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, 2000
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 0-25030
PLAY CO. TOYS & ENTERTAINMENT CORP.
-----------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-3024222
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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 [ ].
The Registrant's revenues for its fiscal year ended March 31, 2000 were
$37,252,210.
The aggregate market value of the voting stock on July 12, 2000 (consisting
of Common Stock, par value $0.01 per share) held by non-affiliates was
approximately $2,040,768 based upon the closing price for such Common Stock on
said date ($.23), as reported by a market maker. On such date, there were
47,369,542 shares of Registrant's Common Stock outstanding.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
The statements which are not historical facts contained in this Annual
Report are forward looking statements that involve risks and uncertainties,
including , but not limited to instability of revenues, future losses, decrease
in same store sales and unpredictable operating results. The Company's actual
results may differ materially from the results discussed in any forward looking
statement. Unless otherwise indicated, all references to the number of our
shares of common stock give effect to the 1 for 3 reverse stock split effected
in July 1997.
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 one of
its subsidiaries, Toys International.COM, Inc. ("Toys," formerly known as Toys
International, Inc.), a company organized under the laws of Delaware, operate an
aggregate of thirty-three 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 and Houston, Texas, (iv)
Auburn Hills, Michigan, (v) Chicago, Illinois, and (vi) Charlotte, North
Carolina. The Company intends to expand its operations geographically and in
accordance therewith has executed leases to open five additional stores by the
end of calendar year 2000. These stores shall be located in Nevada, Illinois,
Colorado, Maryland, and Minnesota. Toys has a wholly-owned subsidiary organized
under the laws of Germany, Toys International.de GmbH, which operates a
German-language e-commerce website. The Company's other subsidiary is Play Co.
Toys Canyon Country, Inc. ("Canyon") which holds the lease for one retail
location operated by Toys. 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 twenty stores
(inclusive of the three it purchased in January 1997) and remodeled one store,
all of which are considered by management to be high-end retail toy and
educational, electronic interactive stores. These outlets, and those the Company
expects to open in the future, offer items comparable in quality and choice to
those offered by FAO Schwarz, Warner Brothers, and Disney Stores and are
expected to attract clientele similar to those attracted by such stores.
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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 offers approximately 3,000 items for sale
on the website. The second site, www.webjumbo.de, debuted in October 1999 and is
a full line site retailing approximately 5,000 items. This site is exclusively
in German, and a sizable portion of the items sold thereon will represent
European toys not sold in the Company's retail 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.
Toys Initial Public Offering
In November 1999, Toys effected an initial public offering of Common Stock,
$.001 per share, in the Federal Republic of Germany, generating net proceeds of
approximately $22,864,000. Such shares are currently traded on the SMAX segment
of the Frankfurt Stock Exchange under the symbol "TY40."
Ownership of the Company
At fiscal year end March 31, 2000, approximately 22% 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"). 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
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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 25% of the Company and owns approximately 79% of UTTC common stock
and is, in turn, owned approximately 62% 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
Liechtenstein Trust, which is the parent corporation also of Frampton
Industries, Ltd. ("Frampton") and ABC Fund, Ltd. ("ABC"), entities affiliated
with the Company. Breaking Waves, Inc., a wholly owned subsidiary of
ShopNet.Com, Inc., owns approximately 11% of the Company.
The following chart depicts the Company's approximate ownership structure
as of March 31, 2000:
Europe American Capital Foundation
/ / || \\
/ / \/ \\
Frampton Industries (>50%) American Telecom PLC (80%) ABC Fund, Ltd. (>50%)
(100%)
||
\/
U.S. Stores Corp.
(62.0%)
||
\/
Multimedia Concepts International, Inc.
(79.0%)
||
\/
United Textiles & Toys Corp.
(22.0%)
||
\/
Play Co. Toys & Entertainment Corp.
The Company has two operating subsidiaries: Toys and Play Co. Toys Canyon
Country, Inc. ("Canyon"). Toys currently operates twenty-eight stores, and
Canyon operates one store. The Company plans to combine these two subsidiaries.
See "Item 2. Description of Property."
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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
above 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 while the Company purchased no additional pieces of suits during year ended
March 31, 2000, it continues to sell the suits at its retail locations. 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 located in San Marcos, California. 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.
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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.
In June 1999, the Company opened its 26th store in the Venetian Hotel in
Las Vegas, Nevada. In September 1999, the Company opened one store in San
Francisco (Pier 39) and two stores near Charlotte, North Carolina. In October
1999, the Company opened one store in Mission Viejo, California, and two stores
near Houston, Texas. During fiscal year 1999, the Company opened six new stores.
With the closure of the Company's Simi Valley store in February 2000, and the
opening of its new stores in Nashville, Tennessee in May 2000 and in Orlando,
Florida in June 2000, the Company's store count was brought to its current level
of thirty-three stores. The Company intends to open seven additional stores by
the end of the calendar year 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation - - Liquidity and Capital
Resources."
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.
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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. and Amazon.com. 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.
Warehousing, Shipping and Inventory Systems
The Company's stores are serviced from one distribution facility in San
Marcos, California which is approximately 37,000 square feet, plus 12,000 square
feet in an adjacent ancillary facility. 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.
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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 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, 2000, the Company had four executive officers, approximately
148 full time employees, and approximately 346 part time employees in the United
States. Toys International.de GmbH has an additional five full time employees in
Germany. 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 with FINOVA. The credit line offered under
the FINOVA Agreement replaced the $7 million credit line the Company previously
had with Congress Financial Corporation (Western) ("Congress"). Neither FINOVA
nor Congress is affiliated with the Company. The Company repaid the Congress
loan on February 3, 1998. The FINOVA credit line is secured by substantially all
of the Company's assets and expires on August 3, 2000. The FINOVA Agreement is
guaranteed by United Textiles and accrues interest at a rate of floating prime
plus one and one-half percent. Effective July 30, 1998, the Company and FINOVA
amended the Agreement to increase the maximum level of borrowings thereunder
from $7.1 million to $7.6 million. Effective September 24, 1998, the Company and
FINOVA entered into a second amendment to increase the maximum level of
borrowings thereunder from $7.6 million to $8.6 million through December 31,
1998. As of January 1, 1999, the maximum level of borrowings returned to the
$7.6 million level. In December 1998, the FINOVA Agreement was amended a third
time to reflect FINOVA's taking of a subordinate position with respect to its
lien on only such equipment as has been leased by the Company from Phoenix
Leasing, Inc.
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In November 1998, pursuant to an agreement ("ZD Agreement") with ZD Group,
L.L.C. ("ZD") - a related New York limited liability company, the beneficiary of
which is a member of the family of the Company's chairman - ZD issued a $700,000
irrevocable standby L/C in favor of FINOVA. As consideration for its issuance of
the L/C, ZD was entitled to (i) a one-third profit percentage after application
of corporate overhead beginning April 1, 1999 through the end of the terms of
the store leases from three of the Company's stores (Venetian Hotel in Las
Vegas, Nevada; Auburn Hills, Michigan; and Gurnee, Illinois) and (ii) nominate
and appoint one-third of the Company's directors during the aforesaid store
lease terms (but in no event later than fiscal year end 2013). Such stores did
not generate a profit after application of corporate overhead through March 31,
2000, thus, no payments have accrued or been made to ZD through March 31, 2000.
As a result of the L/C, FINOVA lent a matching $700,000 to the Company in the
form of a term loan, pursuant to a fourth amendment to the FINOVA Agreement
entered into on February 11, 1999. The term loan from FINOVA expires on August
3, 2000 and bears interest at prime plus one percent. In March 1999, the Company
and FINOVA entered into a Fifth Amendment to Loan and Security Agreement which
stretches the agreed upon (in the FINOVA Agreement) decrease in advance rate
against the Company's cost value of its inventory over a five month period. In
August 1999, the Company and FINOVA entered into a Sixth Amendment to Loan and
Security Agreement pursuant to which the Company's maximum level of borrowings
was increased to $11.3 million. The amendment also (1) increased the minimum net
worth financial covenant from $750,000 to $2.9 million as of June 30, 1999 with
the $2.9 million threshold increasing by 60% of any equity raised by the Company
and by 60% of any annual profits generated by the Company; (2) allows the
Company to sell a minority equity interest (up to 49%) in its Toys subsidiary;
and (3) increased the maximum levels of capital expenditures, capital leases and
unsecured debt allowed under the financing agreement.
In December 1999, at the Company's request, FINOVA agreed to reduce the
maximum borrowing level of the credit facility from $11.3 million to $9.3
million and to terminate a $2 million standby L/C that previously helped support
the credit facility. The termination of the L/C allowed the Company access to a
$2 million certificate of deposit which previously was restricted and was used
as collateral for the L/C by the issuing bank.
On March 13, 2000, the Company and FINOVA agreed that FINOVA would release
its interest as beneficiary in $1.7 million of standby letters of credit. These
standby letters of credit had originally been provided by Multimedia Concepts
International, Inc. for $1 million, and by ZD for $700,000. Further, the total
amount available under the facility was reduced to $5 million. Beginning April
30, 2000, the facility is to be further reduced by $1 million at each month-end,
until reduced to zero in August 2000. On March 31, 2000, the Company had $47,542
outstanding under its revolving credit facility with FINOVA representing fees
and interest as the principal balance was paid down to zero.
In May 2000, the Company entered into a Termination and Release Agreement
with ZD, pursuant to which (i) the Company agreed to pay ZD an aggregate amount
of $500,000 ("Termination Fee") in full satisfaction of any and all obligations
to ZD under the ZD Agreement and (ii) all of ZD's obligations under ZD
Agreement, including the provision of the L/C in favor of FINOVA, were
terminated. By supplemental letter, in lieu of payment of the Termination Fee,
ZD agreed to receive 854,700 shares of the Company's Series E Preferred Stock.
Subsequently, ZD entered into an Assignment of Termination and Release Agreement
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which provided for the assignment by ZD of all its rights and obligations under
the Termination and Release Agreement to EACF. Accordingly, the Company has
issued the 854,700 shares of Series E Preferred Stock to EACF. The Series E
Preferred Stock was valued of $0.59 per share, which represented a 60 percent
discount of the market value as of the date of the transaction. To obtain a fair
value for the Series E Preferred Stock, the Company engaged the services of an
independent appraiser to determine the value of the Series E Preferred Stock
near the transaction date.
The Company is currently seeking an alternative lending arrangement with a
bank or finance company. Although the Company has received three letters of
intent for such a facility, there can be no assurance that it will be able to
obtain such a facility on acceptable terms, or at all.
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 "Description of Business--
Suppliers and Manufacturers."
Fixture Financing
Since the beginning of fiscal year 1999, the Company has utilized lease
financing agreements for the acquisition of fixtures and security equipment 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 are in the
approximate aggregate amount of $1,750,000. All such financings are secured by
the Company's store fixtures and equipment. The Company is currently seeking
additional financing of this type.
Recent Developments
In June 2000, the Company added Carolyn Morrison to its executive
management team. Ms. Morrison joins the Company in the capacity of President and
Chief Operating Officer of Toys. Richard Brady, who formerly held those titles
in the Toys subsidiary, has been promoted to Chief Executive Officer of Toys.
Ms. Morrison has a deep knowledge of the specialty toy market. She has over
20 years of retail experience, most recently having served for eight years with
FAO Schwartz as Executive Vice President.
The Company believes that Ms. Morrison's leadership skills coupled with her
proven successful implementation of strategic plans and her experience in
multi-store management will play a pivotal role in the achievement of the
Company's plan to strengthen its position within the specialty toy segment of
the toy industry.
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On July 15, 1999, Tudor, a British Virgin Islands corporation of which Mr.
Mika is a shareholder, as an assignee of an option to acquire from the Company
25% of the outstanding shares of the common stock of Toys, elected to exercise
such option (the "Tudor Option"). At the time, the Company owned 100% of Toys,
or 9,340,000 shares of common stock. The Tudor Option called for the purchase
price to be 25% of Toy's book value at June 30, 1999, which book value was
determined to be $2,894,711. In October 1999, Tudor paid the Company $723,678
(25% of the book value as of June 30, 1999) for 2,335,000 shares of Toys common
stock. This was the conversion option (as hereinafter defined) which was
assigned to Tudor by ABC.
On July 20, 1999, the Company and Toys entered into an investment agreement
whereby an unaffiliated investment bank (Concord) and CDMI Capital Corp.
("CDMI," a British Virgin islands corporation of which Moses Mika, a director of
the Company, is a shareholder) each purchased 330,000 shares (or 3.3%) of Toys
common stock for an aggregate of $2.8 million as a private placement prior to
the aforementioned public offering. This sale of securities reduced the
Company's ownership of Toys from 75% to 70.05%.
On November 19, 1999, the Company's subsidiary, Toys, consummated an
initial public offering of its common stock on the SMAX segment of the Frankfurt
Stock Exchange ("IPO"). The Offering was underwritten by Concord Effekten AG of
Frankfurt, Germany. Toys sold 2 million shares, or a 16.7% interest, in the
Offering for net proceeds of approximately $23.3 million. The Offering was
priced at 13 Euros per share, or approximately US $13.52 per share. The Company
retained majority ownership of Toys (58.4%).
In May 1999, the Company sold 750,000 shares of Series F Stock, at a
purchase price of $1.00 per share, in a private placement. The Company received
approximately $645,000 in net proceeds from the sale. In September 1999, the
Company filed a registration statement on Form SB-2 (the "Registration
Statement") covering the resale of 1,500,000 shares of Common Stock underlying
the Series F Stock sold in the above-described private placement, an additional
350,000 shares of Common Stock underlying options which were granted to the
Placement Agent and its designees as part of the private placement, and 100,000
shares of Common Stock which will be issued on effectiveness of the Registration
Statement to a former commercial lessor as part of a settlement of an action
commenced by same against the Company. In May 2000, the Company filed Amendment
No. 1 to the Registration Statement, which has not yet been declared effective.
In March 1999, the Company borrowed an aggregate of $400,000 from Full Moon
Development, Inc., a corporation not affiliated with the Company, pursuant to
two promissory notes, each in the amount of $200,000. The Company has repaid
both notes.
In February 1999, the Company entered into a one year agreement with
Typhoon Capital Consultants, LLC ("Typhoon") pursuant to which Typhoon was 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
its services, Typhoon was to be granted an option to purchase an aggregate of
150,000 shares of Common Stock, exercisable at $1.75 per share until their
expiration on August 30, 2001. The Company terminated this agreement in August
1999, however, due to Typhoon's breach of its obligations thereunder.
Accordingly, the Company has not executed the option agreements and does not
expect to issue such options.
11
<PAGE>
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 was 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. The Company has recorded an aggregate value for this transaction of
$143,750, representing only the $100,000 cash payment and $43,750 for the Series
E Stock (based on a closing market price of $0.875 per share on August 27,
1998), as the Company did not execute the option agreements given CRG's failure
to perform material duties required of it by the agreement.
In June 1998, ABC, a Belize corporation and an affiliate of the Company
under common control, the holder of a 5% convertible secured subordinated
debenture - dated January 21, 1998 and due August 15, 2000 - offered to amend
the terms of the debenture to enable the conversion of the principal amount and
accrued interest thereon, into shares of Series E Stock, at a conversion price
of $1.00 per share. Management agreed to convert the debenture since the
conversion of the debt into equity would result in a strengthened equity
position which management believed would provide confidence to the Company's
working capital lender, FINOVA, and trade creditors. Further, converting the
debt to equity eliminated on-going interest expense requirements as well as the
cash flow required to repay the debenture. Simultaneously with its offer to
amend the debenture, ABC elected to convert same as of June 30, 1998, whereby
$1.5 million in principal amount and $33,333 in accrued interest were converted
into 1,533,333 shares of Series E Stock. ABC did not receive any registration
rights regarding the shares. Simultaneously, ABC terminated the Subordinated
Security Agreement between the parties and the Intercreditor and Subordination
Agreement, dated January 21, 1998, by and between ABC and FINOVA.
The debenture provided for the conversion of same, at ABC's option
("Conversion Option"), into shares of common stock of either (i) a subsidiary
which the Company intended to form for the purpose of acquiring those stores
operated by the Company (or its subsidiaries) which conduct business as "Toys
International," or (ii) any other subsidiary (such as Toys) which might acquire
a portion of the assets and business of the Company. This option to convert was
exercisable at the net book value of the subsidiary's shares on the date ABC
exercised the option with a limitation on such share ownership being 25% of the
total outstanding shares of said subsidiary. In September 1998, in accordance
with the terms of the debenture, ABC assigned its option to Tudor as discussed
above.
12
<PAGE>
In May 1998, the Company commenced an offering of units, each unit
comprising one share of Series F Stock and one Series F Preferred Stock Purchase
Warrant (the "Series F Warrants"), at a purchase price of $3.00 per unit,
through Morgan Grant Capital Group, Inc. as placement agent. The Company
terminated the offering in June 1998, and no funds were raised thereby.
In July 1997, the Company effected a 1 for 3 reverse split of its Common
Stock. To date, not all shareholders have exchanged their pre-reverse split
shares for post-reverse split shares; therefore, the number of shares
outstanding as of the date set forth herein is subject to change, nominally, as
such shareholders submit their shares for exchange.
13
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company 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, plus 12,000 square feet in an adjacent ancillary
facility) located at 550 Rancheros Drive, San Marcos, California 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 latter lease is on a
month to month basis, which the Company intends to terminate in the near future.
The 40,000 square foot facility 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. This lease, which was renewed March
2000 for a two-year period ending April 2002, contains an option to extend the
lease for an additional three-year period. The fixed minimum rent has increased,
effective May 1, 2000, to $25,000 per month, or $300,000 per year. As part of
the renewal, the lease was assigned to the Company's Toys subsidiary. The
Company believes that this lease is on terms no more or less favorable than
terms it might otherwise have negotiated with an unaffiliated party.
