the
foregoing restrictions, irrespective of whether Landlord shall have consented to
Tenant's act. If Tenant installs any electrical equipment which overloads the
electrical lines, Tenant shall at its own expense make all changes to its
Premises and install any fire extinguishing equipment and/or other safeguards
that Landlord's insurance underwriters or applicable fire, safety and building
codes and regulations may require. Nothing herein contained shall be deemed to
constitute Landlord's consent to such overloading.
ARTICLE 13
OCCUPANCY TRANSACTIONS
13.1 Definitions. As used in this Article 13, the following definitions
shall apply:
(a) "Transfer" means any voluntary, unconditional and present (i)
assignment of some or all of Tenant's interest, rights and duties in the Lease
and the Premises, including Tenant's right to use, occupy and possess the
Premises, or (ii) sublease of Tenant's right to use, occupy and possess the
Premises, in whole or in part;
(b) "Encumbrance" means any conditional, contingent or deferred assignment,
sublease or conveyance voluntarily made by Tenant of some or all of Tenant's
interest, rights or duties in the Lease or the Premises, including Tenant's
right to use, occupy or possess the Premises, in whole or in part, including,
without limitation, any mortgage, deed of trust, pledge, hypothecation, lien,
franchise, license, concession or other security arrangement;
(c) "Change of Control" means the transfer by sale, assignment, death,
incompetency, mortgage, deed of trust, trust, operation of law, or otherwise of
any shares, voting rights or ownership interests which will result in a change
in the identity of the person or persons exercising, or who may exercise,
effective control of Tenant, unless such change results from the trading of
shares listed on a recognized public stock exchange and such trading is not for
the purpose of acquiring effective control of Tenant. If Tenant is a private
corporation whose stock becomes publicly held, the transfers of such stock from
private to public ownership shall not be deemed a Change of Control;
(d) "Occupancy Transaction" means any Transfer, Encumbrance, Change of
Control, or other arrangement whereby the identity of the person or persons
using, occupying or possessing the Premises changes or may change, whether such
change be of an immediate, deferred, conditional, exclusive, nonexclusive,
permanent or temporary nature; and
(e) "Transferee" means the proposed assignee, sublessee, mortgagee,
beneficiary, pledgee or other recipient of Tenant's interest, rights or duties
in this Lease or the Premises in an Occupancy Transaction.
<PAGE>
13.2 Restrictions.
(a) Tenant shall not make or consent to any Encumbrance without the prior
written consent of Landlord, which Landlord may grant or withhold in its sole
and absolute discretion.
(b) Tenant shall not enter into, or consent to, an Occupancy Transaction,
other than an Encumbrance, without first procuring Landlord's written consent,
which Landlord shall not withhold unreasonably; provided, however, that by way
of example and without limitation, the parties agree it shall be reasonable for
Landlord to withhold its consent if any of the following situations exist or may
exist:
(i) The Transferee's contemplated use of the Premises following the
proposed Occupancy Transaction conflicts with the "Use of Premises" portion of
Exhibit B;
(ii) In Landlord's reasonable business judgment, the Transferee lacks
sufficient business reputation or experience to operate a successful business of
the type and quality permitted under the Lease;
(iii) In Landlord's reasonable business judgment, the present net worth of
the Transferee is less than the greater of (i) the net worth of Tenant, plus the
net worth of the Guarantor, if any, at the Effective Date or (ii) the net worth
of Tenant, plus the net worth of the Guarantor, if any at the date of Tenant's
request for consent;
(iv) In Landlord's reasonable business judgment, the Percentage Rental
under Article 4, Section 4.5, that Landlord reasonably anticipates receiving
from the Transferee is less than that which Landlord has received from Tenant;
or
(v) The proposed Occupancy Transaction would breach any covenant of
Landlord respecting radius, location, use or exclusivity in any other lease,
financing agreement, or other agreement relating to the Property.
13.3 Condition Precedent. Tenant shall not have the right or power to
request or enter into an Occupancy Transaction if Tenant shall be in default of
Tenant's obligations under the provisions of any other lease of real property in
any property owned (in whole or in part) or managed by Landlord or any partner
of Landlord, including any parent, subsidiary, affiliate or
successor-in-interest thereof.
13.4 Procedures. Should Tenant desire to enter into an Occupancy
Transaction, Tenant shall give notice thereof to Landlord by requesting in
writing Landlord's consent to such transaction at least sixty (60) days before
the effective date of any such transaction and shall provide Landlord with the
following:
(a) The full particulars of the proposed transaction, including its nature,
effective date, terms and conditions, and copies of any offers, draft
agreements, subleases, letters of commitment or intent, and other documents
pertaining to such proposed transaction;
(b) A description of the identity, net worth and previous business
experience of the Transferee, including, without limitation, copies of
Transferee's latest income, balance sheet and change-of-financial-position
statements (with accompanying notes and disclosures of all material changes
thereto) in audited form, if available, and certified as accurate by the
Transferee;
(c) Any further information relevant to the transaction which Landlord
shall have requested within fifteen (15) days after receipt of Tenant's request
for consent; and
<PAGE>
(d) A statement that Tenant intends to consummate the transaction if
Landlord consents thereto. Should Tenant fail to make said written request in
accordance with the requirements set forth in this Section 13.4, Tenant's
failure shall constitute a material breach of this Lease which Landlord, in its
sole discretion, may deem curable in the following manner. Within ten (10) days
of Landlord's written demand, Tenant shall make said written request in
accordance with subparagraphs (a), (b), (c), and (d) above and shall pay
Landlord the sum of three percent (3%) of the then Minimum Annual Rental as
liquidated damages for Tenant's breach. The parties agree that said sum
represents a reasonable estimate of Landlord's damages sustained by reason of
Tenant's breach, which damages are extremely difficult or impracticable to fix.
Landlord's acceptance of said sum together with Tenant's late notice shall cure
Tenant's breach of the notice requirement of this Section 13.4 but shall not
waive Tenant's default, if any, with respect to any other provision of this
Article 13. Notwithstanding the foregoing, any request for, or entry into, an
Occupancy Transaction which has not met with the notice provisions set forth in
this Section 13.4 shall be of no force or effect until Landlord's consent has
been obtained in accordance with this Article 13.
Within thirty (30) days after receipt of Tenant's request for consent,
Landlord may respond as follows:
(e) Consent to the Occupancy Transaction, subject to Section 13.6 below;
(f) Refuse to consent to the Occupancy Transaction; or
(g) Refuse to consent to the Occupancy Transaction and, at any time
thereafter, notify Tenant that Landlord shall terminate this Lease on ten (10)
days' written notice to Tenant unless Tenant has rescinded its request for
consent within five (5) days of receipt of Landlord's notice of termination.
13.5 Documentation and Expenses. Each Occupancy Transaction to which
Landlord has consented shall be evidenced by an instrument made in such written
form as is satisfactory to Landlord and executed by Tenant and Transferee. By
such instrument, Transferee shall assume and promise to perform the terms,
covenants and conditions of this Lease which are obligations of Tenant. Unless
expressly released in writing by Landlord, Tenant shall remain fully liable to
perform its duties under the Lease following the Occupancy Transaction. Tenant
shall, on demand of Landlord, reimburse Landlord for Landlord's reasonable
costs, including legal fees, incurred in obtaining advice and preparing
documentation for each Occupancy Transaction to which Landlord has consented.
13.6 Consideration to Landlord.
(a) In the event Landlord shall consent to an Occupancy Transaction, the
Minimum Annual Rental specified in Article 1 shall be increased on the effective
date of such transaction to the highest of:
(i) The minimum or base rental payable by the Transferee to the Tenant;
(ii) An amount equal to the total of the Minimum Annual Rental plus
Percentage Rental required to be paid by Tenant pursuant to this Lease during
the twelve (12) month period immediately preceding such transaction;
(iii) The Minimum Annual Rental specified in Article 1 for the first year
of the Lease Term increased in accordance with Section 4.2 hereof (with no
minimum or maximum increase as may be provided elsewhere) using the Rent Start
Date as the Commencement Date, and the effective date of the Occupancy
Transaction as the Adjustment Date; or
(iv) Such Minimum Annual Rental as Landlord shall determine (on a pro rata
square footage basis) is the prevailing "market rent" for the Premises by
averaging the Minimum Annual Rentals obtained by Landlord from the three (3)
most recent comparable tenants to lease space in the Property.
In no event shall the Minimum Annual Rental, as adjusted, be less than the
Minimum Annual Rental specified in Article 1.
<PAGE>
(b) In the event Landlord consents to an Occupancy Transaction, Tenant
shall pay Landlord any and all consideration received by Tenant in such
transaction (other than for the purchase of Tenant's Personal Property as
defined in Article 10, Section 10.3) to the extent that such consideration
exceeds the unamortized book value of Tenant's Fixtures (as defined in Article
10, Section 10.4) which Tenant paid for and intends to convey to Transferee,
depreciated on a straight-line basis over the Lease Term.
(c) Landlord and Tenant agree that Tenant's payment of the adjusted Minimum
Annual Rental and the consideration set forth in Sections 13.6 (a) and (b) shall
result from the occurrence of a permitted Occupancy Transaction, which is a
condition subsequent to the execution of this Lease, and that said payment shall
not be a condition precedent to Landlord's agreement to consent to said
Occupancy Transaction.
13.7 Nullity. Any purported Occupancy Transaction consummated in violation
of the provisions of this Article 13 shall be null and void and of no force or
effect.
ARTICLE 14
DEFAULTS BY TENANT; REMEDIES
14.1 Events of Default. The occurrence of any of the following shall
constitute a default by Tenant and a breach of this Lease:
(a) Failing or refusing to pay any amount of Minimum Annual Rental or
Additional Rent when due in accordance with the provisions of this Lease;
(b) Failing or refusing to occupy and operate the Premises in accordance
with the provisions of this Lease;
(c) Failing or refusing to perform fully and promptly any covenant or
condition of this Lease, other than those specified in subparagraphs (a) and (b)
above, the breach of which Tenant is capable of curing after reasonable notice
from Landlord; or
(d) Maintaining, committing or permitting on the Premises waste, a
nuisance, or use of the Premises for an unlawful purpose; entering into an
Occupancy Transaction contrary to the provisions of Article 13; or understating
Gross Sales by more than six percent (6%), as set forth in Article 5, Section
5.1; failing to remain open for business on any occasion during a given year of
the Lease Term in which Tenant has received three (3) or more notices pursuant
to subparagraph (b) of Section 14.2; and committing any other breach of the
Lease which is not capable of cure.
14.2 Notices. Following the occurrence of any of the defaults specified in
subparagraphs (a), (b) and (c) of Section 14.1, Landlord shall give Tenant, and
any subtenant, a written notice specifying the nature of the default and the
provisions of this Lease breached and demanding that Tenant, and any subtenant,
either fully cure each such default within the time period specified in the
correspondingly lettered subparagraphs below or quit the Premises and surrender
the same to Landlord:
(a) For nonpayment of Minimum Annual Rental or Additional Rent, five (5)
days;
(b) For a curable default, a reasonable period not to exceed thirty (30)
days, provided, however, that if such default cannot be cured within said time
period, Tenant shall be deemed to have cured such default if Tenant so notifies
Landlord in writing, commences cure of the default within said time period, and
thereafter diligently and in good faith continues with and actually completes
said cure; and
(c) With regard to those noncurable defaults specified in subparagraph (d)
of Section 14.1, Landlord shall give Tenant, and any subtenant, a written notice
specifying the nature of the default and the provisions of this Lease breached
and Landlord shall have the right to demand in said notice that Tenant quit the
Premises within five (5) days.
<PAGE>
To the extent permitted by applicable State law, the time periods provided
in this Section 14.2 for cure of Tenant's defaults under this Lease or for
surrender of the Premises shall be in lieu of, and not in addition to, any
similar time periods described by applicable State law as a condition precedent
to the commencement of legal action against Tenant for possession of the
Premises.
