SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-26676
MULTIMEDIA CONCEPTS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 13-3835325
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)
</TABLE>
1385 Broadway, Suite 814, New York, New York 10018
(Address of Principal Executive Offices)
(212) 391-1111
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section
12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ X].
The Registrant's revenues for its fiscal year ended March 31, 1999 were
$37,791,421.
The aggregate market value of the voting stock on July 29, 1999 (consisting
of Common Stock, par value $0.01 per share) held by non-affiliates was
approximately $242,961.25 based upon the closing price for such Common Stock on
said date ($0.25), 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
History
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 formed
initially as a holding company for the purpose of forming an integrated clothing
design, manufacturing, and distribution operation. It is currently, in
principle, a holding company for its two operating subsidiaries: (i) its direct
wholly owned subsidiary, U.S. Apparel Corp. ("USAC") and (ii) its indirect
majority owned subsidiary, Play Co. Toys & Entertainment Corp. ("Play Co.").
Play Co. is the subsidiary of United Textiles and Toys Corp. ("United Textiles")
which is a majority owned subsidiary of the Company. The Company and its
subsidiaries are hereinafter referred to in the aggregate as the "Company"
except as otherwise required for clarity.
Cessation of Business Operations
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 American Eagle, Match II, and MMP. The Company
terminated its relationship with American Eagle and MMP due to continued losses.
In February 1997, the Company formed a new subsidiary, USAC, to commence
operations as a designer and manufacturer of product lines similar to those of
American Eagle and Match II.
Ownership of the Company
At fiscal year end March 31, 1999, 2,033,165 (or 67.7%) of the Company's
shares of common stock were owned by U.S. Stores Corp. ("USSC"), a private
company of which the Company's president is the president and a director. USSC
is owned 100% by American Telecom PLC ("ATPLC"), a British public corporation,
which is owned approximately 80% by Europe American Capital Foundation ("EACF"),
a Swiss foundation, which is the parent corporation also of Frampton Industries,
Ltd. ("Frampton") and ABC Fund, Ltd. ("ABC"), entities affiliated with the
Company under common control.
The Company owns 3,571,429 (or 78.5%) of the shares of United Textiles
common stock and 100% of the shares of USAC. United Textiles owns 45.2% of Play
Co. which in turn owns 93.4% of Toys International.COM, Inc. ("Toys") and 100%
of Play Co. Toys Canyon Country, Inc. ("Canyon").
The following chart depicts the Company's ownership structure:
Europe American Capital Foundation
Frampton Industries, Ltd. (100%) American Telecom PLC (80%) ABC Fund, Ltd.(100%)
(100%)
U.S. Stores Corp.
(67.7%)
Multimedia Concepts International, Inc.
(78.5%) (100%)
U.S. Apparel Corp.
United Textiles & Toys Corp.
(45.2%)
Play Co. Toys & Entertainment Corp.
Ownership of U.S. Apparel Corp. and United Textiles & Toys Corp.
U.S. Apparel Corp.
In February 1997, the Company formed a wholly-owned subsidiary, USAC - a
New York corporation of which the Company's president is the president and a
director - to design and manufacture a line of private label cotton "t-shirts"
and "polo" type tops predominantly for men and boys. See "-- Business of U.S.
Apparel Corp."
United Textiles & Toys Corp.
On January 2, 1998, the Company was issued 3,571,429 shares of common stock
of United Textiles, at a price of $0.28 per share ($0.01 above the closing price
on December 31, 1997) in repayment of a $1 million loan made by the Company to
United Textiles. United Textiles is a company of which the Company's president
is president and a director. As a result of the transaction, the Company became
the parent of United Textiles, owning 78.5% of the outstanding shares of the
common stock of same.
<PAGE>
United Textiles is a Delaware corporation which was organized in March 1991
and commenced operations in October 1991. It formerly designed, manufactured,
and marketed a variety of lower priced women's dresses, gowns, and separates
(blouses, camisoles, jackets, skirts, and pants) for special occasions and
formal events. In April 1998, United Textiles ceased all operating activities.
It now operates solely as a holding company for Play Co.
Business of U.S. Apparel Corp.
USAC designs and manufactures a line of private label knit cotton tops
(such as T-shirts and polo shirts) for boys and men. USAC's garments consist of
original designs and modifications and copies of existing designs. Typically,
USAC's customers provide it with designs they desire to use which USAC forwards
to a subcontractor in Honduras. The subcontractor creates the pattern from the
design provided it and sews sample garments which it then delivers to USAC sales
personnel who then deliver same to USAC's customers for approval. Once the
samples are approved, customers place their orders with USAC, typically four
months in advance. USAC sends the orders to the subcontractor which manufactures
the final product and ships same LDP (i.e., land and duty paid) to a public
warehouse in Florida where USAC's customers retrieve the goods. USAC maintains a
showroom at 1385 Broadway in New York City and is continually seeking to design
and market new products.
Supplies and Inventory
USAC purchases all of its fabrics and non-fabric sub-materials (zippers,
buttons, and trimmings) directly from the subcontractor which sews the garments
and purchases only so much as is required to fill orders placed with it. USAC
has found that this process is the most cost-effective means of operating its
business and expects to continue its operations in this manner in the future,
though it may use other or additional manufacturers. Although management of USAC
is of the opinion that the fabrics and non-fabric sub-materials it uses are
readily available and that there are numerous manufacturers for such goods who
offer similar terms and prices, there can be no assurance that management is
correct in such belief. The unavailability of fabrics or the absence of
clothiers, or the availability of either at unreasonable cost, could adversely
affect the operations of USAC and, hence, the Company.
Since USAC purchases only finished garments from the overseas
subcontractor, it does not buy or maintain an inventory of fabrics or
sub-materials. While USAC has not experienced difficulty in satisfying finished
garment requirements and considers its source of supply adequate, there can be
no assurance that such supply will continue to be available or that it will
continue to be available on terms or at prices USAC deems reasonable.
Quality Control
USAC conducts limited quality control in Honduras to ensure that finished
goods meet USAC's standards. A 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 department stores in
the United States such as K-Mart, Conway, and Ross. Sales to K-Mart accounted
for approximately 92% and 82% of USAC's revenues for the year ended March 31,
1999 and the six month transition period ended March 31, 1998, respectively.
