SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number O-25030
PLAY CO. TOYS & ENTERTAINMENT CORP.
-----------------------------------
(Exact Name of Registrant as Specified in its Charter)
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<S> <C>
Delaware 95-3024222
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
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550 Rancheros Drive, San Marcos, California 92069
(Address of Principal Executive Offices)
(760) 471-4505
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section
12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
NONE
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, $0.01 par value
Series E Preferred Stock, $0.01 par value
Series E Preferred Stock Purchase Warrants
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ X].
The Registrant's revenues for its fiscal year ended March 31, 1999 were
$34,371,230.
The aggregate market value of the voting stock on July 12, 1999
(consisting of Common Stock, par value $0.01 per share) held by non-affiliates
was approximately $1,737,375 based upon the closing price for such Common Stock
on said date ($1.06), as reported by a market maker. On such date, there were
5,554,530 shares of Registrant's Common Stock outstanding.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
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 two
wholly-owned subsidiaries - Toys International, Inc. ("Toys") and Play Co. Toys
Canyon Country, Inc. ("Canyon," which operates the Company's "flagship model"
store opened in October 1996 in Santa Clarita) - operate an aggregate of
twenty-six 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 ten
additional stores by the end of calendar year 2000. These stores shall be
located in California (San Francisco, San Ysidro, and Mission Viejo), Nevada
(Las Vegas), Texas (Houston), North Carolina (Charlotte), and 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 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 two dedicated
electronic commerce websites. 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 website.
<PAGE>
The second electronic commerce website, www.Playco.com, is currently
being developed to a state-of-the-art standard in conjunction with an Internet
consulting firm. This second site, which will offer collectible and imported
specialty merchandise such as die-cast cars, dolls, plush toys, trains, and
collectible action figures, is expected to open in the fall of 1999. In
conjunction with the website launch, the Company plans to place computer kiosks
in its retail locations in order to permit customers to place orders on the
website for goods otherwise not sold in such stores.
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
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.
<PAGE>
Ownership of the Company
At fiscal year end March 31, 1999, approximately 45.2% of the
outstanding shares of the Company's common stock, par value $0.01 (the "Common
Stock"), were owned by United Textiles & Toys Corp. ("UTTC"), the Company's
parent corporation. 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. The president and a
director of UTTC is Mr. Ilan Arbel who is also the president, chief executive
officer, and a director of Multimedia Concepts International, Inc. ("MMCI"), the
parent company of UTTC. MMCI owns approximately 78.5% of UTTC common stock and
is, in turn, owned approximately 62.2% by U.S. Stores Corp., a company of which
Mr. Arbel is the president and a director. U.S. Stores Corp. is owned 100% by
American Telecom PLC ("ATPLC"), a British public corporation, which is owned
approximately 80% by Europe American Capital Foundation ("EACF"), a Swiss
foundation, which is the parent corporation also of Frampton Industries, Ltd.
("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 (100%) American Telecom PLC (80.0%) ABC Fund, Ltd. (20%)
(100%)
||
\/
U.S. Stores Corp.
(62.2%)
||
\/
Multimedia Concepts International, Inc.
(78.5%)
||
\/
United Textiles & Toys Corp.
(45.2%)
||
\/
Play Co. Toys & Entertainment Corp.
The Company has two operating subsidiaries, Toys and Canyon, each of which
is wholly-owned. Toys operates fourteen stores, and Canyon operates one store.
See "Item 2. Description of Property."
<PAGE>
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, Inc. ("BWI"), an affiliate. The Company's
chairman is also the president of Shopnet.com, Inc. ("Shopnet"), BWI's parent.
Those market tests proved successful. As a result, in November 1998, the Company
entered into a sales agreement with BWI pursuant to which BWI agreed to sell to
the Company on a wholesale basis, and the Company agreed to purchase from BWI,
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.
<PAGE>
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
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 ten
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.
<PAGE>
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.
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.
<PAGE>
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 June 30, 1999, the Company had three executive officers,
approximately 151 full time employees, and approximately 332 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.
Financing through FINOVA Capital Corporation
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) (the "Congress Financing"). Neither
FINOVA nor Congress is affiliated with the Company. The Company repaid the
Congress loan on February 3, 1998.
<PAGE>
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
UTTC. 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
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 letter of credit ("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.
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 MMCI (an affiliate of the Company by virtue of its 78.5%
ownership of UTTC, 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 believes that it will require a significant increase in its
line of credit as a result of its 50% revenue growth over the past fiscal year
and has approached FINOVA about increasing the line of credit. There can be no
assurance that FINOVA (i) will be amenable to such a credit line increase or
(ii) will provide such an increase under terms that the Company deems
reasonable.
<PAGE>
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
During fiscal year 1999, the Company 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 $849,000. All such financings are secured by the
Company's store fixtures and equipment. The Company is currently negotiating
additional financing of this type.
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 UTTC, 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
In May 1999, the Company sold 750,000 shares of Series F Preferred
Stock, par value $0.01 per share (the "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.
<PAGE>
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
the first note, and the second note is due on July 30, 1999.
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 websites. 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. However, since management
cannot contact any representatives at Typhoon and has not received any of these
services, the Company does not intend to issue these options.
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. However, the Company
believes that CRG did not fully perform under the Agreement and, has therefore,
not issued these options.
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.
<PAGE>
ITEM 2. 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 (and its subsidiaries') currently operating stores (aggregating 26)
are located:
<TABLE>
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===============================================================================================================================
SIZE IN SQUARE FEET
LEASE BASE RENT
STORE LOCATION EXPIRATION ANNUAL COST
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<S> <C> <C> <C>
Play Co. Toys 12,000 July 2006 $108,000.00
Santa Clarita
19232 Soledad Canyon Rd
Santa Clarita, CA 91351
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Play Co. Toys 7,800 January 2001 $84,840.00
Santa Margarita
27690-B Santa Margarita
Mission Viejo, CA 92691
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Play Co. Toys 8,250 December 1999 $87,549.72
Chula Vista
1193 Broadway
Chula Vista, CA 91911
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Play Co. Toys 10,030 June 2000 $127,880.64
El Cajon
327 N. Magnolia
El Cajon, CA 92020
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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 2001 $96,360.00
Orange
1349 E. Katella
Orange, CA 92513
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,478 March 2005 $113,162.40
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
===============================================================================================================================
</TABLE>
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
===============================================================================================================================
STORE LOCATION SIZE IN SQUARE FEET LEASE BASE RENT
EXPIRATION ANNUAL COST
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------------
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
===============================================================================================================================
<PAGE>
(table continued from previous page)
===============================================================================================================================
STORE LOCATION SIZE IN SQUARE FEET LEASE BASE RENT
EXPIRATION ANNUAL COST
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------------
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>
ITEM 3. 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. This action is in the discovery phase and a trial is
currently scheduled for September 1999.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 5, 1999, the Company held its annual meeting during which it
proposed (i) to elect four directors to the board and (ii) to amend the
Company's Certificate of Incorporation to authorize an increase in the number of
authorized shares of the Company's (a) Common Stock from fifty-one million
shares currently authorized to one hundred sixty million shares and (b) Series E
Stock from ten million shares currently authorized to twenty-five million
shares. Both proposals were adopted, and the following were elected directors of
the board for a term of one year: Richard Brady, James B. Frakes, Harold
Rashbaum, and Moses Mika. Mr. Mika is the father of Ilan Arbel (the president of
UTTC).
The votes cast or withheld for the election of the directors are set
forth as follows:
<TABLE>
<CAPTION>
Nominees Votes For Votes Withheld
<S> <C> <C>
Harold Rashbaum 4,777,694 12,742
Richard Brady 4,783,236 7,200
James Frakes 4,781,808 8,628
Moses Mika 4,777,727 12,709
</TABLE>
The votes cast for, against, or withheld for the proposal to increase
the capital stock of the Company are set forth as follows:
<TABLE>
<CAPTION>
Votes Cast For Votes Cast Against Abstentions
<S> <C> <C> <C>
4,769,629 20,806 0
</TABLE>
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until September 24, 1997, the Company's Common Stock was quoted on the
Nasdaq SmallCap Stock Market ("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
--- ---- --- ---- --- ---- --- ----
1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
01/01/97 - 03/31/97 1 11/4 1 11/4
04/01/97 - 06/30/97 1 1 1/8
07/01/97 - 09/23/97(3) 1 1 1/8
10/14/97 - 12/31/97 2 3
1998
01/01/98 - 03/31/98 .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
</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 July 12, 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 July 12, 1999, the number of outstanding shares of the
Company's Common Stock was 5,554,530 (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 $1,000,000 and based on transactions it deemed
"detrimental to the investing public and the public interest" concerning
transactions undertaken in February 1996 with respect to options issued to an
investor which provided a $2,000,000 L/C as security for the Congress credit
line. 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, this remand 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 said determination to the Review Committee. In a
determination 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>
Recent Sales of Unregistered Securities
Except where otherwise indicated, the sales of securities of the
Company described below were exempt from registration under the Securities Act
of 1933, as amended (the "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 Private Placement
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 $750,000 for the sale, less expenses, and the placement agent's 10%
commission and 1% nonaccountable expense allowance. 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.
