U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A-1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number O-25030
PLAY CO. TOYS & ENTERTAINMENT CORP.
(Exact Name of Small Business Issuer as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 95-3024222
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
</TABLE>
550 Rancheros Drive, San Marcos, California 92069
(Address of Principal Executive Offices)
(760) 471-4505
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares of each of the issuer's classes of common equity
outstanding as of the latest practicable date: Common Stock, $0.01 par value:
5,509,197 shares outstanding as of February 12, 1999.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page Number
Item 1. FINANCIAL STATEMENTS
<S> <C> <C> <C>
Condensed Balance Sheets as of December 31, 1998 (unaudited) 3
and March 31, 1998.
Condensed Statements of Operations and Comprehensive Net Loss
for the Three Months and Nine Months Ended December 31, 1998
and 1997 (unaudited). 4
Condensed Statements of Cash Flows for the Nine Months Ended
December 31, 1998 and 1997 (unaudited). 5
Notes to Condensed Financial Statements 6-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9-16
PART II. OTHER INFORMATION
17
Item 1. LEGAL PROCEEDINGS
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
Item 3. DEFAULTS UPON SENIOR SECURITIES 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
Item 5. OTHER INFORMATION 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 17-18
Signatures 19
</TABLE>
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
(unaudited) Restated
----------------------- ---------------------
Current
<S> <C> <C>
Cash ........................................................................................... $ 1,219,989 $ 648,986
Accounts receivable ............................................................................ 110,734 78,594
Merchandise inventories ........................................................................ 10,824,770 7,872,804
Other current assets ........................................................................... 1,736,769 433,928
------------ ------------
Total current assets ........................................................................... 13,892,262 9,034,312
Property and Equipment, Net of accumulated
Depreciation and amortization of $4,121,412
And $3,414,235, respectively ................................................................... 4,343,204 2,782,386
Deposits and other assets ...................................................................... 2,385,027 2,323,189
------------ ------------
$ 20,620,493 $ 14,139,887
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 1998 March 31, 1998
Current
Accounts payable ............................................................................... $ 5,218,239 $ 3,505,230
Accrued expenses and other liabilities ......................................................... 781,371 726,601
Current portion of notes payable and capital leases (Note 4) ................................... 405,965 350,000
------------ ------------
Total current liabilities ...................................................................... 6,405,575 4,581,831
Borrowings under financing agreement ........................................................... 7,754,215 5,445,198
Notes payable, and capital leases, net of current portion ...................................... 620,030 1,500,000
Deferred rent liability ........................................................................ 124,005 110,351
------------ ------------
Total liabilities .............................................................................. 14,902,825 1,637,380
------------ ------------
Stockholders' equity
Series E convertible preferred stock, $1 par
10,000,000 shares authorized;
5,883,903 and 4,200,570 shares outstanding 5,236,642 3,974,376
Common stock, $.01 par value, 40,000,000 shares
authorized; 5,509,197 and 4,103,519 shares outstanding ......................................... 55,035 41,035
Additional paid-in-capital ..................................................................... 15,087,422 12,927,918
Accumulated deficit ............................................................................ (14,662,431) (14,440,822)
------------ ------------
Total stockholders' equity ..................................................................... 5,716,668 2,502,507
------------ ------------
$ 20,620,493 $ 14,139,887
============ ============
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE NET LOSS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31, Nine Months Ended
December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales .......................................................... $ 14,715,952 $ 10,396,440 $ 27,171,662 $ 17,768,033
Cost of sales .......................................... 8,545,336 6,381,992 15,665,721 10,740,074
------------ ------------ ------------ ------------
Gross profit ........................................... 6,170,616 4,014,448 11,505,941 7,027,959
Operating expenses:
Operating expenses ............ 4,052,115 2,716,214 9,146,006 6,773,188
Depreciation and amortization ............ 324,975 161,982 707,186 440,035
------------ ------------ ------------ ------------
Total operating expenses ............................... 4,377,090 2,878,196 9,853,192 7,213,223
Operating profit (loss) ................................ 1,793,526 1,136,252 1,652,749 (185,264)
Interest expense:
Interest and finance charges ............ 221,860 165,933 517,172 415,445
Amortization of debt issuance costs ............ 73,032 88,653 127,434 268,208
------------ ------------ ------------ ------------
Total interest expense ................................. 294,892 254,586 644,606 683,653
Net income (loss) ................................ $ 1,498,634 $ 881,666 $ 1,008,143 $ (868,917)
============ ============ ============ ============
Other comprehensive income (loss) .......................... 0 0 0 0
Comprehensive net income (loss) ............................... $ 1,498,634 $ 881,666 $ 1,008,143 $ (868,917)
Calculation of Basic and Diluted Income Per Share:
Net income (loss) .................................. $ 1,498,634 $ 881,666 $ 1,008,143 $ (868,917)
Effect of non-cash dividends on preferred stock (477,973) -- (1,229,752) (1,200,000)
------------ ------------ ------------ ------------
Net income (loss) applicable to common shares
$ 1,020,661 $ 881,666 $ (221,609) $ (2,068,917)
============ ============ ============ ============
Basic income (loss) per common
Share and share equivalents ........................................ $ 0.22 $ 0.21 $ (0.05) $ (0.50)
============ ============ ============ ============
Weighted average number of
Shares and share equivalents outstanding - basic
4,666,562 4,103,519 4,291,883 4,096,974
============ ============ ============ ============
Diluted income (loss) per common
share and share equivalents ........................................ $ 0.03 $ 0.04 $ (0.01) n/a
============ ============ ============ ============
Weighted average number of common
share and share equivalents outstanding - diluted
36,069,029 24,904,765 39,820,796 n/a
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
----------- ------------
1998 1997
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (loss) ....................................................... $ 1,008,143 $ (868,917)
Adjustments used to reconcile net income (loss) to net cash used for
operating activities:
Depreciation and amortization ........................ 707,186 440,035
Amortization of debt issuance costs .................. 127,434 268,208
Deferred rent ........................................ 4,552 29,073
Stock compensation ................................... 32,814 --
Increase (decrease) from
changes in:
Accounts receivable .................................. (32,140) (256,915)
Merchandise inventories .............................. (2,951,966) (519,083)
Other current assets ................................. (1,302,841) 83,889
Deposits and other assets ............................ (213,123) (122,073)
Accounts payable ..................................... 1,713,009 180,313
Accrued expenses and other liabilities ............... 54,770 448,319
----------- -----------
Net cash used for operating activities ............... 852,162 317,151
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................. 1,917,810 853,072
----------- -----------
Net cash used for investing activities ............... 1,917,810 853,072
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred and common stock . 706,148 3,629,470
Borrowings on line of credit, net .................... 2,309,017 307,432
Borrowings under notes payable and capital leases, net 325,810 (116,666)
----------- -----------
Net cash provided by financing activities ............ 3,340,975 3,820,236
----------- -----------
Net increase in cash ....................................... 571,003 2,650,013
Cash at beginning of period ............................... 648,986 177,722
----------- -----------
Cash at end of period ....................................... $ 1,219,989 $ 2,827,735
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
Note 1. General
The interim accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. For further information, management
suggests that the reader refer to the audited financial statements for the year
ended March 31, 1998 included in its Annual Report on Form 10-KSB. Operating
results for the nine-month period ended December 31, 1998 are not necessarily
indicative of the results of operations that may be expected for the year ending
March 31, 1999.
Note 2. Capital Leases
During the nine-month period ended December 31, 1998, the Company entered
into several capital leases and loans to help finance the cost of opening its
new stores. The leases are for an aggregate principal amount of $770,332. They
generally carry terms of five years and bear interest at rates between 13.3% and
18%.