USAC bills its clients on a net 30-day basis. Late or non-payment could cause
material adverse effects on USAC's cash flow and operations, especially since a
large portion of USAC's sales are to one customer.
USAC does not sell on consignment and does 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 generally 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. At
March 31, 1999, USAC had no unfilled purchase orders.
Financing
USAC bills its clients on a net 30-day basis. Although it is customary in
the garment industry to finance receivables through "factoring" (financing
secured by the accounts receivable of the borrower's customers), USAC does not
factor any of its receivables. Although USAC has no present intention to do so,
it may rely on factoring to finance future operations.
<PAGE>
Competition
There is intense competition in the apparel industry. USAC designs,
manufactures, and markets a line of T-shirts and polo shirts to department
stores and competes with many other manufacturers in this market, many of which
are larger and have greater financial and other resources than USAC. There are
relatively insignificant barriers to entry in the business in which USAC is
engaged and numerous companies compete 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 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. 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. Since USAC
advertises only via its showroom presentation, it has no agreements with
department stores or national retail chains to advertise any of its products.
Business of Play Co. Toys & Entertainment Corp.
Play Co., a Delaware corporation, was founded in 1974 and operates an
aggregate of twenty-six stores throughout Southern California (in the Los
Angeles, Orange, San Diego, Riverside, and San Bernardino Counties) and in (i)
Tempe, Arizona, (ii) Las Vegas, Nevada, (iii) Dallas, Texas, (iv) Auburn Hills,
Michigan, and (v) Chicago, Illinois. Play Co. intends to expand its operations
geographically and in accordance therewith has executed leases to open ten
additional stores by the end of calendar year 2000.
Approximately 75% of Play Co.'s stores offer educational, new electronic
interactive, and specialty and collectible toys and items for sale and are
strategically located in highly trafficked, upscale malls. The remaining 25%
sell traditional toys and games and are located in strip shopping centers. Given
the favorable results obtained from a two year market test of the sale of
children's swimwear in its stores, Play Co. recently expanded its product mix
and now offers a limited number of children's swimwear and accessories for sale
in many of its stores.
Since 1997, Play Co. has embraced and implemented a new store design and
layout, remodeled most of its older stores, closed non-profitable stores, and
expanded its geographic market from exclusively Southern California to the
mid-western United States. Since 1996, Play Co. has opened eight stores which
are considered by management to be high-end retail toy and educational,
electronic interactive stores. These outlets, and those Play Co. expects to open
in the future, offer items comparable in quality and choice to those offered by
FAO Schwarz, Warner Brothers, and Disney Stores and are expected to attract
clientele similar to those attracted by such stores.
In April 1999, Play Co. debuted the first of three dedicated electronic
commerce websites. This site, www.ToysWhyPayRetail.com, represents a new trade
name and allows consumers to purchase, at near wholesale prices, overstocks,
special buys, and overruns on mostly name-brand toys purchased by Play Co. out
of season. Play Co. plans to offer approximately 1000 items for sale on the
website. The second electronic commerce website, www.Playco.com, is currently
being developed to a state-of-the-art standard in conjunction with an Internet
consulting firm. This second site, which will offer collectible and imported
specialty merchandise such as die-cast cars, dolls, plush toys, trains, and
collectible action figures, is expected to open in the fall of 1999. In
conjunction with the website launch, Play Co. plans to place computer kiosks in
its retail locations in order to permit customers to place orders on the website
for goods otherwise not sold in such stores.
Because Play Co.'s new and newly remodeled stores focus on the sale of
educational and electronic interactive games and toys, specialty products, and
collector's toys which generally carry higher gross margins than traditional
toys, such stores have shown and are expected to continue to show higher gross
profits than Play Co.'s older stores (which focused primarily on the sale of
traditional toys).
Employees
As of July 30, 1999, the Company, including USAC, had three executive
officers and no employees.
ITEM 2. PROPERTIES
Until April 1998, the Company, along with United Textiles, 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, factory, and warehouse. In April
1998, in connection with United Textiles' cessation of its textile operations,
the Company and United Textiles 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 office space at this
location was leased to USAC (a subsidiary of Multimedia, the Company's parent),
and pursuant to an oral agreement with USAC, neither the Company nor United
Textiles paid remuneration for their use of the premises. The President of the
Company is also the president of USSC and United Textiles.
<PAGE>
On July 1, 1999, the Company vacated 1410 Broadway and relocated, with
United Textiles and USAC (the named tenant on the lease), to 1385 Broadway,
Suite 814, New York, New York 10018. Pursuant to an oral agreement with USAC,
neither the Company nor United Textiles pays remuneration for its use of the
premises.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company's officers, directors, affiliates, nor owners of record
or beneficially of more than five percent of any class of the Company's Common
Stock is a party to any material proceeding adverse to the Company or has a
material interest in any such proceeding adverse to the Company or its parent or
subsidiary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's securities were quote on the Nasdaq SmallCap Stock Market
until they were delisted in March 1997. Since April 1997, the Company's
securities have been quoted on the OTC Bulletin Board. The following table sets
forth representative high and low bid quotes as reported by the OTC Bulletin
Board whereon the Company's securities are quoted, during the periods stated
below (quotes prior to April 1997 are reported by Nasdaq). Bid quotations
reflect prices between dealers, do not include resale mark-ups, mark-downs, or
other fees or commissions, and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Public Warrants
Calendar Period Low High Low High
1997
<S> <C> <C> <C> <C>
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
1998
01/01/98 - 03/31/98 1/8 7/16
04/01/98 - 06/30/98 5/64 9/16
07/01/98 - 09/30/98 0.26 0.34
10/01/98 - 12/31/98 0.125 0.26
1999
01/01/99 - 03/31/99 0.12 1.75
04/01/99 - 06/30/99 0.16 0.34
07/01/99 - 07/31/99 0.19 0.28
</TABLE>
(1) There was no market for the Company's warrants from April 8, 1997 until
their expiration on November 8, 1997, and no warrants were exercised prior to
expiration.
As of July 30, 1999, there were approximately 51 holders of record of the
Company's Common Stock, although the Company believes that there are
approximately 1200 additional beneficial owners of shares of Common Stock held
in street name. As of July 30, 1999, the number of outstanding shares of the
Company's Common Stock was 3,005,000.