The following table sets forth the leased properties on which the Company
is currently operating stores (aggregating 31) are located:
<TABLE>
<CAPTION>
===============================================================================================================================
SIZE IN SQUARE FEET APPROXIMATE
LEASE BASE RENT
STORE LOCATION EXPIRATION ANNUAL COST
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Play Co. Toys 12,000 July 2006 $108,000.00
Santa Clarita
19232 Soledad Canyon Rd
Santa Clarita, CA 91351
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 7,800 January 2001 $85,000.00
Santa Margarita
27690-B Santa Margarita
Mission Viejo, CA 92691
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 8,250 December 1999 $88,000.00
Chula Vista
1193 Broadway
Chula Vista, CA 91911
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,030 June 2000 $128,000.00
El Cajon
327 N. Magnolia
El Cajon, CA 92020
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,000 September 2005 $111,000.00
Encinitas
280 N. El Camino Real
Encinitas, CA 92024
-------------------------------------------------------------------------------------------------------------------------------
<PAGE>
===============================================================================================================================
SIZE IN SQUARE FEET APPROXIMATE
LEASE BASE RENT
STORE LOCATION EXPIRATION ANNUAL COST
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 9,800 December 2004 $117,000.00
Pasadena
885 S. Arroyo Parkway
Pasadena, CA 91105
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 12,000 January 2001 $96,000.00
Orange
1349 E. Katella
Orange, CA 92513
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,478 March 2005 $113,000.00
Redlands
837 Tri-City
Redlands, CA 92373
-------------------------------------------------------------------------------------------------------------------------------
Toys International.deGmbH* 50,000 December 2001 $138,000.00
Neuwiederstrasse 80
56566 Neuwied Germany
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,156 August 2002 $88,000.00
Clairemont
4615-A Clairemont Drive
San Diego, CA 92117
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 11,597 March 2004 $91,000.00
Rancho Cucamonga
9950 W. Foothill Blvd, Suite U
Rancho Cucamonga, CA 91730
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,000 October 2004 $65,000.00
Corona
1210 W. Sixth Street
Corona, CA 91720
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 9,400 December 2003 $179,000.00
Woodland Hills
19804 Ventura Blvd., #366
Woodland Hills, CA 91364
-------------------------------------------------------------------------------------------------------------------------------
Toys International 5,183 January 2004 $160,000.00
South Coast Plaza, Ste. 1020
3333 Bristol Street, Suite 1030
Costa Mesa, CA 92626
-------------------------------------------------------------------------------------------------------------------------------
Toys International 3,869 January 2001 $146,000.00
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
-------------------------------------------------------------------------------------------------------------------------------
<PAGE>
===============================================================================================================================
SIZE IN SQUARE FEET APPROXIMATE
LEASE BASE RENT
STORE LOCATION EXPIRATION ANNUAL COST
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Toys International 3,620 August 2007 $83,000.00
Galleria at South Bay
1815 Hawthorne Blvd., #366
Redondo Beach, CA 90278
-------------------------------------------------------------------------------------------------------------------------------
Toy Co. 5,642 January 2003 $113,000.00
Ontario Mills
One Mills Circle, #302
Ontario, CA 91764
-------------------------------------------------------------------------------------------------------------------------------
Toy Co. 7,103 October 2002 $163,000.00
Arizona Mills
5000 Arizona Mills Circle, #689
Tempe, AZ 85282
-------------------------------------------------------------------------------------------------------------------------------
Toy Co. 6,567 May 2008 $175,000.00
Fashion Outlet of Las Vegas
32100-320 Las Vegas Blvd. So.
Primm, NV 89019
-------------------------------------------------------------------------------------------------------------------------------
Toy Co. 9,369 May 2003 $175,000.00
Grapevine Mills
3000 Grapevine Mills Pkwy, Ste. 312
Grapevine, TX 76051
-------------------------------------------------------------------------------------------------------------------------------
Toys International 5,339 December 2008 $133,000.00
Thousand Oaks
208 W. Hillcrest Drive
Thousand Oaks, CA 91360
-------------------------------------------------------------------------------------------------------------------------------
Toys International 10,000 May 2008 $195,000.00
Great Lakes Crossing
4236 Baldwin Rd., #551
Auburn Hills, MI 48326
-------------------------------------------------------------------------------------------------------------------------------
Toy Co. 12,496 July 2003 $169,000.00
Gurnee Mills Mall
06170 W. Grand Ave., Sp. #559
Gurnee, IL 60031
-------------------------------------------------------------------------------------------------------------------------------
Toys International 9,400 March 2008 $221,000.00
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
===============================================================================================================================
<PAGE>
===============================================================================================================================
SIZE IN SQUARE FEET APPROXIMATE
LEASE BASE RENT
STORE LOCATION EXPIRATION ANNUAL COST
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-------------------------------------------------- --------------- ------------------------- -------------------------
Toys International 5,500 August 2009 $116,000
Pier 39
The Embarcadero
San Francisco, CA 94133
-------------------------------------------------- --------------- ------------------------- -------------------------
Play Co. 4,594 July 2008 $106,000
Concord Mills
8111 Concord Mills Blvd.
Concord, NC 28027
-------------------------------------------------- --------------- ------------------------- -------------------------
Toy Co. 10,402 July 2008 $229,000
Concord Mills
8111 Concord Mills Blvd.
Concord, NC 28027
-------------------------------------------------- --------------- ------------------------- -------------------------
Toy Co. 8,988 October 2009 $198,000
Katy Mills
5000 Katy Mills Circle, Ste. 514
Katy, TX 77494
-------------------------------------------------- --------------- ------------------------- -------------------------
Play Co. 4,476 October 2009 $103,000
Katy Mills
5000 Katy Mills Circle, Ste. 722
Katy, TX 77494
-------------------------------------------------- --------------- ------------------------- -------------------------
Toys International 5,959 January 2010 $155,000
The Shops at Mission Viejo
30 Shops at Mission Viejo
Mission Viejo, CA 92691
================================================== =============== ========================= =========================
</TABLE>
-------------------------
* Consists of office and warehouse space.
ITEM 3. LEGAL PROCEEDINGS
In October 1997, in the Superior Court of the State of California, County
of San Bernardino, Foothill Marketplace, Ltd., a former lessor, commenced suit
against the Company for breach of contract pertaining to premises located in
Rialto, California. During the third quarter of fiscal year end 2000, the
parties settled the action pursuant to a stipulated agreement whereby the
Company remitted an initial cash payment of $35,000 and agreed to remit an
aggregate $186,138 over the ensuing 36-month period. The Company recorded
$156,405 on a discounted basis for this payment stream. In addition, the Company
agreed to issue 100,000 shares of Common Stock to Foothill Marketplace. The
Company recorded $42,500 in litigation related expenses for the shares based on
the market value of the stock including a 15% discount applied, due to the
restricted nature of the shares. The Company has estimated the total net present
value of the settlement to be $233,905, net of related legal costs of $36,301.
17
<PAGE>
The Company is a party to legal proceedings and claims which arise in the
ordinary course of its business. The Company believes that the outcome of these
proceedings, individually and in the aggregate, will not have a material adverse
effect on its financial position, results of operations, or liquidity.
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.
18
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 4, 2000, the Company held a special meeting of its Common
and Series E Preferred Stock shareholders at its San Marcos office. Shareholders
were asked to vote on the proposal to amend the Company's Certificate of
Incorporation to modify the conversion terms of the Series E Preferred Stock to
render all shares of same eligible for conversion as of February 4, 2000. The
proposal was adopted by a majority of both the Common and Series E Preferred
shareholders as follows:
<TABLE>
<CAPTION>
Votes Votes Abstentions
Cast For Cast Against
<S> <C> <C> <C>
Common Stock 3,709,300 3,202 687
Series E Preferred Stock 3,845,880 0 0
-------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<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 Stock(1 Common) (3) Warrants (1) Preferred Stock Warrants
------ --------------- ------------ ---------------- --------
Low High Low High Low High Low High
--- ---- --- ---- --- ---- --- ----
1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
01/01/98 - 03/31/98 .67 1.25 1 4.75 .5 1.75
04/01/98 - 06/30/98 .58 1.75 .87 3.5 .5 1.25
07/01/98 - 09/30/98 .75 1.56 .31 3.5 .12 1.12
10/01/98 - 12/31/98 .56 1.22 .20 .67 .01 .37
1999
01/01/99 - 03/31/99 .75 2.56 .20 1.72 .03 .25
04/01/99 - 06/30/99 1.06 2.03 .50 3.37 .10 .58
07/01/99 - 09/30/99 .75 1.50 .84 1.62 .13 .29
10/01/99 - 12/31/99 .50 1.44 .63 4.13 .13 .95
2000
01/01/00 - 03/31/00 .31 2.00 1.88 3.94 .28 .56
04/01/00 - 07/12/00 .20 .47 1.25 2.68 .19 .43
---------------------------- ----------- ------------ --------- ---------- ---------- -------- ----------- ----------
</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.
As of July 12, 2000, there were approximately 437 holders of record of the
Company's Common Stock, although the Company believes that there are
approximately 1,530 additional beneficial owners of shares of Common Stock held
in street name. As of July 12, 2000, the number of outstanding shares of the
Company's Common Stock was 47,369,542 (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).
See "Market For Common Equity and Related Stockholder Matters - - Conversion of
Series E Preferred Stock to Common Stock."
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.
20
<PAGE>
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 Preferred Stock (the "Series F Stock"), at a purchase price
of $1.00 per share, through Robb Peck McCooey Clearing Corporation (the
"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.
In September 1999, the Company filed a registration statement on Form SB-2
(the "Registration Statement") covering the resale of 1,500,000 shares of Common
Stock underlying the Series F Stock sold in the above-described private
placement, an additional 350,000 shares of Common Stock underlying options which
were granted to the Placement Agent and its designees as part of the private
placement, and 100,000 shares of Common Stock which will be issued on
effectiveness of the Registration Statement to a former commercial lessor as
part of a settlement of an action commenced by same against the Company. In May
2000, the Company filed Amendment No. 1 to the Registration Statement.
Series E Preferred Stock Issuance
In May 2000, the Company entered into a Termination and Release Agreement
with ZD, pursuant to which (i) the Company agreed to pay ZD an aggregate amount
of $500,000 ("Termination Fee") in full satisfaction of any and all obligations
to ZD under the ZD Agreement and (ii) all of ZD's obligations under ZD
Agreement, including the provision of the L/C in favor of FINOVA, were
terminated. By supplemental letter, in lieu of payment of the Termination Fee,
ZD agreed to receive 854,700 shares of the Company's Series E Preferred Stock.
Subsequently, ZD entered into an Assignment of Termination and Release Agreement
which provided for the assignment by ZD of all its rights and obligations under
the Termination and Release Agreement to EACF. Accordingly, the Company has
issued the 854,700 shares of Series E Preferred Stock to EACF.
Pursuant to the settlement agreement, the Company agreed to pay to ZD
$500,000 in cash. Subsequently, ZD agreed to receive 854,700 shares of Series E
Preferred Stock in lieu of the $500,000 cash. The Series E Preferred Stock was
thereby valued at $0.59 per share, which represented a 60 percent discount of
the market value as of the date of the transaction. To obtain a fair value for
the Series E Stock, the Company engaged an independent appraiser to determine
the value of the Series E Stock near the transaction date. ZD assigned its
rights under this agreement to EACF and accordingly, the Company issued the
854,700 shares of Series E Stock to EACF.
Conversion of Series E Preferred Stock to Common Stock
Beginning in January 2000, and through the fourth quarter, certain holders
of 929,563 shares of Series E Preferred Stock elected to convert their shares
into Common Stock shares. Each Series E Preferred Stock was converted into six
shares of Common Stock, or a total of 5,577,378 shares of Common Stock.
Subsequent to March 31, 2000, a substantial amount of Common Stock has been
issued upon conversion of the Series E Preferred Stock.
21
<PAGE>
Conversion of Convertible Debenture into Series E Preferred Stock
In February 1999, the Company issued convertible debentures to Europe
American Capital Foundation ("EACF") and Frampton Industries, Ltd ("Frampton")
in the amounts of $500,000 and $150,000, respectively, both bearing interest at
5% per annum (the "Debentures"). Such Debentures were convertible into an amount
of the Company's Series E Preferred Stock. The Debentures were amended from
time-to-time and as a result, the Debentures became convertible into Series E
Preferred Stock at $.20 per share.
In December 1999, Frampton assigned its debenture to EACF, and on March 3,
2000, EACF advised the Company of its intention to convert the debenture
effective February 29, 2000. Accordingly, in March 2000, in accordance with the
terms of the debenture, the Company issued 3,423,300 shares of Series E Stock to
EACF.
Issuance/Reservation of Common Stock
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.
In December 1999, the Company settled its last tenant/landlord matter.
Pursuant to a settlement agreement, the Company agreed to issue 100,000 shares
of Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - - Results of Operations."
22
<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,
1997 1998 1999 2000
---- ---- ---- ----
Balance Sheet Data:
<S> <C> <C> <C> <C>
Working capital (deficiency) $(1,570,486) $4,452,481 $5,763,509 $13,550,389
Total assets 9,378,618 14,139,887 21,081,758 32,283,781
Total current liabilities 8,148,657 4,581,831 7,558,647 7,436,310
Long term obligations 226,925 7,055,549 8,527,116 1,124,374
Stockholders' equity 1,003,036 2,502,507 4,995,995 13,779,690
Common stock dividends --- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
1997 1998 1999 2000
---- ---- ---- ----
Operating Data:
<S> <C> <C> <C> <C>
Net sales $19,624,276 $22,568,527 $34,371,230 $37,252,210
Gross profit 5,955,172 8,878,928 14,780,446 15,197,485
Gross margin 30.3% 39.3% 43.0% 40.8%
Total operating expenses 8,789,570 10,119,430 13,741,011 22,996,151
Minority interest in net loss of
consolidated subsidiary --- --- --- 952,757
Extraordinary gain on extinguishment of
debt --- --- --- 650,000
Net income (loss) (3,584,881) (2,054,470) (577,766) (8,015,367)
Effects of non-cash dividends on
convertible preferred stock --- (1,473,806) (1,707,725) (2,592,252)
Net income (loss) applicable to common
shares (6,474,496) (3,528,276) (2,285,491) (10,607,619)
Income (loss) per common share(1) (1.29) (0.86) (.50) (1.58)
Weighted average shares outstanding(1)
2,791,876 4,098,971 4,590,642 6,719,736
</TABLE>
(1) Adjusted for effects of 1 for 3 reverse split of Common Stock in July 1997.
23
<PAGE>
Results of Operations
This Annual Report on Form 10-KSB and the following "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
includes "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. All statements other than
statements of historical fact are "forward-looking statements" for purposes of
these provisions, including any projections of earnings, revenues or other
financial items, any statements of the plans and objectives of management for
future operations, any statements concerning proposed new products or services,
any statements regarding future economic conditions or performance, and any
statements of assumptions underlying any of the foregoing in some cases,
forward-looking statements can be identified by the use of terminology such as
"may", "will", "expects", "plans", "anticipates", "estimates", "potential", or
"continue" or the negative thereof or other comparable terminology. Although we
believe that the expectations reflected in the forward-looking statements
contained herein are reasonable, there can be no assurance that such
expectations or any of the forward-looking statements will prove to be correct,
and actual results could differ materially from those projected or assumed in
the forward-looking statements. Our future financial condition and results of
operations, as well as any forward-looking statements are subject to inherent
risks and uncertainties. All forward-looking statements and reasons why results
may differ included in this report are made as of the date hereof, and we assume
no obligation to update any such forward-looking statement or reason why actual
results might differ.
The Company has two subsidiaries, Toys International.COM, Inc. ("Toys") and
Play Co. Toys Canyon Country, Inc. ("Canyon"). Toys currently operates
twenty-nine of the Company's aggregate thirty-three stores, of which Canyon
holds the lease for one of Toys' retail locations.
For the year ended March 31, 2000 as compared to the year ended March 31, 1999
The Company generated net sales of $37,252,210 in the year ended March 31,
2000 (also referred to as fiscal year 2000). This represented an increase of
$2,880,980, or 8.4%, over net sales of $34,371,230 in the year ended March 31,
1999 (also referred to as fiscal year 1999). Of this sales growth, $1,238,720
can be attributed to the Company's Internet operations in the United States and
Germany ("Internet Operations"); the remainder of the sales growth can be
attributed to the Company's new stores as same store sales declined by 24.8% for
the period. The sales of the Internet Operations included both business to
consumer (approximately $719,000) and business to business (approximately
$520,000) sales. The business to business sales activity also included wholesale
transactions to other toy retailers and wholesalers. The Company runs all
wholesale transactions through its Internet division, since its wholesale
division was closed several years ago.
The Company believes that its same store sales showed a decline (after a
period of two years of continuous increases in the fiscal years ended March 31,
1998 and March 31,1999) due to a significant reduction in the sales of certain
collectible items, in particular, Beanie Babies. The Company attributes a great
deal of this decline both to a reduction in demand for Beanie Babies and related
items and a general lack of availability of those items from the manufacturer.
This decline represented approximately a $7.9 million decline in same store
sales. Excluding sales of Beanie Babies and related products, the Company's same
store sales actually increased by 5.7% in the fiscal year 2000. The Company
expects this trend to continue only through the second quarter of current fiscal
year 2001.
24
<PAGE>
The Company ended fiscal year 2000 with 31 retail locations in seven
states, compared to 25 retail locations in six states at the end of fiscal year
1999. During fiscal year 2000, the Company opened seven new stores and closed
one store due to a lease expiration.
The Company posted a gross profit of $15,197,485 in the year ended March
31, 2000. This represented an increase of $417,039, or 2.8%, over the gross
profit of $14,780,446 in the year ended March 31, 1999. The gross profit
increase was due to the above noted growth in net sales. The Company's gross
margin declined from 43.0% in fiscal year 1999 to 40.8% in fiscal year 2000.
This 2.2% gross margin decrease was largely due to dampening effect of the 12.6%
gross margin posted by the Internet Operations on the Company's overall gross
margin and to a $250,000 inventory reserve established by the Company. The
inventory reserve was for obsolete inventory identified after the holiday
season. The reserve is an estimate by management to reflect inventory at the
lower of cost or market. Excluding the impact of the inventory reserve, the
Company posted a gross margin of 41.5%.
Operating expenses (total operating expenses less litigation related
expenses and depreciation and amortization) in the year ended March 31, 2000
were $21,379,825. This represented a $8,652,815, or 67.9%, increase over the
Company's operating expenses of $12,727,010 in the year ended March 31, 1999.
The primary reasons for the operating expense increase were operating expenses
relating to the Internet Operations of approximately $2,721,000, a growth in
rent expense of approximately $2,020,000 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 seven new stores in fiscal year 2000 coupled with a full fiscal
year of expenses related to the six stores that opened in the second half of
fiscal year 1999. As a percentage of sales, operating expenses increased by
20.9% to 57.9% of net sales for fiscal year 2000 from 37.0% in fiscal year 1999.
During the year ended March 31, 2000, the Company commenced international
e-commerce operations, primarily in Germany. The Company experienced a
relatively significant number of bad debts due to its previous use of the
standard German business practice of selling Internet products on a "bill me
later" basis. Accordingly, the Company discontinued this practice and
established an allowance for doubtful accounts of $119,949.