Note 3. Breaking Waves Investment
On November 24, 1998, pursuant to a sales agreement entered into by and
between the Company and Breaking Waves, Inc. ("B.W."), a wholly-owned subsidiary
of Hollywood Productions, Inc. ("Hollywood"), a related party, B.W. purchased
1.4 million unregistered shares of the Company's Common Stock in a private
transaction. The President of Hollywood is also the Chairman of the Company.
Hollywood is a publicly traded company. The shares purchased by B.W. represent
approximately 25.4% of the total Common Stock issued and outstanding after the
transaction.
The consideration for the stock was $504,000, which represented an
approximate price of $0.36 per share. This price was discounted 50% from the
then current market price reflecting a discount for the illiquidity of the
shares, which do not carry any registration rights. $300,973.50 of the
consideration remitted was in cash, and the remaining $203,026.50 was provided
in B.W. product, primarily girls' swimsuits. The Company had previously carried
swimsuits from B.W. in its stores on a trial basis.
Note 4. Financing Agreements
In November 1998, the Company borrowed $250,000 from Amir Overseas Capital
Corp. ("Amir"), a corporation not affiliated with the Company, under a
promissory note which bore interest at 12% and was repaid in January 1999.
Also in November 1998, the Company entered into agreements with ZD Group,
L.L.C. ("ZD"), a related party, and Frampton Industries, Ltd. ("Frampton"), an
unaffiliated British Virgin Islands company, to secure additional financing. ZD
is a New York limited liability company, the beneficiary of which is a member of
the family of the Company's Chairman.
Pursuant to the ZD agreement, ZD issued a $700,000 irrevocable standby
letter of credit ("L/C") in favor of FINOVA Capital Corp ("FINOVA"), the
Company's working capital lender. FINOVA then lent a matching $700,000 to the
Company in the form of a term loan, pursuant to a Fourth Amendment to Loan and
Security Agreement executed on February 11, 1999 by and between the Company and
FINOVA. The term loan from FINOVA expires on August 3, 2000 and bears interest
at prime plus one percent. As consideration for its issuance of the L/C, ZD will
receive a profit percentage after application of corporate overhead from three
of the Company's stores.
<PAGE>
Under the Frampton agreement, Frampton will loan $500,000 in the form of a
convertible, subordinated debenture due December 31, 1999. The debenture will
bear a 5% interest rate and will be convertible into the Company's Series E
Preferred Stock ("Series E Stock") at a price of $0.10 per share at Frampton's
option. 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. The Company expects to receive the
proceeds of this loan in the near future.
Note 5. Subsequent Events
In January 1999, the Company and Frampton executed a letter agreement
pursuant to which Frampton has agreed to act as the exclusive placement agent
and financial advisor for the Company in connection with a contemplated proposed
offering of convertible debentures. The agreement is for a term of six months
(with a potential two month extension at Frampton's option) and provides that
Frampton shall be provided an investment banking fee of 8% of the face amount of
each debenture funded.
On February 1, 1999, the Company entered into a two month agreement
(expiring March 31, 1999) with Coffin Communications Group ("Coffin") pursuant
to which Coffin is to provide investor relations services to the Company in
exchange for which Coffin is to receive an aggregate of $5,000. Also on February
1, 1999, the Company entered into a one year agreement (expiring March 31, 2000)
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
websites.
In February 1999, the Company borrowed $100,000 from B.W. and issued an
unsecured 9% promissory note which calls for repayment of the note in four equal
monthly installments, comprising principal and interest, commencing March 15,
1999 and ending June 15, 1999.
Note 6. Restatement of Financial Statements
The Company has restated its financial statements for the year ended March
31, 1998 from those originally presented, 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 convertible preferred 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, which stock was issued in varying amounts on
various dates, includes a beneficial conversion feature whereby each share is
convertible into six shares of the Company's Common Stock, at the option of the
holder, at no additional conversion price.
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,
which is $0, 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 issuances of the Series E
Stock should initially be recorded as additional paid-in capital, as 100% of the
proceeds are allocable to the beneficial conversion feature. Over the required
holding period, 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
shareholders' equity of the Company.
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.
<PAGE>
In applying the provisions of Topic D-60, the Company has recorded
dividends of $477,973 and none for the three month periods ended December 31,
1998 and 1997, respectively, and $1,229,752 and $1,200,000 for the six month
periods ended December 31, 1998 and 1997, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Statements contained in this report which are not historical facts may be
considered forward looking information with respect to plans, projections, or
future performance of the Company as defined under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
risks and uncertainties, which could cause actual results to differ materially
from those projected.
The Company's operations are substantially controlled by United Textiles &
Toys Corp. ("UTTC"), the Company's parent. UTTC currently owns approximately
45.1% of the issued and outstanding shares of the Company's Common Stock. UTTC
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, UTTC ceased all operating activities; it now
operates solely as a holding company.
For the three months ended December 31, 1998 compared to the three months ended
December 31, 1997
The Company generated net sales of $14,715,952 in the three months ended
December 31, 1998. This represented an increase of $4,319,512, or 41.5%, from
net sales of $10,396,440 in the three months ended December 31, 1997.
Approximately $900,000 of this sales growth came from an 11.8% increase in same
store sales. The remaining sales increase of approximately $3.4 million came
from the Company's new stores.
The Company posted a gross profit of $6,170,616 in the three months ended
December 31, 1998, reflecting an increase of $2,156,168, or 53.7%, from the
gross profit of $4,014,448 in the three months ended December 31, 1997. This
increase was due to the above noted growth in sales and to an increase in the
Company's gross margin. The gross margin of 41.9% in the December 1998 period
was 3.3% higher than the Company's gross margin of 38.6% in the December 1997
period. This gross margin improvement was largely due to the ongoing
implementation of the Company's plan to sell educational, new electronic
interactive, and specialty and collectible toys and items in high traffic malls.
The mix of specialty and educational toys generally produce better margins than
traditional toys.
Operating expenses (excluding depreciation and amortization expenses) for
the three months ended December 31, 1998 were $4,052,115. This represented a
$1,335,901, or 49.2%, increase over the Company's operating expenses of
$2,716,214 in the three months ended December 31, 1997. The primary reasons for
the operating expense increase were an increase in payroll and related expenses
of $712,812 and an increase in rent expense of $405,514. The payroll expense
increase was due to the addition of several middle managers and employees at the
Company's new stores. The growth of rent expense was the result of adding
additional stores.
During the three months ended December 31, 1998, the Company recorded
non-cash depreciation and amortization expense of $324,975, a $162,993 increase
from $161,982 in the period ended December 31, 1997. Total operating expenses
(operating expenses combined with depreciation and amortization) in the December
1998 period were $4,377,090, representing a $1,498,894, or 52.1%, increase from
total operating expenses of $2,878,196 in the December 1997 period.
<PAGE>
As a result of the $2,156,168 increase in gross profit less the $1,498,894
increase in total operating expenses, the Company's operating profit increased
by $657,274, or 57.8%, from $1,136,252 during the three months ended December
31, 1997 to $1,793,526 during the three months ended December 31, 1998.
Interest expense totaled $294,892 for the three months ended December 31,
1998. This represented a $40,306 increase from interest expense of $254,586 for
the three months ended December 31, 1997. The primary reason for the increased
level of interest expense was a higher level of borrowings in the three months
ended December 31, 1998 than in the December 1997 period.