Recent Sales of Unregistered Securities
The Company sold no unregistered securities during the fiscal year ended
March 31, 1999.
<PAGE>
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:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
Restated
Balance Sheet Data:
<S> <C> <C>
Working capital $3,419,711 $6,085,868
Total assets 23,599,316 15,750,583
Total current liabilities 12,119,228 4,411,870
Long-term obligations 8,527,116 7,055,549
Stockholders' equity 1,949,272 2,303,042
Operating data:
Net sales $37,791,421 $15,869,731
Cost of sales 21,801,832 10,897,966
Total operating expenses 14,737,247 6,251,399
Net income (loss) (353,770) (5,119,298)
Income (loss) per common share (.12) (1.17)
Weighted average shares outstanding 3,005,000 3,005,000
</TABLE>
Results of Operations
In May 1998, 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 z31, 1998. Consequently, the following
management discussion covers the year ended March 31, 1999 only.
The consolidated financial statements contained herein for the year ended
March 31, 1999 and the six months ended March 31, 1998 in this document reflect
the operations of the Company's wholly-owned subsidiary, U.S. Apparel
Corporation ("USAC"), and the Company's 78.5% owned subsidiary, United Textiles
& Toys Corp. ("United Textiles"), as well as United Textiles' 45.2% owned
subsidiary, Play Co. Toys & Entertainment Corp. ("Play Co.")
For the year ended March 31, 1999:
Consolidated net sales for the year ended March 31, 1999 were $37,791,421.
This represented the consolidated net sales of the Company which was comprised
of the following components:
U.S. Apparel $3,413,581
Play Co. 34,371,230
United Textiles 6,610
$37,791,421
At the end of March 1999, Play Co. had 25 retail locations, compared to 19
retail locations at the end of March 1998. During the fiscal year ended March
31, 1999, Play Co. opened six new stores.
Consolidated cost of sales were $21,801,832 for the year ended March 31,
1999. The component breakdown of this item was as follows:
U.S. Apparel $2,211,048
Play Co. 19,590,784
$21,801,832
<PAGE>
Consolidated operating expenses (total operating expenses less litigation
related expenses and depreciation and amortization) were $13,722,541 for the
year ended March 31, 1999.
Play Co. incurred $27,659 of litigation related expenses in the period. In
1998, Play Co. closed five store locations. Play Co. settled the litigation
relating to four of the five closed locations. Play Co. remains in litigation
regarding the fifth closed store, and the expenses incurred through March 31,
1999 relate to the fifth store.
Depreciation and amortization expense in the year ended March 31, 1999 was
$987,047. Total interest expense amounted to $965,051 for the year ended March
31, 1999.
For the year ended March 31, 1999, subsequent to the adjustment for the
minority interest in the net losses of subsidiaries, the Company reported a
consolidated net loss of $353,770, or $.12 per common share.
Liquidity and Capital Resources
At March 31, 1999, consolidated working capital was $3,419,711 as compared
to a working capital of $6,085,868 at March 31, 1998. For the year ended March
31, 1999, consolidated operating activities contributed funds of $293,584. Cash
used for investing activities for the year ended March 31, 1999 amounted to
$2,802,634.
Consolidated financing activities generated funds of $1,984,958 during the
year ended March 31, 1999. 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 decreased from $1,635,058 at March 31,
1998 to $1,110,966 at March 31, 1999.
Trends Affecting Liquidity, Capital Resources and Operations
As a result of its planned merchandise mix change to emphasize specialty
and educational toys, Play Co. enjoyed significant increases in sales and gross
profits in the year ended March 31, 1999. While Play Co. believes that its new
product mix will remain popular with the consumer market for the remainder of
1999, there can be no assurance that this growth will continue. The history of
the toy industry indicates that there is generally at least one highly popular
toy every year.
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. Play Co. also competes both through its electronic commerce
operations and through its stores against Internet oriented toy retailers such
as eToys, Inc. There can be no assurance that 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 the third quarter sales an
even greater percentage of the total year's sales.
Impact of Inflation
The impact on consolidated results of operations has not been significant.
Play Co. attempts to pass on increased product prices over time.
Year 2000
The Company does not believe that the Year 2000 computer issue will have a
significant impact on its operations or financial position and thus 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 an adverse impact on
the Company's operations. Furthermore, other entities' failures to ensure year
2000 capability may have an adverse effect on the Company via its subsidiary,
Play Co.
<PAGE>
In 1998, Play Co. developed a plan to upgrade its existing management
information system and computer hardware and to become year 2000 compliant. Play
Co. has completed the hardware upgrade and has installed a year 2000 compliant
upgrade to its accounting software. It expects to finish the year 2000
compliance work in the September quarter of 1999. Beyond this issue, Play Co.
has no current knowledge of any outside third party year 2000 issues that would
result in a material negative impact on its operations. It has reviewed its
significant vendors' and financing arm's recent SEC filings vis-a-vis year 2000
risks and uncertainties and, on the basis thereof, is confident that the steps
it has taken to become year 2000 compliant are sufficient. In continuation of
this review, Play Co. shall continue to monitor or otherwise obtain confirmation
from the aforesaid entities - and such other entities as management deems
appropriate - as to their respective degrees of preparedness. To date, nothing
has come to the attention of Play Co. that would lead it to believe that its
significant vendors and/or service providers will not be year 2000 ready. The
effect, if any, of year 2000 problems on Play Co.'s results of operations if
Play Co. or its customers, vendors, or service providers are not fully compliant
cannot be estimated with any degree of certainty. It is nonetheless possible
that year 2000 problems could have a material adverse effect in that holiday
1999 purchases may be stunted due to consumer uncertainty and that the overall
business environment may be disrupted in Play Co.'s fourth fiscal quarter, which
in turn, would have a material adverse effect on the Company.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On May 14, 1997, the Company and Lazar, Levine & Company LLP ("LLC")
mutually agreed that LLC would no longer be the Company's auditors. The
resignation of LLC was not due to any discrepancies or disagreements between the
Company and same on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, as there were no such
discrepancies or disagreements. There were no disagreements during the two
fiscal years ended September 30, 1997 and 1996 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, 1997 and 1996 contained an explanatory
paragraph addressing the Company's ability to continue as a going concern.
