SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended _________________
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from October 1, 1997 to March 31, 1998
Commission File Number O-26676
MULTIMEDIA CONCEPTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3835325
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
1410 Broadway Suite 1602, New York, New York 10018
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 391-1111
(Registrant's telephone number, including area code)
448 West 16th Street, New York, New York 10011
(Former name, former address, and former fiscal year, if changed
since last report)
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, $.001 par value
(Title of Class)
Common 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 Item 405 of
Regulation S-B is not 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 consolidated revenues for its six month transition period
ended March 31, 1998 were $15,869,731.
The aggregate market value of the voting stock on August 31, 1998
(consisting of Common Stock, par value $.01 per share) held by non-affiliates
was approximately $295,620 based upon the closing price ($0.26), for such Common
Stock on August 29, 1998, as reported by a market maker. On such date, there
were 3,005,000 shares of Registrant's Common Stock outstanding.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Multimedia Concepts International, Inc. (the "Company") is a Delaware
corporation which was organized in June 1994 under the name U.S. Food
Corporation. The Company changed its name to American Eagle Holdings Corporation
in April 1995 and then to its present name in June 1995. The Company was
initially formed as a holding company for the purpose of forming an integrated
clothing design, manufacturing, and distribution operation. The Company is
currently, in principle, a holding company for its two operating subsidiaries;
(i) its wholly owned subsidiary U.S. Apparel Corp. ("USAC") and (ii) its
majority owned subsidiary Play Co. Toys & Entertainment Corp. ("Play Co.")
through its ownership of 78.5% of the outstanding shares of common stock of
United Textiles and Toys Corp. ("UTTC"), which owns 59.1% of Play Co. All
references to the "Company" refer to USAC, UTTC, and Play Co. unless otherwise
required by the context.
In February 1997, the Company formed a wholly-owned subsidiary, USAC, a New
York corporation, to design and manufacture a line of private label cotton
"T-shirts" and "polo" type tops predominantly for men.
In January 1998, UTTC issued 3,571,429 shares of its common stock to the
Company in full repayment of certain loans aggregating $1,000,000 previously
made by the Company to UTTC. This conversion of debt to equity was performed at
a price of $.28 per share. As a result of the transaction, the Company acquired
78.5% ownership of UTTC. See " -United Textiles & Toys"
Prior Operations - American Eagle Industries Corp. and Match II, Inc.
In June 1994, the Company acquired 55% of the outstanding shares of common
stock of American Eagle Industries Corp. ("American Eagle"), which acquired 100%
of the outstanding shares of Match II, Inc. ("Match II"). American Eagle
designed and manufactured a line of private label cotton "T-shirts" and "polo"
type tops predominantly for men. Match II, a wholly owned subsidiary of American
Eagle, sold its own brand name ladies knit tops and coordinates under the
trade-name "Match II". In June 1995, the Company acquired 34% of the outstanding
shares of common stock of Multi Media Publishing, Inc. ("MMP"). MMP was a
company which produced CD-ROM versions of medical clinical study books.
In January 1997, the Company, through vote of its stockholders, voted to
cease funding the operations of the subsidiaries, American Eagle, Match II, and
MMP. At such time the Company formed a new subsidiary, USAC, to commence
operations as a designer and manufacturer of similar product lines of its prior
subsidiaries. The Company as 55% stockholder and sole financing arm of American
Eagle terminated its relationship with American Eagle due to continued losses.
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United Textiles & Toys Corp.
On January 2, 1998, the Company was issued 3,571,429 shares of common stock
of UTTC, a company of which the Company's President Ilan Arbel is President,
Chief Executive Officer, and a Director, at a price of $.28 per share ($.01
above the closing price on December 31, 1997) as payment for $1,000,000 loaned
by the Company to UTTC. As a result of the transaction, the Company owns 78.5%
of the outstanding shares of common stock of UTTC, effectively making UTTC a
subsidiary of the Company. UTTC owns 59.1% of the outstanding shares of common
stock of Play Co., thus the Company and its management obtained beneficial
voting control of Play Co.
UTTC owns 2,486,247 of the outstanding shares, or 59.1%, of Play Co.'s
common stock. All of the UTTC's holdings of Play Co. securities are subject to a
two-year lock up on transfer commencing December 1997, in accordance with a lock
up agreement executed in connection with Play Co.'s Series E Preferred Stock
offering.
UTTC (formerly Mister Jay Fashions International, Inc.) is a Delaware
corporation which was organized in March 1991 and which commenced operations in
October 1991. Until April 1998, when it ceased its textile operations, UTTC
designed, manufactured, and marketed a variety of lower priced women's dresses,
gowns, and separates (blouses, camisoles, jackets, skirts, and pants) for
special occasions and formal events. UTTC currently acts as a holding company.
U.S. Apparel Corp.
USAC currently designs and manufactures a line of private label knit
cotton tops predominantly for men, consisting of T-shirts and polo shirts.
USAC's garments consist of original designs and modifications and copies of
existing designs. In designing USAC's garments, USAC first creates the pattern
of the new garment and sews samples of the new garments, which are then
delivered to the Company's sales personnel for introduction to the Company's
existing customers and the trade. The Company is continually seeking to design
and market new products.
USAC purchases approximately 50% of its fabric, or piece goods, from
suppliers located in South America and approximately 50% of its piece goods from
suppliers in the United States. The piece goods purchased in both South America
and the United States are shipped to Honduras, where they are dyed, cut, and
assembled by subcontractors and then shipped to and warehoused in Florida
pending delivery to USAC's customers. The goods are then shipped to customers by
air or truck common carriers, depending upon customers' needs with respect to
cost and time considerations, although all goods purchased by K-Mart, USAC's 82%
customer for the six months ended March 31, 1998, are picked up by K-Mart's
carriers at USAC's public warehouse in Florida.
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Supplies and Inventory
USAC purchases its fabrics from both the United States and South America.
Most of USAC=s non-fabric sub-materials (zippers, buttons, and trimmings) are
purchased from New York City-based manufacturers and suppliers. USAC generally
pays for fabrics and non-fabric sub-materials upon receipt. As is customary in
the industry, USAC does not have long-term formal arrangements with any of its
suppliers and purchases its supplies based upon specific design and order
requirements. USAC has not experienced difficulty in satisfying their fabric and
non-fabric requirements and considers their sources of supply adequate. USAC's
inventory of garments varies depending upon its backlog of purchase orders and
its financial position.
Quality Control
USAC conducts limited quality control in Honduras to ensure that finished
goods meet USAC's standards. The quality control person inspects samples of
garments on a random basis to ensure compliance with USAC's specifications.
Marketing and Sales
Most of USAC's private label garments are sold through major department
stores in the United States such as K-Mart and J.C. Penny Department Stores.
Sales to K-Mart accounted for approximately 95% and 85% of the Company's
revenues for the years ended September 30, 1996 and 1997, respectively, and 82%
for the six months ended March 31, 1998. USAC bills its clients on a net 30-day
basis. There is a lag time between the time the raw materials are purchased, the
final products are produced and shipped and receipt of payment is received. Late
or non-payment could cause material adverse effects on USAC's cash flow and
operations, especially since a large portion of the USAC's sales are to one
customer.
USAC does not sell on consignment and do not accept return of products
other than imperfect goods or goods shipped in error. Imperfect goods are
generally replaced with new conforming goods.
USAC believes that a key feature of its business is its ability to design,
manufacture, and sell low cost garments which are similar in style and
appearance to more expensive garments.
Work in Progress; Backlog
A significant portion of USAC's sales are generated from short term
purchase orders from customers who place orders on an as-needed basis. USAC
typically manufactures its products upon receipt of orders from its customers
and delivers goods within four weeks of receipt of an order. USAC generally
manufactures approximately 10% more goods than is ordered by customers in
anticipation of reorders from customers. Information relative to open purchase
orders at any date may be materially affected by, among other things, the timing
of recording of orders and shipments. Accordingly, the Company does not believe
that the amount of its unfilled orders at any time is meaningful. As March 31,
1998, USAC had approximately $102,000 worth of unfilled purchase orders with
respect to orders received from K-Mart. Financing
USAC bills its client's on a net 30-day basis. There is a lag time between
the time the raw materials are purchased, the final products are produced and
shipped and receipt of payment is received. Although it is customary in the
garment industry to finance receivables through "factoring" (i.e., financing
secured by accounts receivable of the borrower's customers), USAC does not
normally factor any of its receivables. Although USAC has no present intention
to do so, it may rely on factoring to finance future operations.
Competition
There is intense competition in the apparel industry in which USAC
participates. USAC designs, manufactures, and markets a line of T-shirts and
polo shirts to large department stores. USAC competes with many other
manufacturers in this market, many of which are larger and have greater
resources than USAC.
USAC's business is highly competitive, with relatively insignificant
barriers to entry and with numerous firms competing for the same customers. USAC
is in direct competition with local, regional, and national clothing
manufacturers, many of which have greater resources and more extensive
distribution and marketing capabilities than USAC. In addition, many large
retailers have recently commenced sales of "store brand" garments which compete
with those sold by USAC. Management believes that USAC's market share is
insignificant in its product lines.
Many of the national clothing manufacturers have extensive advertising
campaigns which develop and reinforce brand recognition. In addition, many of
such manufacturers have agreements with department stores and national retail
clothing chains to jointly advertise and market their products. Since USAC does
little advertising and has no agreement with any department store or national
retail chain to advertise any of its products, USAC competes with companies
which have brand names which are well known to the public. It can be expected
that a retail shopper will buy a garment from a "brand name" entity before that
of an unknown entity, if all other factors are equal.