As a result of the above-mentioned factors, the Company recorded a net
income of $1,498,634 for the three months ended December 31, 1998. This
represented a $616,968 increase over the net income of $881,666 recorded in the
three months ended December 31, 1997.
For the three months ended December 31, 1998, net income of $1,498,634 was
reduced by non-cash dividends of $477,973 in order to determine the net income
applicable to common shares. The non-cash dividends represent amortization of
the discount recorded upon issuance of Series E Stock with a beneficial
conversion feature. No dividends in the form of securities or other assets were
actually paid out. There was no such dividend recorded for the December 1997
period.
The basic income per share for the three months ended December 31, 1998 was
$0.22 compared to basic net income per share of $0.21 for the three months ended
December 31, 1997. The weighted average number of common shares outstanding
increased from 4,103,519 in the December 1997 period to 4,666,562 in the
December 1998 period.
The diluted income per share for the three months ended December 31, 1998
was $0.03 compared to diluted net income per share of $0.04 for the three months
ended December 31, 1997. The weighted average number of common shares
outstanding increased from 24,904,765 in the December 1997 period to 36,069,029
in the December 1998 period.
For the nine months ended December 31, 1998 compared to the nine months
ended December 31, 1997
The Company generated net sales of $27,171,662 in the nine-month period
ended December 31, 1998. This represented an increase of $9,403,629, or 52.9%,
from net sales of $17,768,033 in the nine-month period ended December 31, 1997.
Approximately $3.5 million of this sales growth came from a 25.4% increase in
same store sales during the nine-month period, with the remaining increase of
approximately $2.4 million from the Company's new stores.
The Company posted a gross profit of $11,505,941 in the nine-month period
ended December 31, 1998, reflecting an increase of $4,477,982, or 63.7%, from
the gross profit of $7,027,959 in the nine-month period ended December 31, 1997.
This increase was due to the above noted growth in sales and to an increase in
the Company's gross margin. The gross margin of 42.3% in the December 1998
period was 2.7% higher than the Company's gross margin of 39.6% in the December
1997 period. This gross margin improvement was largely due to the ongoing
implementation of the Company's plan to sell educational, new electronic
interactive, and specialty and collectible toys and items in high traffic malls.
The mix of specialty and educational toys generally produces better margins than
traditional toys.
Operating expenses (excluding depreciation and amortization expenses) in
the nine-month period ended December 31, 1998 were $9,146,006. This represented
a $2,372,818, or 35%, increase over the Company's operating expenses of
$6,773,188 in the nine-month period ended December 31, 1997. The primary reasons
for the operating expense increase were an increase in payroll and related
expenses of $1,245,860 and an increase in rent expense of $533,655. The
increased expenses were due to the lease payments on the new stores opened and
the addition of several middle managers and of employees at the new stores.
<PAGE>
During the nine-month period ended December 31, 1998, the Company recorded
non-cash depreciation and amortization expenses of $707,186, a $267,151 increase
from $440,035 in the period ended December 31, 1997. This increase was largely
due to depreciation on the fixed assets purchased for the newly opened stores.
Total operating expenses (operating expenses combined with depreciation and
amortization) in the December 1998 period were $9,853,192, a $2,639,969, or
36.6%, increase from total operating expenses of $7,213,223 in the December 1997
period.
As a result of the $4,477,982 increase in gross profit less the $2,639,969
increase in total operating expenses, the Company's operating profit increased
by $1,838,013 from an operating loss of $(185,264) during the nine-month period
ended December 31, 1997 to $1,652,749 during the nine-month period ended
December 31, 1998.
Interest expense totaled $644,606 for the nine-month period ended December
31, 1998. This represented a $39,047, or 5.7%, decrease from the interest
expense of $683,653 in the nine-month period ended December 31, 1997. The
primary reason for the decreased level of interest expense was a higher level of
amortization of debt issuance costs in the nine-month period ended December 30,
1997 than in the December 1998 period. The interest expense paid to the
Company's lenders actually increased in the period due to higher average
outstanding balances which financed increased levels of inventory.
As a result of the above-mentioned factors, the Company recorded net income
of $1,008,143 for the nine-month period ended December 31, 1998. This
represented a $1,877,060 increase over the net loss of $(868,917) recorded in
the nine-month period ended December 31, 1997.
For the nine months ended December 31, 1998, net income of $1,008,143 was
reduced by non-cash dividends of $1,229,752 in order to determine the net income
(loss) applicable to common shares. The non-cash dividends represent
amortization of the discount recorded upon issuance of Series E Stock with a
beneficial conversion feature. No dividends in the form of securities or other
assets were actually paid out. For the December 1997 period, the net loss of
$(868,917) was reduced by non-cash dividends of $1,200,000 to determine the net
loss applicable to common shares in a restated calculation of the diluted income
(loss) per common share.
The basic loss per share for the nine months ended December 31, 1998 was
$(0.05) compared to a net loss per share of $(0.50) for the nine months ended
December 31, 1997. The weighted average number of common shares outstanding
increased from 4,096,974 in the December 1997 period to 4,291,883 in the
December 1998 period.
The diluted loss per share for the nine months ended December 31, 1998 was
$(0.01). The diluted loss per share for the nine months ended December 31, 1997
was not calculated as the effect of share equivalents was anti-dilutive. The
weighted average number of common shares outstanding in the December 1998 period
was 39,820,796.
Liquidity and Capital Resources
At December 31, 1998, the Company had a working capital position of
$7,486,687 compared to a working capital position of $4,452,481 at March 31,
1998. The primary factors in the $3,034,206 increase in working capital were a
$1,238,957 growth in the Company's net investment in inventories (increase in
inventories less increase in accounts payable), which was financed through a
$2,309,017 increase under the Company's financing agreement, a long term
liability, and a $1,302,841 increase in other current assets.
The Company has generated operating losses for the past several years and
has historically financed those losses and its working capital requirements
through loans and sales of the Company's equity securities, primarily through
the sale of the Company's Series E convertible preferred stock. There can be no
assurance that the Company will be able to generate sufficient revenues or have
sufficient controls over expenses and other charges to achieve profitability.
<PAGE>
During the nine-month period ended December 31, 1998, the Company used
$852,162 of cash in its operations compared to $317,151 used in operations in
the nine-month period ended December 31, 1997. The Company's net income (loss)
was $1,008,143 and $(868,917), respectively, in those periods. The primary
reason the Company used cash in its operating activities during the nine-month
period ended December 31, 1998 was its net investment (increase in inventories
less increase in accounts payable) in inventories of $1,238,957 and an increase
in other current assets of $1,302,841. The largest single component of the
increase in other current assets was approximately $580,000 in tenant
improvement allowances due to the Company from several of the owners of the
malls in which the Company opened stores in December 1998.
The Company used $1,917,810 of cash in its investing activities during the
nine-month period ended December 31, 1998 compared to $853,072 in the nine-month
period ended December 31, 1997. Investing activity consisted of the purchase of
equipment and fixtures for new stores.
The Company generated $3,340,975 of cash from its financing activities in
the nine-month period ended December 31, 1998 compared to the generation of
$3,820,236 from financing activities in the nine-month period ended December 31,
1997. The primary contributors to the Company's financing activities were
borrowings on the Company's line of credit and under notes payable. Those
proceeds were used to finance the Company's working capital requirements and
capital expenditures during the nine-month period ended December 31, 1998. The
primary factor in the prior period was $3,629,470 in proceeds from the sale of
Series E Stock and Common Stock.
As a result of the above factors, the Company had a net increase in cash of
$571,003 in the nine-month period ended December 31, 1998 compared to a net
increase in cash of $2,650,013 in the nine-month period ended December 31, 1997.