On July 1, 1997, the Company's board of directors authorized the Company's
executive officers to engage Jerome Rosenberg, CPA, P.C. as the Company's new
auditing firm for the year ending March 31, 1997. Prior to engaging Jerome
Rosenberg, CPA, P.C., such accounting firm was not consulted on any matters
relative to the application of accounting principles on specified transactions
or in any matter that was the subject of a disagreement with the prior
accountants.
During the past two fiscal years and during the transition report for the
period October 1, 1997 through March 31, 1998, no accountant's report on the
Company's financial statements contained any adverse opinion or disclaimer of
opinion or was modified as to uncertainty, audit scope, or accounting
principles.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
Officers and Directors
The following table sets forth the names, ages, and titles of all directors
and officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Ilan Arbel 46 Chief Executive Officer, President, and Director
Rivka Arbel 47 Vice President and Director
Yair Arbel 51 Director
</TABLE>
All directors are elected at an annual meeting of the Company's
shareholders and hold office for a period of one year or until the next annual
meeting of stockholders or until their successors are duly elected and
qualified. Vacancies on the board of directors may be filled by the remaining
directors. Officers are appointed annually by, and serve at the discretion of,
the board of directors. There are no family relationships between or among any
officers or directors of the Company except that Rivka Arbel is the
sister-in-law of Ilan Arbel and Moses Mika is the father of Mr. Arbel.
As permitted under the Delaware General Corporation Law, the Company's
Certificate of Incorporation eliminates the personal liability of the directors
to the Company or any of its shareholders for damages caused by breaches of said
directors' fiduciary duties. As a result of such provision, stockholders may be
unable to recover damages against directors for actions which constitute
negligence or gross negligence or are in violation of their fiduciary duties.
This provision in the Company's Certificate of Incorporation may reduce the
likelihood of derivative, and other types of shareholder, litigation against
directors.
Ilan Arbel was the president, secretary, and a director of the Company from
inception until June 12, 1995. He was reelected a director in August 1995 and
president in May 1996. Mr. Arbel has been the president, chief executive
officer, and a director of United Textiles since 1991. Mr. Arbel was the
president, chief executive officer, and a director of Atoys from February 1993
until July 1993 at which time he resigned as president thereof. In March 1995,
Mr. Arbel was reelected president of Atoys, a position he held, with his
directorship, until July 1996. Since its inception, in February 1997, Mr. Arbel
has been the president and a director of USAC. From May 1993 to April 1997, Mr.
Arbel was a director of Play Co. (from June 1994 until his April 1997
resignation, he was chairman). Since 1989, he has been the sole officer and
director of Europe America Capital Corp., a company involved in investments and
finance in the United States and Europe. Since 1993, he has been the president
of European Ventures Corp., a company involved in investments and finance in the
United States and Europe. Mr. Arbel is a graduate of the University Bar Ilan in
Israel and has 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, Mrs.
Arbel resigned as an officer of the Company. Mrs. Arbel was re-elected as vice
president in May 1997. From 1992 to present, Mrs. Arbel has been a director of
United Textiles. Since 1986, Mrs. Arbel has been president and a director of
Amigal, Ltd., a producer of men's and women's wear in Israel. Mrs. 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 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.
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors, and persons who beneficially own more than
ten percent of a registered class of the Company's equity securities to file
reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission ("SEC"). Officers, directors, and greater
than ten percent beneficial owners also are required by rules promulgated by the
SEC to furnish the Company with copies of all Section 16(a) forms they file.
No person ("a Reporting Person") who during the fiscal year ended March 31,
1999 was a director, officer, or beneficial owner of more than ten percent of
the Company's Common Stock or Series E Stock [which are the only classes of
equity securities of the Company registered under ss.12 of the Securities
Exchange Act of 1934], failed to file on a timely basis reports required by
ss.16 of the Act during the most recent fiscal year except as follows: all
officers and directors failed to file Forms 5 (and its parent corporations)
failed to file Forms 4. The foregoing is based solely upon a review by the
Company of (i) Forms 3 and 4 during the most recent fiscal year as furnished to
the Company under Rule 16a-3(e) under the Act, (ii) Forms 5 and amendments
thereto furnished to the Company with respect to its most recent fiscal year,
and (iii) any representation received by the Company from any reporting person
that no Form 5 is required, except as described herein.
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and Non-Plan
(as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded or paid
by the Company during (i) the fiscal year ended March 31, 1999, (ii) the
transition period October 1, 1997 through March 31, 1998, and (iii) the fiscal
year ended September 30, 1997 to each of the named executive officers of the
Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Name and
Principal Position Year Awards Payouts
Securities
Other Restricted Underlying All Other
Annual Stock Options/ LTIP Compensation
Compen Award(s) SARs Payouts
Salary Bonus -sation($) ($)
($) ($)(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ilan Arbel (2) ... 1999 -- -- -- -- -- -- --
President, CEO,
And Director
1998 -- -- -- -- -- -- --
1997 -- -- -- -- -- -- --
</TABLE>
(1) 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 and Consulting 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 Mr. Arbel an option to purchase 1,900,000 warrants at $0.04 per
warrant, identical to the warrants sold by the Company in its initial public
offering. The option was exercisable at $7.00 per share. 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 of directors 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 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 1,000,000 warrants for a purchase price of $0.04 per warrant, the
warrants bearing an exercise price of $7.00 per share. 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.
<PAGE>
In May 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, payable either in cash or other securities, whereupon Mr.
Arbel owed the difference between the price he paid for warrants he had
purchased previously ($0.04) and this new purchase price ($1.90). In October
1997, the Company and Mr. Arbel agreed to increase the option price to purchase
the warrants to $2.50 per warrant, 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. As payment of the debt, Mr. Arbel, through certain
affiliates, transferred to the Company an aggregate of 803,070 shares of Play
Co. Series E preferred stock, each share of which is convertible into six shares
of Play Co. common stock at the option of the holder, subject to holding
periods.
In April 1999, USAC entered into a verbal consulting agreement with Yu Jin
International, Inc. ("Yu Jin") pursuant to which Yu Jin oversees the day to day
production of garments and operating activities of USAC's subcontractor. During
the 1st fiscal quarter of 2000, USAC remitted $51,800 to Yu Jin in accordance
with the terms of the aforesaid agreement.From 1992 to October 1998, the Company
and its subsidiaries were provided consulting services from Westside Apparel.