Play Co. Toys & Entertainment Corp.
General
Play Co. Toys & Entertainment Corp. was founded in 1974, at which time it
operated one store under the name Play Co. Toys in Escondido, California. Play
Co. now operates 21 stores: 18 are located throughout Southern California in Los
Angeles, Orange, San Diego, Riverside, and San Bernardino Counties, one is
located in Tempe, Arizona, one is located in Las Vegas, Nevada, and one is
located in Dallas, Texas. Play Co. has executed leases to build and open four
additional stores during calendar 1998. Play Co. expects that by the end of
calendar 1998 it shall have 25 stores. In calendar 1999, the Company expects to
open an additional six stores, bringing its total to 31. The Company operates
its stores under the following names: Play Co. Toys, Toys International, Toy
Co., and Tutti Animali. It shall continue to open stores under such names
contingent upon the product mix and location of the store. The Company
periodically reviews each individual store=s sales history and prospects on an
individual basis to decide on the appropriate product mix.
Corporate Overview
Traditionally, the Company's merchandising strategy was to offer an
alternative, less intimidating environment than that provided by the larger toy
retailers who are in competition with the Company. In 1996, management of the
Company realized the inherent value in, and thus the demand for, a retail outlet
which provides a combination of (i) educational, new electronic interactive, and
specialty and collectible toys and items; and (ii) traditional toys. In
addition, the Company determined that it should place such stores in high
traffic malls, rather than in strip shopping centers where most of its original
stores were located. To achieve its goals, 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 what it believes are the industry=s current and future demands
The Company has thus far remodeled four of its original stores (the
AOriginal Stores@) to fit its new store design (the ANew Stores@), opened six
New Stores, and acquired three stores in the January 1997 acquisition Toys
International, Inc. ("Toys"). Three of the six New Stores operate under the
tradename Toy Co. In conformance with its new goals, Play Co.'s New Stores shall
be smaller (5,000 to 10,000 square feet in size) and shall operate exclusively
in high traffic malls rather than in strip shopping centers. Play Co.'s New
Stores have and are expected to continue to produce higher gross profits since
they 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. Of the 25 stores the Company expects to have in
operation by the end of the 1998 calendar year, 18 shall follow Play Co.'s new
concept and seven shall follow its old format.
The Company shall continue to operate its Original Stores until their
leases expire, except with respect to certain stores for which it is negotiating
lease extensions, which stores it may redesign to fit the New Store concept. The
Original Stores sell children's and adult toys, games, bicycles, and other wheel
goods, sporting goods, puzzles, Nintendo and Sony electronic game systems and
cartridges for such game systems, cassettes, and books. They offer over 15,000
items for sale, most of which are major brand name toys and hobby products.
The New Stores also carry some of the items found in the Original Stores;
however, they focus on selling educational toys, Steiff and North America Bears,
Small World toys, LBG trains, CD-ROMs, electronic software games, Learning
Curve, and Ty products. The Company's Tutti Animali store, located in the
Crystal Court Mall in Costa Mesa, California, is a unique store which sells only
stuffed animals.
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Financing
On January 21, 1998, Play Co. entered into a $7.1 million secured,
revolving Loan and Security Agreement (the AFINOVA Agreement@) with FINOVA
Capital Corporation (AFINOVA@), which line was increased to $7.6 million in July
1998. Play Co. recently received from FINOVA verbal approval to increase the
aforesaid line by $1 million (to $8.6 million) for a period through and until
December 31, 1998, at which time the line shall revert to $7.6 million. The
FINOVA credit line is secured by substantially all Play Co.'s assets and expires
on August 3, 2000. The credit line bears interest at a rate of floating prime
plus one and one-half percent.
On September 18, 1998, Play Co. and Amir Overseas Capital Corp. (AAmir@), a
British Virgin Islands corporation, executed a subordinated security agreement
for a $1 million loan (the AAmir Loan@) made by Amir to Play Co. The Amir Loan
shall be repaid by Play Co. at a 12% annual interest rate pursuant to a schedule
which requires full repayment on or before December 23, 1998.
Employees
As of March 31, 1998, the Company, including USAC, had three executive
officers and two full-time employees. None of the employees of the Company are
represented by a union, and the Company considers employee relations to be good.
Play Co. has three executive officers, approximately 65 full time employees, and
approximately 259 part time employees. None of the employees of Play Co. are
represented by a union, and Play Co. 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 Play Co.'s store managers
reports to Play Co.'s director of operations and director of merchandising who
in turn report directly to Play Co.'s Executive Officers.
ITEM 2. PROPERTIES
Until April 1998, Company subleased 20,000 square feet of industrial space
at 448 West 16th Street, New York, New York, at an approximate rate of $12,500
per annum. It is at this location that the Company housed its administrative
offices.
In April 1998, in connection with UTTC's cessation of its textile
operations, the Company moved its administrative offices to 1410 Broadway, Suite
1602, New York, New York 10018 and vacated its former office, factory, and
warehouse space at 448 West 16th Street. The lease for the 1410 Broadway
location is leased by USAC. Pursuant to an oral agreement with USAC, neither the
Company nor UTTC pays any remuneration for its use of the premises.
Play Co. maintains approximately 3,500 square feet of executive office
space and 48,000 square feet of warehouse space at 550 Rancheros Drive, San
Marcos, California. The combined 51,700 square foot office and warehouse space
are leased at an approximate annual cost of $281,000, the lease expiring on
April 30, 2000. The office and warehouse are leased from a company owned in part
by Richard Brady, the President and a Director of Play Co. Play Co. believes
that the lease is on terms no more or less favorable than terms it might
otherwise have negotiated with an unaffiliated party. In addition, Play Co.
currently leases 18 stores in southern California and one store in each of
Arizona, Nevada, and Texas.
During the last calendar quarter of 1997, Play Co. opened a temporary
short-term seasonal store (in Crystal Court Mall in Costa Mesa, California) and
three new stores in high traffic shopping malls: one in South Bay Galleria in
Redondo Beach, California; one in Ontario Mills in Ontario, California; and one
in Arizona Mills in Tempe, Arizona (Play Co.'s first store outside of southern
California). In addition, in 1998, Play Co. has opened one store in Las Vegas,
Nevada and one store in Dallas, Texas and has executed four additional leases to
open additional locations within the remainder of the 1998 calendar year.
Play Co. has recently completed the enlargement of one of its 21 stores,
the Toys store located in Los Angeles, California. The lease for this store
expired in January 1998 and was extended, at a new location within the same
mall, through and until March 31, 2001. Three of Play Co.'s other Original
stores are operating under leases that either also have expired or will expire
in 1998, the fate of such stores to depend upon Play Co.'s intentions and
concomitant lease negotiations with the landlords of same.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware of
any threatened litigation that would have a material adverse effect on its
business. No director, officer, or affiliate of the Company, or any associate of
any of them, is a party to or has a material interest in any proceeding adverse
to the Company.
In June 1997, in the Superior Court of the State of California, Los Angeles
County, Shook Development Corp. commenced suit against the Company for breach of
contract pertaining to premises leased by the Company from South San Dimas, a
California Limited Partnership. In addition, in the Superior Court of the State
of California, Orange County, Prudential Insurance Company of America commenced
suit against the Company for breach of contract pertaining to premises leased by
the Company. In May 1997, in the Superior Court of the State of California, Los
Angeles County, PNS Stores, Inc. commenced suit against the Company and its
former guarantor for breach of contract pertaining to premises leased by the
Company. These actions settled for an aggregate of $469,600 during fiscal year
1998.
In October 1997, in the Superior Court of the State of California, County
of San Bernardino, Foothill Marketplace commenced suit against the Company and
its former guarantor for breach of contract pertaining to premises leased by the
Company in Rialto, California. The lease for the premises has a term from
February 1987 through November 2003. The Company vacated the premises in August
1997. Under California State law and the provisions of the lease, plaintiff has
a duty to mitigate its damages. Plaintiff seeks damages, of a continuing nature,
for unpaid rent, proximate damages, costs, and attorneys= fees. This action is
in the discovery phase.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Warrants have been quoted on the Nasdaq OTC
Bulletin Board since April 8, 1997. From November 10, 1995 (date of the
Company's initial public offering) until March 21, 1997 the Company=s Common
Stock and Warrants were quoted on the Nasdaq SmallCap Stock Market. The
following table sets forth representative high and low closing prices as
reported by a market maker, during the periods stated below. Quotations reflect
prices between dealers, do not include resale mark-ups, mark-downs, or other
fees or commissions.
<TABLE>
<CAPTION>
Common Stock Public Warrants
Calendar Period Low High Low High
- --------------- --- ---- --- ----
<S> <C> <C> <C> <C>
04/01/96 - 06/30/96 8 3/4 9 5/8 2 3/8 3 3/8
07/01/96 - 09/30/96 5 9 1 1/4 4 1/8
10/01/96 - 12/31/96 1 15/16 4 1/2 11/32 1 3/8
01/01/97 - 03/31/97 5/8 3 1/8 1/16 17/32
04/01/97 - 06/30/97 (1) 1/4 7/8
07/01/97 - 09/30/97 1/4 1
10/01/97 - 12/31/97 1/8 1/2
01/01/98 - 03/31/98 1/8 7/16
04/01/98 - 06/30/98 5/64 9/16
06/30/98 B 08/31/98 1/4 13/32
- ----------------
</TABLE>
(1) There was no market for the Warrants from April 8, 1997 until their
expiration on November 8, 1997. No Warrants were exercised prior to expiration.