14.3 Landlord's Rights and Remedies. Should Tenant fail to cure within the
time periods specified in Section 14.2 any default specified in subparagraph
(a), (b) or (c) of Section 14.1, or fail to quit the Premises in accordance with
subparagraph (c) of Section 14.2 with respect to any default specified in
subparagraph (d) of Section 14.1, Landlord may exercise any of the following
rights without further notice or demand of any kind to Tenant or any other
person, except as required by applicable State law:
(a) The right of Landlord to terminate this Lease and Tenant's right to
possession of the Premises and to reenter the Premises, take possession thereof
and remove all persons therefrom, following which Tenant shall have no further
claim thereon or hereunder;
(b) The right of Landlord, without terminating this Lease and Tenant's
right to possession of the Premises, to reenter the Premises and occupy the
whole or any part thereof for and on account of Tenant and to collect any unpaid
rentals and other charges, which have become payable, or which may thereafter
become payable; or
(c) The right of Landlord, even though it may have reentered the Premises,
in accordance with subparagraph (b) of this Section 14.3, to elect thereafter to
terminate this Lease and Tenant's right to possession of the Premises.
Should Landlord have reentered the Premises under the provisions of
subparagraph (b) of this Section 14.3, Landlord shall not be deemed to have
terminated this Lease, the liability of Tenant to pay rental or other charges
thereafter accruing, or Tenant's liability for damages under any of the
provisions hereof, by any such reentry or by any action, in unlawful detainer or
otherwise, to obtain possession of the Premises, unless Landlord shall have
notified Tenant in writing that it has so elected to terminate this Lease and
Tenant's right to possession. Tenant further covenants that the service by
Landlord of any notice pursuant to the unlawful detainer statutes of the State
where the Property is located and the surrender of possession pursuant to such
notice shall not (unless Landlord elects to the contrary at the time of, or at
any time subsequent to, the serving of such notice and such election is
evidenced by a written notice to Tenant) be deemed to be a termination of this
Lease. In the event of any reentry or taking possession of the Premises as
aforesaid, Landlord shall have the right, but not the obligation, to remove
therefrom all or any part of the merchandise, Fixtures or Personal Property
located therein and to place the same in storage at a public warehouse at the
expense and risk of Tenant. The rights and remedies given to Landlord in this
Section 14.3 shall be additional and supplemental to all other rights or
remedies which Landlord may have under laws in force when the default occurs.
14.4 Landlord's Damages. Should Landlord terminate this Lease and Tenant's
right to possession of the Premises, pursuant to the provisions of subparagraph
(a) or (c) of Section 14.3 or the provisions of Article 17, Section 17.1,
Landlord may recover from Tenant as damages, all of the following:
(a) The worth at the time of award of any unpaid rental that had been
earned at the time of such termination;
(b) The worth at the time of award of the amount by which the unpaid rental
that would have been earned after termination until the time of award exceeds
the amount of such rental loss Tenant proves could have been reasonably avoided;
(c) The worth at the time of award of the amount by which the unpaid rental
for the balance of the Lease Term after the time of award exceeds the amount of
such rental loss that Tenant proves could be reasonably avoided;
<PAGE>
(d) Any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom, including, without limitation, any costs or expense incurred by
Landlord in (i) retaking possession of the Premises, including reasonable
attorney fees therefor, (ii) maintaining or preserving the Premises after such
default, (iii) preparing the Premises for reletting to a new tenant, including
repairs or alterations to the Premises for such reletting, (iv) leasing
commissions, and (v) any other costs necessary or appropriate to relet the
Premises; and
(e) At Landlord's election, such other amounts in addition to or in lieu of
the foregoing as may be permitted from time to time by the laws of the State
where the Property is located.
As used in subparagraphs (a) and (b) of the Section 14.4, the "worth at the
time of award" is computed by allowing interest at the maximum rate allowed by
the usury or similar law, if any, of the State in which the Property is located.
As used in subparagraph (c) of this Section 14.4, "the worth at the time of
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
All rental, other than Minimum Annual Rental shall, for the purposes of
calculating any amount due under the provisions of subparagraph (c) of this
Section 14.4, be computed on the basis of the average monthly amount thereof
accruing during the immediately preceding sixty (60) month period, except that,
if it becomes necessary to compute such rental before such a sixty (60) month
period has occurred, then such rental shall be computed on the basis of the
average monthly amount hereof accruing during such shorter period.
14.5 Fixtures and Personal Property. Without limitation to Landlord's
rights under Article 10, in the event of Tenant's default, all of Tenant's
merchandise, Fixtures and Personal Property shall remain on the Premises and,
continuing during the length of said default, Landlord shall have the right to
take the exclusive possession of same and to use the same free of rent or charge
until all defaults have been cured or, at its option, to require Tenant to
remove same forthwith.
14.6 No Waiver. The waiver by Landlord of any breach of any term, covenant
or condition contained in this Lease shall not be deemed to be a waiver of such
term, covenant or condition of any subsequent breach thereof, or of any other
term, covenant or condition contained in this Lease. Landlord's subsequent
acceptance of partial rental or performance by Tenant shall not be deemed to be
an accord and satisfaction or a waiver of any preceding breach by Tenant of any
term, covenant or condition of this Lease or of any right of Landlord to a
forfeiture of the Lease by reason of such breach, regardless of Landlord's
knowledge of such preceding breach at the time of Landlord's acceptance. No
term, covenant or condition of this Lease shall be deemed to have been waived by
Landlord unless such waiver be in writing and signed by Landlord.
Notwithstanding anything to the contrary contained in this Article 14,
Tenant waives (to the fullest extent permitted under law) any written notice
(other than such notice as this Article 14 specifically requires) which any
statute or law now or hereafter in force prescribes be given Tenant.
14.7 Interest. Any amounts due from Tenant under the provisions of this
Lease which are not paid when due shall bear interest at the rate of two percent
(2%) over the prime rate charged from time to time by Wells Fargo Bank (San
Diego office), but not to exceed the maximum rate which Landlord is permitted by
law to charge.
<PAGE>
ARTICLE 15
DEFAULTS BY LANDLORD; REMEDIES
15.1 Defaults by Landlord. If Landlord shall neglect or fail to perform or
observe any of the terms, covenants, or conditions contained in this Lease on
its part to be performed or observed within thirty (30) days after written
notice of default or, when more than thirty (30) days shall be required because
of the nature of the default, if Landlord shall fail to proceed diligently to
cure such default after written notice thereof, then Landlord shall be liable to
Tenant for any and all damages sustained by Tenant as a result of Landlord's
breach; provided, however, it is expressly understood and agreed that (a) any
money judgment resulting from any default or other claim arising under this
Lease shall be satisfied only out of the current rents, issues, profits and
other income Landlord receives from its operation of the Property, net of all
current operating expenses, liabilities, reserves and debt service associated
with said operation ("Net Income" for purposes of this Article 15 only), (b) no
other real, personal or mixed property of Landlord, wherever located, shall be
subject to levy on any such judgment obtained against Landlord, (c) if such Net
Income is insufficient to satisfy such judgment, Tenant will not institute any
further action, suit, claim or demand, in law or in equity, against Landlord for
or on the account of such deficiency, and (d) such neglect or failure shall not
constitute consent by Landlord for Tenant to perform or observe such terms,
covenants or conditions at Landlord's expense. Tenant hereby waives, to the
extent permitted under law, any right to satisfy said money judgment against
Landlord except from Net Income. The term "Landlord" for purposes of this
Article 15 only shall mean any and all partners, whether general or limited, if
any, which comprise Landlord.
15.2 Mortgagee Notice and Right to Cure. If the Premises or any part
thereof are at any time subject to any mortgage or deed of trust and this Lease
or the rentals due from Tenant hereunder are assigned to the mortgagee or trust
deed holder ("Mortgagee"), Tenant agrees to give each Mortgagee, by registered
mail, a copy of any notice of default served upon Landlord, provided that Tenant
has been previously notified in writing of the address of such Mortgagee. Tenant
further agrees that if Landlord fails to cure such default within the time
provided for in this Lease, then the Mortgagee shall have an additional thirty
(30) days within which to cure such default, or if such default cannot
reasonably be cured within that time, then such additional time as may be
necessary if, within said 30-day period, any Mortgagee has commenced and is
diligently pursuing the remedies necessary to cure the default (including but
not limited to commencement of foreclosure proceedings if necessary to affect
such cure), in which event this Lease shall not be terminated while such
remedies are being so diligently pursued. If and when the Mortgagee has made
performance on behalf of Landlord, such default shall be deemed cured.
ARTICLE 16
ABANDONMENT
16.1 Abandonment Prohibited. Tenant shall not vacate or abandon the
Premises at any time during the term of this Lease nor permit the Premises to
remain unoccupied for a period of longer than five (5) consecutive days during
the Term of this Lease. If Tenant shall abandon, vacate or surrender the
Premises, or be dispossessed by process of law, or otherwise, any Personal
Property or Fixtures belonging to Tenant and left on the Premises shall, at the
option of Landlord, be deemed abandoned. In such case, Landlord may dispose of
said Personal Property in any manner provided by the laws of the state in which
the Property is located and is hereby relieved of all liability for doing so.
Further, in the event Landlord desires that Fixtures installed by Tenant be
removed, Landlord shall have the right to remove said Fixtures and to charge
Tenant fifteen percent (15%) of the cost of such removal to reimburse Landlord
for its administrative expense. These provisions shall not apply if the Premises
should be closed and business temporarily discontinued therein on account of
strikes, lockouts, or similar causes beyond the reasonable control of Tenant.
<PAGE>
ARTICLE 17
BANKRUPTCY; INVOLUNTARY TRANSFERS
17.1 Right of Termination. Should any of the following events occur,
Landlord may terminate this Lease and any interest of Tenant therein, effective
with the commencement of the event:
(a) Proceedings are instituted whereby all, or substantially all, of
Tenant's assets are placed in the hands of a receiver, trustee or assignee for
the benefit of Tenant's creditors, and such proceedings continue for at least
thirty (30) days;
(b) Any creditor of Tenant institutes judicial or administrative process to
execute on, attach or otherwise seize any of Tenant's merchandise, Fixtures or
Personal Property, located on the Premises and Tenant fails to discharge, set
aside, exonerate by posting a bond, or otherwise obtain a release of such
property within thirty (30) days;
(c) A petition is filed for an order of relief under the Federal Bankruptcy
Code or for an order or decree of insolvency or reorganization or rearrangement
under any state or federal law, and is not dismissed within thirty (30) days;
(d) Tenant makes a bulk sale of all, or substantially all, of Tenant's
merchandise, Fixtures or Personal Property located on the Premises, except in
accordance with Article 10, Section 10.1, or except in a permitted Occupancy
Transaction under Article 13, and fails to replace the same with similar items
of equal or greater value and utility within three (3) days; or
(e) Tenant's net worth, determined in accordance with generally accepted
accounting principles consistently applied, decreases, at any time during the
Lease Term, below Tenant's net worth as of the date of execution of this Lease;
or
(f) Any of the foregoing events occurs with respect to any Guarantor of
this Lease.
Landlord may require Tenant to deliver periodic financial statements and
other information reasonably required by Landlord in order to verify Tenant's
current net worth. If a court of competent jurisdiction determines that any of
the foregoing events is not a default under this Lease, and a trustee is
appointed to take possession (or if Tenant remains a debtor in possession), and
such trustee or Tenant transfers Tenant's interest hereunder, then Landlord
shall receive, as Additional Rent, the difference between the rent (or other
consideration) paid in connection with such transfer and the rent payable by
Tenant hereunder. Any assignee pursuant to the provisions of any bankruptcy law
shall be deemed without further act to have assumed all of the obligations of
the Tenant hereunder arising on or after the date of such assignment. Any such
assignee shall upon demand execute and deliver to Landlord an instrument
confirming such assumption. This is a lease of real property in a shopping
center within the meaning of Section 365(b)(3) of the Bankruptcy Code, 11 U.S.C.
ss.101 et. seq.
17.2 Request for Information. Within ten (10) days after Landlord's request
therefor, Tenant or Guarantor of this Lease shall provide Landlord and
Landlord's mortgagee or proposed mortgagee, as Landlord shall specify, such
financial, legal and business information concerning any of the events described
in Section 17.1 as Landlord may request.
ARTICLE 18
RECONSTRUCTION
18.1 Insured Casualty. Should the Premises be damaged by fire, or other
perils covered by Landlord's insurance, Landlord shall undertake to make repairs
to the building and improvements and restore the same to substantially the same
condition as they were in immediately preceding such damage or destruction,
provided that Landlord receives sufficient insurance proceeds to pay the cost of
such repairs. If Landlord does not receive sufficient insurance proceeds, then
Landlord may, at its option, elect to make the repairs within a reasonable time.