During the fiscal year ended March 31, 1999, Westside Apparel was paid $110,367
in consulting fees, inclusive of a profit percentage, pursuant to its oral
agreement with USAC.
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 either the Company or its subsidiary(ies) or who
render significant services to the Company or its subsidiary(ies). 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 president 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. 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's outstanding Common Stock as of July 31, 1999, by (i)
each beneficial owner of 5% or more of the Company's Common Stock, (ii) each of
the Company's executive officers, directors, and key employees, and (iii) all
executive officers, directors, and key employees as a group:
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of Common Stock
of Beneficial Owner Beneficially Owned1 Beneficially Owned2
U.S. Stores Corp.
1385 Broadway, Suite 814
<S> <C> <C> <C>
New York, New York 10018 2,033,155 67.7%
Ilan Arbel (3)
c/o United Textiles & Toys Corp.
1385 Broadway, Suite 814 2,033,155 67.7%
New York, New York 10018
American Telecom, PLC (4)
8-13 Chiswell Street 2,033,155 67.7%
London EC 1Y 4UP
Europe American Capital Foundation (5)
Box 47
Tortola British Virgin Islands 2,033,155 67.7%
Yair Arbel
c/o United Textiles & Toys Corp.
c/o United Textiles & Toys Corp. -- --
1385 Broadway, Suite 814
New York, New York 10018
Rivka Arbel
c/o United Textiles & Toys Corp.
1385 Broadway, Suite 814 -- --
New York, New York 10018
Officers and Directors as a Group
(4 persons) -- --
</TABLE>
<PAGE>
(footnotes from previous page)
(1) Unless otherwise noted, all of the shares shown are held by individuals
or entities possessing sole voting and investment power with respect to such
shares. Shares not outstanding but deemed beneficially owned by virtue of the
right of an individual or entity to acquire them within 60 days, whether by the
exercise of options or warrants, are deemed outstanding in determining the
number of shares beneficially owned by such person or entity.
(2) The "Percent of Common Stock Beneficially Owned" is calculated by dividing
the "Number of Shares Beneficially Owned" by the sum of (i) the total
outstanding shares of Common Stock of the Company, and (ii) the number of
shares of Common Stock that such person or entity has the right to acquire
within 60 days, whether by exercise of options or warrants. The "Percent of
Common Stock Beneficially Owned" does not reflect shares beneficially owned
by virtue of the right of any person, other than the person named and
affiliates of said person, to acquire them within 60 days, whether by
exercise of options or warrants.
(3) Ilan Arbel is the president and a director of each of USSC, a private
company which is the parent of the Company (owning 67.7% of same), and United
Textiles, a publicly traded company which is a subsidiary of the Company (owned
78.5% by same) and, therefore, can control the voting of the shares held by such
entities.
(4) ATPLC is a British corporation and the parent of USSC, owning 100% of
same, and accordingly is a beneficial owner of the shares of Common Stock owned
by USSC
(5) EACF is a Swiss foundation and the parent of ATPLC, owning 80% of same,
and accordingly is a beneficial owner of the shares of Common Stock owned by
ATPLC.
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 and Consulting
Agreements."
From October 1995 to September 1997, the Company loaned an aggregate of
$1,276,235 to United Textiles. On January 2, 1998, the Company was issued
3,571,429 shares of common stock of United Textiles, 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 million loaned by the Company to United Textiles. As
a result of the 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. Because United Textiles owns 45.2% of the outstanding shares of
common stock of Play Co., the Company and its management obtained beneficial
voting control of Play Co. through this transaction
On January 20, 1998, USSC, 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, USSC 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 USSC. Since
then, USSC has acquired an additional 165,155 shares of the Company's Common
Stock on the open market, rendering the Company a 67.7% owned subsidiary of
same.
In April 1998, American Telecom, exchanged all its outstanding common
shares and all of the outstanding shares of its wholly owned subsidiary USSC
with ATPLC, a publicly traded company in Great Britain. After this transaction,
both American Telecom and USSC became wholly owned subsidiaries of ATPLC.
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-1
Consolidated Balance Sheets as of March 31, 1999 F-2
Consolidated Statements of Operations for the year ended March 31, 1999
and the six months ended March 31, 1998 F-4
Consolidated Statement of Changes in Stockholders' Equity for the two
years in the period ended March 31, 1999 F-5
Consolidated Statements of Cash Flows for the year ended March 31, 1999
and the six months ended March 31, 1998 F-6
Notes to Financial Statements F-8
</TABLE>
<PAGE>
(b) During its last fiscal 1999 quarter, the Company filed no Forms 8-K.
(c) All exhibits, except those designated with an asterisk (*) which are
filed herewith have previously been filed with the Commission either in
connection with the Company's Registration Statement on Form SB-2 or, as
indicated by the reference herein and pursuant to 17 C.F.R.ss.230.411, are
incorporated by reference herein. Exhibits previously filed but not as part of
the SB-2 Registration Statement are incorporated herein by reference to the
appropriate document.
<TABLE>
<CAPTION>
<S> <C>
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
3.8(a) Second Amendment to Certificate of Incorporation of the Company, filed in June 1996
3.9 Certificate of Incorporation of U.S. Apparel Corp.
4.1 Specimen Common Stock Certificate.
10.1 The Company Senior Management Incentive Plan.
27.1* Financial Data Schedule
</TABLE>
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
March 31, 1999 and March 31, 1998
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountant F-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1999 and March 31, 1998 F-2
Consolidated Statements of Operations for the year ended March 31, 1999
and the six months ended March 31, 1998 F-4
Consolidated Statement of Changes in Stockholder's Equity for the year
ended March 31, 1999 and the six months ended March 31, 1998 F-5
Consolidated Statements of Cash Flows for the year ended March 31, 1999
and the six months ended March 31, 1998 F-6
Notes to Financial Statements F-8
</TABLE>
<PAGE>
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, 1999 and March 31, 1998, and the
related statements of operations, stockholders' equity, and cash flows for the
year ended March 31, 1999 and the six months ended March 31, 1998.