During fiscal year 2000, the Company settled its final store closing
related litigation. Under this settlement, the Company agreed to an upfront cash
payment of $35,000, to issue 100,000 shares of its common stock, and to pay an
aggregate $186,138 over a 36-month period. The Company has estimated the total
net present value of the settlement to be $233,905 and accrued an additional
amount of $270,206 in fiscal year 2000 to cover the estimated value of the
settlement and other litigation related expenses. In fiscal year 1999, the
Company incurred $27,659 of litigation related expenses.
Depreciation and amortization expense in the year ended March 31, 2000 was
$1,346,120. This represented a $359,778, or 36.4%, increase over the Company's
depreciation and amortization expense of $986,342 in the year ended March 31,
1999. Depreciation and amortization are non-cash charges. The primary reasons
for the depreciation and amortization expense increase was the depreciation
related to the fixed assets purchased for the seven new stores that opened
during fiscal year 2000, and the resulting amortization for the capitalized
website development costs, which were put in service during fiscal year 2000.
25
<PAGE>
Total operating expenses (the sum of operating expenses, litigation related
expenses, and depreciation and amortization expense) in the year ended March 31,
2000 were $22,996,151. This represented a $9,255,140, or 67.4%, increase over
the Company's total operating expenses of $13,741,011 in the year ended March
31, 1999. The reasons for this increase are noted in the three preceding
paragraphs.
The Company recorded an operating loss of $7,798,666 in fiscal year 2000
compared to operating income of $1,039,435 in fiscal year 1999. This represented
a reduction of $8,838,101. This decrease was a result of the $417,039 increase
in gross profit being more than offset by the $9,255,140 increase in total
operating expenses. Approximately $2.6 million of the operating loss was
generated by the Company's Internet Operations.
Total interest expense, net of interest income of $276,923, amounted to
$1,819,458 in the year ended March 31, 2000. This represented a $204,407, or
12.7%, increase over the Company's interest expense of $1,615,051 in fiscal year
1999, a year in which the Company had no interest income. Interest income for
the year ended March 31, 2000 was earned on increased cash positions resulting
from the proceeds of Toys' equity transactions discussed below. In both fiscal
years, the Company recorded a $650,000 non-cash interest charge that related to
the beneficial conversion feature of certain convertible subordinated
debentures. No cash or stock dividends were actually paid out. The Company's
interest expense increased due to a higher level of borrowings in fiscal year
2000 than in fiscal year 1999.
Given the Company's loss in each of fiscal 2000 and 1999, current income
tax expense is not material to the Company's operations. 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,
2000 and 1999 and resulted in a net zero dollar provision for deferred income
taxes for each of the years ended March 31, 2000 and 1999.
In fiscal year 2000, the Company recorded a minority interest in the loss
of the consolidated Toys subsidiary of $952,757. This minority interest arose
out of various sales of stock in the Company's Toys subsidiary, as described in
Note 11 to the consolidated financial statements and below. This minority
interest represented a reduction in the Company's net loss for fiscal year 2000.
Since Toys operated as a wholly owned division of the Company in fiscal year
1999, no minority interest was recorded in that year.
In fiscal year 2000, the Company recorded a $650,000 extraordinary gain
that related to the modification of terms on certain convertible subordinated
debentures. The modification to the terms of the debentures were so significant
that the amended debenture agreements were deemed to be substantially different
by management than the original debentures. The original debentures were
therefore accounted for as an extinguishment of debt. This extraordinary gain
offset the $650,000 non-cash interest charge recorded above.
In fiscal year 2000, the Company recorded other comprehensive loss of
$151,531 that related to foreign currency translation adjustments arising from
Toys' Internet operations in Germany. There were no foreign currency translation
adjustments in fiscal year 1999.
26
<PAGE>
As a result of the above-mentioned factors, the Company recorded a
comprehensive net loss of $8,166,898 for the fiscal year ended 2000 compared to
a comprehensive net loss of $577,766 for the fiscal year ended March 31, 1999.
In fiscal year 2000, the net loss of $8,015,367 was increased by non-cash
dividends of $2,592,252 in order to determine the net loss applicable to common
shares. The non-cash dividends represent amortization of the discount recorded
upon issuance of Series E and Series F 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 $1,707,725 was recorded for fiscal year 1999.
As a result, the net loss applicable to common shares was $10,607,619, or $1.58
per share, for the year ended March 31, 2000 and $2,285,491, or $.50 per share,
for the year ended March 31, 1999.
Liquidity and Capital Resources
At March 31, 2000, the Company had $13,550,389 of working capital compared
to a working capital position of $5,763,509 at March 31, 1999. The primary
factor in the $7,786,880 increase in working capital was the November 1999
initial public offering of Toys, which generated approximately $22,864,000 in
net proceeds and $2,800,000 generated by a private equity transaction in July
1999. Another significant factor in the ending March 31, 2000 working capital
position was a paydown of the Company's line of credit from $7,814,666 at March
31, 1999 to a balance of $47,542 at March 31, 2000, after having reached a peak
borrowing level of $11.3 million during the fiscal year.
While the Company generated an operating profit during fiscal year ended
March 31, 1999, the Company generated an operating loss in fiscal 2000 and in
the fiscal years prior to fiscal 1999. The Company has historically financed
those operating losses and its working capital requirements through debt 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 consistent profitability.
For the year ended March 31, 2000, the Company used $10,066,001 of cash in
its operations compared to $1,197,105 used in operations in the year ended March
31, 1999. The primary reason for the $8,868,896 increase in the use of cash in
operations was the Company's comprehensive net loss of $8,166,898 compared to
the prior year's comprehensive net loss of $577,766.
The Company used $4,007,087 of cash in its investing activities during
fiscal year 2000 compared to $2,833,831 in fiscal year 1999. The primary
investment in both fiscal years was the purchase of property and equipment
generally for new stores. The Company purchased approximately $2.3 million and
$2.7 million in property and equipment in fiscal years 2000 and 1999,
respectively. Also, the Company invested approximately $1.96 million in
capitalized website development costs for its e-commerce operations.
Additionally, in fiscal year 2000, the Company generated $723,678 from the sale
of a portion of its investment in Toys, as discussed below.
27
<PAGE>
The Company generated $20,148,659 from its financing activities in the year
ended March 31, 2000 compared to the generation of $3,507,917 from financing
activities in the year ended March 31, 1999. The most significant item in the
Company's financing activities in fiscal year 2000 was the November 1999 initial
public offering of Toys, which generated approximately $22,864,000 in net
proceeds and $2,800,000 generated by a private equity transaction in July 1999.
As a result of the above factors, the Company had a net increase in cash
and cash equivalents of $5,924,040 in fiscal year 2000 compared to a net
decrease in cash and cash equivalents of $523,019 in fiscal year 1999.
During fiscal 2000, the Company opened seven new stores in high traffic
shopping malls for a total cost (excluding inventory) of approximately $2.3
million. The stores are located in Las Vegas, Nevada; Katy (near Houston),
Texas; Concord (near Charlotte), North Carolina; San Francisco and Mission Viejo
(near Los Angeles), both in California. The Company opened six stores in fiscal
1999.
The Internet operations were another significant use of capital in fiscal
year 2000. The Company invested approximately $4,577,000, primarily in Germany,
to finance the Internet Operations including capitalized website development
costs of approximately $1,960,000, operating expenses of approximately
$1,789,000, and inventories in Germany of approximately $828,000. The Internet
Operations began in April 1999 with the debut of the Company's U.S. website,
www.toyswhypayretail.com. The Company debuted its German website,
www.webjumbo.de, in October 1999.
The Company had planned to finance the costs of opening those new stores
and its Internet Operations through a combination of capital lease financing,
use of the Company's working capital, and the sale of additional equity. The
Company received approximately $861,000 in lease financing during fiscal year
2000. The Company continues to seek additional capital lease financing.
The following equity transactions entered into over fiscal year 2000 were
equity and debt transactions structured to help the Company with the cost of the
capital expenditures associated with opening the seven new stores and starting
the Internet Operations.
On July 15, 1999, Tudor Technologies, Inc. ("Tudor") - an entity of which
Mr. Moses Mika (a director of the Company) is a shareholder - elected to
exercise its right to purchase a 25% ownership interest in the Company's Toys
subsidiary. Tudor was the assignee of an option to acquire 25% of the
outstanding shares of the common stock of Toys at book value. The book value of
Toys as of June 30, 1999 was determined to be $2,894,711. In October 1999, Tudor
paid the Company $723,678 (25% of the book value as of June 30, 1999). This
option arose out of the June 30, 1998 conversion, by ABC Fund, Inc. ("ABC," an
affiliate of the Company), of a $1.5 million debenture into Series E Stock as of
June 30, 1998. Pursuant to the terms of the debenture, in September 1998, ABC
assigned its right to purchase the Toys common stock to Tudor.
28
<PAGE>
On July 20, 1999, the Company's subsidiary, Toys, sold a 6.6% minority
interest to two investors for $2.8 million in gross proceeds in a private
transaction. The investors were an unaffiliated investment banking firm, Concord
Effekten AG ("Concord") of Frankfurt, Germany and CDMI, a British Virgin Islands
corporation. Mr. Mika is a shareholder of CDMI. Each party invested $1.4 million
in the transaction.
In early October 1999, the Company loaned $50,000 to Shopnet.com, Inc. and
$200,000 to Breaking Waves, Inc., both of which entities are affiliated with the
Company. The loans carried interest at 9% and were repaid in March 2000.
On October 25, 1999, Tudor lent the Company $127,922 under a Demand
Promissory Note ("Demand Note") bearing an interest rate of eight percent per
annum. The Demand Note was a bridge loan designed to be paid off after the
completion of the then contemplated initial public offering of Toys and has been
paid in full.
On November 19, 1999, Toys completed an initial public offering (the
"Offering") on the SMAX segment of the Frankfurt Stock Exchange in Germany.
Concord underwrote the Offering. Toys sold 2 million shares, or a 16.7%
interest, in the Offering for net proceeds of approximately $22,864,000. The
Offering was priced at 13 euros per share, or approximately US $13.52 per share.
The Company retained majority ownership of Toys with a 58.4% equity interest in
the subsidiary and, as a result, will continue to consolidate Toys' operations
in its financial statements. No gain or loss was recorded on the sales of Toys'
shares in the public offering or in earlier private placements per Staff
Accounting Bulletin Topic 5, as discussed in Note 11 to the consolidated
financial statements.
On November 29, 1999, the Company loaned Breaking Waves, Inc. ("BWI")
$400,000 under a Demand Promissory Note ("Demand Note") bearing an interest rate
of nine percent per annum. The Demand Note required a principal repayment of
$100,000 plus accrued interest on January 30, 2000 and requires that the balance
be paid on April 30, 2000. The January and April payments were remitted as
agreed.
In March 2000, the holders of the Company's convertible subordinated
debentures converted the then outstanding $650,000 of debentures into the
Company's Series E Preferred Stock at the agreed conversion price of $0.20 per
share. This resulted in an issuance of 3,423,300 shares of Series E stock being
issued, including accrued interest.
In November 1998, the Company entered into an agreement with ZD Group LLC
("ZD"), a related party, 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 with interest at
prime plus one percent. The term loan was repaid during the year ended March 31,
2000.
29
<PAGE>
As consideration for its issuance of the L/C, ZD was entitled to receive
payments representing one-third (33%) of the net profits from three stores
beginning in April 1999. To date, those stores have not earned any net profits;
therefore, the Company has not been liable for any payments.
In May 2000, ZD and the Company reached a settlement whereby the Company is
no longer liable for paying to ZD a percentage of the net profits of the three
stores. As of March 31, 2000, and the date of the settlement, the Company had no
liabilities to ZD as the three stores had not yet made any net profits.
Pursuant to the settlement agreement, the Company agreed to pay to ZD
$500,000 in cash. Subsequently, ZD agreed to receive 854,700 shares of Series E
Preferred Stock in lieu of the $500,000 cash. The Series E Preferred Stock was
thereby valued at $0.59 per share, which represented a 60 percent discount of
the market value as of the date of the transaction. To obtain a fair value for
the Series E Stock, the Company engaged an independent appraiser to determine
the value of the Series E Stock near the transaction date. ZD assigned its
rights under this agreement to EACF and, accordingly, the Company issued the
854,200 shares of Series E Stock to EACF.
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.
During fiscal 2000, the FINOVA Agreement was amended to name the Company
and Toys as co-borrowers under the Agreement. The Agreement was further amended
to reduce the available borrowing levels. As of March 31, 2000, the total amount
available under the facility was $5 million, which is to be further reduced by
$1 million, beginning April 30, 2000 and at each subsequent month-end, until
reduced to zero by August 2000.
The FINOVA Financing also includes various covenants, two of which the
Company violated during the year ended March 31, 1999 by exceeding the specified
maximum levels of capital expenditures and debt financing. The Company received
a waiver of these defaults in connection with an amendment to the FINOVA
financing, which was executed in August 1999. The FINOVA Agreement as amended
established new covenants with which the Company was in compliance during the
year ended March 31, 2000 and with which it expects to comply through the
maturity date of August 2000.
The FINOVA financing also requires the maintenance of a minimum level net
worth in amounts defined by the Agreement. As of March 31, 1999, the requirement
was $750,000. The amendment executed in August 1999 requires the Company to
maintain a base net worth of $2,900,000, plus 60% of any equity raised between
June 30, 1999 and March 31, 2000. At March 31, 2000, the required equity base is
calculated to be approximately $18,300,000, with which the Company is in
compliance given consideration to the aggregate of minority interest and
stockholders' equity.
30
<PAGE>
The FINOVA Agreement is guaranteed by United Textiles & Toys Corp. ("UTTC")
and is secured by substantially all the assets of the Company and $3,000,000 in
letters of credit. Of the $3,000,000 in letters of credit, $2,000,000 was
collateralized by amounts held in a restricted certificate of deposit.
Multimedia Concepts International, Inc., an affiliate through common ownership,
had provided a $1,000,000 L/C. As noted above, the FINOVA Agreement was amended
to reduce the borrowing levels available to the Company. As such, the letters of
credit were no longer needed as a guarantee. Therefore, the letters of credit
were released by FINOVA.
Due to the August 2000 maturity of the FINOVA Agreement, the Company is
seeking an alternative financing agreement. The Company has received a letter of
intent from a major finance company, which is completing its due diligence.
However, there can be no assurance that any such finance agreement will be
consummated on terms acceptable to the Company, or if at all.
Planned new store openings remain a significant capital commitment of the
Company. The Company has entered into leases to open seven 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 $3.4 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 Company has opened two of those seven new stores. The first of those
stores opened in May in the Nashville, Tennessee. The second store opened in
June in Orlando, Florida. The cost of opening those stores (excluding inventory)
was approximately $570,000. The Company expects to receive landlord tenant
improvement contributions on those two stores in the approximate amount of
$212,000, which will reduce the net cost of opening those stores to
approximately $358,000.
The remaining five stores scheduled to be opened in the second half of
calendar year 2000 are expected to cost (excluding inventory) approximately $3.2
million. The Company expects to receive landlord tenant improvement
contributions on those five stores in the approximate amount of $200,000, which
will reduce the net cost of opening those stores to approximately $3 million.
The Company has developed a new strategy for its Internet Operations that
it believes may differentiate its websites from its competitors' websites. The
Company has invested approximately $2 million in this new concept. The new
concept requires the participation of media and/or financing partners. The new
concept is based on the use of a continuing story line to draw repeat
viewers/potential customers to its websites rather than spending significant
amounts of capital on advertising expense. The Company believes that it may draw
a more loyal customer base in this new approach. If the Company does secure the
participation of media partners, than it will also need to raise additional
financing to fund the somewhat open-ended nature of capital expenditures
associated with this new project. The Company is currently seeking additional
financing for this purpose. There can be no assurance that such financing will
be available on terms acceptable to the Company or at all.
31
<PAGE>
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 approximately
$645,000 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. A registration
statement was originally filed in September 1999 on Form SB-2 and amended in May
2000. The registration statement has not yet been declared effective. The shares
of Series F Stock shall convert automatically, without any action by the holder
upon the earlier of (i) two years from issuance, or (ii) in the event the
closing price per share of the Common Stock has been at least $5.00 for a
consecutive 30-day period.
We believe that current cash and cash equivalents and cash that may be
generated from operations will be sufficient to meet our anticipated cash needs
through March 31, 2001. However, any projections of future cash needs and cash
flows are subject to substantial uncertainty. If current cash, cash equivalents
and cash that may be generated from operations are insufficient to satisfy our
liquidity requirements, we will likely seek to sell additional equity or debt
securities or to obtain a line of credit. The sale of additional equity or
equity-related securities would result in additional dilution to our
stockholders. In addition, we will, from time to time, consider the acquisition
of or investment in complementary businesses, products, services and
technologies, which might impact our liquidity requirements or cause us to issue
additional equity or debt securities. There can be no assurance that financing
will be available in amounts or on terms acceptable to us, if at all.
Trends Affecting Liquidity, Capital Resources and Operations
The Company believes that the period covered by its fiscal year 2000 was a
slow year for the worldwide toy industry. With the exception of the Pokemon
phenomenon, there were very few hot toys. Movie related toy products (such as
Star Wars) did not sell well in that period and as discussed above, sales of
Beanie babies slowed dramatically.
The Company is trying to mitigate this slowness in the toy industry by
locating its new stores in sites that have a large amount of customer foot
traffic such as tourist areas. These high-traffic areas should enable the
Company to provide better access to its educational, specialty, and collectible
toy merchandise. Additionally, the history of the toy industry indicates that
there is generally at least one highly popular toy every year. The Company
believes that its new locations will help position the Company to take advantage
of those future positive trends.
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, Amazon.com and Toys R Us.com. There can be no assurance that the
Company's business strategy will enable it to compete effectively in the toy
industry.
32
<PAGE>
Seasonality
The Company's operations are highly seasonal with approximately 30-40% of
its net sales falling within the Company's third quarter, which coincides with
the Christmas selling season. The Company intends to open new stores throughout
the year, but generally before the Christmas selling season, which will make the
Company's third quarter sales an even greater percentage of the total year's
sales.
Impact of Inflation
The impact of inflation on the Company's results of operations has not been
significant. The Company attempts to pass on increased costs by increasing
product prices over time.
Net Operating Loss Carryforwards
At March 31, 2000, the Company has net operating loss ("NOL") carryforwards
of approximately $16,000,000 for federal purposes and approximately $8,000,000
for state purposes. The federal NOLs are available to offset future taxable
income and expire at various dates through March 31, 2020 while the state NOLs
are available and expire at various dates through March 31, 2005.