<PAGE>
Such work shall be done as rapidly as conditions permit. In the event such
damage is so slight as not to interfere substantially with Tenant's use of the
Premises, there shall be no abatement of rent. Should the Tenant's merchandise,
Fixtures, Improvements or Personal Property be damaged by fire, or other perils
covered by Tenant's insurance pursuant to Section 12.3, Tenant shall undertake
to restore such merchandise, Fixtures, Improvements or Personal Property to
substantially the same condition as they were in immediately preceding such
damage or destruction. In the event of a total destruction of the Premises so
that the Premises are rendered unusable, either party shall have the right to
terminate this Lease. If the parties to this Lease cannot agree upon the extent
and amount of such damage or destruction, Landlord shall promptly designate a
certified architect, registered engineer, or licensed building contractor who
shall determine such matters, and the determination of such architect, engineer,
or contractor shall be final and binding upon the parties to this Lease.
18.2 Construction Provisions. In the event of any Reconstruction of the
Premises under this Article 18, Landlord shall, to the extent of available
insurance proceeds, repair or rebuild such building and improvements to
substantially the same condition they were in immediately preceding such damage
or destruction. Tenant shall, within ten (10) days after receipt of written
notice from Landlord, pay the amount of any deductible under the insurance
policy on the Premises into a fund to be used to pay the cost of such repairs.
Where appropriate, Tenant shall pay only Tenant's pro rata share of such
deductible based on the square feet of the Premises (as identified in Section
1.2) compared to the total rentable square footage of the building(s) being
repaired. Tenant shall, to the extent of available insurance proceeds repair or
replace its Personal Property situated upon the Premises which may have been
damaged or destroyed by such cause as may in the opinion of Tenant be necessary
for the resumption by Tenant of its business upon the Premises.
18.3 Abatement of Rent. In the event of Reconstruction as herein provided,
the Minimum Annual Rental set forth in Article 1 shall be abated, to the extent
rental income insurance is received by Landlord, proportionately with the degree
to which Tenant's use of the Premises is impaired, commencing from the date of
destruction and continuing during the period of such Reconstruction and
replacement specified in Section 18.2. Tenant shall continue the operation of
its business on the Premises during any such period to the extent reasonably
practicable from the standpoint of prudent business management, and the
obligation of Tenant to pay Percentage Rental and Additional Rent shall remain
in full force and effect. Tenant shall not be entitled to any compensation or
damages from Landlord for loss of use of the whole or any part of the Premises,
the building of which the Premises are a part, Tenant's Personal Property, or
any inconvenience or annoyance occasioned by such damage, Reconstruction or
replacement. Tenant hereby waives any statutory rights of termination which may
arise by reason of any partial or total destruction of the Premises which
Landlord is obligated to restore or may restore under any of the provisions of
this Lease.
18.4 Release of Liability. Upon any termination of this Lease under any of
the provisions of this Article 18, the parties shall be released thereby without
further obligation to the other party coincident with the surrender of
possession of the Premises to Landlord, except for items which have theretofore
accrued and are then unpaid. In the event of termination, all proceeds for
Tenant's insurance, but excluding proceeds for Tenant's merchandise and Personal
Property, shall be disbursed and paid to Landlord.
18.5 Uninsured Casualty. In the event the Premises are damaged by any
flood, earthquake, act of war, nuclear reaction, nuclear radiation or
radioactive contamination, or any other casualty not covered by Landlord's
insurance, Landlord shall have the election, and shall within ninety (90) days
following the date of such damage give Tenant written notice of Landlord's
election either to commence Reconstruction of the Premises and prosecute the
same diligently to completion, in which event this Lease shall continue in full
force and effect or not to perform such Reconstruction of the Premises, in which
event this Lease shall cease and terminate not later than sixty (60) days after
Landlord's notice of its election to terminate.
<PAGE>
18.6 Major Destruction. Notwithstanding any of the foregoing provisions of
this Article 18, should there be a partial or total destruction of the Property
at any time after the Effective Date, Landlord shall have the right to terminate
this Lease on written notice to Tenant within thirty (30) days after such
destruction.
ARTICLE 19
CONDEMNATION
19.1 Condemnation. If more than twenty-five percent (25%) of the Premises
is taken or sold under such threat, either Landlord or Tenant may terminate this
Lease as of the date that the condemning authority takes possession by delivery
of written notice of such election within twenty (20) days after such party has
been notified of the taking or, in the absence thereof, within twenty (20) days
after the condemning authority shall have taken possession.
19.2 Continuation of Lease After Condemnation. If this Lease is not
terminated by Landlord or Tenant, it shall remain in full force and effect as to
the portion of the Premises remaining; provided, however, that the Minimum
Annual Rental and Tenant's share of Operating Expenses shall be reduced in
proportion to the reduction of the Gross Floor Area of the Premises. In such
event, Landlord shall, at Landlord's expense, restore the Premises to a complete
unit of like quality and character, except as to size, as existed prior to the
date on which the condemning authority took possession; provided, however, that
Landlord's obligation to restore the Premises is limited to the extent of
condemnation proceeds received by Landlord.
19.3 Allocation of Condemnation Award. All awards for the taking of any
part of the Premises or proceeds from the sale made under the threat of the
exercise of the power of eminent domain shall be the property of Landlord,
whether made as compensation for diminution of value of the leasehold estate,
for the taking of the fee, or as severance damage; provided, however, that
Tenant shall be entitled to any award for loss of or damage to Tenant's trade
fixtures, and other removable personal property.
ARTICLE 20
SALE OR MORTGAGE BY LANDLORD
20.1 Sale or Mortgage. From and after the Effective Date, Landlord may at
any time, without the consent of Tenant, sell, purchase, exchange, transfer,
assign, lease or convey Landlord's interest in whole or in part, in the Lease,
the Premises, the realty underlying the Premises and/or any portion of or
interest in the realty or improvements in the Property (collectively referred to
in Article 20 and 21 as "Sale").
20.2 Release on Sale. From and after a Sale, Landlord shall be released
from all liability toward Tenant and Tenant's successors and assigns arising
from this Lease because of any act, occurrence or omission of Landlord occurring
after such Sale, provided Landlord's purchaser or assignee expressly assumes
Landlord's duties and covenants under this Lease.
20.3 Estoppel Certificate. Tenant shall at any time during the term of this
Lease, within five (5) days of written notice from Landlord, execute and deliver
to Landlord a statement in writing, substantially in the form attached hereto as
Exhibit E. Any such statement may be relied upon conclusively by any prospective
purchaser or encumbrancer of the Premises. If Tenant fails to provide such
estoppel certificate within five (5) days after Landlord's request, Tenant shall
be deemed to have approved the contents of any such certificate submitted to
Tenant by Landlord and Landlord is hereby authorized to so certify.
<PAGE>
ARTICLE 21
SUBORDINATION; ATTORNMENT
21.1 Subordination. This lease is junior and subordinate to all ground
leases, mortgages, deeds of trust, and other security instruments now or
hereafter affecting the property of which the Premises are a part and to all
advances made on the security thereof, and to all renewals, modifications,
consolidations, replacements and extensions thereof. If any mortgagee, first
trustee or ground lessor elects to have this Lease prior to the lien of its
mortgage, deed of trust or ground lease, and gives written notice thereof to
Tenant, this Lease shall be deemed prior thereto. Within ten (10) days after the
receipt of a written request from Landlord, from any first mortgagee or first
deed of trust trustee or beneficiary of Landlord, or from any lessor of
Landlord, Tenant will, in writing, subordinate its rights under this Lease to
the lien or security interest of the first mortgage, the first deed of trust
(including all future advances made thereunder, subsequent to the Effective Date
of this Lease), or the interest of any lease in which Landlord is the lessee, as
such may burden the Premises or any building hereafter placed upon the land of
which the Premises are a part.
21.2 Attornment. In the event any proceedings are brought for foreclosure,
or in the event of the exercise of the power of sale under any mortgage or deed
of trust made by Landlord covering the Premises or the expiration or earlier
termination of any ground lease or master lease in which Landlord is the lessee,
Tenant shall attorn to the purchaser upon any such foreclosure or sale or the
lessor of any such lease and recognize such purchaser or lessor as Landlord
under this Lease.
21.3 Subordination of Lease to Certain Agreements with Third Parties. Upon
the request of Landlord, Tenant will subordinate its rights hereunder to any
Declaration of Restrictions and Grant of Easements or any other operation and
reciprocal easement agreement for access and parking between Landlord and the
Owner(s) of any property located within or adjacent to the Property, or as may
be required by governmental authority in connection with development of the
Property, whenever, in the reasonable discretion of Landlord, it is determined
that any such agreement would be beneficial to the use and operation of the
Property.
21.4 Execution of Documents. Tenant, upon request of any party in interest,
shall execute promptly such instruments and certificates to carry out the intent
of this Article 21 as shall be requested by Landlord. Tenant hereby irrevocably
appoints Landlord as attorney-in-fact for Tenant with full power and authority
to execute and deliver in the name of Tenant any such instruments and/or
certificates. If, within ten (10) days after the date of a written request by
Landlord to execute such instruments, Tenant shall not have executed the same,
Landlord may execute the same pursuant to the power of attorney granted in the
preceding sentence.
ARTICLE 22
QUIET ENJOYMENT
22.1 Landlord's Covenant. If Tenant is not in breach under the covenants
made in this Lease, Landlord covenants that Tenant shall have peaceful and quiet
enjoyment of the Premises without hindrance on the part of Landlord. Landlord
will defend Tenant in the peaceful and quiet enjoyment of the Premises against
claims of all persons claiming through or under the Landlord.
ARTICLE 23
HOLDING OVER
23.1 Effect of Holding Over. If Tenant remains in possession of the
Premises after the expiration or earlier termination of the Term of this Lease,
such holding over shall, in the absence of a written agreement to the contrary,
be construed as a tenancy from month to month, terminable on 30 days notice by
either party, subject to all the conditions, provisions and obligations of this
Lease insofar as they are applicable to a month-to-month tenancy. The Minimum
Annual Rental payable during any period of holding over shall be equal to one
<PAGE>
hundred fifty percent (150%) of the Minimum Annual Rental payable during the
period immediately preceding Tenant's holding over, plus Additional Rent
(including Percentage Rental) at the same rates as would have otherwise been
applicable if this Lease had been formally extended on the same terms and
conditions contained herein. Nothing contained in this Article shall be
construed as consent to Tenant's holding over. If Tenant fails to surrender the
Premises upon the expiration or earlier termination of this Lease, Tenant shall
indemnify Landlord against and hold Landlord harmless from any loss of rent that
was payable by any succeeding tenant and any claims, demands, liability, damages
or expenses resulting from such failure, including any claims made by any
succeeding tenant.
ARTICLE 24
LIMITATION OF LIABILITY
24.1 Agreement by Tenant.
(a) In consideration of the execution of this Lease by Landlord, Tenant
agrees in the event of any actual or alleged failure, breach, or default
hereunder by Landlord:
(i) The sole and exclusive remedy shall be against the corporation and its
corporate assets;
(ii) No shareholder, officer or director of Landlord should be sued or
named as a party in any suit or action (except as may be necessary to secure
jurisdiction of the corporation);
(iii) No service of process shall be made against any shareholder, officer
or director of Landlord (except as may be necessary to secure jurisdiction of
the corporation);
(iv) No shareholder, officer or director of Landlord shall be required to
answer or otherwise plead to any service of process;
(v) No judgment will be taken against any shareholder, officer or director
of Landlord;
(vi) Any judgment taken against any shareholder, officer or director of
Landlord may be vacated and set aside at any time without hearing;
(vii) The covenants and agreements are enforceable both by Landlord and
also by any shareholder, officer or director of Landlord.
(b) Tenant agrees that each of the foregoing covenants and agreements shall
be applicable to any covenant or agreement either expressly contained in this
Lease or imposed by statute or at common law.
ARTICLE 25
NOTICES
25.1 Notices. Whenever in this Lease it shall be required or permitted that
notice or demand be given or served by either party to this Lease to or on the
other, such notice or demand shall be in writing, mailed or delivered to the
other party at the addresses specified in Article 1. Mailed notices shall be
sent by United States Postal Service, certified or registered mail, postage
prepaid and shall be deemed to have been given on the date posted by the United
States Postal Service. Either party may, by written notice delivered pursuant to
this provision, at any time designate a different address to which notices shall
be sent.