Common Stock Issuance
In May 1999, 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.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table summarizes certain selected financial data and is
qualified in its entirety by the more detailed financial statements contained
elsewhere in this document.
<TABLE>
<CAPTION>
Year Ended March 31,
1996 1997 1998 1999
---- ---- ---- ----
Balance Sheet Data:
<S> <C> <C> <C> <C>
Working capital (deficiency) $192,401 $(1,570,486) $4,452,481 $5,763,509
Total assets 9,213,104 9,378,618 14,139,887 21,081,758
Total current liabilities 6,673,570 8,148,657 4,581,831 7,558,647
Long term obligations 726,007 226,925 7,055,549 8,527,116
Redeemable preferred stock 87,680 --- --- ---
Stockholders' equity 1,725,847 1,003,036 2,502,507 4,995,995
Common stock dividends --- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
1996 1997 1998 1999
---- ---- ---- ----
Operating Data:
<S> <C> <C> <C> <C>
Net sales $21,230,853 $19,624,276 $22,568,527 $34,371,230
Gross profit 6,097,958 5,955,172 8,878,928 14,780,446
Gross margin 28.7% 30.3% 39.3% 43.0%
Total operating expenses 9,105,515 8,789,570 10,119,430 13,741,011
Net income (loss) before taxes (3,542,715) (3,584,881) (2,054,470) (575,616)
Net income (loss) (3,542,715) (3,584,881) (2,054,470) (577,766)
Net income (loss) applicable to common
shares (3,542,715) (6,474,496) (3,528,276) (2,285,491)
Income (loss) per common share(1) (2.77) (1.29) (0.86) (.50)
Weighted average shares outstanding(1) 1,287,843 2,791,876 4,098,971 4,590,642
</TABLE>
(1) Adjusted for effects of 1 for 3 reverse split of Common Stock in July 1997.
<PAGE>
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 has two wholly owned operating subsidiaries: Toys
International, Inc. ("Toys") and Play Co. Toys Canyon Country, Inc. ("Canyon").
Toys currently operates fourteen stores, and Canyon operates one store. The
Company plans to combine these two subsidiaries and to assign to Toys five Play
Co. Toys stores that either have been or will be reformatted to the Toys
concept.
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.
Operating expenses (total operating expenses less litigation related
expenses and depreciation and amortization) in the year ended March 31, 1999
were $12,727,010. This represented a $3,862,403, or 43.6%, 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 2.3% to 37% of net sales for fiscal year 1999 from 39.3% in fiscal
year 1998.
<PAGE>
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 $13,741,011. This represented a $3,621,581, or 35.8%,
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 $1,039,435 in fiscal year 1999
compared to an operating loss of $(1,240,502) in fiscal year 1998. This
represented an improvement of $2,279,937. This improvement was a result of the
$5,901,518 increase in gross profit being partially offset by the $3,621,581
increase in total operating expenses.
Total interest expense amounted to $1,615,051 in the year ended March
31, 1999. This represented a $801,083, or 98.4%, increase over the Company's
interest expense of $813,968 in fiscal year 1998. The primary reasons for the
increased level of interest expense were a higher level of borrowings in fiscal
year 1999 than in fiscal year 1998, and $650,000 of effective interest expense
for the beneficial conversion feature of the convertible debentures issued by
the Company. The effective interest expense represents a non-cash item that is
effectively offset dollar for dollar in stockholders' equity by an increase in
additional paid-in capital.
The Company issued two similar convertible debentures that contained an
embedded privilege to convert the outstanding debt into Series E Stock. This is
a beneficial feature, whose intrinsic value is accounted for separately and
based on the underlying value of the stock. On the date of the funding of the
convertible debentures, in February 1999, the Company recorded a discount for
$650,000, the amount of the proceeds, and immediately recognized the
amortization of this discount as non-cash effective interest for the beneficial
conversion feature, since the debenture allowed for immediate conversion.
<PAGE>
In May 1999, the Company and two of its creditors, EACF and Frampton,
agreed to modify certain terms of their convertible debentures. The debentures
originally contained a 50% discount factor to the market price of the Series E
Stock. The amended debenture was changed to eliminate the discount based on the
market price on the date of the original agreement. This changed the conversion
price from $.10 per share to $.20 per share; i.e., for every $100,000 converted,
the holder would receive only 500,000 shares, as a result of the modification in
terms. This modification resulted in an extraordinary gain of $650,000 in the
quarter ended June 30, 1999 as an extinguishment of debt. However, as the debt
modification is treated as a new agreement for accounting purposes and due to
the significant increase in Series E stock market price at the modification
date, the $650,000 proceeds have again been allocated to the beneficial
conversion feature, and therefore recognized as non-cash effective interest
expense in the quarter ended June 30,1999.
In fiscal year 1999, the Company recorded income tax expense of $2,150,
representing various state income taxes. The Company's net operating loss
carryforward 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
loss of $(577,766) for the fiscal year ended 1999 compared to a net loss of
$(2,054,470) for the fiscal year ended March 31, 1998. Excluding the $650,000
non-cash effective interest expense from the beneficial conversion feature of
debt investments, the Company would have reported a net income of $72,234 for
the year ended March 31, 1999.
In fiscal year 1999, the net loss of $(577,766) was increased 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 $(2,285,491), or $(.50) 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 March 31, 1999, the Company had a working capital position of
$5,763,509 compared working capital of $4,452,481 at March 31, 1998. The primary
factors in the $1,311,028 increase in working capital were a $1,162,268 growth
in the Company's net investment in inventories (increase in inventories less
increase in accounts payable), which was financed through a $2,369,468 increase
under the Company's financing agreement, a long-term liability.
While the Company generated an operating profit during fiscal year
ended March 31, 1999, the Company generated operating losses for the prior
fiscal years and has historically financed those losses and its working capital
requirements through loans and sales of the Company's equity securities. There
can be no assurance that the Company will be able to generate sufficient
revenues or have sufficient controls over expenses and other charges to achieve
profitability.
For the year ended March 31, 1999, the Company used $1,231,117 of cash
in its operations compared to $2,288,736 used in operations in the year ended
March 31, 1998. The primary reason for the $1,057,619 reduction in the use of
cash in operations was the Company's net loss of $577,766 compared to the prior
year's loss of $2,054,470. Beyond the $1,476,704 net loss, the Company recorded
an incremental amount of $312,177 of non-cash depreciation and amortization,
amortization of debt issuance costs, and $650,000 in non-cash effective interest
expense that are added back to the Company's operating cash flow.
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 $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 letters of credit.
The remaining $1,023,273 of investing activities related to purchases of
property and equipment, largely at four new stores that the Company opened.
<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 decrease in
cash of $523,019 in fiscal year 1999 compared to a net increase in cash of
$471,264 in fiscal year 1998.
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 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 $850,000 in lease financing during fiscal year 1999 and
approximately $240,000 in the April through June 1999 period. The Company
continues to seek additional capital lease financing.
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. ("BWI"), 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 BWI is also the chairman of the Company. Shopnet is a publicly traded
company. The shares purchased by BWI 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
BWI, 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 BWI
in its stores on a trial basis.
<PAGE>
In November 1998, the Company entered into agreements with ZD Group,
L.L.C. ("ZD"), a related party, and Frampton, an affiliate under common control,
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. Frampton is a British
Virgin Islands company.
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 will receive 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 scheduled to open in late summer 1999;
Auburn Hills, Michigan; and Gurnee, Illinois).