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 aspects, the financial position of Multimedia Concepts
International, Inc at March 31, 1999 and March 31, 1998, and the result of its
operations and its cash flows for the year ended March 31, 1999 and the six
months ended March 31, 1998 in conformity with generally accepted accounting
principles.
Melville, New York
June 30, 1999
F-1
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 1999 and March 31, 1998
<TABLE>
<CAPTION>
March. 31, March 31,
1999 1998
ASSETS (Note 10) (Note 3o)
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents (Note 3c) ....... $ 1,110,966 $ 1,635,058
Restricted certificate of deposit (Note 7) 350,000 250,000
Accounts receivable ....................... 692,266 404,288
Advances to supplier ...................... 474,572 --
Inventories (Note 3d) ..................... 11,595,284 7,929,061
Prepaid expenses and other current assets . 1,315,851 189,516
Loans and advances - affiliate ............ -- 89,815
Loans and advances - officer .............. -- --
Total current assets .............. 15,538,939 10,497,738
----------- -----------
PROPERTY AND EQUIPMENT - NET (Notes 2f and 9) 5,350,285 2,782,386
----------- -----------
OTHER ASSETS:
Restricted certificate of deposit (Note 7) .. 2,000,000 2,000,000
Due from affiliates ......................... 136,662 --
Advances to equity affiliate (Note 1) ....... 140,000 140,000
Deposits and other assets (Note 10) ......... 433,430 330,459
----------- -----------
Total assets ...................... $23,599,316 $15,750,583
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-2
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 1999 and March 31, 1998
<TABLE>
<CAPTION>
March. 31 March 31,
1999 1998
(Note 3o)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable ............................................................... $ 9,653,563 $ 3,181,317
Accrued expenses and other current liabilities ................................. 689,580 880,553
Current portion of notes payable (Note 12) ..................................... 1,125,000 350,000
Due to affiliates .............................................................. 423,888 --
Current portion of capital lease obligation .................................... 227,197 --
Total current liabilities ................................................. 12,119,228 4,411,870
------------
LONG-TERM LIABILITIES:
Borrowings under financing agreement (Note 10) ............................... 7,814,666 5,445,198
Note payable, net of current portion (Note 12) ............................... -- 1,500,000
Deferred rent liability ...................................................... 126,769 110,351
Current lease obligations, net of current portion ............................ 585,681 --
Total long-term liabilities .......................................... 8,527,116 7,055,549
Total liabilities .................................................... 20,646,344 11,467,419
------------
MINORITY INTEREST IN SUBSIDIARIES .............................................. 1,003,700 1,980,122
------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 10,000,000 shares authorized; 3,005,000 shares
issued and outstanding at March 31, 1999 and
March 31, 1998 respectively ................................................. 3,005 3,005
Additional paid-in capital ................................................... 13,102,005 13,102,005
Retained earnings (Deficit) .................................................. (11,155,738) (10,801,968)
------------ ------------
Total stockholders' equity ........................................... 1,949,272 2,303,042
------------ ------------
Total liabilities and stockholders' equity ........................... $ 23,599,316 $ 15,750,583
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Six Months Ended
March 31, March 31,
1999 1998
Restated
(Note 3o)
<S> <C> <C>
Net sales ....................................................................... $ 37,791,421 $ 15,869,731
Cost of sales ................................................................... 21,801,832 10,897,966
------------ ------------
Gross profit .................................................................... 15,989,589 4,971,765
------------
Operating expenses:
Operating expenses .............................................................. 13,722,541 5,272,210
Litigation related expenses (Note 13) ...................................... 27,659 583,541
Depreciation and amortization .............................................. 987,047 395,648
------------ ------------
Total operating expenses ......................................... 14,737,247 6,251,399
------------ ------------
Operating income (loss) ......................................... 1,252,342 (1,279,634)
------------
Other income:
Interest and other income ............................. 90,242 12,500
Other expenses:
Loss on investment .................................... -- -(4,221,490)
1,342,584 (5,488,624)
Interest expense: (Note 10)
Interest and finance charges ..................................... 796,202 96,256
Amortization of debt issuance costs .............................. 168,849 288,645
------------ ------------
Total interest expense ........................................... 965,051 384,901
------------ ------------
Income (loss) before the effect of non-cash dividends on
convertible preferred stock and minority interest ............................ 377,533 (5,873,525)
Effect of non-cash dividends on convertible preferred stock .......... (1,707,725) (273,806)
------------ ------------
(Loss) before Minority interests ..................................... (1,330,192) (6,147,331)
Minority interest in net (loss) of consolidated subsidiary (Note 6) 976,422 1,028,033
------------ ------------
Net (loss) ........................................................... $ (353,770) $ (5,119,298)
============ ============
(Loss) per basic and diluted common share and share equivalents:
Net loss before minority interest ..................... $ (.44) $ (2.05)
Minority interest in net loss ......................... .32 .34
------------ ------------
Net (loss) ........................................................... $ (.12) $ (1.71)
============ ============
Weighted average number of common shares outstanding ................. 3,005,000 3,005,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARY
STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended March 31, 1998 restated
and March 31, 1999
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit
<S> <C> <C> <C> <C> <C> <C>
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 .... (5,119,298)
Balance, March 31, 1998 ... 3,005,000 3,005 13,102,005 (10,801,968)
Net loss for the year ended
March 31, 1999 ......... (353,770)
Balance, March 31, 1999 ... 3,005,000 $ 3,005 $ 13,102,005 $(11,155,738)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Year Ended Six Months Ended
March 31, March 31,
1999 1998
Restated
(Note 3o)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) .............................................................. $ (353,770) $(5,119,298)
-----------
Adjustments to reconcile net loss to cash (used) provided for operating
activities:
Depreciation and amortization ............................................... 987,047 395,648
Loss on abandonment of assets ............................................... -- 45,255
Minority interests in net losses of subsidiaries ............................ (976,422) 1,980,122
Changes in assets and liabilities:
(Increase) decrease in accounts receivable .................................. (287,978) 318,824
(Increase) decrease in advances to supplier ................................. (474,572) 60,000
(Increase) decrease in Merchandise inventories .............................. (3,666,223) (7,862,399)
(Increase) decrease in prepaid expenses and other current assets ............ (1,126,335) (189,516)