<PAGE>
ARTICLE 26
GENERAL PROVISIONS
26.1 Governing Law. The laws of the state in which the Property is located
shall govern the validity, performance and enforcement of this Lease.
26.2 Invalidity. If any provision of this Lease is determined to be void by
any court of competent jurisdiction, such determination shall not affect any
other provision of this Lease and such other provisions shall remain in full
force and effect. If any provisions of this Lease are capable of two
constructions, one which would render the provision void and one which would
render the provision valid, the provision shall be interpreted in the manner
which would render it valid.
26.3 Payments. Except as may otherwise be expressly stated, each payment
required to be made by Tenant shall be in addition to and not in substitution
for other payments to be made by Tenant.
26.4 Time of Essence. Time is of the essence of each and every provision of
this Lease.
26.5 Force Majeure. Any prevention, delay or stoppage due to strikes,
lockouts, labor disputes, acts of God; inability to obtain labor, materials or
reasonable substitutes therefor, governmental restrictions, regulations, or
controls, judicial orders, enemy or hostile governmental action, civil
commotion, fire or other casualty, and other causes beyond the reasonable
control of the party obligated to perform, shall excuse the performance by such
party for a period equal to that resulting from such prevention, delay or
stoppage, except those obligations of Tenant to pay Minimum Annual Rental and
Additional Rent pursuant to the terms of this Lease.
26.6 Brokers. Tenant warrants that it has had no dealings with any real
estate broker or agent in connection with the negotiation and/or execution of
the Lease. In the event any broker other than the brokers acknowledged in
writing by Landlord make claim for monies owed, Tenant shall hold Landlord
harmless therefrom. Any such claims or demands or requests should be made
subject to the indemnity provision of Section 12.1.
26.7 Attorney's Fees. If either party commences any legal action or
proceeding to enforce, interpret or construe this Lease, the prevailing party
shall be entitled to recover from the other party reasonable attorneys' fees and
court costs, as determined by the court. "Legal action or proceeding" includes a
declaratory relief action and any bankruptcy or insolvency proceedings. If
Landlord is involuntarily made a party defendant to any litigation relating to
this Lease or the Premises by reason of any act or omission of Tenant, then
Tenant shall hold Landlord harmless from any loss, cost or expense, including
reasonable attorney's fees and expenses as a part of the judgment resulting
therefrom.
26.8 Entire Agreement. This Lease and its exhibits contain all of the
agreements and conditions made between the parties with respect to the hiring of
the Premises and may not be modified orally or in any other manner other than by
a written instrument signed by all the parties to this Lease.
26.9 Liability of Successors. The covenants and conditions herein contained
shall, subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of all of the parties hereto
and all of the parties hereto shall be jointly and severally liable for the
covenants contained herein.
26.10 Nondiscrimination and Nonsegregation. Tenant hereby covenants by and
for itself, its successors and assigns, and all persons claiming under or
through them, and this Lease is made and accepted upon and subject to the
following conditions:
That there shall be no discrimination against or segregation of any person
or group of persons, on account of sex, sexual orientation, marital status,
race, color, creed, religion, national origin or ancestry in the leasing,
subleasing, renting, transferring, use, occupancy, tenure or enjoyment of the
property herein leased, nor shall Tenant itself, or any person claiming under or
through it, establish or permit such practice or practices of discrimination or
segregation with reference to the selection, location, number, use or occupancy
of tenants, lessees, sublessees, subtenants, or vendees in the property herein
leased.
<PAGE>
ARTICLE 27
MARKETING
27.1 Marketing. Tenant shall, at Landlord's option, either participate in a
marketing fund ("Marketing Fund") or a merchants' association ("Merchants'
Association") which shall be organized to market the Property. Landlord shall
control and administer the Marketing Fund, if established, with advice from an
advisory group comprised of representatives of various Property tenants. The
activities of the Marketing Fund or the Merchants' Association, as the case may
be, shall be financed by an annual budget based on an appropriate fiscal year.
The annual budget shall be the sum of the following: the annual marketing
charges of all tenants at the Property; plus the contributions of all Major
Tenants and Pad Tenants pursuant to their separate agreements with Landlord.
Fifteen percent (15%) of the budget shall be paid to Landlord as payment for
administrative costs and expenses in connection with the administration and
management of the Marketing Fund or Merchants' Association.
27.2 Tenant's Marketing Charge. Tenant shall pay the Marketing Charge set
forth in Section 1.5 hereof to Landlord if Landlord has established the
Marketing Fund, or as dues to the Merchants' Association if Landlord has not
established the Marketing Fund. Tenant shall pay the Marketing Charge in equal
monthly installments, payable in advance commencing on the Rent Start Date and
thereafter on the first day of each calendar month of each year. The amount of
Tenant's Marketing Charge shall be adjusted annually in accordance with the
provisions of Section 4.2, provided, however, that in no event shall the
Marketing Charge increase in any one calendar year by more than five percent
(5%) over the Marketing Charge for the previous calendar year, and provided,
further, that notwithstanding the foregoing the Marketing Charge due from Tenant
hereunder shall not increase during the first twenty-four (24) months of the
Lease Term over the $1.50 per square foot provided in Section 1.5 hereof. In
determining the annual increases for purposes of this Section 27.2, the
Commencement Date shall be October 1 of the calendar year immediately preceding
Tenant's initial opening for business in the Property and the Adjustment Date
shall be October 1 during each calendar year of the Lease Term thereafter. The
adjustment shall be effective as of the first day of the calendar year
immediately following the Adjustment Date.
27.3 Special Assessments. In addition to the Marketing Charge described in
Section 27.2 hereof, Tenant agrees to pay to Landlord, as Additional Rent, the
following special Marketing Assessments: (a) a Grand Opening Assessment in the
amount set forth in Section 1.5 hereof; and (ii) a special promotional
assessment, in an amount to be determined by Landlord, for the purpose of
staging special promotions of the Property for the benefit of Tenant and all
other tenants of the Property. Landlord shall notify Tenant and other tenants
and occupants of the Property in writing of the budget Landlord has established
for either such event, and such notice shall include both a description of the
marketing program for the event and the per square foot marketing charge to be
paid by Tenant therefor. The special promotion marketing assessments described
in this Section 27.3 shall be due and payable by Tenant to Landlord within
thirty (30) days of Tenant's receipt of written demand therefor from Landlord.
ARTICLE 28
CONDITIONS TO LEASE
28.1 Conditions to Lease. Notwithstanding anything herein to the contrary,
this Lease is contingent upon Landlord obtaining financing for construction of
the Property, and meeting all conditions and obtaining all approvals required by
governmental authorities, and all other approvals necessary to implement the
provisions of this Lease. If Landlord does not obtain such financing, meet all
such conditions and obtain all such approvals, this Lease shall be terminated
upon notice from Landlord to Tenant. In the event of any such termination,
Landlord and Tenant shall have no further rights or obligations hereunder except
those, if any, which accrued prior to the date of termination and except that
Landlord shall return any deposits previously delivered from Tenant to Landlord
pursuant hereto.
IN WITNESS WHEREOF, the Landlord and Tenant have duly executed this Lease
as of the day and year first above written.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TENANT: LANDLORD:
TOYS INTERNATIONAL, INC., LANDGRANT DEVELOPMENT UNLIMITED,
a California corporation a California corporation
By: /s/ Richard Brady By: /s/ Chris Smith
Signature
Title: Executive Vice President
Richard Brady
Name
By: /s/ C. Samuel Marasco
President
Title Title: President
By: s/ James B. Frakes
Signature
James B. Frakes
Name
Secretary
Title
</TABLE>
<PAGE>
ADDENDUM
OPTION TO EXTEND TERM
THIS ADDENDUM is made a part of that certain Lease Agreement ("Lease") by
and between LandGrant Development Unlimited, a California corporation
("Landlord") and TOYS INTERNATIONAL, INC., a California corporation ("Tenant"),
dated as of ___July 13, 1999______. Unless otherwise defined or the context
otherwise indicates, the terms used herein have the meanings defined in the
Lease.
Landlord hereby grants to Tenant the option to extend the Term of the Lease
for two additional periods of five (5) years each (each an "Option Term"),
subject to the following conditions:
1. Method of Exercise of Option. Tenant shall exercise each option by
delivering to Landlord written notice of its intent to exercise the applicable
option not earlier than four (4) months, and not later than three (3) months,
prior to commencement of the applicable Option Term. Tenant shall have no right
to exercise its option during any time when Tenant is in default under the Lease
including without limitation during any period of time when any monetary
obligation due from Tenant to Landlord remains unpaid.
2. Commencement of Option Term. If the option is exercised pursuant to
Section 1 of this Addendum, the Option Term shall commence upon the expiration
of the preceding Term, whether it be the expiration of the initial Term or the
expiration of an extension of the Expiration Date pursuant to a previously
exercised Option Term.
3. Minimum Annual Rental. The Minimum Annual Rental during each Option Term
shall be the amounts specified for such Option Term in Section 1.4 of the Lease.
4. No Landlord's Work. In the event Tenant exercises the option, Tenant
agrees to take the Premises in an "as is" condition with no obligation on the
part of the Landlord to undertake any work with regard to the Premises.
5. No Assignment. The option granted herein shall be personal to the
original Tenant, may be exercised only by the original Tenant while it is
occupying the Premises, and may not be exercised by or assigned to any party
(including, but not limited to, any sublessee or lender) without the express
written consent of Landlord. Upon assignment or subletting of this Lease, the
option granted herein shall automatically become null and void.
6. Failure to Timely Exercise. Tenant's failure to timely exercise the
option for any Option Term shall nullify the option for all subsequent Option
Terms.
7. Insurance. Landlord shall have the right, as a condition to Tenant's
exercise of any option granted herein, to require Tenant to: (a) increase the
limit and coverage amount of any insurance Tenant is required to maintain
pursuant to Section 12.3 of the Lease to an amount that Landlord, any superior
mortgagee, or any superior landlord may, in its sole reasonable judgment, deem
sufficient, and/or (b) purchase other insurance and/or endorsements in such
amounts or types as Landlord, any superior mortgagee, or any superior landlord
may reasonably require, and/or (c) provide Landlord with a certificate
evidencing the increased coverage.
8. General. All terms and conditions of the Lease shall remain in full
force and effect during any Option Term, except that the provisions of this
Addendum shall control over any inconsistent provisions of the Lease.
Landlord /s/ CSM, CSS Tenant /s/ RB, JBF
<PAGE>
EXHIBIT B
DESCRIPTION OF PREMISES
That certain space in the City of_______________, County of San Diego,
State of California, containing approximately 10,000 square feet of Floor Area
with a frontage of approximately feet and a depth of approximately feet. Said
space is labeled Space #172 and is shown in that approximate location
crosshatched on Exhibit A.
TENANT'S TRADE NAME
Tenant shall operate the Premises only under the trade name of TOY CO.
USE OF PREMISES
Tenant shall not be deemed a Food Court Tenant at the Property. Tenant
shall use the Premises solely for the operation of a toy store, and for no other
use or purpose without Landlord's prior written, reasonable approval. Tenant
shall sell a large variety of toys and agrees that Tenant shall not use the
Premises in violation of any of the Restricted Uses (hereinafter defined).
Without limiting the foregoing preclusions, Tenant specifically agrees that
Tenant shall not sell pets or charge the public for entertainment (machines or
activities or otherwise). Tenant agrees that its sale of bicycles shall be
generally children's and family quality bicycles (and shall therefore not
include high-end bicycles). Tenant further agrees that to the extent Tenant
sells consumer electronics which are consistent with the operation of a toy
store, the display of said electronics shall not exceed 400 square feet of the
Premises. Tenant further agrees that in the event Tenant sells computer
software, prerecorded audio and/or video records, discs, tapes and/or related
devices, Tenant's Gross Sales from such items shall be less than fifteen percent
(15%) of Tenant's total Gross Sales, and Tenant agrees that Tenant shall not
rent such items. Tenant also agrees that in the event Tenant sells children's
apparel, Tenant's Gross Sales from such items shall be less than ten percent
(10%) of Tenant's total Gross Sales.
Landlord shall give its reasonable approval to alternative or additional
uses if said uses are (i) consistent with a "first-class promotional retail
center", and (ii) not a Restricted Use at the time of request, and (iii) not the
primary use of another tenant on the Property at the time of request where
"primary use" shall mean that such other tenant operates fifty percent (50%) or
more of its floor area for such use, or derives fifty percent (50%) or more of
its Gross Sales from such use.