Under the Frampton agreement, Frampton lent $500,000 and Europe
American Capital Foundation, another affiliate under common control, lent
$150,000 in the form of a convertible, subordinated debenture due December 31,
1999. The debentures each bear a 5% interest rate and will be convertible into
the Company's Series E Stock at the lenders' option. The conversion price 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. The Company recorded a
$650,000 non-cash effective interest expense to recognize the beneficial
conversion feature of this debenture. The effective interest expense represents
a non-cash item that is effectively offset dollar for dollar in stockholders'
equity by an increase in additional paid-in capital. Subsequently, in May 1999,
the lenders agreed to amend the conversion price to $0.20 per share, which
equaled the full market price on the date of the original business transaction.
The Company had previously recognized in the fiscal year ending March 31, 1999 a
$650,000 effective interest expense for the beneficial conversion. Upon this
amendment, the Company applied the provision of EITF 96-19 to recognize this
modification of debt terms as an extinguishment of debt. This resulted in an
extraordinary gain of $650,000, which was recognized in the first quarter ending
June 30, 1999. Additionally, due to the change in the Series E stock price at
the modification date, the proceeds would be allocable to the beneficial
conversion feature, and therefore recognized as interest expense.
At March 31, 1999, the Company had a line of credit with FINOVA in
connection with a Loan and Security Agreement ("FINOVA Agreement"). The FINOVA
Agreement originally provided for maximum borrowings up to $7,100,000 based on a
percentage of the cost value of eligible inventory, as defined. Outstanding
borrowings bear interest at 1.5% above the prime rate, as defined (the prime
rate at March 31, 1999 was 7.75%). The FINOVA Agreement matures on August 3,
2000 and can be renewed for one additional year at the lender's option.
In addition to the $700,000 term loan secured by the ZD letter of
credit, the FINOVA Agreement was amended during the 1999 fiscal year to increase
the maximum amount of borrowings available under the line of credit. The maximum
level of borrowings was first increased by $500,000, and later by an additional
$1 million only through December 31, 1998. As of March 31, 1999, the overall
FINOVA Agreement allowed for a maximum level of borrowings of $8.3 million,
including the $700,000 term loan backed by the ZD letter of credit. The Company
had approximately $100,000 available under the FINOVA Agreement at March 31,
1999.
<PAGE>
The FINOVA Agreement is guaranteed by United Textiles & Toys Corp.
("UTTC") and is secured by substantially all the assets of the Company and
$3,700,000 in letters of credit. Of the $3,700,000 in letters of credit,
$2,000,000 is collateralized by amounts held in a restricted certificate of
deposit. Multimedia Concepts International, Inc., an affiliate under common
control, has provided a $1,000,000 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.
The Company believes that it will require a significant increase in its
line of credit as a result of its 50% revenue growth over the past fiscal year
and has approached FINOVA about increasing the line of credit. There can be no
assurance that FINOVA (a) will be amenable to such a credit line increase or (b)
will only provide such an increase under terms that Company management finds
reasonable.
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
the first note, and the second note is due on July 30, 1999.
In the fourth quarter of the year ended March 31, 1999, the Company
borrowed $100,000 from Shopnet under an unsecured note, with interest at 9%. Of
this amount, $25,000 has been repaid to date. The original maturity date has
been verbally extended to an unspecified date. In each of April and May 1999,
the Company borrowed an additional $100,000 under unsecured notes, with interest
at 9%, maturity on August 31, 1999 and September 30, 1999, respectively.
Planned new store openings remain a significant capital commitment of
the Company. The Company has entered into leases to open ten new stores by the
end of calendar year 2000. The 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 Resort and
Casino 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.
As of March 31, 1999, the Company is a defendant in a lawsuit with a
former landlord of a retail site the Company vacated in August 1997. The
plaintiff seeks damages ranging to $300,000. The Company has accrued $41,000 at
March 31, 1999 as an approximate settlement amount based on management's
assessment of the matter, mainly that the landlord allowed the retail mix of the
mall site to change from a contractually agreed minimum percentage level of
retail tenants. As the action is in the discovery phase at March 31, 1999, the
actual outcome could differ from management's estimate. A trial date has been
set for September 1999.
<PAGE>
Electronic commerce represents another area that may result in
significant capital expenditures for the Company in fiscal 2000. In April 1999,
The Company debuted the first of two dedicated electronic commerce websites.
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
website.
The second electronic commerce website, www.Playco.com, is currently
being developed to a state-of-the-art standard in conjunction with an Internet
consulting firm. This second site, which will offer collectible and imported
specialty merchandise such as die-cast cars, dolls, plush toys, trains, and
collectible action figures, is expected to open in the fall of 1999. In
conjunction with the website launch, the Company plans to place computer kiosks
in several of its retail locations in order to permit customers to place orders
on the website for goods otherwise not sold in such store.
In May 1999, pursuant to ss.506 of Regulation D, the Company sold
750,000 shares of Series F Preferred Stock, par value $0.01 per share ("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. 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.
The Company has received letters of intent from two investment banking
firms to raise additional equity through the public sale of a minority interest
in the Company's Toys subsidiary. The Company is pursuing those opportunities
and 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, as noted above, 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 ("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 in the September quarter 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
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
As a result of its planned merchandise mix change to emphasize
specialty and educational toys, the Company enjoyed significant sales and gross
profits in fiscal 1999. Same can be attributed to the expansion of its
collectible die cast cars, specialty yo-yo's, Rokenbok and Learning Curve toys,
and the continued strength of Beanie Babies(R) and other plush and educational
toys. While the Company believes these particular toys will remain popular with
its customer base for the remainder of calendar year 1999, there can be no
assurance that these particular specialty toys will continue to contribute
strongly to the Company's sales and gross profits. However, the history of the
toy industry indicates that there is generally at least one highly popular toy
every year.
<PAGE>
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.
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.
Net Operating Loss Carryforwards
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 is subject to provisions of the
Internal Revenue Code ss.382 which limits use of NOL 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 purchase of a majority interest in the
Company by American Toys, Inc. 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 further limited upon the
exercise of outstanding stock options and stock purchase warrants or as result
of the May 1999 private offering of Series F Stock.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company's independent auditor since February 20, 1997 has been
Haskell & White LLP.
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Officers and Directors
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 72 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.
<PAGE>
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 BWI (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.
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 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.
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors, and persons who beneficially own
more than ten percent of a registered class of the Company's equity securities
to file reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission ("SEC"). Officers, directors, and greater
than ten percent beneficial owners also are required by rules promulgated by the
SEC to furnish the Company with copies of all Section 16(a) forms they file.
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 Securities
Exchange Act of 1934], 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 file a Form 4, (ii) Moses Mika failed to file Forms 3
and 5, (iii) Harold Rashbaum failed to file a Form 4, (iv) EACC failed to file
Forms 3, 4, and 5, and (v) 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.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
or paid by the Company during the years ended March 31, 1999, 1998, and 1997 to
each of the named executive officers of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
Securities
Restricted Underlying All Other
Stock Award(s) Options/ LTIP Compen-sation
($) SARs Payouts ($)
Name and Principal Year Salary Bonus(#) ($) Other Annual
Position Compen-sation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard Brady
President, CEO,
and Director 1999 124,500 -- 8,579 (1) -- -- -- --
1998 120,000 -- 8,579 (1) 25,000(2) -- -- --
1997 108,000 -- 6,179(2) -- -- -- --
</TABLE>
<PAGE>
----------------------
(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.
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.
<PAGE>
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.
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.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's outstanding Common Stock as of July 12, 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 Percent of Common Stock
of Beneficial Owner Beneficially Owned1 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. 25,587 *
550 Rancheros Drive
San Marcos, CA 92069
- ------------------------------------------------------- ----------------------------------- ------------------------------------
James B. Frakes 5
c/o Play Co. Toys & Entertainment Corp. 20,000 --
550 Rancheros Drive
San Marcos, CA 92069
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Moses Mika
c/o Play Co. Toys & Entertainment Corp. -- --
550 Rancheros Drive
San Marcos, CA 92069
- ------------------------------------------------------- ----------------------------------- ------------------------------------
United Textiles & Toys Corp. 6
1410 Broadway, Suite 1602 2,489,910 --
New York, NY 10018
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Breaking Waves, Inc. 4
112 West 34th Street 1,400,000 25.4%
New York, New York 10120
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Multimedia Concepts International, Inc.7
1410 Broadway, Suite 1602 -- --
New York, NY 10018
- ------------------------------------------------------- ----------------------------------- ------------------------------------
ABC Fund, Ltd. 8
Riva Caccia
Lugano, Switzerland CH-900 -- --
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Europe American Capital Foundation ("EACF")9
Via Cantonale
Lugano, Switzerland CH-900 -- --
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Volcano Trading Limited 10
Via Cantonale
Lugano, Switzerland CH-900 -- --
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Officers and Directors as a Group 35,587 *
(4 persons)4,5
- ------------------------------------------------------- ----------------------------------- ------------------------------------
</TABLE>
* Less than 1%
<PAGE>
(1) Unless otherwise noted, all of the shares shown are held by individuals
or entities possessing sole voting and investment power with respect to such
shares. Shares not outstanding but deemed beneficially owned by virtue of the
right of an individual or entity to acquire them within 60 days, whether by the
exercise of options or warrants, are deemed outstanding in determining the
number of shares beneficially owned by such person or entity.