(Increase) decrease in deposits and other assets ............................ (102,971) (330,409)
Increase in accounts payable ................................................ 6,469,363 2,752,033
Decrease in accrued expenses and liabilities ................................ (190,973) 827,027
Increase in deferred rent liability ......................................... 16,418 110,351
----------- -----------
Total adjustments .................................................... 647,354 (1,893,064)
----------- -----------
Net cash provided by operating activities ............................ 293,584 (7,012,362)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of restricted certificates of deposit ................................. (100,000) (2,250,000)
Increase in property and equipment ............................................. (2,702,634) (3,223,288)
Loss on investment ............................................................. -- 4,221,490
Loans made and repaid by officer ............................................... -- 1,314,596
-----------
Net cash provided by (used for) investing activities ................. (2,802,634) 62,798
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Year Ended Six Months Ended
March 31, March 31,
1999 1998
Restated
(Note 3o)
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Net borrowings under financing agreement of subsidiary $ 2,369,468 $ 5,445,198
Loans and advances-affiliates ........................ 377,041 1,276,235
Proceeds from notes payable .......................... 2,700,000 1,850,000
Repayment of notes payable ........................... (3,425,000) --
Repayment under capital leases ....................... (36,551) --
Net cash provided by financing activities .... 1,984,958 8,571,433
-----------
NET INCREASE (DECREASE) IN CASH ........................ (524,092) 1,621,869
Cash, beginning of period .............................. 1,635,058 13,189
-----------
Cash, end of period .................................... $ 1,110,966 $ 1,635,058
===========
Supplemental disclosure of cash flow information:
Interest paid .......................................... $ 965,051 $ 384,901
Taxes paid ............................................. $ 2,150 $ 800
</TABLE>
The accompanying notes are an integral part of these consolidated 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 Holding 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 the common stock of American
Eagle Industries Corp., which had acquired 100% 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 February 1997, the Company formed a new wholly owned subsidiary, U.S.
Apparel Corp. ("U.S. Apparel"), which is engaged in the design and manufacture
of a line of T-shirts and other tops, predominately for men. U.S. Apparel 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 was at a price of $.28 per
share ($.01 above the closing price on December 31, 1997) representing 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 45.2% of the outstanding common shares of Play Co.
Toys and Entertainment Corp. ("Play Co."), a company that sells toys and
educational games primarily on a retail basis. NOTE 1. DESCRIPTION OF COMPANY
(continued):
In March 1998, United Textiles, having sustained continuous losses,
discontinued operating activities.
Nature of Relationship with Affiliates:
As described in the following footnotes, the Company engages in
transactions with affiliated entities, many of which are under common control.
These entities and the nature of the affiliates are as follows:
Affiliates Under Common Control
Name of Entity and Nature of Affiliation
U.S. Stores Corp. ("U.S. Stores"): A private company whose president is
Ilan Arbel, who is also a director. Parent company of the Company.
European American Capital Foundation ("EACF"): Foundation which is the sole
stockholder/beneficiary of Frampton Industries, Ltd. and ABC Fund, Ltd., and the
majority stockholder of American Telecom, PLC.
European American Capital Corporation ("EACC"): Entity of which Ilan Arbel
and/or his relatives is/are officer(s) and/or director(s).
Frampton Industries, Ltd. ("Frampton"): Entity which is wholly owned by
EACF.
American Telecom PLC: Entity which is 80% owned by EACF.
ABC Fund, Ltd. ("ABC"): Entity which is wholly owned by EACF.
Other Affiliates
Name and Entity of Affiliation
ZD Group, L.L.C. ("ZD"): ZD is a New York Trust, the beneficiary of which
is a member of the family of the Company's President.
European Ventures Corp. ("EVC"): Parent company of Shopnet.com. Ilan Arbel
is the President. Moses Mika is the majority shareholder.
Shopnet.com ("Shopnet"): The Chairman of Play Co. (who is a relative of the
Company's President) is the President and a Director of Shopnet.
<PAGE>
NOTE 1. DESCRIPTION OF COMPANY (continued):
Nature of Relationship with Affiliates (continued):
Breaking Waves, Inc. ("BWI"): This entity is the wholly owned subsidiary of
Shopnet and also owns 25% of Play Co.'s common stock. The President of BWI is
also the Chairman of the Board of Play Co. and a relative of Ilan Arbel.
The following chart graphically depicts the Company's ownership structure
at March 31, 1999 for those entities under common control:
Europe American Capital Foundation
Frampton Industries, Ltd. (100%) American Telecom PLC (80%) ABC Fund, Ltd.(100%)
(100%)
U.S. Stores Corp.
(67.7%)
Multimedia Concepts International, Inc.
(78.5%) (100%)
U.S. Apparel Corp.
United Textiles & Toys Corp.
(45.2%)
Play Co. Toys & Entertainment Corp.
NOTE 2. BASIS OF PRESENTATION:
In May 1998, 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.
F-7
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company,
its subsidiaries (U.S. Apparel and United Textiles), and United Textiles'
subsidiary (Play Co.). All material intercompany balances and transactions have
been eliminated in consolidation.
Uses 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.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentration
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. Concentration with regard to accounts receivable are limited
due to the Company's large customer base.
Merchandise Inventories:
Merchandise inventories are stated at the lower of cost (first-in,
first-out method - "FIFO") or market.
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.
F-8
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
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.
Statements of Cash Flows:
For the 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.
Revenue Recognition:
The Company and its subsidiaries recognize revenue upon shipment of
finished goods to customers. All sales are 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.
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.
F-9
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
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. For the year ended March 31, 1999, there is no difference between
basic and diluted loss per common share.
Store Openings and Closing Costs:
Costs incurred to open a new retail location such as advertising, training
expenses and salaries of newly hired employees are generally expensed as
incurred and improvements to leased facilities are capitalized. Upon permanently
closing a retail location, the costs to relocate fixtures, terminate employees
and other related costs are expensed as incurred. In addition, the unamortized
balances of any abandoned leasehold improvements are expensed.
In April 1998, the AICPA's Accountings Standards Executive Committee issued
Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities.
The SOP, which is effective for fiscal years beginning after December 15, 1998
with earlier application encouraged, requires entities to expense start-up and
organization costs for establishing new operations. The Company adopted the
provisions of this statement as of March 31, 1999 without impact given its
historical treatment of store opening costs.