Restricted Uses are any exclusive or restricted or objectionable uses
("Restricted Uses") Landlord has agreed to preclude or restrict pursuant to
written agreement with another tenant or owner in the Property as of the
Effective Date hereof or at any time prior to Tenant's addition of said use or
Tenant's notice to Landlord of Tenant's proposed alternative use or which are
precluded or restricted by the CC&R's referenced in Section 7.1 hereof, and as
such preclusions or restrictions may be amended or expanded from time to time;
provided, however, that Landlord shall not create a Restricted Use after the
Effective Date that is inconsistent with Tenant's exclusive use described
hereinbelow.
Exclusive: So long as (i) Tenant's use of the Premises is for such purpose
and (ii) Tenant is at such time open and operating in the Premises, Landlord
shall not authorize the use of any space in the Shopping Center, other than the
Premises, for the operation of a Competing Business.
Competing business shall, for purposes hereof, mean: a toy store such as
Play Co. Toys is operating as of the Effective Date, or such as is operated as
of the Effective Date by stores like, but not limited to Toys R Us and Kabee
Toys. "Toy store" for purposes hereof means a store selling a wide variety of
toys and toy-type items but excludes (1) space leased to or owned by Major
Tenants or Anchor Tenants of the Shopping Center which, for purposes of this
Exhibit B, shall be defined as any space of 15,000 square feet or more; (2) any
business which specializes in selected items or categories of items sold in a
toy store such as, but not limited to: bicycle stores, game stores, hobby
stores, doll stores, records/tapes/CD stores, computer stores, electronics
stores (such as Radio Shack), or consumer electronics stores (such as Circuit
City), sports cards stores, crafts stores and teacher's supply stores; and (3)
any store with a floor area of 3,000 square feet or less.
<PAGE>
EXHIBIT D
GUARANTY OF LEASE
WHEREAS, a certain Lease of even date herewith has been, or will be,
executed:
<TABLE>
<CAPTION>
<S> <C> <C>
a. Name of Property: International Gateway of the Americas
b. Landlord: LandGrant Development Unlimited, a California corporation
c. Tenant: Toys International, Inc., a California corporation
d. Effective Date: _________________________
e. Space No.: Space #172
</TABLE>
WHEREAS, the Landlord under said Lease requires as a condition to its
execution of said Lease that the undersigned (herein referred to as "Guarantor")
guarantee the full performance of the obligations of Tenant under said Lease,
and
WHEREAS, Guarantor is desirous that Landlord enter into said Lease with
Tenant,
NOW, THEREFORE, in consideration of the execution of said Lease by
Landlord, Guarantor hereby unconditionally guarantees the complete and timely
performance of each and all of the terms, covenants and conditions of said Lease
to be kept and performed by said Tenant, including the payment of all rentals
and other charges to accrue thereunder. Guarantor further agrees as follows:
1. That this Guaranty shall continue in favor of Landlord notwithstanding
any extension, modification, or alteration of said Lease entered into by and
between the parties thereto, or their successors or assigns, notwithstanding any
assignment of said Lease, with or without the consent of Landlord, and no
extension, modification, alteration or assignment of the above referred to Lease
shall in any manner release or discharge Guarantor and it does hereby consent
thereto.
2. This Guaranty will continue unchanged by any bankruptcy, reorganization
or insolvency of Tenant or any successor or assignee thereof or by any
disaffirmance or abandonment by a trustee of Tenant;
3. Landlord may, without notice, assign this Guaranty of Lease in whole or
in part and no assignment or transfer of the Lease shall operate to extinguish
or diminish the liability of Guarantor hereunder.
4. The liability of Guarantor under this Guaranty shall be primary and, in
any right of action which shall accrue to Landlord under the Lease, Landlord
may, at its option, proceed against Guarantor without having commenced any
action or obtained any judgment against Tenant.
5. Guarantor shall pay Landlord's reasonable attorney fees and all costs
and other expenses incurred in any negotiations, action or proceeding commenced
to enforce this Guaranty; and
6. Guarantor hereby waives notice of any demand by Landlord as well as any
notice of Tenant's default in the payment of rent or any other amounts contained
or reserved in the Lease.
The use of the singular shall include the plural. The obligation of two (2)
or more parties shall be joint and several. The terms and provisions of this
Guaranty shall be binding upon and inure to the benefit of the respective heirs,
legal representatives, successors and assigns of the parties herein named.
IN WITNESS WHEREOF, Guarantor has caused this Guaranty of Lease to be
executed as of the Effective Date of the above-mentioned Lease.
GUARANTOR OF LEASE:
PLAY CO. TOYS & ENTERTAINMENT CORPORATION, a California corporation
<TABLE>
<CAPTION>
<S> <C>
By:_____________________________________ By:_____________________________________
Title:_____________________________________ Title:_____________________________________
</TABLE>
NOTE: If Guarantor is a corporation, its authorized officers must sign on
behalf of the corporation and indicate the capacity in which they are signing.
This Guaranty must be executed by the president or vice president and the
secretary or assistant secretary, unless the bylaws or a resolution of the board
of directors shall otherwise provide, in which event, the bylaws or a certified
copy of the resolution, as the case may be, shall be attached to this Guaranty.
Also, the appropriate corporate seal should be affixed hereto.
<PAGE>
EXHIBIT E
TENANT ESTOPPEL CERTIFICATE
RE: Premises:
Lease Dated:
Amendment(s) Dated:
Between (Landlord) and (Tenant)
Square Footage Leased:
Floor(s)/Suite #(s):
The undersigned, Tenant under the above-referenced lease ("Lease"),
certifies to the following:
1. The Lease constitutes the entire agreement between Tenant and Landlord
with respect to the Premises, has not been modified, changed, altered or amended
and is in full force and effect in the form attached as Exhibit A. There are no
other agreements, written or oral, which affect Tenant's occupancy of the
Premises.
2. We have taken possession of and accepted the Premises described above,
except as follows:
3. The lease terms as described below are true and accurate, and the Lease
is in full force and effect:
Minimum Annual Rental: ________________________________________ per year
Escalations: ________________________________________
Abated Rent: ________________________________________
Commencement Date: ________________________________________
Rent Start Date: ________________________________________
Operating Expense Start Date: ________________________________________
Expiration Date: ________________________________________
Renewals: ________________________________________
Except as specified in Section(s) ______________________ of the Lease (copy
attached), we have no option or right to cancel the Lease or to lease additional
space in the Premises or the Property.
We have made no agreement with Landlord or any agent, representative or
employee of Landlord concerning free rent, partial rent, rebate of rental
payments or any other similar rent concession except as specifically set forth
above.
We are not entitled to any credit against any rent or other charge under
the Lease except as set forth in the Lease. No rental payments have been made
more than one month in advance.
4. No part of the Premises has been subleased, and Tenant's interest in the
Lease has not been assigned or encumbered except as follows:
We have no option or preferential right to purchase all or any part of the
Premises (or the land of which the Premises are a part). We have no right or
interest which respect to the Premises or the Building other than as Tenant
under the Lease.
5. The rent has been paid through:
6. The security deposit is
7. All insurance required of Tenant under the Lease has been provided by
Tenant and all premiums have been paid.
8. We represent and warrant that we have not used, generated, released,
discharged, stored or disposed of any Hazardous Materials (as such term is
defined in the Lease) on, under, in or about the Premises or the Property. We
have no actual knowledge that any Hazardous Materials are present, or have been
used, generated, released, discharged, stored or disposed of by any party, on,
under, in or about the Premises or the Property.
9. We are not in default of our obligations under the Lease. Landlord, to
the best of our knowledge, is not in default of its obligations under the Lease.
There exists no defense or counterclaim to rent or other sums required to be
paid by us under or pursuant to the Lease.
If Tenant is a corporation, the undersigned is a duly appointed officer of
the corporation signing this certificate and is the incumbent in the office
indicated under his/her name. In any event, the undersigned individual is duly
authorized to execute this certificate.
<TABLE>
<CAPTION>
<S> <C>
Date:____________________, 199___ Signed: ______________________________________
(Signature)
(Print Name & Title)
</TABLE>
<PAGE>
EXHIBIT F
SIGN CRITERIA
To be Provided by Landlord
EXHIBIT G
WHEN RECORDED RETURN TO:
- ----------------------------------------
c/o LandGrant
12625 High Bluff Drive, Suite 212
San Diego, CA 92130
Attn: __________________________________
SUBORDINATION AGREEMENT
, Tenant named in that certain Lease dated , 19 , wherein Tenant leases
from , as Landlord, certain premises which are part of a Property known as , the
location of said Property being more particularly described in Exhibit "A"
attached hereto and made a part hereof, hereby subordinates said Lease and its
interest in said premises to that certain
_____________________________________________________ dated _______________ , 19
, entered into by and between , , and recorded on , 19 , under File No. Page No.
in the Official Public Records of the County of , State of .
Dated this day of , 19 .
TENANT: _______________________________________
By: ___________________________________
Title: _________________________________
By: ___________________________________
Title: _________________________________
[NOTARIAL ACKNOWLEDGMENT]
<PAGE>
EXHIBIT H
CONFIRMATION OF TERM OF LEASE
This Confirmation of Term of Lease is made ________________________, 19 ___,
between LandGrant Development Unlimited, a California corporation, ("Landlord"),
and TOYS INTERNATIONAL, INC., a California corporation ("Tenant"), who agree as
follows:
1. Landlord and Tenant entered into a lease dated ________________________,
19 ___, in which Landlord leased to Tenant and Tenant leased from Landlord the
premises described in Paragraph 1.2 of the Lease (the "Premises").
2. Pursuant to Paragraph 1.3 of the Lease, Landlord and Tenant agree to
confirm the Commencement Date and Expiration Date of the Term, and the Rent
Start Date, and Operating Expense start date as follows:
a. __________________________ 19 ___, is the Commencement Date of the Term
of the Lease;
b. __________________________ 19 ___, is the Expiration Date of the Term of
Lease;
c. __________________________ 19 ___, is the Rent Start Date under the
Lease; and
d. __________________________ 19,___, is the date for commencement of
payments for Operating Expenses.
<TABLE>
<CAPTION>
<S> <C>
TENANT: LANDLORD:
TOYS INTERNATIONAL, INC., LANDGRANT DEVELOPMENT UNLIMITED,
a California corporation a California corporation
By: _______________________________________ By:_________________________________
Signature
Title: _______________________________
----------------------------------------
Name By:_________________________________
_________________________________________ Title: _______________________________
Title
By: _______________________________________
Signature
----------------------------------------
Name
----------------------------------------
Title
</TABLE>
<PAGE>
EXHIBIT C
PROVISIONS RELATING TO CONSTRUCTION OF TENANT'S STORE
SECTION I - GENERAL REQUIREMENTS
1. As soon as practicable after the final drawings and specifications have
been approved by Landlord and by all applicable governmental agencies, Landlord
will, at its own cost and expense, commence the erection of a building covering
the Premises, unless prevented or delayed by conditions over which Landlord has
no control. It is expressly understood and agreed that the building upon the
Premises may constitute a portion of a larger building. In the event that prior
to commencement of construction of the building of which the Premises are a
part, Landlord elects not to proceed with such construction, Landlord may
terminate this Lease upon notice to Tenant, and both parties shall be forthwith
released.
2. When Landlord's architect (hereinafter "Project Architect") has
completed drawings of the basic shell of the building (or if such drawings have
already been completed, then concurrently with the execution of this Lease),
Landlord shall deliver a floor plan of the Premises ("Floor Plan") to Tenant
showing thereon the columns and other structural work in the Premises.
3. Landlord will construct for Tenant an improved shell, all in conformity
with and to the extent hereinafter set forth as "Landlord's Work". Tenant shall
be responsible, at its own cost and expense, to complete the work hereinafter
set forth as "Tenant's Work"; all Tenant's Work shall be completed to a good
workmanlike condition.