(2) The "Percent of Common Stock Beneficially Owned" is calculated by
dividing the "Number of Shares Beneficially Owned" by the sum of (i) the total
outstanding shares of Common Stock of the Company, and (ii) the number of shares
of Common Stock that such person or entity has the right to acquire within 60
days, whether by exercise of options or warrants. The "Percent of Common Stock
Beneficially Owned" does not reflect shares beneficially owned by virtue of the
right of any person, other than the person named and affiliates of said person,
to acquire them within 60 days, whether by exercise of options or warrants.
(3) Does not include 35,303,418 shares of Common Stock issuable upon the
conversion (any time two years from issuance) of 5,883,903 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 BWI which is a wholly-owned subsidiary of
Shopnet. Mr. Rashbaum is also the president and a director of Shopnet.
(5) Represents those shares underlying an option which have vested and/or
which shall vest within 60 days. 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 UTTC, a publicly traded company which is the Company's
controlling shareholder, is Ilan Arbel who is also the president, chief
executive officer, and a director of MMCI, a publicly traded company which is
the parent company of UTTC (owning approximately 78.5% of same). MMCI is owned
approximately 62.2% by U.S. Stores Corp., a company of which Mr. Arbel is the
president and a director. U.S. Stores Corp. is owned 100% by ATPLC, a British
corporation. By virtue of its ownership of UTTC, MMCI may be deemed a beneficial
holder of the Company's Common Stock held by UTTC.
(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.
(8) Does not include 9,199,998 shares of Common Stock issuable upon the
conversion (any time two years from issuance) of 1,533,333 shares of Series E
Stock.
(9) 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.
(10) Does not include 1,968,000 shares of Common Stock issuable upon
conversion of 328,000 shares of Series E Stock underlying Series E Warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Shopnet.com, Inc.
In the fourth quarter of the year ended March 31, 1999, the Company
borrowed $100,000 from Shopnet under an unsecured note, with interest at 9%. Of
this amount, $50,000 has been repaid to date. The original maturity date has
been extended to an unspecified date. 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.
<PAGE>
Breaking Waves, Inc.
On November 24, 1998, pursuant to a sales agreement entered into by and
between the Company and BWI, BWI purchased 1.4 million unregistered shares of
the Company's Common Stock in a private transaction. The shares purchased by BWI
represent approximately 25.4% of the total Common Stock issued and outstanding
after the transaction. 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 in cash and the remaining $365,000 was in
product from BWI, 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 BWI 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 BWI 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 BWI 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, the Company entered into an agreement with ZD 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 L/C in
favor of FINOVA, the Company's working capital lender (which is not an affiliate
of the Company). 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>
Frampton Industries, Ltd.
In January 1999, the Company and Frampton Industries, Ltd.
("Frampton"), an affiliated British Virgin Islands company, under common
control, executed a letter agreement pursuant to which Frampton has agreed to
act as the exclusive placement agent and financial advisor for the Company in
connection with a contemplated proposed offering of convertible debentures. The
agreement is for a term of six months (with a potential two month extension at
Frampton's option) and provides that Frampton shall be provided an investment
banking fee of 8% of the face amount of each debenture funded.
In November 1998, the Company entered into an agreement with Frampton
to secure additional financing. Pursuant to the agreement, Frampton loaned
$500,000 in the form of a convertible, subordinated debenture due December 31,
1999. The debenture bears a 5% interest rate and initially was convertible into
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. In May 1999, Frampton agreed to amend the conversion price
to $0.20 per share, which represents the full market price on the date of the
original business transaction. The $.20 per share conversion price however,
represented a significant discount from the market price at the date of
amendment.
Europe American Capital Foundation
In November 1998, the Company entered into an agreement with EACF, an
entity which beneficially controls the Company, to secure additional financing.
Pursuant to the agreement, EACF loaned $150,000 in the form of a convertible,
subordinated debenture due December 31, 1999. The debenture bears a 5% interest
rate and initially was convertible into Series E Stock at a price of $0.10 per
share at EACF'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. In May
1999, EACF agreed to amend the conversion price to $0.20 per share, which
represents the full market price on the date of the original business
transaction. The $.20 per share conversion price however, represented a
significant discount from the market price at the date of amendment.
<PAGE>
United Textiles & Toys Corp.
The Company's parent, UTTC, has guaranteed the Company's loan from
FINOVA.
The president of UTTC, 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
UTTC, the Company's principal shareholder, for $100,000. In determining the
purchase price paid by UTTC, 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, the Company and 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
(the "Debenture") - 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. ABC, or its assigns, retained a right included in the
Debenture, to purchase up to an aggregate of 25% of the outstanding shares of
common stock of Toys. The purchase price per share shall equal the net book
value per share of Toys' common stock as of the date of exercise using generally
accepted accounting principals. The calculation of the number of shares subject
to this right and the purchase price per share shall be as of the date that the
Company receives notification that the right is being exercised. This right
shall extend until August 15, 2000 and shall automatically extend thereafter
until August 15, 2003 unless earlier terminated by ABC or its assignee.
<PAGE>
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.
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
MMCI, an affiliate of the Company by virtue of its 78.5% ownership of UTTC, the
Company's parent.
<PAGE>
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.
See "Executive Compensation" for a description of the Company's
compensation of its officers and directors.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements of the Company are included as Part
II, Item 8:
<TABLE>
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<S> <C>
Table of Contents F-1
Report of Independent Certified Public Accountants F-2
Balance Sheets F-3
Statements of Operations and Comprehensive Net Income (Loss) F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-9
</TABLE>
(b) During its last fiscal 1999 quarter, the Company filed no Forms 8-K.
(c) All exhibits, except (i) those designated with an asterisk (*) which are
filed herewith or (ii) those designated with a double asterisk (**) which shall
be filed by amendment hereto, have previously been filed with the Commission
either (i) in connection with the Company's Registration Statement on Form SB-2,
dated November 2, 1994, under file No. 33-81940-NY; (ii) with the Company's
Registration Statement on Form SB-2, Registration No. 333-32051; or (iii) as
indicated by the reference herein and pursuant to 17 C.F.R. ss.230.411 are
incorporated by reference herein. Exhibits previously filed but not as part of
the SB-2 Registration Statement are incorporated herein by reference to the
appropriate document.
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement. See (ii) above.
3.1 Certificate of Incorporation of the Company dated June 15, 1995. See (i) above.
3.2 Amendment to Certificate of Incorporation of the Company, filed July 2, 1997. See (ii) above).
3.2(a) Amendment to Certificate of Incorporation of the Company, filed August 11, 1997. See (ii)
3.2(b)* Amendment to Certificate of Incorporation of the Company, filed May 9, 1996
3.2(c)* Amendment to Certificate of Incorporation of the Company, filed August 13, 1996
3.2(d)* Amendment to Certificate of Incorporation of the Company, filed March 24, 1997
3.2(e)* Amendment to Certificate of Incorporation of the Company, filed May 29, 1998
3.2(f)* Amendment to Certificate of Incorporation of the Company, filed May 12, 1999
3.2(g)* Amendment to Certificate of Incorporation of the Company, filed May 25, 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 (i) above.
10.26 Lease Agreement for Store - Chula Vista. See (i) above.
10.27 Lease Agreement for Store - El Cajon. See (i) above.
10.29 Lease Agreement for Store - Simi Valley. See (i) above.
10.30 Lease Agreement for Store - Encinitas. See (i) above.
10.34 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).
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
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).
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).
<PAGE>
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
10.121* Amendment to Lease Agreement - Tutti Animali.
10.122* Lease Agreement for Store - Aladdin.
10.123* Lease Agreement for Store - Pier 39.
10.124* Lease Agreement for Store - Opry Mills.
10.125* Lease Agreement for Store - Mission Viejo.