During the three-month period ended December 31, 1998, the Company opened
four new stores. Those stores were all located in high traffic shopping malls.
The stores were located in Thousand Oaks and Orange (both located in
California), Auburn Hills, Michigan and in Gurnee, Illinois. These four stores
represented an aggregate capital investment of approximately $1.1 million, net
of landlord tenant improvement ("Landlord TI") contributions.
The Landlord TI contributions related to those four stores equal $587,440.
The Company has not yet received those contributions. The Company expects to
receive those contributions before the end of its fiscal year.
The Company had planned to finance the costs of opening those new stores
through a combination of capital lease financing, use of the Company's working
capital, and the sale of additional equity. The Company received approximately
$420,000 in lease financing on December 30, 1998 and recently received another
$150,000 in commitments for lease financing. The Company continues to seek
additional capital lease financing.
On November 24, 1998, Breaking Waves, Inc. ("B.W."), a wholly-owned
subsidiary of Hollywood Productions, Inc. ("Hollywood"), a related party,
purchased 1.4 million unregistered shares of the Company's Common Stock in a
private transaction. The President of Hollywood is also the Chairman of the
Company. Hollywood is a publicly traded company. The shares purchased by B.W.
represent approximately 25.4% of the total Common Stock issued and outstanding
after the transaction.
The consideration for the stock was $505,000, which represented a price of
$0.36 per share. This price was a 50% discount from the then current market
price reflecting a discount for the illiquidity of the shares, which do not
carry any registration rights. $300,000 of the consideration was in cash and the
remaining $205,000 was in product from B.W., primarily girl's swimsuits. The
Company had previously carried swimsuits from B.W. in its stores on a trial
basis.
In November 1998, the Company entered into agreements ZD Group, L.L.C.
("ZD"), a related party, and Frampton Industries, Ltd. ("Frampton"), an
unaffiliated British Virgin Islands company, to secure additional financing. ZD
is a New York trust, the beneficiary of which is a member of the family of the
Company's Chairman.
<PAGE>
Pursuant to the ZD agreement, ZD issued a $700,000 irrevocable standby
letter of credit ("L/C") in favor of FINOVA Capital Corp ("FINOVA"), the
Company's working capital lender. FINOVA then lent a matching $700,000 to the
Company in the form of a term loan. The term loan expires on August 3, 2000 and
bears interest at prime plus one percent. As consideration for its issuance of
the L/C, ZD will receive a profit percentage after application of corporate
overhead from three of the Company's stores.
Under the Frampton agreement, Frampton will loan $500,000 in the form of a
convertible, subordinated debenture due December 31, 1999. The debenture will
bear a 5% interest rate and will be convertible into the Company's Series E
Stock at a price of $0.10 per share at Frampton's option. This price was a 50%
discount from the then current market price (November 10, 1998) reflecting a
discount for the illiquidity of the shares, which do not carry any registration
rights.
The Company has entered into leases to open eight new stores in calendar
year 1999. The Company anticipates that the cost of opening those new stores
will be approximately $3,000,000, net of landlord TI contributions. The Company
plans to finance the costs of opening those new stores through a combination of
capital lease financing, use of the Company's working capital, and the sale of
additional equity. In January 1999, the Company and Frampton executed a letter
agreement pursuant to which Frampton has agreed to act as the exclusive
placement agent and financial advisor for the Company in connection with a
proposed offering of $5 million in convertible subordinated debentures on terms
similar to the debenture discussed above. The agreement is for a term of six
months (with a potential two month extension at Frampton's option) and provides
that Frampton shall be provided an investment banking fee of 8% of the face
amount of each debenture funded. There can be no assurance that the Company will
be able to obtain sufficient financing to successfully open the planned new
stores.
Year 2000
In 1998, the Company developed a plan to upgrade its existing management
information system ("MIS") and computer hardware and to become year 2000
compliant. The Company has now purchased the necessary hardware and software and
is in the process of installing the software. The Company has completed the
hardware upgrade and has installed a year 2000 compliant upgrade to its
accounting software. The Company expects to finish the year 2000 compliance work
in the first half of 1999.
To finance the cost of the new hardware in the computer upgrade project,
the Company entered into a lease in the amount of $82,472 bearing an interest
rate of 10.8%. The total cost of the hardware and software purchased for the
project was approximately $100,000.
Beyond the above noted internal year 2000 system issue, the Company has no
current knowledge of any outside third party year 2000 issues that would result
in a material negative impact on its operations. Management has reviewed its
significant vendors' (i.e., Mattel, Inc. and Hasbro, Inc.) and financing arm's
(FINOVA) recent SEC filings vis-a-vis year 2000 risks and uncertainties and, on
the basis thereof, is confident that the steps the Company has taken to become
year 2000 compliant are sufficient. In continuation of this review, the Company
shall continue to monitor or otherwise obtain confirmation from the aforesaid
entities - and such other entities as management deems appropriate - as to their
respective degrees of preparedness. To date, nothing has come to the attention
of the Company that would lead it to believe that its significant customers,
vendors, and/or service providers will not be year 2000 ready.
Year 2000 readiness is a priority of the Company. The Company believes that
it is taking such reasonable and prudent steps as are necessary to mitigate the
risks associated with potential year 2000 difficulties; however, the effect, if
any, of year 2000 problems on the Company's results of operations if the
Company's or its customers, vendors, or service providers are not fully
compliant cannot be estimated with any degree of certainty. Nonetheless, the
most likely impact on the Company would be a reduced level of activity in the
fourth quarter of the fiscal year ended March 31, 2000, a time at which, as a
result of the seasonality of the Company's business, its activities in sales and
sourcing of products, are at their low.
<PAGE>
Trends Affecting Liquidity, Capital Resources and Operations
As a result of its current merchandise mix which emphasizes specialty and
educational toys, the Company enjoyed significant sales and gross profits in the
nine months ended December 31, 1998. This mix of specialty and educational toys
includes collectible die cast cars, specialty yo-yo's, Rokenbok and Learning
Curve toys, and Beanie Babies and other plush and many educational toys. There
can be no assurance that these particular specialty toys will continue to
contribute strongly to the Company' sales and gross profits. The history of the
toy industry, however, indicates that there is generally at least one or more
highly popular toy every year.
The Company's current sales efforts focus primarily on a defined geographic
segment consisting of the southern California area and the southwestern and
midwestern United States. The Company's future financial performance will depend
upon (i) continued demand for high-end specialty, educational, and traditional
toys and management's ability to adapt to continuously changing consumer
preferences and the market for such items, (ii) general economic conditions
within the Company's geographic market area, as same may be expanded, (iii) the
Company's ability to choose locations for new stores, (iv) the Company's ability
to purchase products at favorable prices and on favorable terms, and (v) the
effects of increased competition.
The toy and hobby retail industry faces a number of potentially adverse
business conditions including price and gross margin pressures and market
consolidation. The Company competes with a variety of mass merchandisers,
superstores, and other toy retailers, including Toys R Us, Kay Bee Toy Stores,
Walmart and Kmart. Competitors that emphasize specialty and educational toys
include Disney Stores, Warner Bros. Stores, Learning Smith, Lake Shore, Zany
Brainy, and Noodle Kidoodle. There can be no assurance that the Company's
business strategy will enable it to compete effectively in the toy industry or
that the Company will be able to generate sufficient revenues or have sufficient
control over expenses and other charges to increase profitability.
Inflation and Seasonality
The impact of inflation on the Company's results of operations has not been
significant. The Company attempts to pass on increased costs by increasing
product prices over time.