As of August 31, 1998 there were 41 holders of record of the Company's
Common Stock, although the Company believes that there are approximately 440
beneficial owners of shares of Common Stock. As of August 31, 1998, the number
of shares of Common Stock outstanding of the Company was 3,005,000.
6
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PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements contained in this report which are not historical facts may be
considered forward looking information with respect to plans, projections, or
future performance of the Company as defined under the Private Securities
Litigation Reform Act of 1995. These forward looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected.
The following table summarizes certain selected financial data and is
qualified in its entirety by the more detailed financial statements contained
elsewhere in this document:
March 31, September 30,
1998 1997
Balance Sheet Data:
Working capital ........................... $ 6,500,401 $ 1,784,565
Total assets .............................. 15,750,583 7,905,149
Total current liabilities ................. 3,997,337 482,809
Long-term obligations ..................... 7,055,549 --
Stockholders= equity ...................... 1,983,988 7,422,340
Operating Data:
Net sales ................................. $ 15,869,731 $ 2,054,792
Cost of sales ............................. 10,897,966 1,647,563
Total operating expenses .................. 6,251,399 621,724
Net income (loss) ......................... (5,438,352) (32,334)
Income (loss) per common share ............ $ (1.81) $ (.01)
Weighted average shares outstanding ....... 3,005,000 3,005,000
Results of Operations
The Company=s Board of Directors voted to change the end of the Company=s
fiscal year from September 30th to March 31st. The accompanying consolidated
financial statements as of March 31, 1998 reflect the results of operations for
the six months ended March 31, 1998. The financial statements for the year ended
September 30, 1997 have not been restated to reflect the acquisition of UTTC,
which occurred in January 1998.
The consolidated financial statements contained herein for the six months
ended March 31, 1998 in this document reflect the operations of the Company=s
wholly-owned subsidiary, USAC, and its 78.5% owned subsidiary UTTC, as well as
the UTTC 59.1% owned subsidiary, Play Co.
For the six ended March 31, 1998
Consolidated net sales for the six months ended March 31, 1998 were
$15,869,731. This represented the consolidated net sales of the Company which
was comprised of the following components:
U.S. Apparel $ 566,478
Play Co. 15,303,253
----------
$15,869,731
At the end of March 1998, Play Co. had 19 retail locations, compared to 21
retail locations at the end of March 1997. During the fiscal year ended March
31, 1998, Play Co. opened four new stores and closed six stores.
Consolidated cost of sales were $10,897,966 for the six months ended March
31, 1998. The component breakdown of this item was as follows:
U.S. Apparel $ 501,644
Play Co. 10,396,322
Consolidated operating expenses (total operating expenses less litigation
related expenses and depreciation and amortization) were $5,272,210 for the six
months ended March 31, 1998.
Play Co. incurred $583,541 of litigation related expenses in period. The
expenses were associated with the closure of five store locations and related
subsequent litigation. This expense includes settlement amounts relating to four
of the five closed locations and the related legal fees and costs. Play Co.
remains in litigation regarding the fifth closed store. Depreciation and
amortization expense in the six months ended March 31, 1998 was $395,64.80.
Total interest expense amounted to $384,901 for the six months ended March 31,
1998.
For the year ended March 31, 1998, subsequent to the adjustment for the
minority interest in the net losses of subsidiaries, the Company reported a
consolidated net loss of $5,438,352, or $1.81 per common share.
Liquidity and Capital Resources
At March 31, 1998, consolidated working capital was $6,500,402 as compared
to a working capital of $1,784,565 at September 30, 1997. For the six months
ended March 31, 1998, consolidated operating activities used funds of
$7,012,362. Cash flows from investing activities for the six months ended March
31, 1998 amounted to $206,729.
Consolidated financing activities generated funds of $8,571,433 during the
six months ended March 31, 1998. The primary elements in the generation of
financing funds were net borrowings under a new financing agreement by Play Co.
and net proceeds received by Play Co. from notes payable.
As a result, consolidated net cash increased from $13,189 at September 30,
1997 to $1,621,869 at March 31, 1998.
Trends Affecting Liquidity, Capital Resources and Operations
As a result of its planned merchandise mix change to emphasize specialty,
educational, electronic, interactive, and collectible toys, Play Co. enjoyed
significant sales and gross profits in the year ended March 31, 1998. While Play
Co. believes that its new product mix will remain popular with the consumer
market for the remainder of 1998, there can be no assurance that this growth
will continue. As a result of the continual changing nature of children's
consumer preferences and tastes, the success of the Company is dependent on its
ability to change and adapt to such changing tastes and preferences. Children's
entertainment products are often characterized by fads of limited life cycles.
There can be no assurance that the Company will be able accurately to forecast
consumer preferences or that specialty toys will continue to have higher profit
margins.
Play Co.=s sales efforts are focused primarily on a defined geographic
segment consisting of the Southern California area and the Southwestern United
States. Play Co.=s future financial performance will depend upon continued
demand for toys and hobby items and on the general economic conditions within
that geographic market area, its ability to choose locations for new stores, its
ability to purchase product at favorable prices and on favorable terms, and the
effects of increased competition and changes in customer preferences.
The toy and hobby retail industry faces a number of potentially adverse
business conditions including price and gross margin pressures and market
consolidation. Play Co. 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. There can be no assurance that Play Co.=s business strategy
will enable it to compete effectively in the toy industry.
Seasonality
Play Co.=s operations are highly seasonal with approximately 30-40% of its
sales falling within the third quarter which encompasses the Christmas selling
season. Play Co. intends to open new stores throughout the year, but generally
before the Christmas selling season, which will make third quarter sales an even
greater percentage of the total year=s sales.
Impact of Inflation
The impact of inflation on consolidated results of operations has not been
significant. Play Co. attempts to pass on increased costs by increasing product
prices over time.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - Annexed hereto
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On May 14, 1997, the Registrant and Lazar, Levine & Company LLP mutually
agreed that Lazar, Levine & Company LLP would no longer be the Registrant's
auditors. The resignation of Lazar, Levine & Company LLP was not due to any
discrepancies or disagreements between the Company and Lazar, Levine & Company
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. There were no disagreements during
the two fiscal years ended September 30, 1996 and through the date of
resignation, May 14, 1997. The Registrant's board of directors approved the
acceptance of the accountant's resignation.
The former accountants= reports on the Registrant=s financial statements
for the two years ended September 30, 1996 and 1995 contained an explanatory
paragraph addressing the Company's ability to continue as a going concern.
7
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
The directors of the Company are elected annually by the shareholders and
the officers are appointed annually by the Board of Directors. Vacancies on the
Board of Directors may be filled by the remaining directors. Each director and
officer will hold office until the next annual meeting of shareholders, or until
his successor is elected and qualified. The executive officers and directors of
the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Ilan Arbel 43 President and Director
Rivka Arbel 44 Vice President and Director
Allean Goode 63 Secretary and Director
Yair Arbel 48 Director
</TABLE>
The directors of the Company are elected annually by its stockholders and
the officers of the Company are appointed annually by its Board of Directors.
Vacancies on the Board of Directors may be filled by the remaining directors.
Each current director and officer will hold office until the next annual meeting
of stockholders, or until his successor is elected and qualified.
Ilan Arbel was the President, Secretary and a Director of the Company from
inception until June 12, 1995 upon the election of Sheikhar Boodram. Mr. Arbel
was re-elected as President of the Company in May 1996. In August 1995, Mr.
Arbel was re-elected as a Director of the Company. Mr. Arbel was the President,
Chief Executive Officer, and a Director of American Toys, Inc. from inception
until July 1996. From May 1993 to April 1997, Mr. Arbel was a Director of Play
Co. Toys & Entertainment Corp., of which from June 1994 until his resignation in
April 1997, he was the Chairman of the Board. Since 1991, Mr. Arbel has been
President, Chief Executive Officer, and a Director of UTTC, formally Mister Jay
Fashions International, Inc. Mr. Arbel is a graduate of the University Bar Ilan
in Israel, with B.A. degrees in Economics, Business, and Finance.
Rivka Arbel has been a Director of the Company since June 12, 1995 and was
elected as Vice President of the Company in May 1996. In October 1996, Ms. Arbel
resigned as an officer of the Company. Ms. Arbel was re-elected as Vice
President in May 1997. From 1992 to present, Ms. Arbel has been a director of
UTTC. From 1986 to present, Ms. Arbel has been President and a Director of
Amigal, Ltd., a producer of men's and women's wear in Israel. Ms.
8
<PAGE>
Arbel is the wife of Yair Arbel.
Yair Arbel has been a director of the Company since June 12, 1995. Mr.
Arbel is currently employed by Israeli Aircraft Industries, where he has been
employed since 1980. Yair Arbel is the husband of Rivka Arbel and the brother of
Ilan Arbel, the President and Director of the Company.
Allean Goode was appointed Secretary and Treasurer of the Company in March
1998. Ms. Goode has been Secretary, Treasurer, and a Director of UTTC since
September 1992. Ms. Goode was Assistant Secretary of Play Co. from May 1993
until approximately May 1995. From 1991 until September 1992, Ms. Goode acted as
an independent contractor performing bookkeeping services for the Company. Ms.
Goode was Secretary, Treasurer, and a Director of American Toys from February
1993 until July 1996. From 1981 until 1991, Ms. Goode was employed as Office
Manager and Bookkeeper of Via West Sportswear, a New York based manufacturer of
sportswear.