10.126* Fixture Financing Agreement with Premier Capital Corp., dated October 15, 1998.
10.127* Lease Agreement for Store - Venetian.
10.128* Lease Agreement for Store - Woodfield Mall.
10.129* Amendment to Lease Agreement - Rancho Cucamonga.
10.130* Promissory Notes - Full Moon Development, Inc.
21.01* Subsidiaries.
27.01* Financial Data Schedule.
</TABLE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 13th day of July 1999.
PLAY CO. TOYS & ENTERTAINMENT CORP.
By: /s/ Richard Brady
Richard Brady, Chief Executive
Officer and President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.0
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<S> <C> <C>
/s/ Harold Rashbaum Chairman of the 7/13/99
Harold Rashbaum Board of Directors Date
/s/ Richard Brady Chief Executive Officer, 7/13/99
Richard Brady President, and Director Date
/s/ James Frakes Chief Financial Officer, 7/13/99
James Frakes Secretary, and Director Date
/s/ Moses Mika Director 7/13/99
Moses Mika Date
</TABLE>
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
F-1
Table of Contents
March 31, 1999 and 1998
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheets F-3
Statements of Operations and Comprehensive Net Income (Loss) F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-9
</TABLE>
<PAGE>
F-2
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.
As discussed in Note 11, the Company restated its previously issued 1998
financial statements. Further, as discussed in Note 14, the Company has restated
its previously issued 1999 financial statements.
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
Irvine, California
June 24, 1999, except for
Notes 6, 11, and 14, which
are as of April 10, 2000
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Balance Sheets
ASSETS (Note 4)
March 31,
1999
Restated
(Note 14 ) 1998
--------------- ----------
Current
<S> <C> <C>
Cash $ 125,967 $ 648,986
Restricted certificates of deposit (Notes 2 and 4) 350,000 250,000
Accounts receivable 98,276 78,594
Merchandise inventories 11,506,284 7,872,804
Other current assets 1,241,629 183,928
--------------- ----------------
Total current assets 13,322,156 9,034,312
Property and equipment, net of accumulated
depreciation and amortization of $4,058,603 and
$3,414,235, respectively (Note 3) 5,348,175 2,782,386
Restricted certificate of deposit (Notes 2 and 4) 2,000,000 2,000,000
Deposits and other assets (Note 4) 411,427 323,189
--------------- ----------------
$ 21,081,758 $ 14,139,887
=============== ================
</TABLE>
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
See accompanying notes to financial statements.
Balance Sheets
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
March 31,
----------------------
1999 1998
Restated Restated
(Note 14) (Note 11)
--------------- -------------
Current
<S> <C> <C>
Accounts payable $ 5,611,442 $ 3,505,230
Accrued expenses and other liabilities 595,008 726,601
Current portion of capital lease obligations (Note 5) 227,197 -
Current portion of notes payable (Note 6) 1,125,000 350,000
--------------- ----------------
Total current liabilities 7,558,647 4,581,831
Borrowings under financing agreement (Note 4) 7,814,666 5,445,198
Capital lease obligations, net of current portion (Note 5) 585,681 -
Notes payable, net of current portion (Note 6) - 1,500,000
Deferred rent liability (Note 9) 126,769 110,351
--------------- ----------------
Total liabilities 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,
10,000,000 shares authorized; 5,883,903 and 4,200,570 shares outstanding,
respectively, full liquidation value of $5,883,903 and $4,200,570, net of
unamortized discount of $1,842,252 and $1,916,644 for beneficial
conversion
feature (Note 11) 5,761,101 3,974,376
Series F convertible preferred stock, $.01 par value,
5,500,000 shares authorized, none outstanding - -
Common stock, $.01 par value, 51,000,000 shares authorized; 5,503,519 and
4,103,519 shares outstanding, respectively 55,035 41,035
Additional paid-in capital 15,906,172 12,927,918
Accumulated deficit (16,726,313) (14,440,822)
--------------- ----------------
Total stockholders' equity 4,995,995 2,502,507
--------------- ----------------
$ 21,081,758 $ 14,139,887
=============== ================
</TABLE>
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
See accompanying notes to financial statements.
Statements of Operations and Comprehensive Net Income (Loss)
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------
1999 1998
Restated Restated
(Note 14) (Note 11)
--------------- -------------
<S> <C> <C>
Net sales $ 34,371,230 $ 22,568,527
Cost of sales 19,590,784 13,689,599
--------------- ----------------
Gross profit 14,780,446 8,878,928
--------------- ----------------
Operating expenses
Operating expenses (Notes 9 and 10) 12,727,010 8,864,607
Litigation related expenses (Note 7) 27,659 583,541
Depreciation and amortization 986,342 671,282
--------------- ----------------
Total operating expenses 13,741,011 10,119,430
--------------- ----------------
Operating income (loss) 1,039,435 (1,240,502)
--------------- ----------------
Interest expense (Note 4)
Interest and finance charges 855,074 617,119
Amortization of debt issuance costs 109,977 196,849
Effective non-cash interest for beneficial conversion feature (Note 6) 650,000 -
--------------- ----------------
Total interest expense 1,615,051 813,968
--------------- ----------------
Net loss before income taxes (575,616) (2,054,470)
Provision for income taxes (Note 8) 2,150 -
--------------- ----------------
Net loss (577,766) (2,054,470)
Other items of comprehensive income (loss) - -
--------------- ----------------
Comprehensive net loss $ (577,766) $ (2,054,470)
=============== ================
Calculation of basic and diluted loss per share:
Net loss $ (577,766) $ (2,054,470)
Effects of non-cash dividends on convertible
preferred stock (Note 11) (1,707,725) (1,473,806)
--------------- ----------------
Net income (loss) applicable to common shares $ (2,285,491) $ (3,528,276)
=============== ================
Basic and diluted income (loss) per common share
and share equivalents $ (.50) $ (.86)
=============== ===============
Weighted average number of common shares and
share equivalents outstanding 4,590,642 4,098,971
=============== ================
</TABLE>
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Statements of Stockholders' Equity
Years Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
Preferred Stock
-----------------------------------------------------------
Series E Series F Common Stock
-------------------------- ----------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
----------- ------------ ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1997 2,500,570 $ 2,500,570 - $ - 4,083,519 $ 40,835
Issuance of Common Stock for cash - - - - 20,000 200
Issuance of Series E Preferred Stock
for cash 950,000 - - - - -
Issuance of Series E warrants for cash - - - - - -
Issuance of Series E Preferred
Stock and warrants for cash,
net of offering expenses 750,000 - - - - -
Non-cash dividend to amortize
discount on Series E (Note 11) - 1,473,806 - - - -
Net loss for the year - - - - - -
----------- ------------ ----------- ------------ ------------ -----------
Balance, March 31, 1998 4,200,570 3,974,376 - - 4,103,519 41,035
Conversion of debt and accrued
interest to Series E
Preferred Stock 1,533,333 - - - - -
Issuance of Series E Preferred Stock
for cash 100,000 - - - - -
Issuance of Series E Preferred Stock
to consultants - - - - - -
Issuance of Series E Preferred Stock
to officers 50,000 79,000 - - - -
Issuance of Common Stock for cash
and inventories - - - - 1,400,000 14,000
Non-cash dividend to amortize discount
on Series E (Note 11) - 1,707,725 - - - -
Beneficial conversion feature for
convertible debentures(Note 6) - - - - - -
Miscellaneous adjustments - - - - - -
Net income for the year - - - - - -
----------- ------------ ----------- ------------ ------------ -----------
Balance, March 31, 1999 5,883,903 5,761,101 - - 5,503,519 55,035
</TABLE>
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
<TABLE>
<CAPTION>
Statements of Stockholders' Equity
Years Ended March 31, 1999 and 1998
Additional Total
Paid-In Accumulated Stockholders'
Capital Deficit Equity
------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, April 1, 1997 $ 9,374,177 $ (10,912,546) $ 1,003,036
Issuance of Common Stock for cash 300 - 500
Issuance of Series E Preferred Stock
for cash 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 2,303,441 - 2,303,441
Non-cash dividend to amortize
discount on Series E (Note 11) - (1,473,806) -
Net loss for the year - (2,054,470) (2,054,470)
------------ ------------- ------------
Balance, March 31, 1998 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
Issuance of Series E Preferred Stock
for cash 100,000 - 100,000
Issuance of Series E Preferred Stock
to consultants 43,750 - 43,750
Issuance of Series E Preferred Stock
to officers - - 79,000
Issuance of Common Stock for cash
and inventories 651,000 - 665,000
Non-cash dividend to amortize discount
on Series E (Note 11) - (1,707,725) -
Beneficial conversion feature for
convertible debentures(Note 6) 650,000 - 650,000
Miscellaneous adjustments 171 - 171
Net income for the year - (577,766) (577,766)
------------ ------------- ------------
Balance, March 31, 1999 15,906,172 (16,726,313) 4,995,995
</TABLE>
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Statements of Cash Flows (Note 12)
<TABLE>
<CAPTION>
Years Ended March 31,
1999
Restated
(Note 14) 1998
--------------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net (loss) $ (577,766) $ (2,054,470)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization 983,459 671,282
Effective interest for beneficial conversion feature 650,000 -
Stock compensation 79,000 -
Loss on abandonment of assets - 45,255
Amortization of debt issuance costs 109,977 196,849
Deferred rent 16,418 (16,574)
Increase (decrease) from changes in:
Accounts receivable (19,682) (18,388)
Merchandise inventories (3,268,480) (1,779,874)
Other current assets (1,123,757) 63,385
Deposits and other assets (88,238) (195,241)
Accounts payable 2,106,212 381,379
Accrued expenses and other liabilities (98,260) 417,661
--------------- ----------------
Cash used for operating activities (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 (2,699,819) (1,023,273)
--------------- ----------------
Cash used for investing activities (2,799,819) (3,273,273)
--------------- ----------------
</TABLE>
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
See accompanying notes to financial statements.