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. Further, a portion of the
NOL's may be allocable to the Toys subsidiary, the operations of which generated
a portion of the NOL's while previously operating as a division of the Company.
The effects of such have not yet been determined.
33
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
34
<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 73 Chairman of the Board
Richard Brady 48 Chief Executive Officer, President, and Director
James Frakes...... 43 Chief Financial Officer, Secretary, and Director
Moses Mika 79 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. Commencing July 2000, Mr. Brady was promoted
from President of Toys to Chief Executive Officer.
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<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.
Carolyn Morrison has acted as President and Chief Operating Officer of Toys
since June 18, 2000. From September 1992 until February 2000, Ms. Morrison
served as Senior Vice President and Executive Vice President for FAO Schwarz,
Inc. ("FAOS"). From May 1989 through July 1992, she held various executive
positions with Hartmarx Corporation. From June 1995 through May 1992 she worked
for Federated Department Stores Inc. She has held retail positions from 1976
until 1985. Ms. Morrison is a graduate of DePauw University in Indiana and holds
a B.A. degree in communications.
36
<PAGE>
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.
37
<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,
2000 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, (ii) Harold Rashbaum, (iii) UTTC, (iv) MMCI, (v) ATPLC, (vi) ABC, (vii)
EACC, and (viii) EACF. 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.
38
<PAGE>
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, 2000, 1999, and 1998 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 2000 175,000 5,000 9,147 (1) -- -- -- --
1999 124,500 -- 8,579 (1) -- -- -- --
1998 120,000 -- 8,579 (1) 25,000(2) -- -- --
James B. Frakes
Chief Financial
Officer, Secretary, and
Director 2000 110,000 -- 3,797(3) -- -- -- --
1999 101,200 -- -- -- -- -- --
1998 N/A
</TABLE>
(1) Includes an automobile allowance of $7,200 for each of 2000, 1999, and
1998, and the payment of life insurance premiums of $1,947 for 2000 and $1,379
for each of 1999 and 1998.
(2) 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 sold by Mr. Brady in March 2000.
(3) Represents lease payments on a Company car.
During fiscal 2000, Harold Rashbaum, the Company's chairman of the board,
received an aggregate of $48,600 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, both of whom sold their
respective shares during the fourth quarter of the fiscal year ended March 31,
2000. 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.
39
<PAGE>
1994 Stock Option Plan
In 1994, the Company adopted a Stock Option Plan (the "SOP"). The board
believes that SOP is desirable to attract and retain executives and other key
employees of outstanding ability. Under the SOP, options to purchase an
aggregate of not more than 50,000 shares of Common Stock may be granted from
time to time to key employees, officers, directors, advisors, and independent
consultants to the Company and its subsidiaries. The Company granted to James
Frakes, chief financial officer and secretary, pursuant to his hire, an option
to purchase 30,000 shares of Common Stock at an exercise price of $3.25 per
share, vesting at the rate of 10,000 shares per annum in each of July 1998,
1999, and 2000. On June 17, 1998, the board elected to adjust the exercise price
of the option to $1.15, representing approximately 110% of the closing price of
the Common Stock on said date.
The board of directors is charged with administration of the SOP and is
generally empowered to interpret the SOP, prescribe rules and regulations
relating thereto, determine the terms of the option agreements, amend them with
the consent of the Optionee, determine the employees to whom options are to be
granted, and determine the number of shares subject to each option and the
exercise price thereof. The per share exercise price for incentive stock options
("ISOs") will not be less than 100% of the fair market value of a share of the
Common Stock on the date the option is granted (110% of fair market value on the
date of grant of an ISO if the Optionee owns more than 10% of the Common Stock
of the Company).
Options will be exercisable for a term (not less than one year) determined
by the board. Options may be exercised only while the original grantee has a
relationship with the Company or at the sole discretion of the board, within
ninety days after the original grantee's termination. In the event of
termination due to retirement, the Optionee, with the consent of the board,
shall have the right to exercise his option at any time during the thirty-six
month period following such retirement. Options may be exercised up to
thirty-six months after the death or total and permanent disability of an
Optionee. In the event of certain basic changes in the Company, including a
change in control of the Company as defined in the SOP, in the discretion of the
board, each option may become fully and immediately exercisable. ISOs are not
transferable other than by will or by the laws of descent and distribution.
Options may be exercised during the holder's lifetime only by the holder or his
guardian or legal representative.
Options granted pursuant to the SOP may be designated as ISOs with the
attendant tax benefits provided therefor pursuant to Sections 421 and 422A of
the Internal Revenue Code of 1986. Accordingly, the SOP provides that the
aggregate fair market value (determined at the time an ISO is granted) of the
Common Stock subject to ISOs exercisable for the first time by an employee
during any calendar year (under all plans of the Company and its subsidiaries)
may not exceed $100,000. The board may modify, suspend, or terminate the SOP,
provided, however, that certain material modifications affecting the SOP must be
approved by the shareholders, and any change in the SOP that may adversely
affect an Optionee's rights under an option previously granted under the SOP
requires the consent of the Optionee.
40
<PAGE>
1994 401(k) Employee Stock Option Plan ("ESOP")
In May 1994, the Company adopted corporate resolutions approving a 401(k)
Employee Stock Ownership Plan (the "401(k) ESOP Plan") which covers
substantially all employees of the Company. The 401(k) ESOP Plan was filed on
July 14, 1995 with the Internal Revenue Service and includes provisions for both
employee stock ownership and a 401(k) Plan. The 401(k) ESOP Plan allows
contributions only by the Company: these can be made annually at the discretion
of the Company's board of directors. The 401(k) ESOP Plan has been designed to
invest primarily in the Company's stock. The employees of the Company will
contribute to the 401(k) portion of the Plan through payroll deductions. The
Company does not intend to match contributions to the 401(k). Contributions to
the 401(k) ESOP Plan may result in an expense, resulting in a reduction in
earnings, and may dilute the ownership interests of persons who currently own
securities of the Company. On January 26, 1995, Messrs. Brady and Tom Davidson
(a founder of the Company and the Company's former president) and the Company's
then parent company contributed an aggregate of 15,333 shares of the Company's
Common Stock to the 401(k) ESOP Plan. During the year ended March 31, 1999,
5,673 shares of the Company's Common Stock were contributed to the plan by
individuals.
Toys Employee Stock Option Plan ("ESOP")
In October 1999, Toys adopted an Employee Stock Option Plan, pursuant to
which 1,000,000 shares of Common Stock have been reserved for issuance. To date,
Carolyn Morrison has been granted options in the aggregate of 225,000, subject
to certain vesting.
41
<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, 2000 (on
which date there were 47,369,542 shares outstanding) by (i) each beneficial
owner of 5% or more of the Company's Common Stock; (ii) each of the Company's
executive officers, directors, and key employees; and (iii) all executive
officers, directors, and key employees as a group:
<TABLE>
<CAPTION>
------------------------------------------------------- ----------------------------------- ------------------------------------
Name and Address Number of Shares of Common Stock
Of Beneficial Owner Beneficially Owned1 Percent of Common Stock
Beneficially Owned2,3
------------------------------------------------------- ----------------------------------- ------------------------------------
<S> <C> <C>
Harold Rashbaum 4
c/o Play Co. Toys & Entertainment Corp.
550 Rancheros Drive -- --
San Marcos, CA 92069
------------------------------------------------------- ----------------------------------- ------------------------------------
Richard Brady
c/o Play Co. Toys & Entertainment Corp.
550 Rancheros Drive 25,587 *
San Marcos, CA 92069
------------------------------------------------------- ----------------------------------- ------------------------------------
James B. Frakes 5
c/o Play Co. Toys & Entertainment Corp.
550 Rancheros Drive 30,000 *
San Marcos, CA 92069
------------------------------------------------------- ----------------------------------- ------------------------------------
Moses Mika
c/o Play Co. Toys & Entertainment Corp.
550 Rancheros Drive -- --
San Marcos, CA 92069
------------------------------------------------------- ----------------------------------- ------------------------------------
Breaking Waves, Inc. 4
112 West 34th Street 1,270,000 2.7%
New York, New York 10120
------------------------------------------------------- ----------------------------------- ------------------------------------
ShopNet.Com, Inc. 4
14 East 60th Street, Suite 402 1,270,000 2.7%
New York, New York 10022
------------------------------------------------------- ----------------------------------- ------------------------------------
United Textiles & Toys Corp. 6
1410 Broadway, Suite 1602 4,384,910 9.3%
New York, NY 10018
------------------------------------------------------- ----------------------------------- ------------------------------------
Multimedia Concepts International, Inc.7
1410 Broadway, Suite 1602 4,818,420 10.1%
New York, NY 10018
------------------------------------------------------- ----------------------------------- ------------------------------------
U.S. Stores Corp. 8
1385 Broadway, Suite 814 -- --
New York, New York 10018
------------------------------------------------------- ----------------------------------- ------------------------------------
<PAGE>
(table continued from previous page)
------------------------------------------------------- ----------------------------------- ------------------------------------
Name and Address Number of Shares of Common Stock
of Beneficial Owner Beneficially Owned1 Percent of Common Stock
Beneficially Owned2,3
------------------------------------------------------- ----------------------------------- ------------------------------------
American Telecom, PLC 9
8-13 Chiswell Street 2,400,000 5.1%
London EC 1Y 4UP
------------------------------------------------------- ----------------------------------- ------------------------------------
ABC Fund, Inc.10
P.O. Box 47 Road Town 3,757,920 7.9%
Tortola, BVI
------------------------------------------------------- ----------------------------------- ------------------------------------
Europe American Capital Foundation 11
c/o Vermogenstreuhand GMBH 20,539,800 43.4%
14 Kaiser Street
Bregenz, Austria A-6900
------------------------------------------------------- ----------------------------------- ------------------------------------
Officers and Directors as a Group
(4 persons)4,5 45,587 *
------------------------------------------------------- ----------------------------------- ------------------------------------
</TABLE>
* Less than 1%
(1) Unless otherwise noted, all of the shares shown are held by individuals
or entities possessing sole voting and investment power with respect to such
shares. Shares not outstanding but deemed beneficially owned by virtue of the
right of an individual or entity to acquire them within 60 days, whether by the
exercise of options or warrants, are deemed outstanding in determining the
number of shares beneficially owned by such person or entity.
(2) The "Percent of Common Stock Beneficially Owned" is calculated by
dividing the "Number of Shares Beneficially Owned" by the sum of (i) the total
outstanding shares of Common Stock of the Company, and (ii) the number of shares
of Common Stock that such person or entity has the right to acquire within 60
days, whether by exercise of options or warrants. The "Percent of Common Stock
Beneficially Owned" does not reflect shares beneficially owned by virtue of the
right of any person, other than the person named and affiliates of said person,
to acquire them within 60 days, whether by exercise of options or warrants.
(3) Does not include 41,715,060 shares of Common Stock issuable upon the
conversion of 6,952,510 shares of Series E Stock outstanding, or any portion
thereof, except where directly applicable and in accordance with footnote 2
above. Between March 31, 2000 and July 12, 2000, a substantial amount of Common
Stock has been issued upon conversion of the Series E Preferred Stock.
(4) Mr. Rashbaum, the Company's chairman of the board, is also the
president and the sole director of Breaking Waves which is a wholly owned
subsidiary of ShopNet, a publicly traded company. Mr. Rashbaum is also the
president and a director of ShopNet. By virtue of its ownership of Breaking
Waves, ShopNet may be deemed the beneficial owner of the Company's Common Stock
owned by Breaking Waves.
(5) Represents shares underlying an option.
(6) The president of United Textiles, a publicly traded company, is Ilan
Arbel who is also the president, chief executive officer, and a director of
Multimedia, a publicly traded company which is the parent company of United
Textiles (owning approximately 78.5% of same). Multimedia is owned approximately
67.7% by U.S. Stores Corp. ("U.S. Stores"), a company of which Mr. Arbel is the
president and a director. U.S. Stores is owned 100% by American Telecom, PLC
("ATPLC"), a British corporation.
(7) By virtue of its majority ownership of United Textiles, Multimedia also
may be deemed a beneficial owner of the Company's Common Stock held by United
Textiles.
(8) By virtue of its majority ownership of Multimedia, U.S. Stores may be
deemed a beneficial owner of the Company's Common Stock held by Multimedia.
43
<PAGE>
(footnotes continued from previous page)
(9) Represents shares of Common Stock into which ATPLC's 400,000 shares of
Series E Stock are convertible. By virtue of its ownership of U.S. Stores, ATPLC
also may be deemed a beneficial owner of the Company's Common Stock beneficially
owned by U.S. Stores.
(10) Represents shares of Common Stock into which its EACF's shares of
Series E Stock are convertible.
(11) Represents shares of Common Stock into which its 3,423,300 shares of
Series E Stock are convertible. By virtue of its ownership of ATPLC, EACF also
may be deemed a beneficial owner of the Company's Common Stock beneficially
owned by ATPLC.
44
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ShopNet.Com, Inc.
In October 1999, the Company loaned $50,000 to ShopNet. The loan bore
interest at 9% and was repaid in March 2000.
In January 1999, the Company borrowed $100,000 from ShopNet under an
unsecured note, with interest at 9%. In each of April and May 1999, the Company
borrowed an additional $100,000 under unsecured notes, with interest at 9% and
maturity on August 31, 1999 and September 30, 1999, respectively. These notes
were repaid.
Breaking Waves, Inc.
On November 29, 1999, the Company loaned Breaking Waves $400,000 under a
Demand Promissory Note bearing an interest rate of nine percent per annum. The
Demand Note required a principal repayment of $100,000 plus accrued interest on
January 30, 2000 and requires that the balance be paid on April 30, 2000. The
January and April payments were remitted as agreed.
In October 1999, the Company loaned $200,000 to Breaking Waves. The loan
bore interest at 9% and was repaid in March 2000.
On November 24, 1998, pursuant to a sales agreement entered into by and
between the Company and Breaking Waves, Breaking Waves purchased 1.4 million
unregistered shares of the Company's Common Stock in a private transaction. The
shares purchased by Breaking Waves represent approximately 25.2% of the total
Common Stock currently issued and outstanding. The consideration for the stock
was $665,000, which represents a price of $0.475 per share. The price represents
an approximate 33% discount from the then current market price of $0.718
reflecting a discount for the illiquidity of the shares, which do not carry any
registration rights. $300,000 of the consideration was remitted in cash, and the
remaining $365,000 consisted of product from Breaking Waves (primarily girl's
swimsuits). The $365,000 value of the swimsuit inventory was determined by the
Company based on its analysis of the net realizable value of the inventory
received. The Company had previously carried swimsuits from Breaking Waves in
its stores on a trial basis. While the Company purchased no additional pieces of
suits during the year ended March 31, 2000, the Company continues to sell the
suits at its retail locations.
Pursuant to the sales agreement (which has a term of one year and
automatically extends for one year terms unless terminated by either of the
parties), the Company agreed to purchase a minimum of 250 pieces of merchandise
for each of its retail locations and to provide advertising promotional
materials and ads of the merchandise in all of its brochures, advertisements,
catalogs, and all other promotional materials, merchandising programs, and sales
promotion methods.
On July 15, 1998, the Company borrowed $300,000 from Breaking Waves and
issued an unsecured promissory note (at 9% interest per annum) to same in
exchange therefor. The note called for five monthly installments of principal
and interest commencing August 15, 1998 and ending December 30, 1998 and has
been repaid in full.
45
<PAGE>
On March 1, 1998, the Company borrowed $250,000 from Breaking Waves and
issued an unsecured promissory note (at 15% interest per annum) to same in
exchange therefor. The note called for ten monthly installments of principal and
interest commencing on March 31, 1998 and ending on December 31, 1998 and has
been repaid in full.
ZD Group, L.L.C.
In November 1998, pursuant to an agreement with ZD - a related New York
limited liability company, the beneficiary of which is a relative of the
Company's chairman - ZD issued a $700,000 irrevocable standby L/C in favor of
FINOVA. As consideration for its issuance of the L/C, ZD is entitled (i) to a
one-third profit percentage after application of corporate overhead beginning
April 1, 1999 from three of the Company's stores (Woodfield Mall in Schaumburg,
Illinois, now scheduled to open in the late fall of 1999; Auburn Hills,
Michigan; and Gurnee, Illinois) and (ii) to nominate and appoint one-third of
the Company's directors during the aforesaid store lease terms (but in no event
later than fiscal year end 2013). Such stores did not generate a profit after
application of corporate overhead in the nine-month period ended December 31,
1999, thus, no payments have accrued or been made to ZD to date. FINOVA then
lent a matching $700,000 to the Company in the form of a term loan, pursuant to
a fourth amendment to the FINOVA Agreement entered into on February 11, 1999.
The beneficiary interest in the $700,000 standby letter of credit was released
by FINOVA in March 2000.
In May 2000, the Company entered into a Termination and Release Agreement
with ZD, pursuant to which (i) the Company agreed to pay ZD an aggregate amount
of $500,000 ("Termination Fee") in full satisfaction of any and all obligations
to ZD under the ZD Agreement and (ii) all of ZD's obligations under ZD
Agreement, including the provision of the L/C in favor of FINOVA, were
terminated. By supplemental letter, in lieu of payment of the Termination Fee,
ZD agreed to receive 854,700 shares of the Company's Series E Preferred Stock.
Subsequently, ZD entered into an Assignment of Termination and Release Agreement
which provided for the assignment by ZD of all its rights and obligations under
the Termination and Release Agreement to EACF. Accordingly, the Company has
issued the 854,700 shares of Series E Preferred Stock to EACF.
Pursuant to the settlement agreement, the Company agreed to pay to ZD
$500,000 in cash. Subsequently, ZD agreed to receive 854,700 shares of Series E
Preferred Stock in lieu of the $500,000 cash. The Series E Preferred Stock was
thereby valued at $0.59 per share, which represented a 60 percent discount of
the market value as of the date of the transaction. To obtain a fair value for
the Series E Stock, the Company engaged an independent appraiser to determine
the value of the Series E Stock near the transaction date. ZD assigned its
rights under this agreement to EACF and accordingly, the Company issued the
854,200 shares of Series E Stock to EACF
46
<PAGE>
Frampton Industries, Ltd. and Europe American Capital Foundation
In January 1999, the Company and Frampton, then an affiliated British
Virgin Islands company under the common control of EACF, an entity which
beneficially controls the Company, executed a letter agreement pursuant to which
Frampton agreed to act as the exclusive placement agent and financial advisor
for the Company in connection with a contemplated proposed offering of
convertible debentures. The agreement, which provided that Frampton shall be
provided an investment banking fee of 8% of the face amount of each debenture
funded, initially bore a six month term and was extended on mutual agreement
until March 31, 2000 whereupon it terminated.