Tenant's plans shall be prepared with full knowledge of and in compliance
with the Floor Plan, this Exhibit C and all City, County, State and Federal
ordinances, rules and regulations relating thereto including, without
limitation, the energy conservation requirements, if applicable, of the State in
which the Property is located and the architectural and accessibility
regulations issued by the United States Attorney General's office pursuant to
Title III of the Americans with Disabilities Act of 1990 and the Minimum
Guidelines and Requirements for Accessible Design issued by the Architectural
and Transportation Barriers Compliance Board. All drawings for Tenant's Work, as
described below, are to be prepared at Tenant's expense by an interior designer
or space planner or, if required by governmental authorities, Tenant's architect
who shall be licensed in the State in which the Property is located.
Tenant agrees to submit to Landlord, within twenty (20) days after the
later of Tenant's receipt of the Floor Plan or the Effective Date of the Lease,
fully dimensioned and detailed 1/4" scale preliminary drawings showing general
store layout.
Within forty-five (45) days after the later of Tenant's receipt of the
Floor Plan or the Effective Date of the Lease, Tenant agrees to submit to
Landlord two (2) sets of fully detailed and dimensioned one-quarter inch (1/4")
scale construction drawings. These drawings shall indicate the specific
requirements of Tenant's space showing clearly, without limitation, the interior
partitions, trade fixture plans, lighting, electrical outlets, plumbing, signs,
size and locations of equipment to be installed on the roof, if any, state
energy compliance calculations, handicap access requirements, structural
calculations, samples, etc., and all other items set forth under "Tenant's
Work".
All drawings for Tenant's Work are subject to Landlord's and Project
Architect's approval and in the event said drawings are not approved, for any
reason whatsoever, within sixty (60) days after the later of Tenant's receipt of
the Floor Plan or the Effective Date of the Lease, this Lease shall, at the
option of Landlord, be null and void and of no further force or effect.
Tenant shall be responsible for submitting construction drawings to the
proper building authority (or health authority as applicable) to obtain a
building permit. Fees for plan checking, processing, permitting, and any other
fees relating to Tenant's Work shall be paid by Tenant. At Landlord's option the
Premises shall be constructed by Landlord or Tenant's contractor in accordance
with said drawings and both parties agree to pursue the construction work of
said building diligently to completion, complying with all governmental
ordinances, rules and regulations. Upon completion of all Tenant's Work, Tenant
shall file for record in the Office of the County Recorder where the Property is
located a Notice of Completion, as permitted by law.
<PAGE>
5. In the event Landlord agrees in writing to perform any of Tenant's Work,
the following procedures and conditions apply:
a. The cost of all requirements shown on Tenant's construction drawings are
to be paid for by Tenant. Landlord shall submit a bid proposal to Tenant after
Landlord approval of Tenant's construction drawing and Landlord's agreement in
writing to perform Tenant's Work. Tenant shall have the right to approve all
costs to be borne by Tenant pursuant to the provisions of this paragraph 5.
Tenant shall notify Landlord in writing within ten (10) days after Tenant's
receipt of the bid proposal that Tenant approves or disapproves the bid
provided, however, that if Tenant does not so notify Landlord within such ten
(10) day period, Tenant shall be deemed to have approved such costs. The total
amount of such costs to be paid by Tenant shall be delivered to Landlord prior
to the commencement of construction of Tenant's Work.
b. Any additional charges, expenses, or costs arising by reason of any
subsequent change, modification, or alteration in said approved general plans
and specifications ("change to plan") made at the request of Tenant or required
by governmental authorities, including without limitation architect's fees or
consultant's fees, shall be at the sole cost and expense of Tenant, and Landlord
shall have the right to demand payment for such change to plan prior to
Landlord's performance thereof. No change to plan shall be made without the
written consent of Landlord. Landlord shall bear no costs in connection with the
plans or fees related to, or construction of, Tenant's Work.
6. The parties agree to cooperate with each other and to respond with
required approvals or disapprovals with reasonable diligence in order to
complete Landlord's Work and any Tenant's Work which Landlord agrees to perform
pursuant to Section 5 of this Exhibit C by the Commencement Date described in
Section 3.1 of the Lease. Prior to occupancy of the Premises, Tenant shall pay
Minimum Annual Rental at the rate specified in Section 1.4, prorated for the
number of days completion is delayed for any of the following reasons:
a. Tenant's failure to submit drawings within the time periods specified in
Section 3 of this Exhibit C. b. Tenant's request for changes in the plans and
specifications or in the construction of the work; and/or c. Tenant's failure to
pay any costs required of Tenant pursuant to this Exhibit C, within the time
periods specified herein.
7. Tenant may not require an exterior design, finish or construction other
than one that has been approved by Landlord; and Landlord shall be entitled to
erect and construct such exteriors in keeping with the overall plans and design
of the Property. Tenant shall not be permitted to maintain or place on the
building or upon the Premises any awnings or other exterior appendage except
with written consent of Landlord.
8. Tenant agrees that upon receipt of Landlord's Notice of Substantial
Completion, as defined in Section 3.2, Tenant will accept the Premises in the
condition which it may then be and waives any right or claim against Landlord
for any cause, directly or indirectly, arising out of the condition of the
Premises, appurtenances thereto, the improvements thereon and the equipment
thereof; and Tenant shall thereafter save and hold harmless Landlord from
liability as provided in Article 12 of this Lease. Landlord shall not be liable
for any latent or patent defects therein; provided, however, that Landlord
warrants the building against latent defects for a period of one year from
completion.
9. In the event Tenant enters into possession of the Premises for the
purpose of performing Tenant's Work prior to the Notice of Substantial
Completion and completion of Landlord's Work, such entry shall be deemed an
acceptance by Tenant of substantial completion of the Premises, and in such
event Tenant shall hold Landlord harmless and indemnify Landlord for any loss or
damage to Tenant's property, fixtures, equipment and merchandise and for injury
to any persons, unless same be caused by the gross negligence or willful
misconduct of Landlord or its agents, and Tenant shall repair any damage done by
Tenant or Tenant's agents, contractors, subcontractors, employees, vendors, or
representatives to Landlord's Work.
<PAGE>
10. During the construction of Landlord's Work, Landlord agrees at
Landlord's expense to obtain and maintain public liability and worker's
compensation insurance adequate to fully protect Tenant as well as Landlord from
and against any and all liability for death of or injury to person or damage to
property caused in or about or by reason of the construction of Landlord's Work.
Tenant agrees at Tenant's expense to obtain or maintain public liability
insurance as set forth in Article 12.3 and worker's compensation insurance
adequate to fully protect Landlord as well as Tenant from and against any and
all liability for death of or injury to person caused in or about or by reason
of the construction of Tenant's Work.
11. Where final drawings are in conflict with this Exhibit C, the
provisions of Exhibit C shall prevail.
12. Upon actual completion of the building shell of which the Premises are
a part, Landlord agrees to file for record in the Office of the County Recorder
where the Property is situated a Notice of Completion, as permitted by law.
SECTION II - DESCRIPTION OF LANDLORD'S WORK
The following is a description of the construction, and limitations of
same, which will be provided by Landlord and herein referred to as "Landlord's
Work".
A. BASIC SHELL
1. Frame: The building shall be of steel or wood frame, reinforced
concrete, or bearing wall construction designed in accordance with governing
building codes.
2. Exterior Walls: The exterior walls shall be of masonry or such other
material or materials as selected by the Project Architect.
3. Floors: All floors on the ground floor area shall be a minimum three and
one-half inch (31/2") concrete with smooth finish. Floor to be flat and on a
single plane without visible depressions or raised areas.
4. Roof: The roof shall be built-up composition type, single ply, or other
commercial roofing material as selected by the Project Architect.
5. Exterior Doors/Frames: Rear/side exterior exit door frame(s) will be
hollow metal construction. Exterior service doors will be hollow metal with
panic hardware.
6. Exterior walls and roof will be insulated with Fiberglass batt
insulation in accordance with building code and state energy requirements.
7. Fire Service and Distribution: As required by building code, or
otherwise at Landlord's option.
8. Storefront: A standard store front shall be designed by Project
Architect and installed by Landlord at its sole cost and expense. One single
storefront door will be provided to each store unless otherwise shown on Floor
Plan.
B. INTERIOR FINISHES
1. Ceilings: Ceilings to be 2' x 4' lay-in acoustical tile with an exposed
T-bar suspension system. Clear height between floor slab and ceiling shall be
governed by structural design and specified in the Floor Plan delivered by
Landlord to Tenant.
2. Walls: Demising walls between suites shall be framed of wood stud, metal
stud, or masonry, and shall be unpainted drywall, finish taped and textured;
they shall extend from floor to roof structure with drywall only on one side
above the ceiling. Any interior partitions shall not be a part of Landlord's
Work. The interior portion of the exterior walls shall be unpainted drywall,
finish taped, and textured; drywall to extend 6" above ceiling height.
<PAGE>
3. Interior Doors/Frames: Interior door frames shall be wood or metal at
the option of Landlord. Interior doors will be wood, hollow core, with lever
hardware.
C. SANITARY FACILITIES
1. Two Toilet Rooms, each containing: One (1) standard lavatory, one (1)
water closet, one (1) door with hardware, one (1) light fixture with fan, one
(1) electrical outlet, and sheet vinyl floor with topset base.
D. UTILITIES
1. Water and Sewer: Landlord will furnish water and sewer service lines for
one toilet facility for each store. All installation required beyond these
facilities shall not be a part of Landlord's Work. Cost of water used will be
paid by Tenant.
2. Electricity: Landlord shall furnish one (1) 100 amp subpanel within the
Premises which shall include breakers appropriate for the scope of Landlord's
Work and wiring stubbed to the subpanel and which shall be constructed to
provide for separate metering. The meter shall not be a part of Landlord's Work.
Landlord shall furnish seven (7) electrical convenience outlets, located as
shown on Landlord's floor plans (including the electrical outlet shown in the
toilet room). Two (2) additional interior ceiling outlets will be located above
the storefront, if required by code.
3. Telephone: Landlord shall furnish one (1) telephone conduit (without
wires) from main telephone room for the building stubbed to Tenant's Premises.
4. Lighting: Landlord shall furnish one two foot (2') by four foot (4')
long recess mounted fluorescent light fixture per 112 square feet of Floor Area
of the Premises arranged in accordance with Landlord's Floor Plan.
5. All Tenant Illuminated Storefront signs shall be under central control
of Landlord.
6. Sprinkler Drops: Landlord shall furnish sprinkler heads as required by
building code (excluding additional heads which may be required as a result of
Tenant's Work).
7. H.V.A.C.: Landlord will install a Landlord selected air conditioning
unit, located on the roof complete with air distribution ductwork, air
distribution outlets, fresh air supply, and thermostats as designed by the
Landlord to suit the standard lease space requirements. Air conditioning tonnage
shall be based on approximately one ton per 400 square feet, as dictated by
state energy requirements and calculations, based on the standard Landlord
improvement. One (1) ducted return vent shall be provided. Supply venting shall
be as follows:
2 supply diffusers for 4 tons or less; 3 supply diffusers for
5 tons; 4 supply diffusers for 7 1/2 tons; and 6 supply
diffusers for 10 tons.
In the event that Tenant's use of the Premises requires fresh air, make-up
air, and/or exhaust air for special equipment, cooking equipment, stock room
areas, or show windows, and the like, Tenant will provide same at its sole cost
and expense, subject to Landlord's prior approval.
SECTION III - DESCRIPTION OF TENANT'S WORK
The work to be done by Landlord in satisfying its obligations to construct
Tenant's store under the Lease shall be limited to that described in the
foregoing paragraphs. All other items of work not therein provided for to be
done by Landlord shall be provided by Tenant at Tenant's expense and are herein
referred to as "Tenant's Work". Tenant acknowledges and agrees that if required
by Landlord, Utility equipment and facilities included in Tenant's Work shall be
procured from Utility providers specified by Landlord. Tenant's Work shall
include, but not be limited to, the purchase and/or installation and/or
performance of the following:
<PAGE>
1. Electric Fixtures and Equipment: All electrical work for the Premises
not specifically stated under Landlord's Work to be performed by Tenant
including without limitation any additional convenience outlets or circuit
breakers.
2. Utility Meters and Connections: All Utility meters, connections and
hookup fees, assessments, front footage charges and any other fees or charges
for Utilities serving the Premises shall be paid by Tenant. Tenant shall apply
for and arrange for installation of all meters.
3. Telephones: All wiring from the main telephone room to the Premises and
within the Premises. All conduits for Tenant's telephone system in the Premises.
Tenant shall make all arrangements for telephone service.
4. Walls: All interior partitions and curtain walls within the Premises,
except as provided by Landlord under Landlord's Work.