Statements of Cash Flows (Note 12) (continued)
<TABLE>
<CAPTION>
Years Ended March 31,
1999
Restated
(Note 14) 1998
--------------- ----------
Cash flows from financing activities:
<S> <C> <C>
Change in bank overdraft $ - $ (135,325)
Borrowings under financing agreements 43,239,568 33,560,443
Repayments under financing agreements (40,870,100) (32,554,120)
Proceeds from notes payable 2,700,000 1,750,000
Repayment of notes payable (1,925,000) (141,666)
Repayments under capital leases (36,551) -
Proceeds from issuance of common stock 14,000 500
Proceeds from issuance of preferred stock 386,000 3,390,450
Proceeds from issuance of preferred stock warrants - 162,991
--------------- ----------------
Cash provided by financing activities 3,507,917 6,033,273
--------------- ----------------
Net (decrease) increase in cash (523,019) 471,264
Cash, beginning of year 648,986 177,722
--------------- ----------------
Cash, end of year $ 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.
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:
<PAGE>
1. Summary of Accounting Policies (continued)
Business Organization and Revenue Recognition (continued)
Affiliates Under Common Control
Name of Entity and 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). Ilan Arbel is
the President of UTTC. The Company is influenced to a significant degree by
UTTC. The Company bases its conclusion that it is influenced to a significant
degree by UTTC on several factors. During the period of April 1, 1998 through
November 23, 1998, which represented a majority of the fiscal year ended March
31, 1999, UTTC owned approximately 61% of the Company's common stock. From
November 24, 1998 through March 31, 1999, UTTC owned 44.9% of the Company's
common stock. Therefore, for over seven months of the fiscal year, UTTC
maintained a majority voting interest in the Company. It is the Company's
position that UTTC's 44.9% ownership position also represented de facto voting
control over the Company's Common Stock at fiscal year-end, since it would be
extremely difficult for the various small block shareholders that represent the
remaining 55.1% interest to actually achieve the necessary votes to garner 45%
(the percentage needed to outvote UTTC) of the vote. Additionally there are
significant affiliate relationships that help enforce UTTC's influence, to a
significant degree, over the Company. The President of UTTC is the son-in-law of
Harold Rashbaum, the President of Shopnet.com ("Shopnet") and Breaking Waves,
Inc. ("Breaking Waves"), who in turn is the Chairman of the Company. Breaking
Waves owns approximately 25% of the Company's Common Stock. The combination of
Breaking Waves' 25% position and UTTC's 44.9% position yields a 69.9% voting
interest in the Company. Moses Mika, the father of the President of UTTC, and
Harold Rashbaum occupy two of the four seats on the Company's Board of
Directors.
Multimedia Concepts International, Inc. ("MMCI"): Majority stockholder in
UTTC. The president and director of MMCI is Ilan Arbel.
<PAGE>
1. Summary of Accounting Policies (continued)
Nature of Relationships with Affiliates (continued)
Name of Entity and Nature of Affiliation
Europe American Capital Foundation ("EACF"): Foundation of which Ilan Arbel
and/or his relatives is/are officer(s) and/or director(s). 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 ("EACC"): Entity of which Ilan Arbel
and/or his 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.
U.S. Stores Corp. ("USSC"): A private company whose president is Ilan
Arbel, who is also a director. Parent company of MMCI.
Other Affiliates
Name of Entity and Nature of Affiliation
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.
Shopnet.com ("Shopnet"): The Chairman of Play Co. is the president and a
director of Shopnet.
<PAGE>
1. Summary of Accounting Policies (continued)
Nature of Relationships with Affiliates (continued)
Name of Entity and Nature of Affiliation
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.
The following chart graphically depicts the Company's ownership structure
at March 31, 1999 for those entities under common control:
Europe American Capital Foundation
/ / || \\
/ / \/ \\
Frampton Industries (100%) American Telecom PLC (80.0%) ABC Fund, Ltd. (20%)
(100%)
||
\/
U.S. Stores Corp.
(62.2%)
||
\/
Multimedia Concepts International, Inc.
(78.5%)
||
\/
United Textiles & Toys Corp.
(45.2%)
||
\/ (60.1% through November 24, 1998)
Play Co. Toys & Entertainment Corp.
<PAGE>
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 $2,603,308 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.
<PAGE>
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 (Note 11).
For the year ended March 31, 1999, 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 anti-dilutive given the net loss applicable to
common shares for each year.
<PAGE>
Summary of Accounting Policies (continued)
Net Loss Per Share (continued)
As of 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>
Potential Common Shares
March 31,
1999 1998
--------------- ----------
Common shares issuable upon:
<S> <C> <C>
Conversion of Series E Preferred Stock; 5,883,903 and 4,200,570 shares
outstanding, respectively, each convertible into six shares of Common
Stock, subject to holding periods. 35,303,418 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
Conversion of debentures (Note 6) into 6,500,000 shares of Series E
Preferred Stock, each share of Series E then convertible into six
shares of Common Stock, subject to holding periods. Subsequently
reduced to 19,500,000 upon amendment of debenture
(Note 6). 39,000,000 -
Exercise of employee stock options 30,000 30,000
--------------- ----------------
86,333,418 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
cash, certificates of deposit, accounts receivable, and accounts payable,
approximates their fair value due to the relatively short maturity of these
instruments.
The fair value of the Company's financing agreement approximates the
carrying value due to the variable interest rate feature of the agreement. The
fair value of the Company's other long-term debt arrangements are considered to
approximate fair value, given such features as lower interest rates coupled with
conversion features.
For short-term debt arrangements, the Company estimates the fair value of
these obligations in relation to the interest rate on its primary financing
arrangement. As of March 31, 1999 and 1998, the effects of imputing interest on
these obligations is considered to be immaterial (Note 6).
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.
<PAGE>
1. Summary of Accounting Policies (continued)
Impairment of Long-Lived Assets
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. 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.
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.
<PAGE>
1. Summary of Accounting Policies (continued)
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 paid-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.
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.
<PAGE>
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
March 31,
----------------------
1999 1998
--------------- ----------
<S> <C> <C>
Furniture, fixtures and equipment $ 5,968,292 $ 4,222,586
Leasehold improvements 2,763,711 1,551,760
Signs 501,798 317,363
Vehicles 104,912 104,912
Construction in progress 68,065 -
--------------- ----------------
9,406,778 6,196,621
Accumulated depreciation and amortization (4,058,603) (3,414,235)
--------------- ----------------
$ 5,348,175 $ 2,782,386
=============== ================
The following is a summary of property and equipment held under capital
leases (Note 5) at March 31, 1999:
Furniture and fixtures $ 849,429
Less accumulated depreciation (112,584)
----------------
$ 736,845
</TABLE>
<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"), to acquire shares of
Common Stock and Preferred Stock, the aggregate value of which was $458,000. The
method used to value these options is discussed in Note 11. The aggregate
$458,000 was initially included in other assets, as debt issuance costs, and
additional paid-in capital. The option values were amortized in prior fiscal
years into interest expense through the February 1, 1998 maturity of the
Congress Financing. The final period of amortization resulted in aggregate
interest charges of $196,849 for the year ended March 31, 1998, and as such, no
interest expense was amortized for the year ended March 31, 1999.