In November 1998, the Company entered into agreements with each of (i)
Frampton and (ii) EACF to secure additional financing. Pursuant to the
agreements, Frampton loaned $500,000 to the Company and EACF loaned $150,000 to
the Company, each loan in the form of a convertible, subordinated debenture due
December 31, 1999. The debentures bore a 5% interest rate and initially were
convertible into Series E Stock at a price of $0.10 per share at Frampton's and
EACF's respective options. This price represents a 50% discount from the then
current (November 10, 1998) market price reflecting a discount for the
illiquidity of the shares, which do not carry any registration rights. In May
1999, Frampton and EACF each agreed to amend such conversion price to $0.20 per
share, which represents the full market price on the date of the original
transaction. In December 1999, Frampton assigned its debenture to EACF, and on
March 3, 2000, EACF advised the Company of its intention to convert the
debenture effective February 29, 2000. Accordingly, in March 2000, in accordance
with the terms of the debenture, the Company issued 3,423,300 shares of Series E
Stock to EACF.
United Textiles & Toys Corp.
The Company's former majority stockholder, United Textiles, has guaranteed
the Company's loan from FINOVA.
On July 27, 1998, the Company sold 100,000 shares of Series E Stock to
United Textiles, the Company's parent, for $100,000. In determining the purchase
price paid by United Textiles, the trading price of the Company's Series E Stock
- along with the applicable discounts for illiquidity, lack of marketability,
and lack of registration rights - were considered. The trading price of
approximately $2.00 per share was discounted by 50% for the above reasons.
ABC Fund, Ltd.
In June 1998, ABC, a Belize corporation and an affiliate of the Company
under common control, the holder of a 5% convertible secured subordinated
Debenture - dated January 21, 1998 and due August 15, 2000 - offered to amend
the terms of the Debenture to enable the conversion of the principal amount and
accrued interest thereon, into shares of Series E Stock, at a conversion price
of $1.00 per share. Management agreed to convert the Debenture since the
47
<PAGE>
conversion of the debt into equity would result in a strengthened equity
position which management believed would provide confidence to the Company's
working capital lender, FINOVA, and trade creditors. Further, converting the
debt to equity eliminated on-going interest expense requirements as well as the
cash flow required to repay the Debenture. Simultaneously with its offer to
amend the Debenture, ABC elected to convert same as of June 30, 1998, whereby,
$1.5 million in principal amount and $33,333 in accrued interest were converted
into 1,533,333 shares of Series E Stock. ABC did not receive any registration
rights regarding the shares. Simultaneously, ABC terminated the Subordinated
Security Agreement between the parties and the Intercreditor and Subordination
Agreement, dated January 21, 1998, by and between ABC and FINOVA.
The Debenture provided for the conversion of same, at ABC's option, into
shares of common stock of either (i) a subsidiary which the Company intended to
form for the purpose of acquiring those stores operated by the Company (or its
subsidiaries) which conduct business as "Toys International," or (ii) any other
subsidiary (such as Toys) which might acquire a portion of the assets and
business of the Company. This option to convert was exercisable at the net book
value of the subsidiary's shares on the date ABC exercised the option with a
limitation on such share ownership being 25% of the total outstanding shares of
said subsidiary. In September 1998, in accordance with the terms of the
Debenture, ABC assigned its option to Tudor, an entity of which Mr. Moses Mika
(a director of the Company) is a shareholder.
Tudor Technologies, Inc.
On July 15, 1999, Tudor elected to exercise its right to purchase the Toys
common stock, assigned from ABC, with the exercise price based on the book value
at the end of the most recent fiscal quarter, June 30, 1999. On September 15,
1999, the Company provided Tudor with a compilation of the Toys June 30, 1999
financial statements as the formal basis for the exercise price. In October
1999, Tudor received 2,335,000 shares of Toys' common stock, representing 23.35%
of the outstanding shares of the Toys subsidiary as of October 1999, in exchange
for $723,678.
On October 25, 1999, Tudor lent the Company $127,922 under a Demand
Promissory Note. The Demand Note carried an interest rate of eight percent per
annum and was utilized as a bridge loan, which was paid off after the completion
of Toys' initial public offering.
CDMI Capital Corporation
On July 20, 1999, the Company and Toys entered into an investment agreement
whereby Concord (an unaffiliated investment bank) and CDMI (a British Virgin
islands corporation of which Moses Mika, a director of the Company, is a
shareholder) each purchased 330,000 shares (or 3.3%) of Toys common stock for an
aggregate of $2.8 million as a private placement financing to the Toys German
public offering.
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.
48
<PAGE>
During fiscal 2000, the Company remitted an aggregate of $48,000 to Mr.
Rashbaum in consideration of the consulting services he provided therefor.
During fiscal year 1999, the Company remitted $33,000 to Mr. Rashbaum for his
services. 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.
In March 1998, each of Messrs. Brady and Rashbaum was issued 25,000 shares
of Series E Stock as bonuses in recognition of their efforts to further the
Company's turnaround toward profitability. Both sold their shares in the fourth
quarter of fiscal year end 2000.
See "Executive Compensation" for a detailed description of the Company's
compensation of its officers and directors.
Multimedia Concepts International, Inc.
In January 1998, in accordance with certain financing provided by FINOVA,
the Company received $3.0 million in standby L/Cs. Of same, $2 million was
established by the Company and was secured by a $2 million certificate of
deposit, which was acquired with $1.5 million in proceeds from a subordinated
debt arrangement and $500,000 from the proceeds of the Company's December 1997
public offering of Series E Stock. The remaining $1 million was provided by
Multimedia, an affiliate of the Company by virtue of its 78.5% ownership of
United Textiles. The letter of credit was terminated in March 2000. See
"Business of the Company - Financing Through FINOVA Capital Corporation."
49
<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>
<CAPTION>
<S> <C>
Table of Contents F-1
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations and Comprehensive
Net Income (Loss) F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-10
</TABLE>
(b) During its last fiscal 2000 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; with
the Company's Registration Statement on Form SB-2, Registration No. 333-87251 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)
above.
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).
<PAGE>
4.5 Form of Warrant Agreement between the Company, the Underwriter and Continental Stock Transfer
& Trust Company. See (ii) 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).
<PAGE>
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).
<PAGE>
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).
10.111(a)* Termination and Release Agreement by and between ZD Group, L.L.C. and the Company, dated May
2000.
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).
<PAGE>
10.116 Fourth (initially filed as "Third") Amendment to Loan and Security Agreement by and between
the Company and FINOVA Capital Corporation, dated February 11, 1999 (later renamed "Fourth"
Amendment) (incorporated by reference herein to exhibit 10.116 of the Company's 10-QSB for the
period ended December 31, 1998).
10.117 Letter of Intent by and between the Company and Frampton Industries, Inc., dated January 4,
1999 (incorporated by reference herein to exhibit 10.117 of the Company's 10-QSB for the
period ended December 31, 1998).
10.118 Fifth Amendment to Loan and Security Agreement by and between the Company and FINOVA
Capital Corporation, dated March 1999 (incorporated by reference herein to exhibit
10.118 of the Company's 10-QSB/A-1 for the period ended December 31, 1998).
10.119 Typhoon Capital Consultants, LLC agreement dated February 1, 1999 (incorporated by reference
herein to exhibit 10.118 of the Company's 10-QSB/A-1 for the period ended December 31, 1998).
10.120 5% Convertible Secured Subordinated Debenture in favor of Europe American Capital Foundation,
dated November 11, 1998.
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.
10.131 ABC Fund, Inc. Assignment of Debenture to Tudor Technologies, Inc. dated September 15, 1998
(incorporated by reference herein to exhibit 10.131 of the Company's 10-QSB for the period
ended June 30, 1999).
10.132 Tudor Technologies, Inc. Election to Exercise dated July 15, 1999 (incorporated by reference
herein to exhibit 10.132 of the Company's 10-QSB for the period ended June 30, 1999).
10.133 Sixth Amendment to Loan and Security Agreement by and between the Company and FINOVA
Capital Corporation, dated August 1999 (incorporated by reference herein to exhibit
10.133 of the Company's 10-QSB for the period ended June 30, 1999).
10.134 Fixture Financing Agreement With Longwater Capital Corporation (incorporated by
reference herein to exhibit 10.134 of the Company's 10-QSB for the period ended June 30, 1999).
10.135 Lease Agreement for Store - International Gateway
10.136 Investment Agreement
<PAGE>
10.137 Amendment to Lease Agreement - Concord Mills (Toy Co.) (incorporated by reference herein to
exhibit 10.137 of the Company's 10-QSB for the period ended September 30, 1999).
10.138 Amendment No. 2 to Chula Vista Lease Agreement
10.139 Amendment and Assignment of Warehouse Lease Agreement
10.140 Assignment of Rancho Cucamonga Lease
10.141 Lease Agreement - Arundel Mills
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 14th day of July 2000.
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.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Harold Rashbaum Chairman of the 7/14/00
Harold Rashbaum Board of Directors Date
/s/ Richard Brady Chief Executive Officer, 7/14/00
Richard Brady President, and Director Date
/s/ James Frakes Chief Financial Officer, 7/14/00
James Frakes Secretary, and Director Date
/s/ Moses Mika Director 7/14/00
Moses Mika Date
</TABLE>
56
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Table of Contents
March 31, 2000 and 1999
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Operations and Comprehensive Net Income (Loss) F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-10
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Play Co. Toys & Entertainment Corp.
We have audited the accompanying consolidated balance sheets of Play Co. Toys &
Entertainment Corp. and Subsidiary as of March 31, 2000 and 1999 and the related
consolidated 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, 2000. These consolidated 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 13, the Company restated its previously issued 1999
financial statements.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Play Co. Toys &
Entertainment Corp. and Subsidiary at March 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the two years in the period
ended March 31, 2000 in conformity with generally accepted accounting
principles.
HASKELL & WHITE LLP
Irvine, California
July 7, 2000
F-2
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Consolidated Balance Sheets
ASSETS (Note 4)
<TABLE>
<CAPTION>
March 31,
-----------------------------------
2000 1999
Restated
(Note 13)
--------------- ----------------
Current
<S> <C> <C>
Cash and cash equivalents $ 6,050,007 $ 125,967
Restricted certificates of deposit (Notes 2 and 4) 129,000 350,000
Accounts receivable, net of allowance for doubtful
accounts of $119,949 in 2000 676,456 98,276
Merchandise inventories, net of reserve for obsolete
inventory of $250,000 in 2000 14,111,236 11,506,284
Other current assets 20,000 1,241,629
--------------- ----------------
Total current assets 20,986,699 13,322,156
Property and equipment, net of accumulated depreciation and
amortization of $5,162,813 and $4,058,603, respectively
(Note 3) 7,398,621 5,348,175
Restricted certificate of deposit (Notes 2 and 4) - 2,000,000
Website development costs (Note 1) 1,753,193 34,012
Deposits and other assets (Note 4) 2,145,268 377,415
--------------- ----------------
$ 32,283,781 $ 21,081,758
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
March 31,
-----------------------------------
2000 1999
Restated
(Note 13)
--------------- ----------------
Current
<S> <C> <C>
Accounts payable $ 6,110,161 $ 5,611,442
Accrued expenses and other liabilities 892,428 595,008
Current portion of capital lease obligations (Note 5) 386,179 227,197
Current portion of notes payable (Note 6) - 1,125,000
Borrowings under financing agreement (Note 4) 47,542 -
--------------- ----------------
Total current liabilities 7,436,310 7,558,647
Borrowings under financing agreement (Note 4) - 7,814,666
Capital lease obligations, net of current portion (Note 5) 988,767 585,681
Deferred rent liability 135,607 126,769
--------------- ----------------
Total liabilities 8,560,684 16,085,763
--------------- ----------------
Minority interest 9,943,407 -
--------------- ----------------
Commitments and contingencies (Notes 4, 5, 7, 9, 10 and 14)
Stockholders' equity (Note 11)
Series E Convertible Preferred Stock, $.01 par value, 25,000,000 and
10,000,000 shares authorized; 8,377,640 and 5,883,903 shares outstanding,
respectively, full liquidation value of $8,377,640 and $5,883,903, net of
unamortized discount of $0 and $1,842,252
for beneficial conversion feature (Notes 6 and 11) 7,349,154 5,761,101
Series F Convertible Preferred Stock, $.01 par value,
5,500,000 shares authorized, 750,000 and none outstanding,
full
liquidation value of $375,000 750,000 -
Common stock, $.01 par value, 160,000,000 and 51,000,000 shares
authorized; 11,227,568 and 5,503,519 shares outstanding,
respectively 112,275 55,035
Additional paid-in capital 33,053,724 15,906,172
Accumulated other comprehensive income (loss) (151,531) -
Accumulated deficit (27,333,932) (16,726,313)
--------------- ----------------
Total stockholders' equity 13,779,690 4,995,995
--------------- ----------------
$ 32,283,781 $ 21,081,758
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Consolidated Statements of Operations and Comprehensive Net Income (Loss)
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------
2000 1999
Restated
(Note 13)
--------------- ----------------
<S> <C> <C>
Net sales $ 37,252,210 $ 34,371,230
Cost of sales 22,054,725 19,950,784
--------------- ----------------
Gross profit 15,197,485 14,780,446
--------------- ----------------
Operating expenses
Operating expenses (Notes 9 and 10) 21,379,825 12,727,010
Litigation related expenses (Note 7) 270,206 27,659
Depreciation and amortization 1,346,120 986,342
--------------- ----------------
Total operating expenses 22,996,151 13,741,011
--------------- ----------------
Operating income (loss) (7,798,666) 1,039,435
--------------- ----------------
Interest income (expense)
Interest income 276,923 -
Interest and finance charges (1,152,988) (855,074)
Amortization of debt issuance costs (293,393) (109,977)
Effective non-cash interest for beneficial conversion feature (Note 6) (650,000) (650,000)
--------------- ----------------
Total interest income (expense) (1,819,458) (1,615,051)
--------------- ----------------
Net loss before income taxes and minority interest (9,618,124) (575,616)
Provision for income taxes (Note 8) - 2,150
--------------- ----------------
Net loss before minority interest (9,618,124) (577,766)
Minority interest in net loss of consolidated subsidiary 952,757 -
--------------- ----------------
Net loss before extraordinary gain (8,665,367) (577,766)
Extraordinary gain on extinguishment of debt (Note 6) 650,000 -
--------------- ----------------
Net loss (8,015,367) (577,766)
Other items of comprehensive income (loss) (151,531) -
--------------- ----------------
Comprehensive net loss $ (8,166,898) $ (577,766)
=============== ================
Calculation of basic and diluted loss per share:
Net loss $ (8,015,367) $ (577,766)
Effects of non-cash dividends on convertible
preferred stock (Note 11) (2,592,252) (1,707,725)
--------------- ----------------
Net loss applicable to common shares $ (10,607,619) $ (2,285,491)
=============== ================
Basic and diluted loss per common share and share equivalents (Note 1) $ (1.58) $ (.50)
=============== ================
Weighted average number of common shares and
share equivalents outstanding 6,719,736 4,590,642
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended March 31, 2000 and 1999
(Notes 6 and 11)
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Years Ended March 31, 2000 and 1999
(Notes 6 and 11)
Preferred Stock Preferred Stock Additional
Series E Series F Common Stock Paid-In
Shares Amount Shares Amount Shares Amount Capital
------------- ------------- ------ ------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1998 4,200,570 $ 3,974,376 - $ - 4,103,519 $ 41,035 $12,927,918
Conversion of debt and accrued
interest to Series E Stock 1,533,333 - - - - - 1,533,333
Issuance of Series E Stock
for cash 100,000 - - - - - 100,000
Issuance of Series E Stock to
consultants - - - - - - 43,750
Issuance of Series E Stock to officers 50,000 79,000 - - - - -
Issuance of common stock for cash
and inventories - - - - 1,400,000 14,000 651,000
Non-cash dividend to amortize discount
on Series E - 1,707,725 - - - - -
Beneficial conversion feature for
convertible debentures - - - - - - 650,000
Miscellaneous adjustments - - - - - - 171
Net loss for the year - - - - - - -
------------- ------------- ------ ------ --------- ------ ----------
Balances, March 31, 1999 (Note 13) 5,883,903 5,761,101 - - 5,503,519 55,035 15,906,172
</TABLE>
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
(cont'd)
<TABLE>
<CAPTION>
Accumulated
Other Total
Comprehensive Accumulated Stockholders'
Income(Loss) Deficit Equity
------------- ------------- -------------
<S> <C> <C> <C>
Balances, March 31, 1998 $ - $(14,440,822) $ 2,502,507
Conversion of debt and accrued
interest to Series E Stock - - 1,533,333
Issuance of Series E Stock
for cash - - 100,000
Issuance of Series E Stock to
consultants - 43,750
Issuance of Series E Stock to officers - - 79,000
Issuance of common stock for cash
and inventories - - 665,000
Non-cash dividend to amortize discount
on Series E - (1,707,725) -
Beneficial conversion feature for
convertible debentures - - 650,000
Miscellaneous adjustments - - 171
Net loss for the year - (577,766) (577,766)
------------- ------------- -----------
Balances, March 31, 1999 (Note 13) - (16,726,313) 4,995,995
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (continued)
Years Ended March 31, 2000 and 1999
(Notes 6 and 11)
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Preferred Stock Additional Other
Series E Series F Common Stock Paid-In Comprehensive
Shares Amount Shares Amount Shares Amount Capital Income(Loss)
--------- ---------- ------- --------- --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1999 (Note 13) 5,883,903 $5,761,101 - $ - 5,503,519 $ 55,035 $15,906,172 $ -
Issuance of Series F Stock - - 750,000 - - - 645,380 -
Conversion of debt and accrued interest
to Series E Stock 3,423,300 684,660 - - - - - -
Conversion of Series E Stock
to common stock (929,563) (938,859) - - 5,577,378 55,774 883,085 -
Issuance of subsidiary stock - - - - - - 15,521,953 -
Issuance of common stock to consultant - - - - 45,333 453 55,647 -
Non-cash dividend to amortize discount
on Series E and F Preferred Stock - 1,842,252 - 750,000 - - - -
Issuance of common stock for litigation
settlement - - - - 100,000 1,000 41,500 -
Translation adjustment - - - - - - - (151,531)
Miscellaneous adjustments - - - - 1,338 13 (13) -
Net loss - - - - - - - -
---------- ---------- ------- -------- ---------- -------- ----------- ----------
Balances, March 31, 2000 8,377,640 $7,349,154 750,000 $750,000 11,227,568 $112,275 $33,053,724 $(151,531)
========== ========== ======= ======== ========== ======== =========== ==========
</TABLE>
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (continued)
Years Ended March 31, 2000 and 1999
(Notes 6 and 11)
(cont'd)
<TABLE>
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
---------------- -----------------
<S> <C> <C>
Balances, March 31, 1999 (Note 13) $(16,726,313) $ 4,995,995
Issuance of Series F Stock - 645,380
Conversion of debt and accrued interest
to Series E Stock - 684,660
Conversion of Series E Stock
to common stock - -
Issuance of subsidiary stock - 15,521,953
Issuance of common stock to consultant - 56,100
Non-cash dividend to amortize discount
on Series E and F Preferred Stock (2,592,252) -
Issuance of common stock for litigation
settlement - 42,500
Translation adjustment - (151,531)
Miscellaneous adjustments - -
Net loss (8,015,367) (8,015,367)
--------------- -----------------
Balances, March 31, 2000 $ (27,333,932) $ 13,779,690
=============== =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Consolidated Statements of Cash Flows (Note 12)
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------
2000 1999
Restated
(Note 13)
--------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (8,015,367) $ (577,766)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 1,346,120 986,342
Minority interest in net loss of subsidiary (952,757) -
Effective interest for beneficial conversion feature 650,000 650,000
Extraordinary gain on extinguishment of debt (650,000) -
Stock compensation - 79,000
Other 13,110 (2,883)
Amortization of debt issuance costs 293,393 109,977
Deferred rent 8,838 16,418
Increase (decrease) from changes in:
Accounts receivable (278,180) (19,682)
Merchandise inventories (2,604,952) (3,268,480)
Other current assets 1,221,629 (1,123,757)
Deposits and other assets (2,027,235) (54,226)
Accounts payable 498,719 2,106,212
Accrued expenses and other liabilities 430,681 (98,260)
--------------- ----------------
Cash used for operating activities (10,066,001) (1,197,105)
--------------- ----------------
Cash flows from investing activities:
Purchase of restricted certificates of deposit (129,000) (100,000)
Purchases of property and equipment (2,341,428) (2,699,819)
Capital expenditures on website development costs (1,960,337) (34,012)
Sale of stock in subsidiary 723,678 -
Issuance of notes receivable to affiliates (650,000) -
Repayment of notes receivable to affiliates 350,000 -
--------------- ----------------
Cash used for investing activities (4,007,087) (2,833,831)
--------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Consolidated Statements of Cash Flows (Note 12) (continued)
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------
2000 1999
Restated
(Note 13)
--------------- ----------------
Cash flows from financing activities:
<S> <C> <C>
Borrowings under financing agreements $ 27,061,000 $ 43,239,568
Repayments under financing agreements (34,828,124) (40,870,100)
Proceeds from notes payable 127,922 2,700,000
Repayment of notes payable (602,922) (1,925,000)
Repayments under capital leases (299,036) (36,551)
Proceeds from issuance of common stock - 14,000
Proceeds from issuance of preferred stock 645,380 386,000
Proceeds from issuance of common stock of subsidiary 25,694,439 -
Reclassification of restricted cash 2,350,000 -
--------------- ----------------
Cash provided by financing activities 20,148,659 3,507,917
--------------- ----------------
Effect of exchange rate changes on cash (151,531) -
--------------- ----------------
Net increase (decrease) in cash and cash equivalents 5,924,040 (523,019)
Cash and cash equivalents, beginning of year 125,967 648,986
--------------- ----------------
Cash and cash equivalents, end of year $ 6,050,007 $ 125,967
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
1. Summary of Accounting Policies
Business Organization
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
also owns a majority interest in a subsidiary, Toys International.COM,
Inc. ("Toys") that is in the same line of business, with the addition
of e-commerce operations. Prior to April 1, 1999, Toys operated as a
division of the Company. Effective April 1, 1999, the net assets and
liabilities of the division were pushed-down to a separate subsidiary
corporation. Toys has a wholly owned foreign subsidiary in Germany,
Toys International.de GmbH ("Toys.de").