The Company's operations are highly seasonal with approximately 30-40% of
its net sales historically falling within the Company's third quarter, which
coincides with the Christmas selling season. The Company intends to open stores
throughout the year, but generally before the Christmas selling season, which
will make the Company's third quarter sales an even greater percentage of the
total year's sales.
<PAGE>
PART II
Item 1. Legal Proceedings
In October 1997, in the Superior Court of the State of California, County
of San Bernardino, Foothill Marketplace commenced suit against the Company and
its former guarantor for breach of contract pertaining to premises leased by the
Company in Rialto, California. The lease for the premises has a term from
February 1987 through November 2003. The Company vacated the premises in August
1997. Under California State law and the provisions of the lease, plaintiff has
a duty to mitigate its damages. Plaintiff seeks damages, of a continuing nature,
for unpaid rent, proximate damages, costs, and attorneys' fees, in the
approximate amount of $300,000. This action is in the discovery phase but has
been set for trial in August 1999.
No Director, Officer, or affiliate of the Company, nor any associate of
same, is a party to, or has a material interest in, any proceeding adverse to
the Company.
Item 2. Changes in Securities and Use of Proceeds: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits were filed with the Company's initially filed
Form 10-QSB for the quarter ended December 31, 1998 except those designated by
an asterisk (*) which are filed herewith:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10.111 Agreement by and between the Company and ZD Group, L.L.C., dated November 11, 1998.
10.112 Intercreditor and Subordination Agreement by and between ZD Group, L.L.C. and FINOVA Capital Corporation, dated
February 11, 1999.
10.113 5% Convertible Secured Subordinated Debenture in favor of Frampton Industries, Ltd., dated November 11, 1998.
10.114 Subordinated Security Agreement by and between the Company and Frampton Industries, Ltd., dated November 11,
1998.
10.115 Intercreditor and Subordination Agreement by and between Frampton Industries, Ltd. and FINOVA Capital
Corporation, dated February 11, 1999.
10.115(a)* Third Amendment to Loan and Security Agreement by and between the Company and FINOVA Capital Corporation, dated
December 1998
10.116 Fourth (mistakenly entitled as "Third") Amendment to Loan and Security Agreement by and between the Company and
FINOVA Capital Corporation, dated February 11, 1999.
10.117 Letter of Intent by and between the Company and Frampton Industries, Inc., dated January 4, 1999.
10.118* Fifth Amendment to Loan and Security Agreement by and between the Company and FINOVA Capital Corporation, dated
March 1990
10.119* Typhoon Consulting Agreement, dated February 1, 1999
27.01* Financial Data Schedule
</TABLE>
(b) During the quarter ended December 31, 1998, no reports on Form 8-K were
filed with the Securities and Exchange Commission.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, this 31st day of March 1999.
PLAY CO. TOYS & ENTERTAINMENT CORP.
By: /s/ Richard L. Brady
Richard L. Brady
President and Chief Executive Officer
By: /s/ James B. Frakes
James B. Frakes
Chief Financial Officer
EXHIBIT 10.115(a)
AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT
This Amendment No. 3 to Loan and Security Agreement (this "Amendment") is
entered into as of this ___ day of December, 1998, by and between FINOVA CAPITAL
CORPORATION, a Delaware corporation ("Lender"), and PLAY CO. TOYS &
ENTERTAINMENT CORP., a Delaware corporation ("Borrower").
W I T N E S S E T H :
WHEREAS, Borrower and Lender entered into a Loan and Security Agreement
dated as of January 21, 1998 which was amended pursuant to that certain
Amendment No. 1 to Loan and Security Agreement dated as of July 24, 1998 and
that certain Amendment No. 2 to Loan and Security Agreement dated as of
September 24, 1998 (the aforementioned Loan and Security Agreement as amended by
the aforementioned amendments, collectively the "Loan Agreement"), that
evidences a loan from Lender to Borrower; and
WHEREAS, Borrower has asked Lender to modify the Loan Agreement in
accordance with the terms of, and subject to the conditions contained in, this
Amendment and Lender is willing so to amend the Loan Agreement, upon the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of these recitals, the covenants contained
in this Amendment, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Lender and Borrower agree as
follows:
1. Definitions. Unless otherwise defined in this Amendment, all capitalized
terms used herein which are defined in the Loan Agreement have the same meaning
as set forth in the Loan Agreement.
2. Loan Agreement. The Loan Agreement is amended as follows:
2.1 Definitions. Section 1 is hereby amended by adding the following
definitions:
"Phoenix" means Phoenix Leasing Incorporated., a California
corporation and its successors and assigns.
"Phoenix Financing" means that Senior Loan and Security Agreement No.
4003 by and between Borrower and Phoenix (as Lender) dated as of October
19, 1998, whereby Phoenix, upon the terms and conditions set forth therein
has extended to Borrower a line of credit of up to $500,000 to be used for
the original acquisition cost of the Phoenix Equipment. A true and complete
copy of the aforesaid Loan Agreement is attached hereto as Schedule 1.
"Phoenix Equipment" means that certain equipment and fixtures
identified on Schedule 2 attached hereto and proceeds therefrom.
"Third Amendment" means that certain Amendment No. 3 to Loan and
Security Agreement between Lender and Borrower dated as of December ____,
1998.
"Third Amendment Effective Date" means December ___, 1998, the date
upon which the Third Amendment became effective pursuant to the terms and
upon the conditions thereof.
2.2 Permitted Encumbrances. The definition of Permitted Encumbrances
appearing in the Borrower Information section of the Schedule shall be
amended by adding the foregoing as subparagraph (e) thereof:
"(e) the lien in all of the Phoenix Equipment in favor of Phoenix
securing the Borrower's obligations under the Phoenix Financing."
<PAGE>
3. Phoenix Financing.
(a) On the Third Amendment Effective Date, the Lender agrees to
subordinate the lien of the Loan upon only the Phoenix Equipment to
the Phoenix Financing. The Borrower agrees that, except for the
Permitted Encumbrances, it will not enter into any additional loans or
financings nor grant any additional security interests in the
Collateral, without the prior consent of the Lender. Further, the
Borrower agrees that it will not amend or modify the documents
evidencing Phoenix Financing and/or the terms of the Phoenix
Financing, without obtaining first, in each instance, the prior
consent of Lender.
(b) The Borrower agrees to promptly supply to Lender true and
complete copies of any notice sent by Phoenix to the Borrower alleging
either (i) a default by the Borrower under the Phoenix Financing or
(ii) the occurrence of an event which with notice or the passage of
time (or both) would constitute a default by the Borrower under the
Phoenix Financing.
(c) In connection with the Phoenix Financing, FINOVA hereby
establishes reserve equal to at least three (3) months principal and
interest due and payable by the Borrower under the Phoenix Financing
(the "Phoenix Reserve"). The Phoenix Reserve will be considered a part
of the Loan Reserves.
4. Effect as an Amendment. Other than as specifically set forth in this
Amendment, the remaining terms of the Loan Agreement and the other Loan
Documents shall remain in full force and effect and shall remain unaffected and
unchanged except as specifically amended hereby. In the event of any conflict
between the terms and conditions of this Amendment and any of the other Loan
Documents, the provisions of this Amendment shall control. Each reference to in
the Loan Agreement to "this Agreement" shall be deemed to refer to the Loan
Agreement as amended through and including the Second Amendment, and each
reference in any other Loan Document to the Loan Agreement as amended through
and including the Second Amendment.