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.
<PAGE>
Financing Agreement (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 waiver was granted for the specific defaults noted and did
not cover a specific period of time. The waiver was granted in connection with
negotiations to amend the FINOVA financing. The proposed amendment, which was
executed in August 1999, increased the available borrowing level and established
new covenants with which the Company expects compliance to be probable through
the maturity date of August 2000. The arrangement has been classified as a
long-term obligation as of March 31, 1999, since it is not callable by the
creditor.
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).
<PAGE>
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:
<TABLE>
<CAPTION>
Year ending
March 31,
<S> <C> <C>
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
================
</TABLE>
6. Notes Payable
<TABLE>
<CAPTION>
March 31,
----------------------
1999 1998
--------------- ----------
<S> <C> <C> <C>
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 (Note 11). $ - $ 1,500,000
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 Financing (Note 4). - 250,000
<PAGE>
6. Notes Payable (continued)
March 31,
----------------------
1999 1998
--------------- ----------
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 an
unspecified date. 75,000 -
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. 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 -
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, 1999. 150,000 -
Total notes payable 1,125,000 1,850,000
Less current portion (1,125,000) (350,000)
--------------- ----------------
Long-term portion $ - $1,500,000
=============== ================
</TABLE>
<PAGE>
6. Notes Payable (continued)
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
plus any accrued interest. The conversion price is $.10 per share, i.e. for
every $100,000 converted, the holder would receive 1,000,000 shares. Each share
of Series E Preferred Stock is convertible into six shares of Common Stock (Note
11).
The embedded privilege to convert the outstanding debt into Series E
Preferred Stock is a beneficial feature, which is accounted for separately, in
accordance with Topic D-60 of the Emerging Issues Task Force ("EITF"). Topic
D-60 of the EITF communicated the views of the staff of the Securities and
Exchange Commission ("SEC"), in that for such convertible debentures, that
portion of the proceeds upon issuance of the debentures allocable to the
beneficial conversion feature should be recorded as additional paid-in capital
and recognized as interest expense over the minimum period in which the holder
can realize the conversion. The intrinsic value is calculated based on the value
of the underlying stock into which the debenture can be converted, limited to
the proceeds. On the date of funding the convertible debentures in February
1999, the Company recorded a discount for $650,000, and immediately recognized
the amortization of this discount as non-cash effective interest for the
beneficial conversion feature, since the debenture allowed for immediate
conversion, which was effectively offset by the dollar for dollar increase in
additional paid-in capital.
<PAGE>
6. Notes Payable (continued)
In May 1999, the Company and these two creditors, EACF and Frampton, agreed
to modify certain terms of their convertible debentures. The debentures
originally contained a 50% discount factor to the market price of the Series E
Preferred Stock. The amended debenture was changed to eliminate the discount
based on the market price on the date of the original agreement. This changed
the conversion price from $.10 per share to $.20 per share; i.e., for every
$100,000 converted, the holder would receive only 500,000 shares as a result of
the modification in terms. The Company had previously recognized a $650,000
non-cash effective interest expense for the year ended March 31, 1999. The
Company has subsequently applied the provisions of EITF 96-19 to recognize this
modification of debt terms as an extinguishment of debt. This extraordinary gain
of $650,000 was subsequently recognized in the quarter ended June 30, 1999.
However, since the agreement was revised in May 1999, the revised agreement is
treated as a new arrangement for accounting purposes. At the date of the amended
agreement, the $.20 conversion price was substantially lower than the
approximate $2.00 per share closing market price for the Series E Preferred
Stock. As such, the modified agreement contains a beneficial conversion feature,
the amount of which is limited to the proceeds of $650,000 under Topic D-60 of
the EITF. Therefore, the Company also subsequently recognized $650,000 in
non-cash effective interest expense for the beneficial conversion feature in the
quarter ended June 30, 1999.
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.
The statement of operations for the year ended March 31, 1999 and 1998
includes $27,659 and $583,541 of "litigation related expenses" which comprise
the settlement costs on the aforementioned leases, and legal fees associated
with the negotiations.
<PAGE>
7. Closure of Retail Stores - Litigation (continued)
The Company currently has one remaining landlord/tenant matter which has
yet to be resolved with a potential range of loss of $300,000. As of March 31,
1999, the Company has accrued a liability of $41,000 related to this matter,
which is an estimate by management based on its assessment of the matter
including management's belief that the landlord allowed the retail mix of the
mall site to change from a contractually agreed minimum percentage level of
retail tenants.
8. Income Taxes
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
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>
<PAGE>
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.
<PAGE>
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>
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).
<PAGE>
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.
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>
<PAGE>
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.
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 on the
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 August 1994, the Company adopted a 401(k) Employee Stock Ownership Plan
(the "Plan") which covers substantially all employees of the Company. The Plan
includes provisions for both an Employee Stock Ownership Plan ("ESOP") and a
401(k) Plan.
<PAGE>
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. During the year
ended March 31, 1999, 5,673 shares of Common Stock were contributed to the ESOP.
However, these shares were contributed by individuals, and not by the Company.
Therefore, the Company has recorded no expense 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.
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.
<PAGE>
9. Commitments and Contingencies (continued)
1994 Stock Option Plan
In June 1994, the Company adopted the 1994 Stock Option Plan (the "Plan")
which provides for options to purchase an aggregate of not more than 50,000
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. The option award granted initially was
recorded as a fixed award under APB 25. Due to the subsequent modification in
terms, it is to be valued as a variable award rather than a fixed award. Under
APB 25, such a variable award has the associated compensation expense adjusted,
up or down, to reflect subsequent changes in the market price. The Company has
not recorded any compensation expense related to this change in award due to the
change in the subsequent market price being immaterial. 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.
<PAGE>
9. Commitments and Contingencies (continued)
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.
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.
<PAGE>
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.
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.
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.
Purchase Agreement With Breaking Waves, Inc. ("BWI")
The Company has entered into an agreement with BWI, an affiliate (Note 1),
to purchase a minimum of 250 pieces of merchandise for each of its retail
stores. BWI sells children's swimsuits. The agreement has a term of one year,
and automatically extends each year, unless terminated by either party. The
agreement additionally calls for the Company to provide advertising, promotional
materials, and ads for this merchandise in all of its brochures, advertisements,
catalogs, and all other promotional materials, merchandising programs, and sales
promotions.
<PAGE>
10. Related Party Transactions (continued)
Financing Provided by BWI
On July 15, 1998, the Company borrowed $3000,000 from BWI and issued an
unsecured promissory note at an interest rate of 9% per annum. The repayment
terms of the note were for five monthly installments of principal and interest
commencing on August 15, 1998 and ending December 30, 1998, at which time the
note was repaid in full.
Additionally, the Company had a $250,000 note payable with BWI as of March
31, 1998, which was repaid during the year ended March 31, 1999. The terms of
this note are disclosed in Note 6.
Placement Agent Agreement With Frampton Industries, Ltd.
In January 1999, the Company and Frampton Industries, Ltd., an affiliated
entity (Note 1), 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 offering of convertible debentures.
The agreement is for a term of six months and provides that Frampton shall be
provided an investment-banking fee of 8% of the face amount of each debenture
funded. Frampton has the option to extend the agreement for two months after the
expiration. During the year ending March 31, 1999, Frampton arranged two such
transactions for a face amount of $650,000 involving itself and EACF (Note 6).
<PAGE>
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
<S> <C> <C>
Authorized shares of $.01 par value
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>
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>
11. Equity Transactions (continued)
Capital Structure (continued)
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 be automatically converted
in the event of the earlier of two years or the Company's Common Stock having 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.
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.
<PAGE>
11. Equity Transactions (continued)
EACC Options (continued)
The option values were based on the Company's analysis of its market
capitalization value immediately prior to each stock option grant as compared to
its market capitalization value immediately after the assumed exercise of each
grant. The analysis gave consideration to assumed cash that would be received
upon exercise and the liquidation values of outstanding series of preferred
stock to determine a market capitalization value attributable to the common
shares. This value was then discounted for market factors such as the thin
trading volume and price volatility of the Company's common stock and
restrictions on the underlying securities which required a two-year holding
period and had no registration rights. The option to acquire 1,250,000 shares of
common stock was considered to be insignificant based on the market
capitalization analysis given its relative insignificance in relation to the
options to acquire 20,000,000 shares of Series E Stock, each share of which was
convertible into 20 shares of common stock at the time. 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 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.