Significant Employees
Albert Benaderet, through Westside Apparel, a company in which he is a
partner, has been a consultant to the Company and it's subsidiaries since 1992.
From 1992 to 1994, Mr. Benaderet was a consultant to Match II regarding
manufacturing and sales. From 1994 to 1996, Mr. Benaderet was a consultant to
American Eagle regarding overseas production and manufacturing. Since January
1997, Mr. Benaderet has been a consultant to USAC regarding sales,
manufacturing, and close outs. Westside Apparel, Inc. receives a weekly fee of
$2,000 and has the right to 5% of all earnings before interest and taxes.
The Company has agreed to indemnify its officers and directors with respect
to certain liabilities including liabilities which may arise under the
Securities Act of 1933. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers, and controlling
persons of the Company pursuant to any charter, provision, by-law, contract,
arrangement, statute, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer, or controlling person of the Company in the successful
defense of any such action, suit, or proceeding) is asserted by such director,
officer, or controlling person of the Company in connection with the Securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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
9
<PAGE>
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. Based solely upon
requests for information of the Company's officers, directors and greater than
10% shareholders, during fiscal 1997, the Company has been informed that all
officers, directors, or greater than 10% shareholders have stated that they have
filed such reports as is required pursuant to Section 16(a) during the 1997
fiscal year. The Company has no basis to believe that any required filing by any
of the above indicated individuals has not been made.
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 to,
earned by, paid by the Company during the years ended September 30, 1998, 1997,
and 1996 to each of the named executive officers of the Company.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
(a) (b) (c) (d) (e) (g)
Securities
Name and Principal Other Annua Underlying
Position Year Salary($) Bonus($)(1) Compensation($)Options/ SARs(#)
<S> <C> <C> <C> <C> <C>
Ilan Arbel(2) 1998 - - -(1) -
President 1997 - - -(1) -
1996 - - -(1) 2,900,000 (2)
</TABLE>
Mr. Arbel does not receive any cash compensation as an officer of the
Company. Mr. Arbel entered into an employment agreement with the Company in May
1996. See "Employment Agreements." (2) See "Employment Agreements."
Employment Agreements
On April 4, 1996, the board of directors authorized the Company to enter
into a compensation agreement with Ilan Arbel. Pursuant thereto, the Company
granted to Ilan Arbel an option to purchase 1,900,000 warrants, identical to the
Warrants sold by the Company in its initial public offering. The option was
exercisable at $.04 per Warrant. The Warrants and shares underlying the Warrants
were registered for resale pursuant to a Form S-8 registration statement. Mr.
Arbel exercised this option in full and sold the Warrants in April 1996. In
addition, the board authorized the Company to issue an additional option to Mr.
Arbel to purchase 200,000 shares of Common Stock at $3.70 per share. On April
19, 1996, the board of directors of the Company and Mr. Arbel amended the
compensation agreement and terminated the option to purchase 200,000 shares of
Common Stock and in lieu thereof, issued an option to purchase an additional
1,000,000 Warrants. The option was exercisable at $.04 per Warrant. The Warrants
were registered for resale pursuant to an amendment to the Form S-8 registration
statement. Mr. Arbel exercised this option in full and sold the Warrants
commencing in May 1996.
As of May 15, 1996, the Company entered into an employment agreement with
Ilan Arbel, for a period of five years. Pursuant thereto, Mr. Arbel became the
President and Chief Executive Officer of the Company. At such time the Company
and Mr. Arbel agreed to increase the option price to purchase the Warrants to
$1.90 per Warrant, whereby Mr. Arbel owed the Company $7,250,000, which was
payable either in cash, or other securities. The term securities was defined as
any debt or equity security or convertible security, the underlying security of
which, is traded on either a national securities exchange or on the Nasdaq Stock
Market. The price for which the securities could be exchanged to reduce the debt
was 50% of the average bid price of the securities or the underlying securities
of a convertible security, for a period of ninety days ending five days prior to
the exchange. The employment agreement provides that no other compensation or
remuneration be paid to Mr. Arbel during its term. Mr. Arbel, through affiliates
has transferred to the Company an aggregate of 803,070 shares of Play Co. Series
E Preferred Stock, each of which is convertible at any time into six shares of
Play Co.=s common stock as payment of the debt.
In May 1996, the Company, in anticipation of the execution of an employment
agreement with Rivka Arbel, granted Mrs. Arbel an option to purchase from the
Company up to 600,000 Warrants, which Warrants were to be identical to the
Warrants issued in the Company's initial public offering. Initially Mrs. Arbel
was to pay $.04 per Warrant and resell the Warrants pursuant to a Form S-8
registration statement, however, the Company and Mrs. Arbel agreed that such
price was too low and decided to increase the price to $2.50 per Warrant, which
was to be paid either in cash, or other securities, as such term is described
above. In June 1996, Mrs. Arbel entered into an employment agreement with the
Company, for a period of five years, pursuant thereto Mrs. Arbel became a
Vice-President of the Company. The employment agreement provided that no other
compensation or remuneration be paid to Mrs. Arbel during its term. In August
1996, this agreement was terminated and the 600,000 Warrants returned to the
Company=s treasury unexercised.
1995 Senior Management Incentive Plan
In June 1995, the Board of Directors adopted the Senior Management
Incentive Plan (the "Management Plan"), which was adopted by stockholder
consent. The Management Plan provides for the issuance of up to 150,000 shares
of the Company's Common Stock in connection with the issuance of stock options
and other stock purchase rights to executive officers and other key employees.
The Management Plan was adopted to provide the Board of Directors with
sufficient flexibility regarding the forms of incentive compensation which the
Company will have at its disposal in rewarding executive officers and directors
who are also employees of the Company, or a subsidiary or the Company, who
render significant services to the Company or one of its subsidiaries. To enable
the Company to attract and retain qualified personnel without unnecessarily
depleting the Company's cash reserves, the Board of Directors intends to offer
key personnel equity ownership in the Company through the grant of stock options
and other rights pursuant to the Management Plan. The Management Plan is
designed to augment the Company's existing compensation programs and is intended
to enable the Company to offer executive officers and directors who are also
employees of the Company a personal interest in the Company's growth and success
through awards of either shares of Common Stock or rights to acquire shares of
Common Stock.
The Management Plan is intended to help the Company attract and retain key
executive management personnel whose performance is expected to have a
substantial impact on the Company's long-term profit and growth potential by
encouraging and assisting those persons to acquire equity in the Company. It is
contemplated that only those executive management employees (generally the
Chairman of the Board, Vice-Chairman, Chief Executive Officer, Chief Operating
Officer, President, and Vice Presidents of the Company) who perform services of
special importance to the Company will be eligible to participate under the
Management Plan. The Company does not presently have any intention to hire any
additional management employees and has not engaged in any solicitations or
negotiations with respect to the hiring of any management employees. As of the
date of this Prospectus, the Company's sole officers are Ilan Arbel, Rivka
Arbel, and Allean Goode, and its directors also includes Yair Arbel. A total of
150,000 shares of Common Stock will be reserved for issuance under the
Management Plan. It is anticipated that awards made under the Management Plan
will be subject to three-year vesting periods, although the vesting periods are
subject to the discretion of the Board of Directors. In December 1995, the
Company granted an option to purchase 75,000 shares at $8.75 per share to Howard
Wertheim, D.M.D., who was the President and sole director of MMP at such time.
This option has been terminated by the Company.
10
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information at August 31, 1998 based
upon information obtained by the persons named below, with respect to the
beneficial ownership of common shares by (i) each person known by the Company to
be the owner of 5% or more of the outstanding common shares; (ii) by each
director; (iii) and by all officers and directors as a group. Percent of Number
of Common Stock Name Shares Owned (1) American Telecom, PLC (2)(3)(4) 1,868,000
62.2% c/o Multimedia Concepts International, Inc. 448 West 16th Street New York,
New York
<TABLE>
<CAPTION>
<S> <C> <C>
U.S. Stores Corp. (2)(3)(4) 1,868,000 62.2%
c/o Multimedia Concepts International, Inc.
448 West 16th Street
New York, New York
Ilan Arbel (3)(4) -- --
c/o Multimedia Concepts International, Inc.
448 West 16th Street
New York, New York
Yair Arbel (3)(4) -- --
c/o Multimedia Concepts International, Inc.
448 West 16th Street
New York, New York
Rivka Arbel (3)(4) -- --
c/o Multimedia Concepts International, Inc.
448 West 16th Street
New York, New York
Officers and Directors -- --
(4 as a Group) (3)(4)
</TABLE>
(1) Does not give effect to 150,000 shares of Common Stock reserved for
issuance under the Company's 1995 Senior Management Incentive Plan. U.S. Stores
Corp. ("U.S. Stores") is a wholly owned subsidiary of American Telecom, PLC, a
publicly traded company in Great Britain.
(3) Dated as of January 2, 1998, U.S. Stores acquired control of a majority
of the outstanding shares of the Company, of which (i) 403,000 shares were
acquired through purchases in the public market (ii) 1,339,000 shares were
acquired from European Ventures Corp., a company in which Ilan Arbel is an
officer and director, in a private sale and (iii) 100,000 shares were acquired
from another shareholder in a private transaction.