5. No Waiver. This Amendment in no way acts as a waiver by Lender of any
breach, default, Event of Default or condition which, with the giving of notice
or passing of time or both, would constitute an Event of Default, of Borrower
(whether known or unknown to Lender) or as a release or relinquishment of any of
the liens, security interests, rights or remedies securing payment and
performance of the Obligations or the enforcement thereof. Nothing contained in
this Amendment is intended to or shall be construed as relieving any person or
entity, whether a party to this Amendment or not, of any of such person's or
entity's obligations to Lender.
6. Conditions Precedent. This Amendment will not be effective unless and
until each of the following conditions precedent have been satisfied, in form,
manner and substance satisfactory to Lender prior to the Third Amendment
Effective Date:
(a) Borrower shall have delivered or caused to be delivered to
Lender the following documents, all of which shall be properly
completed, executed and otherwise satisfactory to Lender:
(i) This Amendment;
(ii) Consent of Guarantor in the form attached hereto and
incorporated herein by this reference;
(iii) A corporate resolution of each of Borrower and
Guarantor, approving the transactions contemplated hereby to
which it is a party;
(iv) An Intercreditor-Subordination Agreement between Lender
and Phoenix in a form satisfactory to Lender;
<PAGE>
(v) Such other items as Lender may reasonably require or
reasonably deem necessary.
(b) There shall not then exist an Event of Default or any act or
event which with notice, passage of time, or both would constitute an
Event of Default.
(c) All the representations and warranties of the Loan Parties in
the Loan Documents shall be true and correct, in all material
respects, before and after giving effect to the making of this
Amendment.
(d) Borrower shall have paid all closing costs, recording fees
and taxes, appraisal fees and expenses, travel expenses, fees and
expenses of Lender's counsel, and all other costs and expenses
incurred by Lender in connection with the preparation of, closing of
and disbursement of the advances pursuant to this Amendment, which
costs, fees and expenses may be payable from the first advance made
pursuant to this Amendment.
7. Indebtedness Acknowledged. Borrower acknowledges that the indebtedness
evidenced by the Loan Documents is just and owing and agrees to pay such
indebtedness in accordance with the terms of the Loan Documents. Borrower
further acknowledges and represents that no event has occurred and no condition
presently exists that would constitute a default or event of default by Lender
under the Loan Agreement or any of the other Loan Documents, with or without
notice or lapse of time.
8. Validity of Documents. Borrower hereby ratifies, reaffirms, acknowledges
and agrees that the Loan Agreement and the other Loan Documents represent valid,
enforceable and collectable obligations of Borrower, and that Borrower presently
has no existing claims, defenses (personal or otherwise) or rights of setoff
whatsoever with respect to the Obligations of Borrower under the Loan Agreement
or any of the other Loan Documents. Borrower furthermore agrees that it has no
defense, counterclaim, offset, cross-complaint, claim or demand of any nature
whatsoever which can be asserted as a basis to seek affirmative relief or
damages from Lender.
9. Reaffirmation of Warranties. Borrower hereby reaffirms to Lender each of
the representations, warranties, covenants and agreements of Borrower as set
forth in each of the Loan Documents with the same force and effect as if each
were separately stated herein and made as of the date hereof. Borrower
represents and warrants to Lender that with respect to the financing transaction
herein contemplated, no Person is entitled to any brokerage fee or other
commission and Borrower agrees to indemnify and hold Lender harmless against any
and all such claims.
10. Other Writings. Lender and Borrower will execute such other writings as
may be necessary to confirm or carry out the intentions of Lender and Borrower
evidenced by this Amendment.
11. Entire Agreement. The Loan Documents as modified by this Amendment
embody the entire agreement and understanding between Borrower and Lender, and
supersede all prior agreements and understandings between said parties relating
to the subject matter thereof.
12. Counterparts; Telefacsimile Execution. This Amendment (including the
consents attached hereto) may be executed in any number of separate
counterparts, all of which when taken together shall constitute one and the same
instrument, admissible into evidence, notwithstanding the fact that all parties
have not signed the same counterpart. Delivery of an executed counterpart of
this Amendment by telefacsimile shall be equally as effective as delivery of a
manually executed counterpart of this Amendment. Any party delivering an
executed counterpart of this Amendment by telefacsimile shall also deliver a
manually executed counterpart of this Amendment, but the failure to deliver a
manually executed counterpart shall not affect the validity, enforceability, and
binding effect of this Amendment.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first written above.
FINOVA CAPITAL CORPORATION, a Delaware corporation
By:
Name:
Title:
PLAY CO. TOYS & ENTERTAINMENT CORP., a Delaware corporation
By:
Name:
Title:
90885-1
<PAGE>
CONSENT OF GUARANTOR
The undersigned ("Guarantor") hereby executes this Consent for the purpose
of (i) evidencing Guarantor's consent to the execution and performance of the
foregoing Amendment No. 3 to Loan and Security Agreement (the "Third Amendment")
by Lender and Borrower, (ii) reaffirming the terms of the Continuing Guaranty
Agreement executed by Guarantor in favor of Lender, (iii) evidencing Guarantor's
agreement that the Liabilities as set forth and defined in the Continuing
Guaranty Agreement shall, for all purposes, include the Loan Documents, as
amended by the Third Amendment, and shall further include all additional amounts
which may be funded or advanced to Borrower pursuant to the Loan Agreement
described above as amended by the Third Amendment, and (iv) ratifying and
affirming all terms and provisions of the Continuing Guaranty Agreement. Except
to the extent otherwise indicated, terms used herein with initial capital
letters shall have the meanings set forth in the Loan Agreement, as amended by
the Third Amendment.
Guarantor agrees that it has no defense, counterclaim, offset,
cross-complaint, claim or demand of any nature whatsoever which can be asserted
as a basis to seek affirmative relief or damages from Lender.
IN WITNESS WHEREOF, the undersigned has hereunto executed this Consent as
of this ____ day of _____________, 1998.
UNITED TEXTILES & TOYS CORPORATION,
a Delaware corporation
By:
Name:
Title:
90885-1
Exhibit 10.118
FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Fifth Amendment to Loan and Security Agreement (this "Amendment") is
entered into as of this ___ day of March, 1999 (the "Amendment Effective Date"),
by and between FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"),
and PLAY CO. TOYS & ENTERTAINMENT CORP., a Delaware corporation ("Borrower").
W I T N E S S E T H :
WHEREAS, Borrower and Lender entered into a Loan and Security Agreement
dated as of January 21, 1998 as amended by a First Amendment to the same dated
as of July 24, 1998; a Second Amendment to the same dated as of September 24,
1998; a Third Amendment to the same dated December 11, 1998, and a Fourth
Amendment to the same dated February 11, 1999 (collectively, the "Loan
Agreement"), that evidences a loan from Lender to Borrower; and
WHEREAS, Borrower has asked Lender to modify the Loan Agreement in
accordance with the terms of, and subject to the conditions contained in, this
Amendment and Lender is willing so to amend the Loan Agreement, upon the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of these recitals, the covenants contained
in this Amendment, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Lender and Borrower agree as
follows:
1. Definitions. Unless otherwise defined in this Amendment, all capitalized
terms used herein which are defined in the Loan Agreement have the same meaning
as set forth in the Loan Agreement.