5. Coves and Ceilings: All special coves, ceilings, furring, etc.
6. Furniture and Fixtures: All store fixtures, cases, wood paneling,
cornices, etc.
7. Show Window Background, Floors, Etc.: All show window floors, show
window background, show window lighting fixtures, and show window doors.
8. Floor Coverings: All floor coverings and floor materials (including wall
base) other than concrete (except as Landlord is required to provide in the
toilet room as Landlord's Work).
9. Ornamental Stairs: All ornamental or other stairs not required by
governing building codes.
10. Alarm Systems, Etc.: All alarm systems or other protective devices.
11. Plumbing: All plumbing, either roughing in fixtures, or equipment
required for Tenant's needs.
12. Special Ventilation: All ventilation systems, hoods, ducts, shafts, and
chases, including show window's ventilation.
13. Special Equipment: All special equipment such as conveyors, elevators,
escalators, dumb waiters, etc., including installation and connection.
14. Interior Painting and wall coverings.
15. Tenant's exterior sign. All Tenant signs shall be designed,
constructed, and located in accordance with the approved sign plan, and shall be
subject to the approval of Landlord, and local governing agency, all as more
specifically described in Exhibit F to the Lease.
16. Concrete Floors: Any special reinforcing, raised areas, insulated
floor, or depressions.
17. Roof: Framing of all roof openings in accordance with structural
calculations as required by code. All flashing, counterflashing and roof repairs
caused by the installation of Tenant's equipment shall conform to the project's
roofing specifications and such work shall be paid for by Tenant, but shall be
performed by the project's original roofing contractor.
SECTION IV - CONDITIONS RELATED TO PERFORMANCE OF TENANT'S WORK
If Tenant's Work is performed by anyone other than Landlord's contractor,
the following items shall apply; said items shall be incorporated as "Special
Conditions" into the contract between Tenant and its contractor (with a copy of
the contract to be furnished Landlord for Landlord's reasonable approval prior
to the commencement by Tenant of Tenant's Work):
<PAGE>
1. Prior to start of Tenant's Work, Tenant or Tenant "s contractor shall
provide Landlord with a construction schedule in "bar graph" form indicating the
completion dates of all phases of Tenant's Work.
2. Tenant or Tenant's contractor shall perform said work in a manner and at
times which do not impede or delay Landlord's contractor in the completion of
the Premises as provided in this Lease. Any delays in the completion of the
Premises impacting the commencement of the Minimum Annual Rental and any damage
caused by Tenant or Tenant's contractor shall be at the sole cost and expense of
Tenant.
3. Tenant or Tenant's contractor shall be responsible for the repair,
replacement or cleanup of any damage done by him to other contractors' work
which specifically includes Landlord's Work and accessways to the Tenant's
Premises which may be currently used by others.
4. Tenant shall accept the Premises prior to Tenant's contractor starting
any trenching operations. Any rework of subbase or compaction required after
Tenant initial acceptance of the Premises shall be done by Tenant's contractor,
which shall include the removal from the Property of any excess dirt or debris.
5. Tenant or Tenant's contractor shall contain his storage of materials and
his operations within the Premises and such other space as he may be assigned by
Landlord or Landlord's contractor. Should he be assigned space outside of the
Premises, he shall move to such other space as Landlord or Landlord's contractor
shall direct from time to time to avoid interference or delays with other work.
6. All trash and surplus construction materials shall be stored within the
Premises and shall be promptly removed from the Property at the sole cost of
Tenant or Tenant's contractor. Once the Property is open and operating, no
Common Area trash containers shall be used for construction debris.
7. Tenant or Tenant's contractor shall provide temporary utilities,
portable toilet facilities and potable drinking water as required for his work
within the Premises and shall pay to Landlord or Landlord's contractor the cost
of any temporary utilities and facilities provided by Landlord or Landlord's
contractor at Tenant or Tenant's contractor's request.
8. Tenant or Tenant's contractor shall notify Landlord or Landlord's
Project Manager of any planned work to be done on weekends, holidays or other
than normal job hours.
9. Tenant and Tenant's contractor are responsible for compliance with all
applicable codes and regulations of duly constituted authorities having
jurisdiction insofar as the performance of the work and completed improvements
are concerned for all work performed by Tenant or Tenant's contractor and all
applicable safety regulations established by the general contractor for the
Property, and Tenant further agrees to save and hold Landlord harmless for said
work as provided in Article 12 of the Lease. Prior to commencement of
construction, Tenant shall submit to Landlord evidence of insurance as required
in Article 12 of the Lease.
10. Tenant's contractor or subcontractors shall not post signs on any part
of the Property or on the Premises.
11. Notwithstanding the provisions herein, Tenant shall be responsible for
and shall obtain and record a Notice of Completion promptly following completion
of Tenant's Work.
12. Prior to the commencement of construction, Tenant shall obtain or cause
its contractor to obtain payment and performance bonds covering the faithful
performance of the contract for the construction of Tenant's Work and the
payment of all obligations arising thereunder. Such bonds shall be for the
mutual benefit of both Landlord and Tenant and shall be issued in the names of
both Landlord and Tenant as obligees and beneficiaries. Prior to the date Tenant
commences construction of Tenant's Work, Tenant shall submit evidence
satisfactory to Landlord that such bonds have been issued.
<PAGE>
ADDENDUM to EXHIBIT C
CONSTRUCTION ALLOWANCE
Notwithstanding anything to the contrary contained in this Exhibit C,
Landlord agrees to contribute the sum of Eighty Thousand Dollars ($80,000.00)
("Construction Allowance") toward the cost of Tenant's Work ("Costs"), except
that said sum shall not in any event be applied toward costs of preparing the
space plans, the Final Plans and the working drawings; engineering and
architectural fees; costs of governmental permits and plan check fees; testing
and inspection costs; bonds.
As soon as reasonably possible after completion of working drawings, Tenant
shall prepare and deliver to Landlord a firm breakdown of Costs. Landlord shall
deliver its written approval or disapproval of the Costs to Tenant within three
(3) business days after receipt. If Landlord performs the Tenant Work, the Costs
payable by Tenant which exceed the Construction Allowance shall be delivered to
Landlord prior to the date specified by Landlord for commencement of
construction.
If Tenant performs the Tenant Work, upon written request, Landlord shall
pay Tenant the Construction Allowance within thirty (30) days after the latest
date on which any contractor, subcontractor, materialman or laborer of Tenant
may record a valid mechanics' lien against the Premises and/or Property with
respect to Tenant's Work and after the Tenant has opened for business and
delivered to Landlord the following:
1. An executed Tenant's Certificate substantially in the form of Exhibit H;
2. A copy of the "Certificate of Occupancy";
3. A copy of Tenant's recorded, valid "Notice of Completion," if
applicable;
4. A complete list of the names, addresses, telephone numbers and contract
amount for all contractors, subcontractors, vendors and/or suppliers providing
materials and/or labor for Tenant's Work;
5. Copies of all invoices from Tenant's contractor, subcontractors, vendors
and/or suppliers of labor and/or materials for Tenant's Work, which Tenant has
paid;
6. Copies of all mechanics' lien releases or other lien releases on account
of Tenant's Work, which are notarized, unconditional and in such form as
Landlord shall have approved;
7. Copies of all building permits, indicating inspection and approval by
the issuer of said permits; and
8. An architect's certification that the Premises have been constructed in
accordance with Tenant's Plans and are one hundred percent (100%) complete in
accordance with this Exhibit C.
The cost of any additional work performed by Landlord for the benefit of
Tenant shall be deducted from the Construction Allowance before said
Construction Allowance is paid to Tenant.
Should Tenant fail to open for business within the time limit set forth in
Article 3, Section 3.2 or otherwise be in default of its obligations under the
Lease, or should Tenant fail to request payment of the Construction Allowance
within one hundred twenty (120) days after its opening for business, then
Landlord shall not be obligated to pay Tenant this Construction Allowance. In
the event that the Lease is terminated as a result of Tenant's default pursuant
to the provisions of Article 14 of the Lease, then, in addition to all other
damages specified in Section 14.4 of the Lease, Landlord's damages shall include
the unamortized cost of the Construction Allowance, (amortized on a
straight-line basis over the initial Lease Term) with interest thereon at the
interest rate specified in Section 14.7, from the Commencement Date of the Lease
through the date of payment to Landlord.
EXHIBIT 10.136
Investment Agreement
Investment Agreement
between
Toys International.com Inc. ("Toys International" or "Company")
550 Rancheros Drive, San Marcos, CA 92069
Play Co. Toys & Entertainment Corp. ("Playco")
550 Rancheros Drive, San Marcos, CA 92069
both represented by
Harold Rashbaum, Chairman of the Board and Rich Brady, President
CDMI Capital Corporation ("CDMI")
P.O. Box 47, Roadtown, Tortola, British Virgin Islands
represented by Ilan Arbel
and
Concord Effekten AG ("Concord")
Gro(beta)e Gallusstr. 1 - 7 60311 Frankfurt am Main
represented by
Dirk Schaper (Chairman of the Board) and Bernd Groebler (Board member)
Preface
Objective of this Agreement is a Pre-IPO capital increase of Toys
International through an investment by Concord and CDMI. Toys International is
currently a wholly owned subsidiary of Playco. Playco is a US public company,
quoted on the OTC Bulletin Board, which is controlled by affiliates of CDMI.
After a second capital increase, the shares will be distributed to the public
and Toys International will be introduced for trading on the Regulated Market
("Geregelter Markt") in the SMAX segment at the Frankfurt Stock Exchange. The
date of first listing is planned for 15 October 1999.
I. Participation
Toys International shall issue 660.000 of its common stock, $0.001 par
value. Concord and CDMI agree to each purchase 330.000 shares, for the price of
US$4.24 per share, for an aggregate value of US$1.4 million each. Toys
International agrees that at the conclusion of this transaction, the total
issued and outstanding share capital of the Company will be 10 million shares of
common stock issued as follows:
Concord: 330,000 shares (3.3%)
CDMI: 330,000 shares (3.3%)
Playco 9,340,000 shares (93.4%)
Concord shall be allowed to sell part of its shares to a cooperation
partner.
Playco may transfer 25% of its shares in Toys International to Tudor
Technologies, Inc. ("Tudor"), a British Virgin Islands investment company, which
invested in Playco's original acquisition of certain assets of Toys
International and received an option over 25% of Playco's interest in Toys
International. The above transfer may not occur unless Playco secures a voting
rights agreement from Tudor giving Playco the irrevocable right to vote Tudor's
shares and Tudor agrees to participate in the Voting Trust described below.
The Company agrees that it shall not issue any additional equity or debt
capital prior to the IPO without the express written approval of Concord.
<PAGE>
II. Voting trust
Playco, Concord and CDMI hereby agree to form a voting trust concerning
their shares of Toys International in conformity with the following arrangements
(the "Voting Trust"):
All shares owned by Playco, Concord and CDMI shall, in regard to the voting
rights arising from these shares, be committed until Toys International goes
public. This shall also apply for new shares which the contracting parties
obtain in the course of further capital increases. The committed shares shall
remain the separate property of each of the Parties and this Agreement shall not
be construed as establishing joint or shared ownership. In the event of third
parties acquiring shares in Toys International, Playco, Concord and CDMI will
ensure that these new shareholders become parties to the Voting Trust.
The purpose of the Voting Trust is to assure the official listing of Toys
International on the Frankfurt stock exchange and to deal with matters regarding
capital increases and the public offering process.
The Voting Trust shall be responsible for all issues regarding the official
listing of Toys International on the Frankfurt stock exchange, capital increases
and the public offering process.. This includes, if necessary, consulting and
decision-making, and for taking note of all matters incumbent upon it under this
contract, in particular:
decisions on how the voting rights controlled by the Voting Trust shall to
be exercised for each agenda item of a planned shareholders' meeting;
changes to the Voting Trust, the admission of new shareholders, and the
transfer of shares to third parties, as far as this agreement does not stipulate
the right to have co-investors;
all other matters relating to the Company and the Voting Trust.