(4) Yair Arbel and Ilan Arbel are brothers and Rivka Arbel is the wife of
Yair Arbel. Though it can be expected any shares of Common Stock of record and
beneficially owned by members of the Arbel family would be voted as a group on
matters presented to the Company's stockholders; however there is no voting
agreement or arrangements which require such unified voting.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 4, 1996, the board of directors authorized the Company to enter
into a compensation agreement with Ilan Arbel. Pursuant thereto, the Company
granted to Ilan Arbel an option to purchase 1,900,000 warrants, identical to the
Warrants sold by the Company in its initial public offering. The Warrants were
registered for resale pursuant to an amendment to the Form S-8 registration
statement. Mr. Arbel exercised this option in full and sold the Warrants
commencing in May 1996. See "Executive Compensation - Employment Agreements"
From October 1995 to September 1997, the Company loaned an aggregate of
$1,276,235 to UTTC. $1,000,000 of which was converted into equity in the
Company. See "Business-United Textiles & Toys." On December 1, 1997, the Company
received 3,571,429 shares of UTTC's common stock from UTTC as payment for
$1,000,000 owed to the Company by UTTC.
In June 1996, the Company loaned $331,136 to Ilan Arbel, the Company's
President, which was payable upon demand not accruing any interest. This loan
has been repaid.
As of June 30, 1996, the Company had loaned approximately $420,000 to
Hollywood Productions, Inc. The loan accrued no interest and was payable upon
demand. The loan has been repaid.
On October 21, 1996, the board of directors adopted resolutions authorizing
the Company, subject to stockholder approval, to terminate its ownership and
relationships with American Eagle and MMP as non-profitable business
investments. These resolutions were adopted by the Company=s shareholders in
December 1996.
On January 2, 1998, the Company was issued 3,571,429 shares of common stock
of UTTC, a company of which Ilan Arbel is President, Chief Executive Officer,
and a Director, at a price of $.28 per share as payment for $1,000,000 loaned by
the Company to UTTC. As a result of the transaction, the Company owns 78.5% of
the outstanding shares of common stock of UTTC, effectively making UTTC a
subsidiary of the Company. Because UTTC owns 61% of the outstanding shares of
common stock of Play Co., thus the Company and its management obtained
beneficial voting control of Play Co.
On January 20, 1998, U.S. Stores, a company which was incorporated on
November 10, 1997 acquired 1,465,000 shares of the Company=s Common Stock of
which 1,339,000 shares were acquired from European Ventures Corp., a company in
which Ilan Arbel is an officer and director, in a private sale. After this
transaction, U.S. Stores held an aggregate of 1,868,000 shares of the Company=s
Common Stock, or 62.2% of the outstanding shares, effectively making the Company
a subsidiary of U.S. Stores.
In April 1998, American Telecom, exchanged all its outstanding common
shares and all of the outstanding shares of its wholly owned subsidiary U.S.
Stores with American Telecom, PLC, a publicly traded company in Great Britain.
After this transaction, both American Telecom and U.S. Stores became wholly
owned subsidiaries of American Telecom, PLC.
12
<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>
Report of Independent Certified Public Accountant F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1998 and September 30, 1997 F-3
Consolidated Statements of Operations for the six months ended March 31, 1998
and the year ended September 30, 1997 F-5
Consolidated Statement of Changes in Stockholders= Equity for the two years
in the period ended March 31, 1998 F-6
Consolidated Statements of Cash Flows for the six months ended March 31, 1998
and the year ended September 30, 1997 F-7
Notes to Financial Statements F-9
</TABLE>
(b) On March 31, 1998, the Company filed a Form 8-K detailing the March 16,
1998 resignation of Sheikhar Boodram as a Director of the Company. On May 15,
1998, the Company filed a Form 8-K changing the Company's fiscal year end to
March 31, 1998.
(c) The following exhibits designated by an asterisk (*) are to be filed
with the Commission via Form SE. The exhibits not designated by an asterisk have
previously been filed with the Commission in connection with the Company's
Registration Statement on Form SB-2 and pursuant to 17 C.F.R. 230.411 and are
incorporated by reference herein.
<TABLE>
<CAPTION>
<S> <C>
3.1 - Certificate of Incorporation of the Company
3.2 - Amendment to Certificate of Incorporation of the Company, filed in May 1995
3.3 - Second Amendment to Certificate of Incorporation of the Company, filed in June 1995
3.5 - By-Laws of the Company
3.9 - Certificate of Incorporation of U.S. Apparel Corp.
4.1 - Specimen Common Stock Certificate.
10.1 - The Company Senior Management Incentive Plan.
10.2 - Sublease at 448 West 16th Street, New York, New York
10.4 - Dytex Agreement
10.5* - Lease for 1410 Broadway, Suite 1602, New York, New York
</TABLE>
13
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
March 31, 1998 and September 30, 1997
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountant F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1998 and September 30, 1997 F-3
Consolidated Statements of Operations for the six months ended March 31, 1998
and the year ended September 30, 1997 F-5
Consolidated Statement of Changes in Stockholders= Equity for the two years
in the period ended March 31, 1998 F-6
Consolidated Statements of Cash Flows for the six months ended March 31, 1998
and the year ended September 30, 1997 F-7
Notes to Financial Statements F-9
</TABLE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Board of Directors
Multimedia Concepts International, Inc.
We have audited the accompanying consolidated balance sheets of Multimedia
Concepts International, Inc. as of March 31, 1998 and September 30, 1997, and
the related statements of operations, stockholders= equity, and cash flows for
the six months ended March 31, 1998 and the year ended September 30, 1997.
These financial statements are the responsibility of the Company=s
management. Our responsibility is to express an opinion on these financial
statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Multimedia Concepts
International, Inc. at March 31, 1998 and September 30, 1997, and the result of
its operations and its cash flows for the six months ended March 31, 1998 and
the year ended September 30,1997 in conformity with generally accepted
accounting principles.
JEROME ROSENBERG, CPA,P.C.
Syosset, New York
July 6, 1998
F-1
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 1998 and September 30, 1997
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
ASSETS (Note 10)
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents (Note 3c) ...... $ 1,635,058 $ 13,189
Restricted certificate of deposit (Note 7) 250,000 --
Accounts receivable ...................... 404,288 723,112
Advances to supplier ..................... -- 60,000
Inventories (Note 3d) .................... 7,929,061 66,662
Prepaid expenses and other current assets 189,516 --
Loans and advances-affiliate ............. 89,815 89,815
Loans and advances-officer ............... -- 1,314,596
Total current assets ............. 10,497,738 2,267,374
PROPERTY AND EQUIPMENT-NET(Notes 2f and 9) 2,782,386 --
OTHER ASSETS:
Restricted certificate of deposit (Note (7) 2,000,000 --
Due from affiliate ........................ -- 1,276,235
Investment in convertible preferred stock (Note 5) - 4,221,490
Advances to equity affiliate (Note 1) ..... 140,000 140,000
Deposits and other assets (Note 10) ....... 330,459 50
Total assets ..................... $15,750,583 $ 7,905,149
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 1998 and September 30, 1997
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
--------- ------------
LIABILITIES AND STOCKHOLDERS= EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable .............................................................. $ 3,593,811 429,283
Accrued expenses and other current liabilities ................................ 53,526 53,526
Current portion of notes payable (Note 12) .................................... 350,000 --
------------ ------------
Total current liabilities ............................................. 3,997,337 482,809
------------ ------------
LONG-TERM LIABILITIES:
Borrowings under financing agreement (Note10) .................................. 5,445,198 --
Note payable, net of current portion (Note 12) ................................. 1,500,000 --
Deferred rent liability ........................................................ 110,351 --
------------ ------------
Total long-term liabilities ........................................... 7,055,549 --
------------ ------------
Total liabilities ..................................................... 11,052,886 482,809
------------ ------------
MINORITY INTERESTS IN SUBSIDIARIES ............................................. 2,713,709 --
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 7,10,11,13 and 15)
STOCKHOLDERS EQUITY:
Common stock, $.001 par value; 10,000,000 shares authorized; 3,005,000 shares
issued and outstanding at March 31, 1998 and September 30, 1997
respectively ............................................................. 3,005 3,005
Additional paid-in capital ................................................... 13,102,005 13,102,005
Retained earnings (Deficit) .................................................. (11,121,022) (5,682,670)
------------ ------------
Total stockholders' equity ......................................... 1,983,988 7,422,340
Total liabilities and stockholders' equity $ 15,750,583 $ 7,905,149
------------ ------------
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
March 31, September 30,
1998 1997
--------- -------
<S> <C> <C>
Net sales ...................................................... $ 15,869,731 $ 2,054,792
------------ ------------
Cost of sales .................................................. 10,897,966 1,647,563
------------ ------------
Gross profit ................................................... 4,971,765 407,229
Operating expenses:
Operating expenses ............................................. 5,272,210 603,275
Litigation related expenses ( Note 13) ................ 583,541 --
Depreciation and amortization ......................... 395,648 18,449
------------ ------------
Total operating expenses ..................... 6,251,399 621,724
------------ ------------
Operating (loss) ...................................... (1,279,634) (214,495)
------------ ------------
Other income:
Interest and other income .................... 12,500 182,161
------------ ------------
(1,267,134) (32,334)
Other expenses:
Loss on investment (Note 5) .................. 4,221,490 --
Interest expense: ( Note 10 )
Interest and finance charges .......................... 96,256 --
Amortization of debt issuance costs ................... 288,645 --
------------ ------------
Total interest expense ................................ 384,901 --
------------ ------------
(Loss) before Minority interest ................................ $ (5,873,525) (32,334)
Minority interest in net (loss)
of consolidated subsidiary (Note 6) ........................ 435,173 --
------------ ------------
Net (loss) ..................................................... $ (5,438,352) $ (32,334)
============ ============
(Loss) per basic and diluted common share and share equivalents:
Net loss before minority interest ..................... $ ( 1.96) $ ( .01)
Minority interest in net loss ......................... .15 --
------------ ------------
Net (loss) ..................................................... $ (1.81) $ ( .01)
============ ============