The Company had thirty-one (31) retail stores located within southern
California, Arizona, Illinois, Michigan, Nevada, North Carolina, and
Texas at March 31, 2000, as compared to twenty-five (25) stores located
in the same states, except North Carolina, as of March 31, 1999. The
Company's retail stores, which are located in resorts, high-traffic
malls, and strip centers, operate under the names "Play Co.
Toys," "Toys International," and "Toy Co."
Revenue Recognition
Revenues are recognized at the point of sale for retail locations.
Internet sales are recorded at the shipping date of the merchandise.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its majority-owned subsidiary, Toys. All significant
intercompany transactions and balances have been eliminated. A minority
interest is reflected in the consolidated balance sheet to reflect the
minority stockholders' share of Toys equity and cumulative pro rata
share of net income (loss).
Nature of Relationships with Affiliates
As described in the following footnotes, the Company obtains a portion
of the financing from, and engages in transactions with affiliated
entities. These entities and the nature of the affiliates are as
follows:
F-10
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
1. Summary of Accounting Policies (continued)
Nature of Relationships with Affiliates (continued)
Name of Entity and Nature of Affiliation
United Textiles & Toys Corp. ("UTTC"): A company that held a majority
of the Company's common stock ("Common Stock") through November 1998.
As a result of the Company's equity transactions, and/or those of UTTC,
UTTC's interest in the Company has been reduced to 44.9% as of March
31, 1999 and 22% as of March 31, 2000. The Company is influenced to a
significant degree by UTTC, as a result of affiliate relationships
between members of the management of UTTC and the Company. Ilan Arbel
("Arbel") is the President of UTTC. Arbel is the son-in-law of Harold
Rashbaum, the President, Chief Executive Officer, and a Director of
ShopNet.com ("ShopNet") and Breaking Waves, Inc. ("BWI"), which holds
11% of the Company's Common Stock. Moses Mika, the father of Arbel, 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. Arbel is the President and Director of MMCI.
Europe American Capital Foundation ("EACF"): A Liechtenstein trust,
of which Arbel is an agent. EACF is the majority stockholder of
Frampton Industries, Ltd. and ABC Fund, Ltd., and the majority
stockholder of American Telecom, PLC.
Europe American Capital Corporation ("EACC"): Entity of which Arbel is
an officer.
Frampton Industries, Ltd. ("Frampton"): Majority-owned entity of EACF.
American Telecom PLC: 80%-owned entity of EACF.
ABC Fund, Ltd. ("ABC"): Majority-owned entity of EACF.
U.S. Stores Corp. ("USSC"): A private company, and parent company of
MMCI, whose president and director is Arbel.
F-11
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
1. Summary of Accounting Policies (continued)
Nature of Relationships with Affiliates (continued)
Name of Entity and Nature of Affiliation
ZD Group L.L.C. ("ZD"): ZD is a New York limited liability company
whose members are related to Arbel and the Company's Chairman.
European Ventures Corp. ("EVC"): Partial owner of ShopNet.com. (24%).
Arbel is the president.
ShopNet.com ("ShopNet"): The Chairman of Play Co. is the president, CEO
and a director of ShopNet.
Breaking Waves, Inc. ("BWI"): This entity is a wholly owned subsidiary
of ShopNet, and also owns 11% 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 Arbel.
The following chart depicts the Company's approximate ownership
structure at March 31, 2000:
Europe American Capital Foundation
/ / || \\
/ / \/ \\
Frampton Industries (>50%) American Telecom PLC (80%) ABC Fund, Ltd. (>50%)
(100%)
||
\/
U.S. Stores Corp.
(62.0%)
||
\/
Multimedia Concepts International, Inc.
(79.0%)
||
\/
United Textiles & Toys Corp.
(22.0%)
||
\/
Play Co. Toys & Entertainment Corp.
F-12
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
1. Summary of Accounting Policies (continued)
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 $39,211 and
$2,603,308 at March 31, 2000 and 1999, respectively. The Company also
maintains a brokerage account in which it invests surplus cash in money
market funds. The account is insured by the Securities Investor
Protection Corporation up to $500,000. Uninsured balances are
approximately $4,805,325 and $0 at March 31, 2000 and 1999,
respectively.
Cash and Cash Equivalents
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."
Merchandise Inventories
Merchandise inventories are stated at the lower of cost (first-in,
first-out method - "FIFO") or market.
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.
F-13
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
1. Summary of Accounting Policies (continued)
Store Opening and Closing Costs (continued)
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.
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.
For the year ended March 31, 2000, 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.
F-14
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
1. Summary of Accounting Policies (continued)
Net Loss Per Share (continued)
The following summarizes the components of the basic and diluted loss
per common share and share equivalents:
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Net loss before extraordinary gain $ (1.29) $ (.13)
Extraordinary gain .10 -
------------- ---------------
Net loss (1.19) (.13)
Effects of non-cash dividends on convertible
preferred stock (.39) (.37)
------------- --------------
Net loss applicable to common shares $ (1.58) $ (.50)
============= ==============
</TABLE>
F-15
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
1. Summary of Accounting Policies (continued)
Net Loss Per Share (continued)
As of March 31, 2000 and 1999, 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,
2000 1999
--------------- ----------------
Common shares issuable upon:
<S> <C> <C> <C>
Conversion of Series E Convertible Preferred Stock ("Series E Stock");
8,377,640 and 5,883,903 shares outstanding, each convertible into six
shares of Common Stock; all holding
periods eliminated in February 2000. 50,265,840 35,303,418
Exercise of 2,000,000 outstanding warrants to purchase 2,000,000 shares
of convertible Series E Stock, each share of Series E Stock then
convertible into six shares of Common
Stock; all holding periods eliminated in February 2000. 12,000,000 12,000,000
Conversion of debentures (Note 6) into 6,500,000 shares of Series E
Stock, each share of Series E Stock then convertible into six shares of
Common Stock, subject to holding periods. The debentures were amended
in May 1999 (Note 6) reducing the number of shares of Series E Stock to
3,250,000 related to principal. The debentures were converted in March
2000. The shares of Series E Stock resulting from the conversion of
principal and interest are included above. - 39,000,000
Conversion of Series F Convertible Preferred Stock ("Series F Stock");
750,000 and no shares outstanding, respectively, each convertible into
two shares of common stock, subject to
holding periods (Note 11). 1,500,000 -
Exercise of employee stock options 30,000 30,000
--------------- ----------------
63,795,840 86,333,418
=============== ================
</TABLE>
F-16
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
1. Summary of Accounting Policies (continued)
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, 2000 and 1999, 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.
Impairment of Long-Lived Assets
Long-lived assets, and certain identifiable intangibles held and used
by the Company, are 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. Through
March 31, 2000, the Company had not identified any circumstances giving
rise to impairment, other than the closing of retail locations
discussed above.
F-17
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
1. Summary of Accounting Policies (continued)
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," established
financial accounting and reporting standards for stock-based employee
compensation plans and certain other transactions involving the
issuance of stock. The Company adopted the disclosure requirements of
SFAS 123 for stock-based employee compensation effective April 1, 1996.
However, the Company continues to use the "intrinsic-value" method for
recording compensation expenses, as prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The "fair-value" method
prescribed by SFAS No. 123 is used to record stock-based compensation
to non-employees.
Capitalization of Internet Development Cost
In March 2000, the Emerging Issues Task Force ("EITF") provided
guidance for the accounting treatment of website development costs with
Issue No. 00-2. The consensus of the EITF was that Statement of
Position 98-1, "Accounting for Cost of Computer Software Developed or
Obtained for Internal Use," should be applied to account for costs
associated with developing websites. The Company has adopted these
provisions and has capitalized certain costs directly attributable to
developing the software for its e-commerce operations under its Toys
subsidiary. All other costs to develop and implement the Internet and
e-commerce operations have been expensed as incurred. Capitalized
amounts are being amortized on a straight-line basis over the estimated
useful life, initially believed to be two years.
The Company's initial website was under development beginning in fiscal
1999. For the year ended March 31, 1999, the Company capitalized
approximately $35,000 in software development costs. As the Company
upgraded its initial website and began developing new e-commerce
websites, those software development costs were also capitalized in
fiscal 2000. For the year ended March 31, 2000, the Company capitalized
approximately $1,960,337 in software development costs, of which
$207,144 was amortized during the year.
F-18
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
1. Summary of Accounting Policies (continued)
Comprehensive Income (Loss)
The Company applies the provision of SFAS No. 130, "Reporting
Comprehensive Income," which 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. During the
fiscal year ended March 31, 1999, the Company had no items of
comprehensive income (loss). For the year ended March 31, 2000, items
of comprehensive income (loss) were related to foreign currency
translation.
Segment Information
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," in the fiscal year ended March 31,
2000. This accounting standard changes the way the Company reports
information about its operating segments.
The Company's reportable segments are its retail store operations and
its Internet operations. The retail store operations are entirely based
in the United States, and its Internet operations occur both in the
United States and in Germany. The Internet operations consist of both
business-to-consumer and business-to-business (or wholesale) sales.
Since the Internet activities effectively began in April 1999, no
restatements of prior-year presentations are necessary to comply with
SFAS 131.
Information on segments which is based on information utilized by the
Company's chief operating decision maker, and a reconciliation to
income (loss) before income taxes, are as follows:
F-19
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
1. Summary of Accounting Policies (continued)
Segment Information (continued)
Fiscal year ended March 31, 2000:
<TABLE>
<CAPTION>
Assets:
<S> <C>
Retail stores $ 29,131,504
Internet 3,152,277
-----------------
$ 32,283,781
Capital Expenditures:
Retail stores - Fixed Asset $ 2,341,428
Internet - Website Development Costs 1,960,337
-----------------
$ 4,301,765
Sales:
Retail stores $ 36,013,490
Internet 1,238,720
-----------------
$ 37,252,210
Gross profit:
Retail stores $ 15,041,506
Internet 155,979
-----------------
$ 15,197,485
Operating income (loss):
Retail stores $ (5,132,710)
Internet (2,565,956)
-----------------
$ (7,698,666)
=================
</TABLE>
F-20
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
2. Restricted Certificates of Deposit
At March 31, 1999, the Company had three certificates of deposit, which
were restricted as to their nature. The first, in the amount of
$2,000,000, represented collateral against a letter of credit securing
financing under the FINOVA Capital Corporation ("FINOVA") agreement
("FINOVA Financing") (Note 4) and was classified as a non-current asset
since the funds in the certificate of deposit remained restricted until
the letter of credit expired or was released by FINOVA. The second, in
the amount of $250,000, was collateral for a facility for letters of
credit. The third, in the amount of $100,000, was to cover an increase
on the previously mentioned letter of credit facility.
As the Company paid off the principal balance of the FINOVA financing
during fiscal 2000, the $2,000,000 certificate of deposit was released.
Separately, the remaining $350,000 of certificates of deposit, in
aggregate, were also released as the facilities for letter of credit
expired. The certificates were not renewed, and the funds were used for
current operations.
As of March 31, 2000, the Company maintains time deposits as collateral
to cover trade letters of credit, and a standby letter of credit as
security for its electrical utility provider.
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
March 31,
-----------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Furniture, fixtures and equipment $ 8,025,451 $ 5,968,292
Leasehold improvements 3,860,829 2,763,711
Signs 493,509 501,798
Vehicles 104,912 104,912
Construction in progress 76,733 68,065
--------------- ----------------
12,561,434 9,406,778
Accumulated depreciation and amortization (5,162,813) (4,058,603)
--------------- ----------------
$ 7,398,621 $ 5,348,175
=============== ================
</TABLE>
F-22
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
3. Property and Equipment (continued)
The following is a summary of property and equipment held under capital
leases (Note 5):
<TABLE>
<CAPTION>
March 31,
-----------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Furniture and fixtures $ 1,765,270 $ 849,429
Accumulated depreciation (345,873) (112,584)
--------------- ----------------
$ 1,419,397 $ 736,845
=============== ================
</TABLE>
4. Financing Agreements
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 a previous credit facility with Congress
Financing, and to pay fees related to the FINOVA Financing.
The FINOVA Financing, as amended currently, provides for maximum
borrowings up to $5,000,000 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, 2000 and
1999 was 9.0% and 7.75%, respectively). Beginning April 30, 2000, the
availability is to be reduced by $1 million at each month end until
reduced to zero by the maturity date in August 2000.
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
$33,269 and $133,876, as of March 31, 2000 and 1999, respectively, and
is included in "Deposits and other assets" in the consolidated balance
sheets. Additional costs were incurred and capitalized during the year
relating to amendments to the agreement that increased the borrowing
capacity.
F-22
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
4. Financing Agreements (continued)
The FINOVA Financing also includes various covenants, two of which the
Company violated during the year ended March 31, 1999, by exceeding the
specified maximum levels of capital expenditures and debt financing.
The Company received a waiver of these defaults in connection with an
amendment to the FINOVA Financing, which was executed in August 1999.
The amendment increased the available borrowing level and established
new covenants with which the Company was in compliance during the year
ended March 31, 2000, and with which it expects to comply through the
maturity date of August 2000.
The FINOVA Financing also requires the maintenance of a minimum level
of net worth in an amount defined by the agreement. As of March 31,
1999, the requirement was $750,000. The amendment executed in August
1999 defines the Company and Toys as "co-borrowers," and requires the
maintenance of a base net worth of $2,900,000, plus 60% of any equity
raised between June 30,1999 and March 31, 2000. At March 31, 2000, the
required equity base is calculated to be approximately $18,300,000,
with which the Company and Toys are in compliance, given consideration
to the aggregate of the consolidated stockholders' equity and minority
interest since the minority interest represents significant equity
raised between June 30, 1999 and March 31, 2000.
The FINOVA Financing is guaranteed by UTTC and is secured by
substantially all of the assets of the Company, and formerly secured by
$3,000,000 in letters of credit, $2,000,000 of which was collateralized
by amounts held in a restricted certificate of deposit (Note 2). The
remaining $1,000,000 letter of credit had been provided by MMCI, an
affiliate of the Company (Note 1).
At March 31, 1999, the Company also had $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), which was repaid during the
year ended March 31, 2000.
As of July 7, 2000, the Company is seeking an alternative financing
arrangement. The Company has received a letter of intent from a major
finance company, which is completing its due diligence. However, there
can be no assurance that any such finance agreement will be consummated
on terms acceptable to the Company, or if at all.