Meetings of the Voting Trust members ("Trust Meetings") shall be held upon
invitation of the Trust Representative. The invitation to a Trust Meeting shall
be issued no later than three days prior to a shareholder's meeting of the
Company. The Trust Representative has the obligation to call for a Trust Meeting
upon written request of Trust members which own no less than 3% of the shares of
Toys International. The invitation to a Trust Meeting shall be in writing, or by
fax, with an invitation period of two days (beginning with the day after which
the letter was sent). The day of the Trust Meeting is not included in the
calculation of the invitation period. In urgent cases, the invitation period can
be shortened to one day. The Trust Meeting may be held by telephone if all Trust
Members are present.
The Trust Meeting shall not have a quorum until 98% of the entire share
capital of the Voting Trust is present or regularly represented. If this is not
the case, the Trust Representative shall call a new Trust Meeting which has no
quorum with a shortened invitation period of two days.
Resolutions of the Trust may be made in writing if all Trust Members sign
the resolution.
Each Trust Member has the right to appoint another Trust Member as his
representative by written authorization. Representation by third parties is not
permitted, except for authorized employees of the Trust Members.
All resolutions of the Trust Meeting shall be recorded in writing, signed
by the Trust Representative, and sent to all Trust Members.
The Trust Representative shall be elected for a period of four years. The
first Trust Representative will be Mr. Harold Rashbaum.
Resolutions of the Trust Meeting shall be adopted by a simple majority of
all exercised votes, if not otherwise agreed on in this contract. Abstentions
are considered as not exercised votes. The voting rights are exercised according
to the number of shares of Toys International held by each Trust Member, with
one share entitled to one vote. The right to vote in the Trust Meeting shall not
exist if one of the parties entitled to such vote cannot exercise such vote in a
Shareholders' Meeting of the Company on the actual resolution topic involved.
<PAGE>
The following resolutions of the Trust Meeting relating to decisions about
the following issues at a Shareholders' Meeting of the Company require the
approval of Concord:
resolutions on all capital increases which take place prior to the IPO, and
resolutions on assuring the public placement;
resolutions on dividend payments from net profits (ss. 119 Para. 1 No. 2 of
the German Corporation Act "Aktiengesetz")
resolutions on changes to the articles of incorporation, including capital
increases and decreases, and on dissolving the company.
Moreover, Concord has a veto-right concerning decisions of the Trust
Meeting, which could, from Concord's sole discretion, materially adversely
affect the IPO of Toys International.
The rights of Concord set forth in Sections 11(a) through (d) shall not be
construed to give Concord any veto-right over the general operations and
management of the Company.
The Parties agree that on request of not less than 3% of the committed
shares, a shareholders' meeting can be convened in accordance with ss. 122 of
the Corporation Act "Aktiengesetz".
The voting rights of the shares in the Voting Trust shall be exercised at
the Shareholder Meeting by the Trust Representative, unless an alternative
representative is appointed at the Trust Meeting. The right of the Trust Members
to participate at Shareholder Meetings is not affected by this rule.
In the event of a shareholder dying, the Voting Trust shall be continued in
regard to the committed shares with the heirs or survivors benefiting. In the
event of bequest through a legacy, the transfer of the shares involved shall be
conditional on the heirs or survivors entering into this voting trust agreement.
This Voting Trust agreement shall be deposited with the Company and the
Company agrees that any exercise at a Shareholder Meeting by a Trust Member of
their voting rights in violation of this Voting Trust agreement shall be not
valid.
The provisions under this section IV will also be valid for the legal
successors of the parties.
III. Management
Harold Rashbaum, Rich Brady and Jim Frakes agree to remain active in their
present functions and positions. This agreement shall be valid for not less than
three years after Toys International goes public, and if the company does not go
public, then at least until December 31, 2004.
IV. Business Plan
The Business Plan (appendix A) is an integral part of this agreement:
Toys International agrees, within 28 days after the end of each quarter, to
forward to Concord an internal report containing actual figures for the quarter
concerned in a comparison with the planned figures (within 6 weeks of the end of
each quarter, except for the year end, the Company shall provide public
quarterly reports. Within 90 days from the end of the fiscal year the Company
shall provide audited accounts, unless the Frankfurt Stock Exchange requires
other terms).
If there is a negative deviation of more than 30% in the resulting net
income for a quarter in comparison with the Business Plan, Concord shall have
the right to appoint a representative to the Board of Directors.
Toys International furthermore agrees to inform Concord immediately if it
is foreseeable, that the monthly planned sales and income figures will be more
than 10% below the expected results.
<PAGE>
V. Warranties
Toys International hereby represents and warrants to Concord and CDMI as of
the date this contract is entered into that
Toys International is a corporation duly organized, validly existing, and
in corporate good standing under the laws of the State of Delaware, USA.
Toys International has all requisite corporate power and authority to
perform, and observe its obligations under this Agreement and any other
instruments provided for herein and to carry on Toys International's business.
Toys International represents and warrants that the execution, delivery,
performance and observance of this Agreement by it and each of the other
documents or instruments delivered by Toys International to Concord and CDMI
hereunder have been duly and validly authorized by all necessary corporate
action. Toys International represents and warrants that this Agreement and such
documents and instruments have each been duly executed and delivered by it, and
are the legal, valid, and binding obligations of it, enforceable against it in
accordance with their terms.
Toys International represents and warrants that neither the execution and
delivery of this Agreement by Toys International nor compliance by Toys
International with the terms and provisions of this Agreement will conflict with
or result in a breach of any of the terms, conditions, or provisions of any
contract or other instrument to which Toys International is a party or by which
Toys International is or may be bound (including, without limitation, the
Articles of Association of Toys International) or constitute a default
thereunder.
no governmental or third party consents, approvals, filings, or
qualifications are necessary in connection with the execution, delivery,
performance, and observance of Toys International's obligations under this
Agreement or the documents and instruments provided for herein by Toys
International.
the shares being issued hereunder shall be fully paid and non-assessable
and that there are no third party claims, liens or charges relating to shares of
Toys International, other than an option owned by Tudor Technologies, Inc. over
25% of Playco's shares in Toys International.
the issued and outstanding share capital of Toys International following
the transaction contemplated by this Agreement shall consist of 10,000,000
shares of common stock, $0.001 par value.
Toys International is not overindebted or insolvent.
to the best of its knowledge, the last annual financial statements of Toys
International are materially accurate,
Toys International has paid all taxes due, and all tax liabilities have
been accurately shown in the financial statements,
to the best of its knowledge and belief no hidden dividend payments have
been made at Toys International,
no lawsuits against Toys International are pending, and Toys International
itself is not conducting any lawsuits against third parties.
all approvals required for Toys International business operations are
unrestrictedly in place,
the property of Toys International is free of any claims of third parties
(except Finova, which has a first lien on the assets of the Toys International
pursuant to its credit facility), and all approvals are unrestrictedly in place
relating to construction permission, trade and industry legislation,
environmental statutes and other requirements.
<PAGE>
Toys International further warrants that it knows of no circumstances which
prior to Toys International going public might entail changes in the above
situations and guarantees.
Toys International refuses to register any transfer of the securities not
made in accordance with the provisions of Regulation S, pursuant to registration
under the Act, or pursuant to an available exemption from registration;
provided, however, that if German law prevents Toys International from refusing
to register securities transfers, other reasonable procedures such as a
restrictive legend will be implemented to prevent any transfer of the securities
not made in accordance with the provisions of Regulation S.
Should the above listed representations and warranties be incorrect,
Concord and CDMI, irrespective of further rights arising from this contract,
shall be put in the position in which they would be if the representations and
warranties concerned were to be correct. This above entitlement shall be valid
until three years after the IPO of Toys International, or December 31, 2004,
whichever is earlier.
Concord and CDMI represent and warrant as follows:
that they are not U.S. persons and are not acquiring the securities for the
account or benefit of any U.S. person;
That they agree to resell such securities only in accordance with the
provisions of Regulation S under the US Securities Act of 1933, as amended (the
""Act"), pursuant to registration under the Act, or pursuant to an available
exemption from registration; and that they agree not to engage in hedging
transactions with regard to such securities unless in compliance with the Act;
VI. Lock Up
Playco agrees, for a period of six months after the IPO, and Concord and
CDMI agree until the IPO, not to dispose of their shares, except as provided
elsewhere in this Agreement. Any shares not sold by CDMI and Concord in the IPO
shall be bound by the same lock up as Playco. CDMI agrees that Concord shall
have sole discretion as to the number of shares sold by CDMI and Concord in the
IPO, provided that they shall be an equal amount.
The parties agree, that the shares which are locked up according to this
agreement, shall be deposited on trust in a common lock-up-account of a banking
institution and shall be transferred only according to this agreement. This
joint deposit shall not alter anything regarding the parties' separate ownership
of the shares each of them holds. In particular, this shall not be construed as
establishing any joint or shared ownership.
On termination of this contract, the parties may demand delivery of their
shares. Shares which have to remain on a security deposit for reasons of
liability are exempt from this regulation.
The lock-up shall not be considered contrary to the right of Concord to
sell shares to one or more co-investors prior to the IPO.
VII. Adjustment of Concord and CDMI shares.
If the IPO price for the 330.000 shares each held by Concord and CDMI is
less than $2,8 Million, Concord and CDMI shall receive additional shares from
the Company until the value of the shares held by Concord and CDMI equals an IPO
value of $2,8 Million. If Toys International chooses, this adjustment may be
paid in cash. Toys International shall inform Concord and CDMI in writing prior
to the filing of the prospectus with the Deutsche Borse AG as to whether the
adjustment will be paid in cash or shares. The adjustment shall be payable with
closing of the IPO.
VIII. Right of withdrawal, consequences of a withdrawal
<PAGE>
CDMI and Concord shall be entitled to withdraw from this contract if by
April 1, 2000, the capital increase required for the IPO has not been
implemented for reasons within the responsibility of Toys International or
Playco.
Concord and CDMI can, not affecting other rights, withdraw from this
contract prior to Toys International going public:
if Toys International is in breach of any representation or warranty under
Section V.
if a comparison between the business plan and the actual quarterly figures
reveals negative deviations of 30 % or more, or in the case of any similar
negative deviation of figures which have been authorized by Toys International
for being published prior to the IPO.
If the market valuation of the Company at the IPO is less than $50 million.
if the proceeds of the pre-IPO investment is not utilised according to the
provisions of the Engagement Letter dated June 14, 1999.
The withdrawal shall be declared by registered letter given 30 days notice
and specifying the reasons for the withdrawal.
If Concord and/or CDMI should withdraw for the reasons specified in No. 1
and/or No. 2 above, Toys International agrees to repay Concord and/or CDMI
assignment of the shares to Toys International.
Following withdrawal from this contract by CDMI or Concord, they shall have
no rights or duties whatsoever any longer under this contract, with the
exception of the above-mentioned obligations. Concord and CDMI's rights under
Section V(2) shall remain unaffected by a right of withdrawal.
Other provisions
Changes and supplements to this contract must be made in writing.
In case one or more provisions of this Contract are rendered ineffective or
contestable, the validity of the other provisions will not be affected. In this
case, a valid regulation will replace the ineffective and contestable provisions
having a similar economic purpose to the ineffective or contestable provision.
The same applies in case the Contract contains a gap.
This contract is subject to the laws of the Federal Republic of Germany.
International Laws shall not apply. The place of jurisdiction is Frankfurt am
Main.
XII. Term of Contract
This contract shall begin upon the signing by the parties and shall end
three years after Toys International going public, but not later than December
31, 2004.
<TABLE>
<CAPTION>
<S> <C>
For CDMI: For Concord:
Frankfurt a.m.. the . . . . . . . . . Frankfurt a.m., the . . . . . . . . .
- -------------------------- ---------------- ----------------
Ilan Arbel Bernd Groebler Markus Saller
Vorstand Prokurist
For Toys International: For Playco:
- ----------------------------------- -----------------------------------
Harold Rashbaum, Chairman of the Board Harold Rashbaum, Chairman of the Board
- -------------------------------- --------------------------------
Richard Brady, Director and President Richard Brady, Director and President
</TABLE>
EXHIBIT 21.1
Subsidiaries
Toys International.COM, Inc.
State of Incorporation: Delaware
Name(s) under which does business: Play Co. Toys International, Toy Co.,
Tutti Animali
Play Co. Toys Canyon Country, Inc.
State of Incorporation: Delaware
Name(s) under which does business: Play Co.
EXHIBIT 23.1
Consent of Haskell & White, LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated June 24, 1999, relating to the
financial statements of Play Co. Toys & Entertainment Corp. which are contained
in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
HASKELL & WHITE LLP
September 15, 1999