Weighted average number
of common shares outstanding ................................. 3,005,000 978,805
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. ANDSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDERS= (DEFICIT) EQUITY
For the Period October 1, 1996 to March 31, 1998
<TABLE>
<CAPTION>
Additional Common Stock Paid -in Accumulated
Shares Amount Capital (Deficit)
<S> <C> <C> <C> <C> <C>
Balance, Oct 1, 1996 ............ 3,005,000 $ 3,005 $ 13,102,005 $ (5,650,336)
Net loss for the year ended
September 30,1997 .............. -- -- -- (32,334)
------------ ------------ ------------ ------------
Balance, September 30, 1997 ..... 3,005,000 $ 3,005 $ 13,102,005 $ (5,682,670)
Net loss for the six months ended
March 31, 1998 ................ -- -- -- (5,438,352)
------------ ------------ ------------ ------------
Balance, March 31, 1998 ......... 3,005,000 $ 3,005 $ 13,102,005 $ (11,121,022)
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
March 31, September 30,
1998 1997
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ....................................................... $(5,438,352) $(32,334)
----------- -----------
Adjustments to reconcile net loss to cash (used)
provided for operating activities:
Depreciation and amortization ................................ 395,648 18,449
Loss on abandonment of assets ................................ 45,255 --
Minority interest in net loss of subsidiary .................. 2,713,709 --
Changes in assets and liabilities:
Decrease in Accounts receivable ............................... 318,824 468,398
Decrease in advances to supplier .............................. 60,000 (60,000)
(Increase) decrease in Merchandise inventories ................. (7,862,399) (28,572)
(Increase) decrease in prepaid expenses and other current assets (189,516) --
(Increase) decrease in deposits and other assets ............... (330,409) (50)
Increase in accounts payable .................................. 3,164,527 147,911
(Decrease) in accrued expenses and liabilities ................. -- (7,185)
Increase in deferred rent liability ............................ 110,351 --
----------- -----------
Total adjustments ..................................... (1,574,010) 538,951
----------- -----------
Net cash provided by operating activities ............. (7,012,362) 506,617
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of restricted certificates of deposit ................. (2,250,000) --
Increase in property and equipment ............................. (3,223,288) --
Loss on investment ............................................. 4,221,490 --
Loans made and repaid by officer .............................. 1,314,596 (369,455)
----------- -----------
Net cash (used for) investing activities .............. 62,798 (369,455)
----------- -----------
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
March 31, September 30,
1998 1997
----- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Net borrowings under financing agreement ........ 5,445,198 --
Loans and advances-affiliates ................... 1,276,235 (595,235)
Advances to equity investee ..................... -- (20,000)
Proceeds from notes payable ..................... 1,850,000 --
---------- ----------
Net cash provided by investing activities 8,571,433 (615,235)
---------- ----------
NET INCREASE (DECREASE) IN CASH .................. 1,621,869 (478,073)
Cash, beginning of period ........................ 13,189 491,262
---------- ----------
Cash, end of period .............................. $1,635,058 $ 13,189
========== ==========
Supplemental disclosure of cash flow information:
Interest paid .................................... $ 526,875 $ --
Taxes paid ....................................... $ 800 $ --
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1- DESCRIPTION OF COMPANY:
Multimedia Concepts International, Inc. (the "Company") is a Delaware
corporation which was organized in June 1994 under the name U.S. Food
Corporation. The Company changed its name to American Eagle Holdings Corporation
in April 1995 and then to its present name in June 1995. The Company was
initially formed as a holding company for the purpose of forming an integrated
clothing design, manufacturing, and distribution operation. In June 1994, the
Company acquired 55% of the outstanding shares of common stock of American Eagle
Industries Corp., which had acquired 1 00% of the outstanding shares of Match
II, Inc.
In January 1997, the Company terminated its financing and business
relationships with these subsidiaries. Both companies had ceased operating
activities in September 1996.
In January 1997, the Company also terminated all business relationships
with Multi Media Publishing Corp., an unconsolidated subsidiary in which the
Company had a 34% interest since June 1995. This company during this period had
no revenue or operating activities. The Company is seeking the return of certain
funds that it had advanced to Multi Media Publishing Corp.
In January 1997,the Company formed a new wholly-owned subsidiary, U.S.
Apparel Corp., which is engaged in the design and manufacture of a line of
T-shirts and other tops, predominately for men. U.S. Apparel Corp. began
operations in January 1997.
In January 2, 1998, the Company acquired 3,571,429 shares of the
outstanding common stock of United Textiles and Toys Corp. ("United Textiles"),
a company of which the Company's President is also President, Chief Executive
Officer, and a Director. The issuance of these shares at a price of $.28 per
share ($.01 above the closing price on December 31, 1997) represented payment
for $1,000,000 loaned to United Textiles by the Company. As a result of this
transaction, the Company owns 78.5% of the outstanding shares of common stock of
United Textiles, effectively making United Textiles, a subsidiary of the
Company.
United Textiles is a company that was engaged in the design, manufacturing
and marketing of a variety of lower priced women's dresses, gowns, and separates
for special occasions and formal events.
United Textiles owns 59.1% of the outstanding common shares of Play Co Toys
and Entertainment Corp. a company that sells toys and educational games
primarily on a retail basis.
In March 1998, United Textiles having sustained continuous losses,
discontinued operating activities.
F-7
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- BASIS OF PRESENTATION:
In December, 1997, the Company's Board of Directors voted to change the end
of the Company's fiscal year from September 30th to March 31st. Accordingly, the
accompanying consolidated financial statements as of March 31, 1998 reflect the
results of operations for the six months ended March 31, 1998. The financial
statements for the year ended September 30, 1997, have not been restated to
reflect the acquisition of United Textiles.
Note 3- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Principles of Consolidation:
The consolidated financial statements include the accounts of Multimedia
Concepts Intentional, Inc. and its subsidiaries, U.S. Apparel Corp. and United
Textiles & Toys Corp. and its subsidiary Play Co. Toys and Entertainment Corp.
All material intercompany balances and transactions have been eliminated in
consolidation.
b. 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.
c. Concentration of Credit Risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and accounts receivable.
The Company maintains at times, deposits in federally insured financial
institutions in excess of federally insured limits. Management attempts to
monitor the soundness of the financial institutions and believes the Company's
risk is negligible. Concentrations with regard to accounts receivable are
limited due to the Company's large customer base.
d. Merchandise Inventories:
Merchandise inventories are stated at the lower of cost (first-in,
first-out method- "FIFO") or market.
e. Fair value of Financial Instruments:
The carrying amount of the Company's financial instruments,
consisting of accounts receivable, accounts payable, and borrowings approximate
their fair value.
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
f. Fixed Assets and Depreciation:
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.
g. Statements of Cash Flows:
For purpose of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
h. Revenue Recognition:
The Company and its subsidiaries recognize revenue upon shipment of
finished goods to customers. All sales are based pursuant to firm contracts,
with no title to merchandise passing at shipping. Sales returns and discounts
are reflected in net sales and historically have not been significant.
i. Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred income
taxes are recognized based upon 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.
j. 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), by the weighted
average number of common shares outstanding. Diluted earnings (loss) per share
is similar in calculation except that the weighted average number of common
shares is increased to reflect the effects of potential additional shares that
would result from the exercise of stock options or other convertible
instruments.
F-8
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3- SUMMARY OF SIGNIFICANT ACCOUNTING POLCIES: (continued)
k. Store Openings and Closing Costs:
Costs incurred by Play Co. 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 balance of any abandoned leasehold improvements are
expensed.
l. Impairment of Long-Lived Assets:
SFAS No. 12 1, Accounting for the Impairment of long-lived Assets and
long-lived Assets to be Disposed Of, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company adopted SFAS No.
121 effective April 1, 1997. There was no impact of such adoption on the
Company's financial condition and results of operations.
m. 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 No. 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 Accounting Principles Board Opinion (APB) No. 125, 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.
n. Effect of New Accounting Pronouncements:
In June 1997, the FASB issued SFAS No. 13 1, Disclosure About Segments of
an Enterprise and Related Information. This statement requires public
enterprises to report financial and descriptive information about its reportable
operating segments and establishes standards for related disclosures about
product and services, geographic areas, and major customers. This pronouncement
is effective for fiscal years beginning after December 15, 1997 and the Company
expects to adopt the provisions of this statement in the fiscal year 1999.
Management does not expect this statement to significantly impact the Company's
financial statements.
In April 1998, the American Institute of Certified Public Accountant'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. Management does not expect this statement to
significantly impact the Company's financial statements. MULTIMEDIA CONCEPTS
INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4- INVESTMENT BY U.S. STORES CORP.:
On January 20, 1998, U.S. Stores Corp. ("U.S. Stores") acquired 1,465,000
shares of the Company's common stock. U.S. Stores was incorporated on November
10, 1997. The Company's President is also President and Director of U.S. Stores.
After this transaction, U.S. Stores held an Aggregate of 1,868,000 shares of the
Company's common stock or 63% of the outstanding shares, effectively making
Multimedia a subsidiary of U.S. Stores.
On February 28, 1998, American Telecom Corporation ("American Telecom")
acquired 100% of the outstanding common shares of U.S. Stores Corp. American
Telecom was incorporated on July 11, 1997. The Company's President is also
President and Director of U.S. Stores. After this transaction, American Telecom
effectively obtained beneficial vesting control of the Company and its
subsidiaries.