F-23
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
5. Capital Lease Obligations
At March 31, 2000, the Company was obligated to several leases with
financing companies that have been classified as "capital lease
obligations." The amounts financed ranged from $1,000 to $232,000, with
varying monthly installment payments from $26 to $5,300, at interest
rates varying from 6% to 17%. The leases, which have maturity dates
ranging from 2001 to 2006, require minimum payments as follows:
<TABLE>
<CAPTION>
Year ending
March 31,
<S> <C> <C>
2001 $ 564,312
2002 505,123
2003 387,520
2004 242,381
2005 35,596
----------------
Total minimum lease payments 1,734,932
Less amount representing interest (359,986)
----------------
Present value of minimum lease payments 1,374,946
Less current portion (386,179)
----------------
Long-term portion $ 988,767
================
</TABLE>
F-23
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
6. Notes Payable
<TABLE>
<CAPTION>
March 31,
-----------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Note payable to ShopNet, an affiliate (Note 1), bearing interest at 9%
per annum, payable in monthly installments of $25,000. Note was paid in
April 1999.
$ - 75,000
Note payable to Full Moon Development, Inc., an
unaffiliated entity, bearing interest at 12%, payable in
monthly installments of $50,000. Paid in July 1999.
- 200,000
Note payable to Full Moon Development, Inc., an
unaffiliated entity, bearing interest at 12%, payable in
monthly installments of $66,667. Paid in June 1999.
- 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 Stock. Converted in
December 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 Stock. Converted in December
1999. - 150,000
--------------- ----------------
Total notes payable, all current
$ - $ 1,125,000
</TABLE>
The above notes may have carried interest rates that differed from
prevailing interest rates. The Company did not provide for imputed
interest on rate discounts or premiums, as the effects were immaterial
to the financial statements.
F-25
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
6. Notes Payable (continued)
The embedded privilege to convert the debentures to Frampton and EACF
into Series E Stock represents a beneficial conversion feature, which
is accounted for separately, in accordance with Topic D-60 of the 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 for the year ended March
31, 1999, since the debenture allowed for immediate conversion, which
was effectively offset by the dollar-for-dollar increase in additional
paid-in capital (Note 13).
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 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.
Thus, an extraordinary gain of $650,000 resulting from the modification
of the terms was recognized in the quarter ended June 30, 1999.
F-26
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
6. Notes Payable (continued)
However, since the agreement was revised in May 1999, the revised
agreement is treated as a new debt 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 Stock. As such, the modified agreement also
contains a beneficial conversion feature, the amount of which is
limited to the original proceeds of $650,000 under Topic D-60 of the
EITF. Therefore, the Company also recognized $650,000 in non-cash
effective interest expense for the beneficial conversion feature in the
quarter ended June 30, 1999. As previously noted, both EACF and
Frampton elected to convert the debentures and the accrued interest
into Series E Stock.
The above convertible debentures to Frampton and EACF, and accrued
interest thereon, were converted into Series E Stock during the year
ended March 31, 2000. The conversion price was $.20 per share; i.e.,
for every $100,000 converted, the holder would receive 500,000 shares.
Each share of Series E Stock is convertible into six shares of Common
Stock (Note 11).
7. Closure of Retail Stores - Litigation
During the year ended March 31, 1998, the Company closed, and
ultimately vacated, five retail locations prior to the end of their
lease terms. As a result, four of the five landlords filed lawsuits
against the Company to collect unpaid rent, as well as rental
obligations remaining under the terms of the respective leases.
Subsequent to the filing of actions by the landlords, and through May
1998, the Company with assistance of outside counsel, reached
settlement agreements with the various landlords. These settlements
aggregated $469,600, of which $57,820 remained outstanding on one
settlement as of March 31, 1999, and was satisfied during the year
ended March 31, 2000.
In December 1999, the Company settled its last tenant/landlord matter.
Pursuant to a settlement agreement, the Company made a cash payment of
$35,000 and agreed to pay installment payments of $5,170.50 per month,
aggregating $186,138 over a 36-month period. The Company recorded
$156,405 on a discounted basis in association with this payment stream.
In addition, the Company agreed to issue 100,000 shares of Common
Stock. The Company recorded $42,500 in expense related to this issuance
based on the market value of the Common Stock, less a 15% discount
applied, due to the restricted nature of the shares. An additional cost
of $36,301 was recorded for attorney fees incurred in negotiating the
settlement agreement.
F-27
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
7. Closure of Retail Stores - Litigation (continued)
The statements of operations for the years ended March 31, 2000 and
1999 includes $270,206 and $27,659 of "litigation-related expenses,"
which comprise the settlement costs on the aforementioned leases and
legal fees associated with the negotiations.
8. Income Taxes
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
March 31
-----------------------------------
2000 1999
--------------- ----------------
Current:
<S> <C> <C>
Federal $ - $ -
State - 2,150
--------------- ----------------
Total current - 2,150
--------------- ----------------
Deferred:
Federal (2,370,508) 40,424
State (330,811) 45,726
--------------- ----------------
Total deferred (2,701,319) 86,150
--------------- ----------------
Valuation allowance 2,701,319 (86,150)
--------------- ----------------
Total provision for income taxes $ - $ 2,150
=============== ===============
</TABLE>
F-28
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
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,
-----------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Inventories $ (369,486) $ (329,264)
AMT tax credits (23,260) (23,260)
Accrued expenses 24,810 72,760
--------------- ----------------
Current portion of net deferred income
tax (assets) liabilities (367,936) (279,764)
--------------- ----------------
Depreciation and amortization (253,552) (211,108)
Loss on disposal of assets 170,417 127,043
Net operating loss carryforwards (6,082,466) (3,471,124)
Deferred rent liability (53,620) (50,099)
Income taxes 1,585 794
Amortization of stock options (200,520) (200,520)
--------------- ----------------
Long-term portion of net deferred
income tax (assets) liabilities (6,418,156) (3,805,014)
--------------- ----------------
Total net deferred income tax (assets) liabilities (6,786,092) (4,084,778)
--------------- ----------------
Valuation allowance 6,786,092 4,084,778
--------------- ----------------
Net deferred income taxes $ - $ -
=============== ================
</TABLE>
At March 31, 2000 and 1999, a 100% valuation allowance has been
provided on the net deferred income tax assets since the Company can
not determine that it is "more likely than not" to be realized.
F-29
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
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,
-----------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Federal statutory income tax (benefit) rate 34.0% 34.0%
Permanent adjustments (.2) 4.4
State income taxes, net of federal benefit - 1.5
Change in valuation allowance (33.8) (38.4)
--------------- ----------------
Effective income tax rate -% 1.5%
=============== ================
</TABLE>
At March 31, 2000, the Company has net operating loss ("NOL")
carryforwards of approximately $16,000,000 for federal purposes, and
approximately $8,000,000 for state purposes. The federal NOL's are
available to offset future taxable income and expire at various dates
through March 31, 2020, while the state NOL's are available and expire
at various dates through March 31, 2005.
A portion of the NOL's described above are 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
acquisition of a majority interest in the Company, and the Company's
November 1994 completion of an Offering of its Common Stock. Further
changes in common and preferred stock ownership during each of the
years ended March 31, 1997 through 2000, as described in Note 11, have
also potentially limited the use of NOL's. The effect of such
limitations has yet to be determined. NOL's 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
Stock (Note 13). Further, a portion of the NOL's may be allocable to
the Toys subsidiary, the operations of which generated a portion of the
NOL's while previously operating as a division of the Company. The
effects of such have not yet been determined.
F-30
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
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, insurance, and additional rents based on
percentages of sales in excess of various specified retail sales
levels. Many of the retail leases contain a provision allowing the
Company to cancel the agreement if certain mutually agreed-upon minimum
sales thresholds are not achieved by the end of the third year of the
lease. The Company leases its primary office/warehouse facility from a
related party, as discussed in Note 10.
During the years ended March 31, 2000 and 1999, the Company incurred
total rental expense under all operating leases of $6,158,171 and
$4,104,073, respectively. Contingent rent expense was insignificant
during the years ended March 31, 2000 and 1999.
At March 31, 2000, the aggregate future minimum lease payments due
under these noncancelable leases are as follows:
<TABLE>
<CAPTION>
Related
Party
Office/
Year Ending Warehouse Retail
March 31, (Note 10) Locations Total
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
2001 $ 323,484 $ 4,975,164 $ 5,298,648
2002 304,444 5,208,156 5,512,600
2003 27,963 5,100,892 5,128,855
2004 - 4,662,136 4,662,136
2005 - 4,210,678 4,210,678
Thereafter - 16,187,494 16,187,494
--------------- --------------- ----------------
Total minimum lease payments $ 655,891 $ 40,344,520 $ 41,000,411
=============== =============== ================
</TABLE>
F-31
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
9. Commitments and Contingencies (continued)
Operating Leases (continued)
During the year, the Company executed leases for four (4) stores
located in Florida, Nevada, Tennessee, and Illinois, which have varying
lease expiration dates through 2001, for which stores are expected to
open on various dates in fiscal 2001. Such leases require minimum
rental payments aggregating approximately $15,800,000 over the life of
the leases. The aggregate minimum rental payments attributable to these
leases are included in the schedule of future minimum lease payments,
above.
As of the date of this report, the Company has executed leases for the
opening of six (6) additional stores located in California, Colorado,
Maryland, Minnesota, Oregon, and Texas. The stores are expected to open
on various dates in fiscal 2001 and 2002, and the leases expire on
various dates through April 2011. These leases will require expected
minimum rental payments aggregating approximately $14,829,000 over the
life of the leases. Accordingly, existing minimum lease commitments as
of March 31, 2000, plus the expected minimum commitments for the
proposed retail location would aggregate minimum lease commitments of
approximately $55,829,000.
In June 2000, Toys negotiated a lease for an approximate 50,000 square
foot warehouse near Koblenz, Germany. The lease requires monthly
payments of approximately $10,000 for the first five months, and
$12,500 for the next thirteen months. After the initial 18-month
period, Toys has an option to purchase the location for approximately
$1,200,000 in cash; or approximately $1,400,000, including $700,000 of
cash and $700,000 of Toys' common stock; or renew the lease for an
additional two years at approximately $12,500 per month. The warehouse
is to be used as a fulfillment center for Toys' Internet operations in
Germany.
Legal Matters
The Company is party to legal proceedings and claims which arise in the
ordinary course of its business. The Company believes that the outcome
of these proceedings, individually and in the aggregate, will not have
a material adverse effect on its financial position, results of
operations, or liquidity.
F-32
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
9. Commitments and Contingencies (continued)
Dependence on Suppliers
Approximately 40% and 41% of the Company's inventory purchases were
made directly from five (5) manufacturers for the years ended March 31,
2000 and 1999, respectively. 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 or
deterioration of a 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.
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 with ZD
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 with interest at prime plus one percent. The term loan
was repaid during the year ended March 31, 2000 (Note 4).
F-33
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
9. Commitments and Contingencies (continued)
Financing Agreement with ZD (continued)
As consideration for its issuance of the L/C, ZD was entitled to
receive payments representing one-third (33%) of the net profits from
three retail locations beginning in April 1999. Through March 31, 2000,
the stores had not made a net profit; therefore, the Company has not
been liable for any payments.
In May 2000, ZD and the Company entered into a termination and release
agreement whereby the Company is no longer liable to pay ZD a
percentage of the net profits of the retail locations. However,
pursuant to the termination and release agreement, the Company agreed
to pay ZD $500,000 in cash. Subsequently, ZD agreed to receive 854,700
shares of Series E Stock in lieu of the $500,000 cash. The Series E
Stock was thereby valued at $0.59 per share, which represented a 60
percent discount of the market value as of the date of the transaction.
To obtain a fair value for the Series E Stock, the Company engaged an
independent appraiser to determine the value of the Series E Stock near
the transaction date. ZD assigned its rights under this agreement to
EACF and, accordingly, the Company issued the 854,700 shares of Series
E Stock to EACF.
1994 Stock Option Plan
In June 1994, the Company adopted the 1994 Stock Option 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 hiring 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, 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
initially granted 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, due to the
change in the subsequent market price being immaterial. As of March 31,
200, no portion of the option to purchase Common Stock had been
exercised.
F-34
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
9. Commitments and Contingencies (continued)
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 to cover operating expenditures.
Historically, the Company has been able to obtain such credit
arrangements and substantially repay the amounts borrowed from
suppliers, and reduce outstanding borrowings from its lender, during
the fourth quarter of its fiscal year.
Year 2000
In 1998, the Company developed a plan to upgrade its existing
management information system ("MIS") and computer hardware and to
become year 2000 compliant. The Company completed the hardware upgrade
and installed a year 2000 compliant upgrade to its accounting software.
The Company finished 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 have experienced any difficulties related to
year 2000.
F-35
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
9. Commitments and Contingencies (continued)
Year 2000 (continued)
Although the Company has not experienced any problems related to year
2000 issues, the possibility still exists that such problems may arise
during the calendar year. However, the effect, if any, of year 2000
problems on the Company's results of operations, if the Company or its
customers, vendors, or service providers are not fully compliant,
cannot be estimated with any degree of certainty.
10. Related-Party Transactions
Office and Warehouse Lease
The Company leases an office/warehouse building from Davidson, Welker,
& Brady, a partnership of which one of the partners, Richard Brady, is
the Company's chief executive officer, president, and a 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 Consumer
Price Index, adjusted every three years. The lease was amended in 1993
to extend the term through April 2000 (Note 9). In April 2000, the
lease was assigned to, and renewed by, Toys for a two-year term with an
option to extend the lease for an additional three years. Monthly rent
payments are $25,000.
Rent expense under this lease totaled $247,289 for each of the years
ended March 31, 2000 and 1999.
Consulting Fees to Chairman
The Company made payments aggregating $48,600 and $33,000 to the
Chairman of the Board of Directors of the Company for various
consulting services during the years ended March 31, 2000 and 1999,
respectively.
F-36
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
10. Related-Party Transactions (continued)
Purchase Agreement with BWI
In November 1998, the Company entered into an agreement with BWI, an
entity that sells children's swimsuits and is 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 had an initial
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. While the Company purchased no additional pieces of
merchandise during the year ended March 31, 2000, the Company continues
to sell the swimsuits at its retail locations.
Placement Agent Agreement with Frampton
In January 1999, the Company and Frampton, 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 was 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
ended March 31, 1999, Frampton arranged two such transactions for a
face amount of $650,000 involving itself and EACF (Note 6). The Company
recognized $52,000 of interest expense for the investment-banking fee.
Unsecured Promissory Notes Payable/Receivable
On July 15, 1998, the Company borrowed $300,000 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. The
Company recognized $7,875 in interest expense associated with this
transaction for the year ended March 31, 1999.
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 were
due monthly beginning May 31, 1999. The note was repaid upon its
maturity date of August 31, 1999. The Company recognized $2,100 in
interest expense for the year ended March 31, 2000.
F-37
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
10. Related Party Transactions (continued)
Unsecured Promissory Notes Payable/Receivable (continued)
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 unsecured note had an interest rate of 15% per annum, paid in 10
monthly installments of $25,000, plus accrued interest, through its
maturity date of December 31, 1998. The Company recognized $14,063 in
interest expense for the year ended March 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 were due
monthly beginning June 30, 1999. The note was repaid upon its maturity
date of September 30, 1999. The Company recognized $2,250 in interest
expense for the year ended March 31, 2000.
On October 25, 1999, Tudor Technologies, Inc. ("Tudor") lent the
Company $127,922 under a demand promissory note ("Tudor Demand Note")
bearing an interest rate of 8% per annum. The Tudor Demand Note was a
bridge loan designed to be paid off after the completion of the then
contemplated initial public offering of Toys and has been paid in full.
The Company recognized $1,279 in interest expense for the year ended
March 31, 2000.
In early October 1999, the Company loaned $50,000 to ShopNet and
$200,000 to Breaking Waves, both of which entities are affiliated with
the Company. The loans carry interest at 9% and were repaid during the
year. The Company recorded $2,250 and $9,150 in interest earned for
these loans for the year ended March 31, 2000.
On November 29, 1999, the Company loaned BWI $400,000 under a demand
promissory note ("BWI Demand Note") bearing an interest rate of nine
percent per annum. The BWI Demand Note required a principal repayment
of $100,000, plus accrued interest, on January 30, 2000, and requires
that the balance be paid on April 30, 2000. The January 30, 2000
payment was remitted as agreed. The remaining $300,000 balance is
included in accounts receivable at March 31, 2000 and was paid, as
agreed, subsequent to year-end. The Company earned $10,150 in interest
income for the year ended March 31, 2000.
Equity Transactions
See Note 11 for equity transactions with affiliates of the Company.
F-38
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
11. Equity Transactions
Capital Structure
The following summarizes the Company's capital structure as of March
31, 2000 and 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, March 31,
2000 1999
--------------- ----------------
Common Stock
<S> <C> <C>
Authorized shares of $.01 par value
common stock 160,000,000 51,000,000
Preferred Stock
Authorized 15,500,000 shares of preferred stock designated as:
$.01 par convertible Series E Stock 25,000,000 10,000,000
$.01 par convertible Series F Stock 5,500,000 5,500,000
</TABLE>
Each share of 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.
Each share of Series F Stock is convertible into two shares of Common
Stock, at the option of the holder, commencing at any time following
the date that 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 30-day period. The Series F Stock
has a liquidation preference of $0.50 per share, subject only to the
Series E Stock preference.
F-39
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
11. Equity Transactions (continued)
Issuance of Common Stock to BWI
In November 1998, the Company issued 1,400,000 shares of Common Stock
to BWI, 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.
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 shares 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.
Conversion of Series E Stock to Common Stock
Beginning in January 2000, and through the fourth quarter, certain
holders of 929,563 shares of Series E Stock elected to convert their
shares into Common Stock shares at six-to-one. This resulted in an
issuance of 5,577,378 shares of Common Stock.
Issuance of Common Stock for Settlement
As described in Note 7, the Company reserved for issuance 100,000
shares of Common Stock as a result of a litigation settlement
agreement.
Issuance of Series E Stock
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.
F-40
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
11. Equity Transactions (continued)
Issuance of Series E Stock (continued)
Simultaneously, ABC converted the debenture and $33,333 of accrued
interest into 1,533,333 shares of Series E 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.
However, as part of the above-mentioned amendment, ABC retained 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, 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.
In July 1999, Tudor elected to exercise its right to purchase 25% of
Toys based on Toys' book value, which was determined to be $2,894,711
as of June 30, 1999, the agreed-upon measurement date. The Company
received $723,678 from Tudor in October 1999.
On July 28, 1998, the Company sold 100,000 shares of Series E 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 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.)