2. In the Section of the Schedule entitled "Revolving Credit Loans",
subparagraph (a) (ii) (A) (1) shall be deleted in its entity and replaced with
the following:
"during (x) the period occurring from the Closing Date through and
including February 27, 1999, fifty-five percent (55%) of the value of Borrower's
Eligible Inventory, or (ii) the period commencing on February 28,1999 and
continuing through and including March 30,1999, fifty-four percent (54%) of the
value of the Borrower's Eligible Inventory, or (iii) the period commencing on
March 31,1999 and continuing through and including April 29,1999, fifty-three
percent of the value of the Borrower's Eligible Inventory, or (iv) the period
commencing on April 30, 1999 and continuing through and including May 30,1999,
fifty-two percent (52%) of the value of the Borrower's Eligible Inventory, or
(v) the period commencing on May 31, 1999 and continuing through and including
June 30,1999, fifty-one percent (51%) of the Borrower's Eligible Inventory, or
(vi) the period commencing on June 31, 1999 through and including July 30, 1999
and thereafter during the calendar months of January through and including July
of each subsequent Loan Year, fifty percent (50%) of the value of the Borrower's
Eligible Inventory, in each case calculated at the lower of cost or market value
and determined on a first-in, first-out basis, or "
3. Effect as an Amendment. Other than as specifically set forth in this
Amendment, the remaining terms of the Loan Agreement and the other Loan
Documents shall remain in full force and effect and shall remain unaffected and
unchanged except as specifically amended hereby. In the event of any conflict
between the terms and conditions of this Amendment and any of the other Loan
Documents, the provisions of this Amendment shall control. Each reference to in
the Loan Agreement to "this Agreement" shall be deemed to refer to the Loan
Agreement as amended through and including this Amendment, and each reference in
any other Loan Document to the Loan Agreement as amended through and including
this Amendment.
4. No Waiver. This Amendment in no way acts as a waiver by Lender of any
breach, default, Event of Default or condition which, with the giving of notice
or passing of time or both, would constitute an Event of Default, of Borrower
(whether known or unknown to Lender) or as a release or relinquishment of any of
the liens, security interests, rights or remedies securing payment and
performance of the Obligations or the enforcement thereof. Nothing contained in
this Amendment is intended to or shall be construed as relieving any person or
entity, whether a party to this Amendment or not, of any of such person's or
entity's obligations to Lender.
<PAGE>
5. Conditions Precedent. This Amendment will not be effective unless and
until each of the following conditions precedent have been satisfied, in form,
manner and substance satisfactory to Lender prior to the Amendment Effective
Date:
(a) Borrower shall have delivered or caused to be delivered to
Lender the following documents, all of which shall be properly
completed, executed and otherwise satisfactory to Lender:
(i) This Amendment;
(ii) Acknowledgment of the Guarantors in the form attached
hereto and incorporated herein by this reference;
(iii) Corporate resolutions of Borrower and Guarantor,
approving the transactions contemplated hereby to which it is a
party; and
(iv) Such other items as Lender may reasonably require or
reasonably deem necessary.
(b) There shall not then exist an Event of Default or any act or
event which with notice, passage of time, or both would constitute an
Event of Default.
(c) All the representations and warranties of each and every Loan
Party shall be true and correct, in all material respects, before and
after giving effect to the making of this Amendment.
(d) Borrower shall have paid all closing costs, recording fees
and taxes, appraisal fees and expenses, travel expenses, fees and
expenses of Lender's counsel, and all other costs and expenses
incurred by Lender in connection with the preparation of, closing of
and disbursement of the advances pursuant to this Amendment, which
costs, fees and expenses may be payable from the first advance made
pursuant to this Amendment.
(e) Borrower shall have paid to Lender an amendment fee of
$10,000.
6. Indebtedness Acknowledged. Borrower acknowledges that the indebtedness
evidenced by the Loan Documents is just and owing and agrees to pay such
indebtedness in accordance with the terms of the Loan Documents. Borrower
further acknowledges and represents that no event has occurred and no condition
presently exists that would constitute a default or event of default by Lender
under the Loan Agreement or any of the other Loan Documents, with or without
notice or lapse of time.
7. Validity of Documents. Borrower hereby ratifies, reaffirms, acknowledges
and agrees that the Loan Agreement and the other Loan Documents represent valid,
enforceable and collectable obligations of Borrower, and that Borrower presently
has no existing claims, defenses (personal or otherwise) or rights of setoff
whatsoever with respect to the Obligations of Borrower under the Loan Agreement
or any of the other Loan Documents. Borrower furthermore agrees that it has no
defense, counterclaim, offset, cross-complaint, claim or demand of any nature
whatsoever which can be asserted as a basis to seek affirmative relief or
damages from Lender.
8. Reaffirmation of Warranties. Borrower hereby reaffirms to Lender each of
the representations, warranties, covenants and agreements of Borrower as set
forth in each of the Loan Documents with the same force and effect as if each
were separately stated herein and made as of the date hereof. Borrower
represents and warrants to Lender that with respect to the financing transaction
herein contemplated, no Person is entitled to any brokerage fee or other
commission and Borrower agrees to indemnify and hold Lender harmless against any
and all such claims.
<PAGE>
9. Other Writings. Lender and Borrower will execute such other writings as
may be necessary to confirm or carry out the intentions of Lender and Borrower
evidenced by this Amendment.
10. Entire Agreement. The Loan Documents as modified by this Amendment
embody the entire agreement and understanding between Borrower and Lender, and
supersede all prior agreements and understandings between said parties relating
to the subject matter thereof.
11. Counterparts; Telefacsimile Execution. This Amendment (including the
consents attached hereto) may be executed in any number of separate
counterparts, all of which when taken together shall constitute one and the same
instrument, admissible into evidence, notwithstanding the fact that all parties
have not signed the same counterpart. Delivery of an executed counterpart of
this Amendment by telefacsimile shall be equally as effective as delivery of a
manually executed counterpart of this Amendment. Any party delivering an
executed counterpart of this Amendment by telefacsimile shall also deliver a
manually executed counterpart of this Amendment, but the failure to deliver a
manually executed counterpart shall not affect the validity, enforceability, and
binding effect of this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first written above.
FINOVA CAPITAL CORPORATION, a Delaware corporation
By:
Name:
Title:
PLAY CO. TOYS & ENTERTAINMENT CORP., a Delaware corporation
By:
Name:
Title:
<PAGE>
ACKNOWLEDGMENT
The undersigned ("Guarantor") hereby executes this Consent for the purpose
of (i) evidencing Guarantor's consent to the execution and performance of the
foregoing Fifth Amendment to Loan and Security Agreement (the "Fifth Amendment")
by Lender and Borrower, (ii) reaffirming the terms of the Continuing Guaranty
Agreement executed by Guarantor in favor of Lender, (iii) evidencing Guarantor's
agreement that the Liabilities as set forth and defined in the Continuing
Guaranty Agreement shall, for all purposes, include the Loan Documents, as
amended by the Fifth Amendment, and shall further include all additional amounts
which may be funded or advanced to Borrower pursuant to the Loan Agreement
described above as amended by the Fifth Amendment, and (iv) ratifying and
affirming all terms and provisions of the Continuing Guaranty Agreement. Except
to the extent otherwise indicated, terms used herein with initial capital
letters shall have the meanings set forth in the Loan Agreement, as amended by
the Fifth Amendment.
Guarantor agrees that it has no defense, counterclaim, offset,
cross-complaint, claim or demand of any nature whatsoever which can be asserted
as a basis to seek affirmative relief or damages from Lender.
IN WITNESS WHEREOF, the undersigned has hereunto executed this
Consent as of this ____ day of _____________, 1999.
UNITED TEXTILES & TOYS CORPORATION,
a Delaware corporation
By:
Name:
Title:
90885-1
EXHIBIT 10.119(a)
TYPHOON CONSULTING AGREEMENT
TYPHOON
Capital Consultants, LLC
February 1, 1999
Rich Brady, President
Play Co. Toys, Inc.