Note 5- INVESTMENT IN PREFERRED STOCK:
The Company had reflected its investment in convertible preferred stock in
accordance with Statement of Financial Standards No. 115- Accounting for Certain
Investments in Debt and equity Securities. This standard requires that certain
debt and equity securities be adjusted to fair value at the end of each
accounting period. Unrealized gains or losses for securities treated as
available for sale securities are to be charged or credited to a separate
component of shareholders' equity. As of March 31, 1998, the Company determined
that the decline in the value of its investment in preferred stock was other
than temporary, and accordingly, wrote down the cost basis of this security to
zero. The write down of $4,221,490 was recorded as a realized loss on available
for sale securities in the accompanying consolidated statement of operations for
the six months ended March 31, 1998.
In connection with an employment agreement entered into with an executive
officer in May 1996, the Company granted an option to acquire 2,900,000 common
stock purchase warrants at a price of $2.50 per warrant (market value), payable
either in cash or other securities. Since the warrants were issued at market
value, no compensation was reflected. As of May 1996, the officer had purchased
these warrants with payment being made throughout the transfer of 528,000 shares
of convertible preferred stock in Play Co Toys & Entertainment Corp. The Company
had valued this preferred stock at $6,917,717, the deemed fair value at the time
of the transfer, based upon such factors as dilution, lack of marketability,
etc. The Company had previously written down these securities to $4,221,490, its
deemed market value.
Note 6- MINORITY INTEREST IN SUBSIDIARIES:
The Company owns a majority interest (78.5%) in United Textiles, which in
turn owns a majority interest (59.1%) in Play Co. The minority interest
liability represents the minority shareholders' portion (21.5%) of United
Textiles equity at March 31, 1998.
F-9
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7- RESTRICTED CERTIFICATE OF DEPOSIT:
At March 31, 1998, Play Co. has two certificates of deposit which are
restricted as to their nature. The first, in the amount of $2,000,000 represents
collateral against a letter of credit securing the FINOVA Financing (Note 10)
and is classified as a non-current asset, as the funds in the certificate of
deposit will remain restricted until the letter of credit expires or is released
by FINOVA Capital Corporation. The second, in the amount of $250,000, is
collateral for a facility for letters of credit.
Note 8- WORKING CAPITAL GUARANTEE OF MAJORITY SHAREHOLDER:
For the years ended March 31, 1998 and 1997, the Play Co. reflected net
losses of $2,054,470 and $3,584,881 respectively, which amounts include minority
shareholders' pro-rata share. United Textiles has also reflected substantial
losses, which reflects the Board of Directors' decision to cease operating
activities.
The individual, beneficial, majority shareholder of the Company has
represented his intent and ability to provide additional working capital to
United Textiles and its subsidiary, should such be necessary.
Note 9- FIXED ASSETS:
<TABLE>
<CAPTION>
Fixed assets consisted of the following:
March 31, September 30,
1998 1997
<S> <C> <C>
Furniture, fixtures and equipment .................... $ 4,260,738 $ 29,844
Leasehold improvements ............................... 1,551,760 --
Signs ................................................ 317,363 --
Vehicles ............................................. 104,912 --
----------- -----------
6,234,773 29,844
Less: Accumulated depreciation and amortization (3,452,387) ( 29,844)
----------- -----------
$ 2,782,386 $ --
</TABLE>
The reported amounts for March 31, 1998 include the consolidated fixed
assets of United Textiles and Play Co.
F-10
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10- FINANCING AGREEMENTS:
On February 7, 1996, Play Co. borrowed, under an agreement with Congress
Financial Corporation (Western) (the "Congress Financing"), approximately
$2,243,000, the proceeds of which were used to repay the then outstanding
borrowings under a bank line of credit agreement. The Congress Financing
provided for maximum borrowings up to $7,000,000 based upon a percentage of the
cost value of eligible inventory, as defined. Outstanding borrowings bore
interest at 1.5% above the prime rate, as defined.
In connection with the Congress Financing, and the previous bank line of
credit agreement, European American Capital Corp. ("EACC"), an affiliate,
provided a $2,000,000 letter of credit for collateral. As compensation to EACC,
the Play Co. granted EACC options to acquire shares of common stock, the value
of such options estimated at $224,000 by Play Co.; and options to acquire
additional shares of common stock and shares of Play Co.'s Series E preferred
stock, the value of these options estimated at $234,000 by Play Co. The
aggregate $458,000 was initially included in other assets, as debt issuance
costs, and additional paid-in capital. The option values were amortized into
interest expense through the February 1, 1998 maturity of the Congress
Financing, resulting in aggregate interest charges of $196,849 and $214,743 for
the years ended March 31, 1998 and 1997 respectively. No options to acquire
shares of common stock were exercised before the termination of the exercise
period.
The exercise of options to acquire shares of Series E preferred stock by
EACC, before the options terminated in December 1997 upon consummation by Play.
Co.'s Series E Preferred Stock offering.
In March 1997, the Congress Financing was amended to provide or, among
other things, increased borrowing ratios and an additional $1,000,000 letter of
credit as collateral from EACC. Thereafter, the Congress Financing was
collateralized by an aggregate $3,000,000 in letters of credit through its
maturity on February 1, 1998.
On February 3, 1998, Play Co. borrowed, under an agreement with FINOVA
Capital Corporation (the "FINOVA financing") $4,866,324, the proceeds of which
were used primarily to repay the then outstanding borrowings under the Congress
Financing, and to pay fees related to the FINOVA Financing. The FINOVA Financing
provides for maximum borrowings up to $7,100,000 based on a percentage of the
cost value of eligible inventory, as defined. Outstanding borrowings bear
interest at 1. 5% above the prime rate, as defined (the prime rate at March 31,
1998 was 8.5%). The agreement matures on August 3, 2000 and can be renewed for
one additional year at the lender's option.
Total fees related to the FINOVA Financing aggregated $272,000 and are
being amortized over the 30-month term of the agreement. The unamortized portion
of these debt issuance costs, $330,409 is included in "deposits and other
assets" at March 31, 1998.
The FINOVA Financing includes a financial covenant requiring Play Co. to
maintain, at all times, net worth, as defined, of $750,000. At March 31, 1998,
Play Co. was in compliance with this financial covenant.
F-11
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10- FINANCING AGREEMENTS: (continued)
The FINOVA Financing is guaranteed by the Company and is secured by
substantially all of the assets of Play Co. and $3,000,000 in letters of credit.
Of the $3,000,000 in letters of credit, $2,000,000 is collateralized by amounts
held in a restricted certificate of deposit (Note 7). The remaining $ 1,000,000
letter of credit, has been provided by the Company.
Note 11- ASSET PURCHASE AGREEMENT:
On January 16, 1997, the Board of Directors of Play Co. approved the
purchase of the assets and assumption of certain existing liabilities of Toys
Intentional. Toys Intentional is a high-end retailer of toys which operated
three mall locations in Southern California. As part of the purchase agreement,
Play Co. obtained the rights to the Toys Intentional and Tutti Animali operating
name trademarks and also assumed the existing leases at the three locations. The
total purchase price was $1,024,184 which consisted mainly of inventory and
certain prepaid expenses and deposits. The purchase price was paid in the form
of a cash payment of $759,184 in January 1997 and the execution of two
promissory notes aggregating $265,000 (Note 12).
Note 12- NOTES PAYABLE:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
<S> <C>
Note payable to ABC Fund, Ltd., an affiliate,
bearing interest at 5% per annum, principal
due on August 15, 2000, accrued interest due
on May 10, 1998, and quarterly until debt paid
in full or converted $1,500,000
Note payable to Breaking Waves, Inc. , an
affiliate, bearing interest at 15% per annum,
payable in ten monthly installments of $25,000
plus accrued interest through maturity on
December 31, 1998. Note is subordinate
to the FINOVA Financing (Note 10) 250,000
Note payable to stockholder of Toys Intentional,
non-interest bearing, guaranteed by the Company,
payable in quarterly installments of $25,000
through maturity, on January 6, 1999.
Note is subordinate to FINOVA Financing
(Note 10) 100,000 200,000
</TABLE>
F-12
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
Note 12- NOTES PAYABLE: (continued)
<S> <C> <C> <C> <C>
Note payable to stockholder of Toys Intentional,
non-interest bearing, guaranteed by the Company,
payable in five installments ranging from $11,667
to $15,000 through maturity, on June 16, 1997 - 41,666
Total notes payable 1,850,000 241,666
Less: current portion (350,000) (141,666)
--------- ---------
Long-term portion $1,500,000 $100,000
========== ========
</TABLE>
Note 13- CLOSURE OF RETAIL STORES-LITIGATION:
During the year ended March 31, 1998, Play Co. 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 Play Co. 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,
Play Co., with the assistance of outside counsel, reached settlement agreements
with the various landlords. These settlements aggregated $469,600.
The statement of operations for the year ended March 31, 1998 includes
$583,541 of "litigation related expenses" which comprise the settlement costs on
the aforementioned leases, legal fees associated with the negotiations, and
monthly rentals for the locations since vacating the premises.
Play Co. currently has one remaining landlord/tenant matter which has yet
to be resolved. Play Co.'s management expects this matter to be resolved without
further material effects on the financial statements.