F-41
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
11. Equity Transactions (continued)
Issuance of Series E Stock (continued)
In March 2000, EACF, the holder of the Company's $650,000 of
convertible debentures, as amended, elected to convert the debentures
into Series E Stock. Prior to this transaction, Frampton assigned its
convertible debenture to EACF. The conversion of the $650,000, along
with $34,660 in accrued interest at the amended $.20 per share,
resulted in 3,423,300 shares of Series E Stock being issued to EACF.
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 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 at the holder's option 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 Company filed a Registration
Statement on Form SB-2 with the Securities and Exchange Commission in
September 1999, and amended the registration statement in May 2000. The
registration statement has not yet been declared effective. The shares
of Series F Stock shall convert automatically, without any action by
the holder, upon the earlier of (i) two years from issuance, or (ii) in
the event the closing price per share of the Common Stock has been at
least $5.00 for a consecutive 30-day period.
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 20
months, the volatility factor utilized for the model was 155%.
Additionally, the model used a risk-free interest rate of 6.0%. Since
this amount was considered a cost of the offering, it was netted
against the proceeds in additional paid-in capital, resulting in no net
effect on the consolidated statement of operations or stockholders'
equity.
F-42
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
11. Equity Transactions (continued)
Private Placement of Series F Stock (continued)
Additionally, the placement agent received a commission of 10%, or
$75,000; and 1%, or $7,500, to cover administrative expenses. The
Private Placement closed on May 27, 1999, providing net cash proceeds
of $645,380 to the Company.
Issuance of Options
In February 1999, Typhoon Capital Consultants, LLC ("Typhoon") and the
Company entered into a consulting agreement (the "Typhoon Agreement"),
pursuant to which Typhoon is to provide financial and other consulting
services. In exchange for Typhoon's services, the Typhoon 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 Typhoon 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, accordingly, has not executed the option agreements, and does not
expect to issue such options. Therefore, no amounts have been recorded
for these options as of March 31, 1999.
In July of 1998, Corporate Relations Group ("CRG") and the Company
entered into a five-year consulting agreement to provide
corporate-relations services (the "CRG Agreement"). As compensation for
their services, CRG received $100,000 in cash upon execution of the CRG
Agreement, and 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 CRG 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.
F-43
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
11. Equity Transactions (continued)
Issuance of Options (continued)
In the year ended March 31, 1999, the Company 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 of $0.875 per share on August 27, 1998. 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
has been 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.
As of March 31, 2000, the Company has assessed the value of these
brochures and has reevaluated the useful life of the brochures. Due to
the changing focus of the Company, management expects the future
benefits of the brochures will not be realized throughout the original
five-year amortization period. Management estimates that an aggregate
three-year amortization period will be an appropriate reflection of the
time period that such brochures will provide a benefit to the Company.
Therefore, the Company has revised its amortization period to a
three-year life and recorded an adjustment in the current period. Such
adjustment was not significant to the financial statements.
Series E Stock Bonus
In March 1998, the Board of Directors of the Company granted to its
chairman, and to the Company's 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 the 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.
F-44
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
11. Equity Transactions (continued)
Series E and Series F Stock Dividends Resulting from Beneficial
Conversion Feature
For the years ended March 31, 2000 and 1999, the Company recorded
non-cash dividends of $2,592,252 and $1,707,725 in applying the
provisions of Topic No. D-60 of the EITF, as described below.
Topic D-60 communicated the views of the staff of the SEC 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 beneficial conversion feature is measured at the date
of issuance of a convertible security, as the difference between the
conversion price and the market price of the underlying security, and
is limited to the proceeds received from the issuance of the
convertible security.
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 20 shares of Common Stock, at the option of the
holder, with no holding period requirement.
Based on the calculations prescribed by Topic No. D-60, all proceeds
initially received by the Company from the issuance of its Series E and
Series F 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 and Series F 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,
were initially being recorded over the required two-year holding period
of the security.
F-45
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
11. Equity Transactions (continued)
Series E and Series F Stock Dividends Resulting from Beneficial
Conversion Feature (continued)
In February 2000, at a special meeting of the Company's stockholders,
the holding period requirement for the Series E Stock was eliminated.
As such, the balance of the unamortized dividend was recorded in the
quarter ended March 31, 2000, such that there are no remaining
dividends to be provided for Series E Stock issued through that date.
As the Series F Stock was initially convertible into common stock upon
an effective registration statement, the Company provided for dividends
to be recognized over a seven-month period through December 1999, based
on the time estimated to be necessary to effect a registration. As
such, the dividends on the 750,000 shares of Series F Stock have been
fully recognized during the year ended March 31, 2000. As of July 2000,
the registration statement for the Series F Stock has not yet been
declared effective.
Equity Transactions of Subsidiary
Private Sale of Equities
On July 20, 1999, Toys sold a 6.6% minority interest to two investors
for $2.8 million in gross proceeds. The investors were an unaffiliated
German investment-banking firm, which assisted with the public Offering
discussed below and CDMI, a company in which one of the Company's
directors, Moses Mika, is a shareholder. Each party invested $1.4
million in the transaction. No gain or loss was recorded by the Company
on this sale of Toys' shares, or the transaction involving Tudor
discussed above, in accordance with Staff Accounting Bulletin Topic 5 -
Miscellaneous Accounting, "Accounting for Sales of Stock in a
Subsidiary" ("SAB Topic 5"), as such shares were issued as part of a
broader corporate reorganization; namely, the public offering of Toys
shares discussed below.
F-46
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
11. Equity Transactions (continued)
Equity Transactions of Subsidiary (continued)
Initial Public Offering
On November 19, 1999, Toys completed an initial public offering (the
"Offering") on the SMAX segment of the Frankfurt Stock Exchange in
Germany. The Offering was underwritten by Concord Effekten AG
("Concord") of Frankfurt, Germany. In the Offering, Toys sold two
million shares, or a 16.7% interest, for net proceeds of approximately
$22,864,000. The Offering was priced at 13 Euros per share, or
approximately US $13.52 per share. The Company retained majority
ownership of Toys (58.4%) and, as a result, will continue to
consolidate Toys' operations in its financial statements. No gain was
recorded on the sale of Toys' shares in the Offering per SAB Topic 5,
as the realization of the gain is not assured given the Company's
history of losses from operations, net operating loss carryforwards,
which are generally not available to offset capital gains, and the
start-up nature of the Company's Internet operations, an emerging focus
Toys cited in its Offering prospectus. As such, the transaction was
reflected as a capital transaction, which affected the consolidated
paid-in capital of the Company.
Stock Options
In July 1999, Toys granted options to purchase an aggregate 250,000
shares of common stock to certain of its directors, officers, and
advisors. The options bear an exercise price of $4.24 per share, and a
term of three years, and are not exercisable prior to November 19,
2000. As the Company and Toys utilize the provisions of APB 25 for
stock options granted to employees, no compensation expense was
recorded for 224,000 of these options, as the exercise price was
estimated by management to approximate the fair value given the private
sales of Toys shares immediately preceding such grants. However, 26,000
of the options were granted to a legal advisor for services related to
the proposed Offering, and were valued by management at the estimated
fair value of approximately $118,000, which amount was netted against
the proceeds of the Offering credited to additional paid-in capital. As
such, the compensation recorded for such shares had no net effect on
Toys' or the Company's equity or results of operations.
F-47
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
11. Equity Transactions (continued)
Stock Options (continued)
Had compensation expense for the stock options been recognized based on
the fair value on the grant date, under the methodology prescribed
under FASB 123, the Company's net loss applicable to common shares and
loss per common share would have been $11,225,619 and $1.67 per share,
respectively, for the year ended March 31, 2000, based on a fair value
of $2.76 per option. The fair value of the options granted, which is
amortized to expense over the option vesting period in determining the
pro forma impact, is estimated on the grant date using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
<S> <C>
Expected life of option 3 years
Risk-free interest rate 6.5%
Expected volatility of Play Co. stock 100.0%
Expected dividend yield 0.0%
</TABLE>
Options granted prior to fiscal 2000 are immaterial for disclosure
purposes.
Concurrently, Toys granted an additional 450,000 incentive options to
acquire shares of Toys common stock, which have an exercise period over
nine years at an exercise price of three Euros per share. The exercise
price in US dollars will depend on the conversion rate at the time in
the future when the options are exercised. The exercise price was $3.06
as of September 22, 1999, the date of the option grant. As these
options were granted subject to Toys meeting future performance
criteria, no compensation expense has been recorded currently, as the
compensation has not yet been earned. If Toys meets these performance
targets in the future, the officers will therefore be entitled to the
options, and Toys will record compensation expense on the measurement
date. As Toys utilizes the provisions under APB 25, a compensation
expense for each option will be recognized for the difference between
the quoted market price and the exercise price on the measurement date.
F-48
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
11. Equity Transactions (continued)
Stock Options (continued)
The performance parameters of these options are based on Toys' annual,
audited, retail after-tax profit. Retail after-tax profit is defined as
Toys' "overall operations," excluding its Internet operations. The
retail profit criteria are for any fiscal year after the grant date.
Once the first threshold of greater than $5 million is achieved, a
retail profit of greater than $6.5 million will need to be earned in
any subsequent year in order for the next options to become
exercisable. The same circumstance is applicable to the next threshold
level. These options expire nine years after the grant date. The actual
performance criteria, and the parties to whom the incentive option were
issued, are shown in the following table:
<TABLE>
<CAPTION>
Total
Retail Profit Retail Profit Retail Profit Options
Name $5 million $6.5 million $9 million Achievable
------------------ --------------- -------------- ------------------
<S> <C> <C> <C> <C>
Richard Brady 75,000 75,000 75,000 225,000
Harold Rashbaum 45,000 45,000 45,000 135,000
James Frakes 30,000 30,000 30,000 90,000
------------------ --------------- --------------- ------------------
150,000 150,000 150,000 450,000
================== =============== =============== ==================
</TABLE>
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
Play Co. Toys
----------------------------------- ----------------------------------
Weighted Weighted
Options Average Options Average
------------------ --------------- -------------- ------------------
<S> <C> <C> <C> <C>
Outstanding -
March 31,1999
beginning of year 30,000 $ 1.15 - $ -
Granted - - 700,000 3.48
Exercised - - - -
Forfeited/Cancelled - - - -
------------------ --------------- --------------- -----------------
Outstanding -
March 31, 2000
end of year 30,000 $ 1.15 700,000 $ 3.48
================== ============== =============== ================
</TABLE>
F-49
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
11. Equity Transactions (continued)
Stock Options (continued)
The weighted average remaining contractual life of options as of March
31, 2000 is as follows:
<TABLE>
<CAPTION>
Range of Wghtd Avg Wghtd Avg Wghtd Avg
Exercise # of Options Contract Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
----------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Play Co. $ 1.15 30,000 5 $ 1.15 20,000 $ 1.15
=========== =========== =========== ===========
Toys $ 3.06 450,000 9 $ 3.06 - $ 3.06
4.24 250,000 3 4.24 - 4.24
----------- -----------
700,000 -
=========== ===========
</TABLE>
Warrants for Services
In November 1999, in exchange for services rendered in connection with
Toys' Offering, Toys issued a warrant to Value Management & Research
(Espana), S.A. ("VMR Spain"), whereby VMR Spain may purchase up to
44,250 shares of Toys' common stock. VMR Spain may exercise its rights
at any time, in whole or in part, during the period commencing May 23,
2000 and ending May 19, 2001. The purchase price under this warrant is
8.50 Euros per share of Toys' common stock, which is proportionately
reduced if Toys should subdivide its outstanding common stock into a
greater number of common shares or declare a dividend, or make any
other distribution of common stock of the Company payable in common
stock. Conversely, the purchase price is proportionately increased if
the common stock outstanding is combined into a smaller number of
common shares.
Toys' management valued the warrants granted to VMR Spain at
approximately $598,000, based on the commission rate stipulated in the
service agreement and the portion of shares sold in the Offering
resulting from introductions made by VMR Spain. As the $598,000 was
netted against the proceeds of the Offering and credited to additional
paid-in capital, the compensation had no net effect on Toys' or the
Company's equity or results of operations. No warrants have been
exercised as of July 7, 2000.
F-51
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
11. Equity Transactions (continued)
Warrants for Services (continued)
Also in November 1999, in exchange for services to be rendered, Toys
issued a warrant to Value Relations IR Services GmbH & Co. KG ("VMR
Germany"), whereby VMR Germany may purchase up to 200,000 shares of
Toys' common stock. VMR Germany may exercise its rights, in whole or in
part, at any time during the period commencing June 1, 2000 and ending
May 31, 2001. The purchase price of this warrant is the same as the
above-described warrant. The warrant is exercisable in 40,000-share
increments, based upon the bid price of the common stock on the
Frankfurt Stock Exchange, as defined within the warrant agreement. No
warrants have been exercised through July 7, 2000.
The warrants granted to VMR Germany are in exchange for service to be
rendered for marketing and public relations. As of July 7, 2000, Toys'
management is not aware of any services performed to date, and no
compensation has been earned by VMR Germany and, accordingly, Toys has
recorded no compensation. If and when services are performed, and the
related compensation is earned, the fair value of the warrants or
services provided will be determined and recorded at that time. No
warrants have been exercised as of July 7, 2000.
12. Supplemental Cash Flow Information
Cash paid for income taxes and interest was as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Interest paid $ 1,152,988 $ 809,601
=============== ================
Income taxes $ 5,000 $ 850
=============== ================
</TABLE>
Non-cash investing and financing activities consisted of the following:
The Company acquired leasehold improvements and equipment during the
year ended March 31, 2000 and 1999, by entering into capital lease
obligations for $861,104 and $849,429, respectively (Notes 3 and 5).
Convertible debt and accrued interest of $684,660 and $1,533,333 was
converted into 3,423,300 and 1,533,333 shares of Series E Stock during
the year ended March 31, 2000 and 1999, respectively (Note 11).
F-52
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
12. Supplemental Cash Flow Information (continued)
Common stock 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, 2000 and 1999, non-cash dividends of
$2,592,252 and $1,707,725, respectively, were recorded to amortize the
discount recorded on Series E and Series F Stock resulting from the
beneficial conversion features (Note 11).
During the year ended March 31, 2000, shares of Series E Stock were
converted into Common Stock, which was reflected as a $938,859
reclassification from Series E Stock to Common Stock (Note 11).
Common Stock was issued to satisfy two obligations of the Company for
an aggregate value $98,600 during the year ended March 31, 2000.
13. Restatement of Amounts Previously Reported
The March 31, 1999 financial statements contain certain restatements of
amounts previously reported. These restatements have previously been
reflected in an amendment to the Company's Annual Report on Form 10-KSB
for the year ended March 31, 1999.
The restatements were the result of inquiries made by the staff of 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, which are described below. The table below
identifies significant changes to balances in the financial statements.
The revision for the grant of options relates to the Company
recognizing a prepaid expense for the fair value of options at the time
it entered into two agreements to issue options, the related services
for which were never performed. Therefore, the Company reversed the
accounting for these transactions. See Items 1 and 4 below for the
impact on the balance sheet and Item 2 below for the impact on the
"Consolidated Statement of Operations and Comprehensive Net Income
(Loss)." This reduction of "Other current assets" is less than the
amount of the adjustment to additional paid-in capital in Item 4
because of the reversal of the amortization of the prepaid expense
recorded during the year ended March 31, 1999.
F-53
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
Restatement of Amounts Previously Reported (continued)
The revision for the Series E Stock was to record the issuance of
shares to officers for which the Company did not previously recognize
compensation expense during the year ending March 31, 1999. See Item 2
below for the impact on the balance sheet, and Item 1 below for the
impact on the "Consolidated Statement of Operations and Comprehensive
Net Income (Loss)."
The revision in Item 3 below is to reflect accounting necessary for a
beneficial conversion feature included in $650,000 of debentures
convertible into shares of Series E Stock at a discount from the
trading price of the Series E Stock.
The following is a summary of the impact of the restatements on the
1999 consolidated balance sheet.
<TABLE>
<CAPTION>
<S> <C> <C>
1. Reduction of other current assets for options not ultimately issued
(CRG for $35,000 and Typhoon for $44,000, net of amortization expense
of $10,366) $(68,634)
2. Increase in Series E Stock for issuance of shares to officers (See Note
11 "Series E Stock Bonus") 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 the options never issued to
CRG and Typhoon (79,000)
5. Additional net loss in accumulated deficit (from above items) 718,634
</TABLE>
The following is a summary of the impact of the restatements on the
1999 consolidated statement of operations and comprehensive net income
(loss).
<TABLE>
<CAPTION>
<S> <C>
1. Increase in operating expenses from recognition of compensation expense
from issuance of Series E Stock to officers $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>
F-54
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
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 Stock $ 5,682,101 $ 79,000 $ 5,761,101
Additional paid-in capital 15,335,172 571,000 15,906,172
Accumulated deficit (16,007,679) 718,634 (16,726,313)
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>
F-55
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
Years Ended March 31, 2000 and 1999
14. Subsequent Events
Software Development for Toys Subsidiary
In the fiscal year ended March 31, 2000, Toys entered into two purchase
orders with a European software developer to create the underlying
concept and the initial sample of a potential next-generation Internet
portal for the Company. Cash payments under the purchase orders were
made as the software development unfolded. In May 2000, as part of the
consideration of $100,000 for this first phase of the software
development, Toys issued 11,430 shares of Toys' common stock to the
software developer. These shares were valued at $100,000 based on the
fair value of consulting services received by Toys. The number of
shares was determined based on the US $9.00 market value for the shares
on the date of the agreement to issue the shares. Such amount has been
included in the capitalized costs for website development.
In June 2000, Toys entered into a memorandum of understanding with the
software developer for ongoing development of the next-generation
concept. This memorandum summarizes several key points of an ongoing
business relationship: (a) the intellectual property belongs to Toys;
(b) the software developer will invoice Toys as expenses are incurred,
based on budgets that must be preapproved by Toys; (c) Toys will grant
options for 200,000 shares of Toys' common stock that will vest
pro-ratably over three years, 10 Euros per share, with an exercise
price.
President and Chief Operating Officer of Toys Subsidiary
On June 18, 2000, Toys hired a new president and chief operating
officer under a three-year employment agreement (the "Employment
Agreement"). The Employment Agreement calls for a stock option grant
of 225,000 of Toys' common stock with an exercise price of $9.00 (as
calculated at 85% of the fair market value of Toys' common stock on
the date of the Employment Agreement). The option grant is for a
10-year period and vests as follows: (a) on or after the first
anniversary date, up to 50,000 shares; (b) on or after the second
anniversary date, an additional 75,000 shares; (c) on or after the
third anniversary date, an additional 100,000 shares. The intrinsic
value of the option will be recognized as compensation expense over
the required three-year service period.
F-56