550 Rancheros Drive
San Marcos, CA 92069
Re: Consulting Agreement
Dear Mr. Rashbaum:
This letter confirms Play Co. Toys, Inc. at 550 Rancheros Drive, San
Marcos, CA 92069 (the "Company") agreement (this "Consulting Agreement" or
"Agreement") to retain Typhoon Capital Consultants and its respective agents and
employees ("Typhoon") to position management and the Company so as to increase
the Company's visibility in its industry and position it for growth in the
future. Attached hereto is a summary of the major activities that Typhoon will
perform in connection with this Consulting Agreement. This summary is
incorporated into the terms of this Consulting Agreement between Typhoon and the
Company. Below are additional agreements between the parties with respect to
this Consulting Agreement:
Term. The Company hereby appoints Typhoon to perform the duties and render
the services described in the attached Summary of Services for a term of one (1)
years commencing the date hereof and terminating on March 31, 2000.
Notwithstanding anything to the contrary contained herein, the Agreement is
immediately terminable by the Company in the event (I) Typhoon breaches its
fiduciary duty to the Company or (ii) Typhoon, or any of its principals, are
convicted of a felony.
Death or Disability. Notwithstanding the provisions of Paragraph 1 above,
during the term of this Agreement, if Typhoon fails to perform any of its duties
on account of an illness or other incapacity of Sanjay Sabnani, the president of
Typhoon, and such illness or incapacity shall continue for a period of more than
60 days, the Company shall have the right to terminate Typhoon upon the
provision of 30 days written notice.
Discontinuance of Business. Notwithstanding the provisions of Paragraph 1
above, during the term of this Agreement, if the Company shall discontinue or
interrupt the operation of its business for a period of 30 days, this Agreement
shall automatically terminate without further liability on the part of either of
the parties.
Non-Exclusive Services. Typhoon will devote part of the time and efforts of
its employees to the Company during the term of this Agreement.
<PAGE>
Compensation. The Company agrees to compensate Typhoon in Stock Options by
granting a total of 150,000 options to buy free-trading shares of Company's
common stock (OTCBB:PLCO). 50,000 options will be issued to Typhoon immediately
upon signing of this agreement. Additionally, beginning April 1, 1999 Typhoon
will be granted 20,000 options per month through August of 1999 at which point a
total of 150,000 options will have been issued to Typhoon. The term of these
options will be 30 months (2 1/2 years) expiring on August 30, 2001. These
options will be exercisable at $1.75 per share and shall be registered by the
Company no later than December 31, 1999. The Company may, with 30 day written
notice, terminate this agreement. In the event the Company exercises this right
prior to April 1, 1999, then only the original 50,000 options are owed to
Typhoon. After April 1, 1999 and through August 1999, the Company is responsible
for issuing all options owed to Typhoon through the calendar month in which the
notice of termination is served.
Non-Competition. Typhoon from time to time may represent entities in
competition with the Company, and the Company acknowledges that such
representation is not a breach of this Consulting Agreement. Nevertheless,
Typhoon: (i) shall not divulge trade secrets or confidential information of any
sort with respect to the Company, and (ii) shall advise the Company of any such
business relationship.
Non-Assignability. This Consulting Agreement shall inure to the benefit of
and shall be binding upon the successors and the assigns of the Company. Since
this Consulting Agreement is based upon the unique abilities and personal
confidence in Typhoon and its employees, Typhoon shall have no right to assign
this Consulting Agreement or any of the rights hereunder written without the
consent of the Company.
Notices. Any notice required or permitted to be given hereunder shall be
sufficient if in writing and if sent by certified mail or facsimile to the
parties at their present principal business addresses. Any change of address
must be sent to the other party via such procedure to be valid against such
other party.
Severability. If any provision of this Consulting Agreement shall be found
invalid by any court of competent jurisdiction, such findings shall not effect
the validity of the other provisions hereof and the invalid provisions shall be
deemed to have been severed herefrom.
Attorney's Fees. If any action is brought to enforce the terms of this
Consulting Agreement, the prevailing party shall be entitled to its costs and
reasonable attorneys' fees.
Arbitration. Any dispute concerning this Agreement shall be settled by
binding Arbitration in accordance with the Rules of the American Arbitration
Association in New York, NY.
If the terms hereof meet with your approval, please indicate by signing
below.
Sincerely,
TYPHOON CAPITAL CONSULTANTS
By: _________________________
Sanjay Sabnani, its President
Agreed and accepted as of the date first above stated:
Play Co. Toys, Inc.
By: _________________________
Rich Brady, President
90885-1
<PAGE>
SUMMARY OF CONSULTING SERVICES
Corporate and Industry Profile/Summary Business Plan
On a cost effective basis Typhoon will assist the Company in producing a
summary business plan. This business plan will summarize the Company's business
activities, its objectives, management, capitalization and incorporate pro forma
financial information. The purpose of this plan is to condense the Company's
principal business objectives into an attractive package which can be circulated
to potential customers and/or investors. Separate from the business plan,
Typhoon will assist the Company in connection with the production of a four-page
corporate profile which summarizes the plan and acts as an additional corporate
and industry profile brief on the Company which can be independently sent to
parties interested in the Company.
Board of Directors and Advisory Board
Typhoon will assist the Company in providing the necessary corporate
governance infrastructure for the support of the Company's board of directors.
Typhoon will work with management of the Company in constructing a schedule of
items which should be reviewed to put into place all key components of a
sophisticated company in advance of any due diligence procedures which may be
performed by potential customers and/or investing partners. In addition, Typhoon
will assist the Company in putting together an advisory board which will bring
together certain people helpful to the Company without such people assuming the
general risk of liability for serving on a board of directors of a public
company.
E-Commerce and Internet Strategy
Typhoon will assist the Company with building significant recognition for
their online sales and marketing efforts. Alliance and strategic partners will
be sought for the purpose of identifying sources of traffic for the Company's
web-sites. Additionally, Typhoon will attempt to showcase the Company's efforts
at industry events and other high profile venues.
Corporate Finance Consulting
Typhoon will introduce the Company to sources of capital and assist in
packaging and presenting the Company's story in the most attractive light.
Primary among Typhoon's objectives will be seeking the highest Company valuation
in order to generate the lowest cost of capital.
90885-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.01
FINANCIAL DATA SCHEDULE
ARTICLE 5 OF REGULATION S-X
This schedule contains summary financial information extracted from Balance
Sheet, Statement of Operations, Statement of Cash Flows and Notes thereto
incorporated in Part 1, Item 1, of this Form 10-QSB/A-1 is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> mar-31-1999
<PERIOD-END> dec-31-1998
<CASH> 1,219,989
<SECURITIES> 0
<RECEIVABLES> 110,734
<ALLOWANCES> 0
<INVENTORY> 10,824,770
<CURRENT-ASSETS> 13,892,262
<PP&E> 8,464,616
<DEPRECIATION> (4,121,412)
<TOTAL-ASSETS> 20,620,493
<CURRENT-LIABILITIES> 6,405,575
<BONDS> 0
0
5,236,642
<COMMON> 0
<OTHER-SE> 480,026
<TOTAL-LIABILITY-AND-EQUITY> 20,620,493
<SALES> 27,171,662
<TOTAL-REVENUES> 27,171,662
<CGS> 15,665,721
<TOTAL-COSTS> 15,665,721
<OTHER-EXPENSES> 9,853,192
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 644,606
<INCOME-PRETAX> (1,008,143)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,008,143)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,008,143)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.01)
</TABLE>