<PAGE>
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.
Simultaneously, ABC converted the debenture, and $33,333 of accrued
interest into 1,533,333 shares of Series E Preferred Stock. This transaction
has, in substance, been accounted for as a capital transaction since ABC and the
Company were entities under common control through majority ownership greater
than 50%, at the time the conversion occurred. (See chart in Note 1.)
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. ABC did, however, as part of the above mentioned amendment, retain
this option to acquire up to 25% of the common stock of the subsidiary to be
formed at book value at the time of the exercise, if any. ABC subsequently
assigned this right to Tudor Technologies, Inc. ("Tudor"), an entity affiliated
with the Company. Tudor is an affiliate due to the fact that Mr. Moses Mika is a
director on the boards of directors of both Tudor and the Company.
<PAGE>
11. Equity Transactions (continued)
Issuance of Series E Stock (continued)
On July 28, 1998, the Company sold 100,000 shares of Series E Preferred
Stock to UTTC, its principal shareholder and owner of more than 50% of the
Company's common stock as of the date of the transaction. As such, the Company
is an entity under common control of UTTC. The sale was $1.00 per share, or
$100,000. The Company has recorded the amount as additional paid-in capital
since the related party transaction was with a commonly controlled entity. The
Series E Preferred Stock is convertible into Common Stock, and therefore,
contains a beneficial conversion feature, the value of which exceeded the
proceeds. The amount of the beneficial conversion is being amortized as a
dividend over the required two-year holding period. (See "Series E Stock
Dividends Resulting From Beneficial Conversion Feature" in Note 11.)
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 would be capitalized and amortized
through the term of the Agreement. However, the Company has not been able to
locate and communicate with any representatives at Typhoon. The Company has
received no services and doubts that any services will be performed by Typhoon
in the future, and has accordingly not executed the option agreements, and does
not ever expect to issue such options. Therefore, no amounts have been recorded
for these options as of March 31, 1999.
<PAGE>
11. Equity Transactions (continued)
Issuance of Options (continued)
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
Company 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 Company has recorded an aggregate value for this transaction of
$143,750, including the $100,000 cash payment, and $43,750 for the Series E
Stock based on a closing market price on August 27, 1998 of $0.875 per share.
The Company felt CRG did not fully perform under the contract and has,
therefore, not issued the above-mentioned options, for the 450,000 shares of
Common Stock and 700,000 shares of Series E Stock. Should services ultimately be
provided and options issued, the fair value of the option compensation will be
determined when earned. Accordingly, no amounts have been recorded for the
option portion of this transaction. The $143,750 for the cash and stock tendered
has been capitalized by the Company, and is being pro-ratably expensed over the
term of the agreement, since the Company has received corporate brochures and
other promotional material from CRG that it will continue to utilize over future
periods.
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 $79,000 in the aggregate, based on a closing market price of $1.86
per share, which was subjected to a 15% marketability discount given the
restrictive nature and vesting requirement of the securities, as well as their
relatively low trading volume.
<PAGE>
11. Equity Transactions (continued)
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.
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.
<PAGE>
11. Equity Transactions (continued)
Series E Stock Dividends Resulting from Beneficial Conversion Feature
(continued)
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.
<PAGE>
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>
<PAGE>
12. Supplemental Cash Flow Information (continued)
Non-cash investing and financing activities 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).
13. Subsequent Events
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.
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.
<PAGE>
Subsequent Events (continued)
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. Utilizing the
Black-Scholes valuation model, the option was valued at $507,000, or $1.45 per
option. The model utilized several variables to determine the value including
the current price of the stock and its expected volatility, and the risk-free
interest rate for the expected term. The current stock price was $1.69 on May
27, 1999, the closing date. Based on an analysis of the stock price over the
previous twenty months, the volatility factor utilized for the model was 155%.
Additionally, the model used a risk-free interest rate of 6.0%.
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.
As noted above, the Company's Common Stock had a closing price of $1.69 on
the closing date of the Private Placement. 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. The Company intends to recognize the
effects of this non-cash dividend over a period of seven months. This period is
based on the Company's estimate as to the length of time to complete the
registration of the shares through an SB-2 filing with the Securities and
Exchange Commission.
<PAGE>
Subsequent Events (continued)
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. The share are valued 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.
<PAGE>
14. Restatement of Amounts Previously Reported
The March 31, 1999 financial statements contain certain restatements of
amounts previously reported. The restatements were the result of inquiries made
by the SEC regarding the accounting treatment for transactions revolving around
the Company's debt and equity securities, including grants of options/stock
(Note 11), convertible debentures (Note 6), and convertible preferred stock
(Note 11). As a result, the Company has restated several amounts. The table
below identifies significant changes to balances in the financial statements.
The following is a summary of the impact of the restatements on the 1999
consolidated balance sheet.
<TABLE>
<CAPTION>
<S> <C>
1. Reduction of other current assets for options not ultimately issued $ 68,634
2. Increase in Series E Preferred Stock for issuance of shares 79,000
3. Increase in additional paid-in capital for beneficial conversion
feature of convertible debentures 650,000
4. Reduction in additional paid-in capital for cancellation of options 79,000
5. Additional net loss in accumulated deficit (from above items) 718,634
The following is a summary of the impact of the restatements on the
1999 consolidated statement of operations and comprehensive net income
(loss).
1. Increase in operating expenses from recognition of compensation expense $ 79,000
2. Reduction in operating expenses from reversing amortization for options
not ultimately issued (10,366)
3. Additional effective non-cash interest expense attributable to the
beneficial conversion feature of convertible debentures 650,000
Decrease in 1999 net income $ 718,634
===============
</TABLE>
<PAGE>
Restatement of Amounts Previously Reported (continued)
The effects on the Company's previously issued 1999 financial statements are
summarized as follows.
<TABLE>
<CAPTION>
Previously Increase
Reported (Decrease) Restated
Consolidated Balance Sheet:
<S> <C> <C> <C>
Other current assets $ 1,310,263 $ (68,634) $ 1,241,629
Total assets $ 21,150,392 $ (68,634) $ 21,081,758
=============== ================ ===============
Series E convertible preferred stock $ 5,682,101 $ 79,000 $ 5,761,101
Additional paid-in capital 15,335,172 571,000 15,906,172
Total liabilities and stockholders' equity $ 21,150,392 $ (68,634) $ 21,081,758
=============== ================ ===============
Consolidated Statement of Operations and
Comprehensive Income (Loss):
Operating expenses $ 12,658,376 $ 68,634 $ 12,727,010
Effective interest for beneficial
conversion feature - 650,000 650,000
Net income (loss) and comprehensive
net loss $ 140,868 $ (718,634) $ (577,766)
=============== ================ ===============
Net income (loss) applicable to
common shares $ (1,566,857) $ (718,634) $ (2,285,491)
=============== ================ ===============
Basic and diluted income(loss) per
common share and share equivalents $ (.34) $ (.16) $ (.50)
============== ============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.01
FINANCIAL DATA SCHEDULE
This schedule contains summary information extracted from the Balance Sheet,
Statement of Operations, Statement of Cash Flows and Notes thereto incorporated
in Part I, Item 7, of this Form 10-KSB and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Mar-31-2000
<PERIOD-END> Mar-31-2000
<CASH> 125,967
<SECURITIES> 0
<RECEIVABLES> 98,276
<ALLOWANCES> 0
<INVENTORY> 11,506,284
<CURRENT-ASSETS> 13,322,156
<PP&E> 9,406,778
<DEPRECIATION> (4,058,603)
<TOTAL-ASSETS> 21,081,758
<CURRENT-LIABILITIES> 7,558,758
<BONDS> 0
0
5,761,101
<COMMON> 0
<OTHER-SE> (765,106)
<TOTAL-LIABILITY-AND-EQUITY> 21,081,758
<SALES> 34,371,230
<TOTAL-REVENUES> 34,371,230
<CGS> 19,590,784
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,741,011
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,615,051
<INCOME-PRETAX> (575,616)
<INCOME-TAX> 0
<INCOME-CONTINUING> (575,616)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (575,616)
<EPS-BASIC> (.50)
<EPS-DILUTED> (.50)
</TABLE>