F-13
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14- INCOME TAXES:
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, September 30,
1998 1997
------ ------------
<S> <C> <C>
Inventories $(227,696) $(500)
AMT tax credits (23,260) (-)
Accrued expenses (24,534) (400)
-------- -----
Current portion of net deferred
income tax (assets) liabilities (275,490) (900)
--------- -----
Depreciation and amortization (26,974) (100)
Loss on disposal of assets 25,926 -
Net operating loss carryforwards (3,877,473) (1,011,785)
Deferred rent liability (43,891) -
Income taxes 508 -
------------ --------
Long-term portion of net deferred
income tax (assets) liabilities (3,921,904) (1,011,875)
----------- -----------
Total net deferred income tax
(assets) liabilities (4,197,394) (1,012,775)
----------- -----------
Valuation allowance 4,197,394 1,012,775
--------- ---------
Net deferred income taxes $ - $ -
=========== ============
</TABLE>
At March 31, 1998, a 100% valuation allowance has been provided on the net
deferred income tax assets since the Company cannot determine that it is "more
likely than not" to be realized.
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,
1998
<S> <C>
Federal statutory income tax (benefit) rate (34.0)%
State income taxes, net of federal benefit 0.1
Change in valuation allowance 33.9
----
Effective income tax rate - %
</TABLE>
At March 31, 1998, the Company has net operating loss (NOL) carry forwards
of approximately $1,000,000 for federal purposes and approximately $800,000 for
state purposes. The federal and state NOLs are available to offset future
taxable income and expire at various dates through September 30, 2015.
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14- INCOME TAXES: (continued)
A portion of the NOLs described above are subject to provisions of the
Internal Revenue Code, Section 382, which limits use of net operating loss
carryforwards when changes in ownership of more than 50% occur during a three
year testing period.
Note 15- COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company until March 31, 1998 occupied space at 448 West 16th Street,
New York, NY, where it maintained its administrative offices, showroom, factory
and warehouse. It vacated these premises and relocated to 141 0 Broadway, New
York, NY where it occupies office space with United Textiles and U.S. Apparel
Corp. U.S. Apparel Corp. is the prime tenant on the lease and has allowed the
Company to occupy space on a rent free basis.
The lease which was signed on April 21, 1998 provides for annual lease
payments of $88,400 under this noncancellable lease. The lease term is from May
15, 1998 through October 31, 2001. Actual lease payments do not begin until July
1998.
Play Co. leases its retail store properties under noncancelable operating
lease agreements which expire through October 2007 and require various minimum
annual rentals. Several of the leases provide for renewal options to extend the
leases for additional five or ten year periods.
Certain store leases also require the payment of property taxes, normal
maintenance, and insurance on the properties and additional rents based on
percentages of sales in excess of various specified retail sales levels.
During the years ended March 31, 1998 and 1997, Play Co. incurred rental
expense under all operating leases of $3,112,822 and $2,681,728, respectively.
Contingent rent expense was insignificant during the years ended March 31, 1998
and 1997.
During the year ended March 31, 1997, Play Co. subleased portions of its
warehouse building and a portion of one of its retail locations under
noncancelable operating leases. Sub lease income for the year ended March 31,
1997 was $93,822.
F-14
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15- COMMITMENTS AND CONTINGENCIES: (continued)
At March 31, 1998, the Aggregate future minimum lease payments due under
these noncancelable leases are as follows:
Year Ending
March 31, Amount
1999 $ 2,541,123
2000 2,583,314
2001 2,103,669
2002 1,788,302
2003 1,665,152
Thereafter 3,919,531
-----------
Total minimum lease payments $14,601,091
===========
Termination of Warehouse Lease
In April 1997, Play Co. negotiated a settlement with a landlord for an
excess warehouse facility, whereby Play Co. was released from the lease
obligation for a settlement of $60,000. This early lease termination will result
in annual savings of approximately $235,000 based on the original scheduled
lease term through April 2000.
Convertible Debt Agreement
As discussed in Note 12, Play Co. has a $1.5 million note payable to ABC
Fund, an affiliate. Prior to the August 15, 2000 maturity date, the note payable
is convertible into the common stock of a subsidiary of Play Co. ABC Fund may.
At its option, convert all or a portion of the note and accrued unpaid interest
thereon into up to 25% of the common stock of the subsidiary at an exercise
price equal to the net book value of the subsidiary's shares.
Dependence on Suppliers
For the year ended March 31, 1998, United Textiles ceased manufacturing
activities. United Textiles had disposed of all remaining inventory.
The Company's sales through its subsidiary, U.S. Apparel are generated from
short-term purchase orders from customers who place orders on an as needed
basis. The Company typically manufactures its products upon receipt of orders
from customers and delivers finished goods within four weeks of receipt of an
order. The Company generally manufactures 10% more goods than is needed in
anticipation of reorders from customers.
The Company has been able to purchase raw materials from a variety of
suppliers.
F-15
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15- COMMITMENTS AND CONTINGENCIES: (continued)
Approximately thirty -One percent (31%) of Play Co.'s inventory purchases
are made directly from five (5) manufacturers. Play Co. typically purchases
products from it suppliers on credit arrangements provided by the manufacturers.
The termination of a credit line or the loss of a major supplier or the
deterioration of Play Co.'s relationship with a major supplier could have a
material adverse effect on Play Co.'s business.
Seasonality
Play Co.'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 Play Co. to operate, it must obtain substantial
short-term borrowings from lenders and its suppliers during the first three
quarters of each fiscal year to purchase inventory and for operating
expenditures. Historically, Play Co. 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.
Note 15- RELATED PARTY TRANSACTIONS:
Office and warehouse lease
Play Co. leases an office and warehouse building from a partnership of
which one of the partners is a Company officer, stockholder and director. Rent
expense under this lease for the years ended March 31, 1998 and 1997 totaled
$247,289 and $227,546, respectively. The lease expires in April 2000.
Sub-Lease
During the year ended March 31, 1997, sub-lease rental income included
$54,422 from an entity in which stockholders and employees of Play Co. have an
ownership interest. Sub-lease income was insignificant for the year ended March
31, 1998.
Consulting Agreement
In January 1997, Play Co. entered into a consulting agreement with the
stockholder of Toys Intentional as part of the purchase agreement with Toys
Intentional. The term of the agreement commenced on January 16, 1997, expired on
April 16, 1997 and called for three monthly payments of $ 10,000 each. As a
result, the expenses related to the agreement totaled $23,334 and $6,666 for the
years ended March 31, 1998 and 1997, respectively.
F-16
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15- RELATED PARTY TRANSACTIONS: (continued)
Consulting Fees
Play Co. made payments aggregating $25,000 and $7,000 to the Chairman of
the Board of Directors for various consulting services during the years ended
March 31, 1998 and 1997, respectively.
Commitment of Financing
The individual, beneficial majority stockholder of the Company, in a letter
dated May 15, 1998, has represented his intent and ability to provide additional
working capital to Play Co., should such be necessary, through September 1999.
Note 16- YEAR 2000:
The Company does not believe that the impact of the year 2000 computer
issue will have a significant impact on its operations or financial position.
Furthermore, the Company does not believe that it will be required to
significantly modify its internal computer systems. However, if internal systems
do not correctly recognize date information when the year changes to 2000, there
could be adverse impact on the Company's operations. Furthermore, there can be
no assurance that another equity's failure to ensure year 2000 capability would
not have an adverse effect on Company and its subsidiary, Play Co.
Note 17- SUBSEQUENT EVENTS:
In April 1998, American Telecom in a transaction in which shares were
exchanged, exchanged all of its outstanding common shares with American Telecom,
PLC, a publicly traded company in Great Britain. After this transaction,
American Telecom effectively became a subsidiary of American Telecom PLC.
Additionally, as part of this transaction, American Telecom, PLC acquired 100%
of the outstanding common shares of U.S. Stores, thereby effectively making U.S.
Stores a direct subsidiary of American Telecom, PLC.
F-17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, as
amended the Registrant has caused this report to be signed on its behalf,
thereunto duly authorized as of the 15th day of September, 1998.
MULTIMEDIA CONCEPTS INTERNATIONAL, INC.
By: /s/ Ilan Arbel
Ilan Arbel, 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/ Ilan Arbel President and Director 9/15/98
Ilan Arbel Date
/s/ Rivka Arbel Director 9/15/98
Rivka Arbel Date
/s/ Yair Arbel Director 9/15/98
Yair Arbel Date
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
EXHIBIT
FINANCIAL DATA SCHEDULE
ARTICLE 5 OF REGULATION S-X
The schedule contains summary financial information extracted from the financial
statements for the six months ended March 31, 1998 and is qualified in its
entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> mar-31-1998
<PERIOD-END> oct-01-1997
<CASH> 1,635,058
<SECURITIES> 0
<RECEIVABLES> 404,288
<ALLOWANCES> 0
<INVENTORY> 7,929,061
<CURRENT-ASSETS> 10,497,738
<PP&E> 6,234,773
<DEPRECIATION> (3,452,387)
<TOTAL-ASSETS> 15,750,583
<CURRENT-LIABILITIES> 3,997,337
<BONDS> 0
0
0
<COMMON> 3,005
<OTHER-SE> 1,980,983
<TOTAL-LIABILITY-AND-EQUITY> 15,750,583
<SALES> 15,869,731
<TOTAL-REVENUES> 15,882,231
<CGS> 10,897,966
<TOTAL-COSTS> 10,897,966
<OTHER-EXPENSES> 5,855,751
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 384,901
<INCOME-PRETAX> (5,438,352)
<INCOME-TAX> (5,438,352)
<INCOME-CONTINUING> (5,438,352)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,438,352)
<EPS-PRIMARY> (1.81)
<EPS-DILUTED> (1.81)
</TABLE>