Impairment of Long-Lived Assets:
SFAS No. 121, Accounting for the Impairment of long-lived Assets and
long-lived Assets to be Disposed Of, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity by reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an assets 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.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
Stock-Based Compensation:
SFAS No. 123, Accounting for Stock-Based Compensation, established
financial accounting and reporting standards for stock-based employee
compensation plans and certain other transactions involving the issuance of
stock. The Company adopted the disclosure requirements of SFAS 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.
Effect of New Accounting Pronouncements:
In June 1997, the FSAB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in an entity's
financial statements. This statement requires an entity to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of a statement of
financial position. This pronouncement, which is effective for fiscal years
beginning after December 15, 1997, was adopted by the Company during the fiscal
year ending March 31, 1999 without impact to the financial statements for either
of the years ended March 31, 1999 or 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. This statement requires public enterprises
to report financial and descriptive information about its reportable operating
segments and establishes standards for related disclosures about product
services, geographic areas, and major customers. This pronouncement is effective
for fiscal years beginning after December 15, 1997. Management reviewed the
provision of this statement during the year ended March 31, 1999. While Play Co.
has expanded into several states during the year, management believes Play Co.'s
operations to be limited to one reporting segment being a retailer of
educational, specialty, collectible, and traditional toys. All of Play Co.'s
sales have been domestic, and there are no foreign operations.
<PAGE>
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
Restatement of Financial Statements - March 31, 1998:
The consolidated financial statements for the year ended March 31, 1998
have been restated to reflect a restatement by Play Co. of its dividend
attributable to the beneficial conversion feature of its Series E preferred
stock. This restatement resulted in an increase of $1,473,806 in its originally
reported net loss.
NOTE 4. INVESTMENT BY U.S. STORES CORP.:
On January 20, 1998, 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 the Company 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. American Telecom
was incorporated on July 18, 1997. The Company's President is also President and
a Director of American Telecom. After this transaction, American Telecom
effectively obtained beneficial voting control of the Company and its
subsidiaries.
In April 1998, American Telecom 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.
NOTE 6. MINORITY INTEREST IN SUBSIDIARIES:
The Company owns a majority interest (78.5%) in United Textiles, which in
turn owns a majority interest (45.2%) in Play Co. The minority interest
liability represents the minority shareholders' portion (21.5%) of United
Textiles' equity at March 31, 1999.
NOTE 7. RESTRICTED CERTIFICATE OF DEPOSIT:
At March 31, 1999 and 1998, the Company has three certificates of deposit
which are restricted as to their nature. The first, in the amount of $2,000,000,
represents collateral against a letter of credit securing financing to Play Co.
under the FINOVA Capital Corporation agreement ("FINOVA Financing") (Note 10)
and is classified as a non-current asset since the funds in the certificate of
deposit will remain restricted until the letter of credit expires or is released
by FINOVA Capital Corporation ("FINOVA"). The second, in the amount of $250,000,
is collateral for a facility for letters of credit. The third, in the amount of
$100,000, is to cover an increase on the previously mentioned letter of credit
facility.
NOTE 8. WORKING CAPITAL GUARANTEE OF MAJORITY SHAREHOLDER:
For the year ended March 31, 1999, the Company's Play Co. subsidiary
reported a net loss of $1,566,857. For the year ended March 31, 1998, Play Co.
reported a restated net loss of $3,528,276. These amounts include the minority
shareholders' pro-rata share of net income or loss.
The Company's beneficial and majority shareholder has represented his
intent and ability to provide additional working capital to Play Co.
NOTE 9. FIXED ASSETS:
<TABLE>
<CAPTION>
Fixed assets consisted of the following:
March 31, March 31,
1999 1998
<S> <C> <C>
Furniture, fixtures and equipment ..... $ 6,008,554 $ 4,260,738
Leasehold improvements ................ 2,763,711 1,551,760
Signs ................................. 501,798 317,363
Vehicles .............................. 104,912 104,912
Construction in progress .............. 68,065 --
9,447,040 6,234,773
Less: Accumulated depreciation and
Amortization ..................... (4,096,755) (3,452,387)
----------- -----------
$ 5,350,285 $ 2,782,386
=========== ===========
</TABLE>
The reported amounts for March 31, 1999 include the consolidated fixed
assets of United Textiles and Play Co.
<PAGE>
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 (Note
1), provided a $2,000,000 letter of credit for collateral. As compensation to
EACC, Play Co. granted EACC options to acquire shares of common stock and
preferred stock, the aggregate value of which was $458,000. The aggregate
$458,000 was initially included in other assets, as debt issuance costs, and
additional paid-in capital. The option values were amortized into interest
expense through the February 1, 1998 maturity of the Congress Financing,
resulting in aggregate interest charges of $196,849 for the year ended March 31,
1998.
In March 1997, the Congress Financing was amended to provide for, among
other things, increased borrowing ratios and an additional $1,000,000 letter of
credit as collateral from EACC. Thereafter, the Congress Financing was
collateralized by an aggregate 3,000,000 in letters of credit through its
maturity on February 1, 1998.
On February 3, 1998, Play Co. borrowed $4,866,324 under the FINOVA
Financing, the proceeds of which were used primarily to repay the then
outstanding borrowings under the Congress Financing and to pay fees related to
the FINOVA Financing.
The FINOVA Financing, as amended currently, provides for maximum borrowings
up to $8,300,000 based on a percentage of the cost value of eligible inventory,
as defined. Outstanding borrowings bear interest at 1.5% above prime rate, as
defined (the prime rate at March 31, 1999 and 1998 was 7.75% and 8.5%,
respectively. The agreement matures on August 3, 2000 and can be renewed for one
additional year at the lender's option.
F-10
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. CAPITAL LEASE OBLIGATIONS:
During the year ended March 31, 1999, Play Co. entered into several leases
with financing companies that have been classified as capital lease obligations.
The amounts financed ranged from $49,901 to $232,098, with varying monthly
installment payments from $849 to $5,313, at interest rates varying from 12.6%
to 19.6%. the leases, which have maturity dates ranging from October 15, 2001 to
March 1, 2004, require minimum payments as follows:
Year ending
March 31,
2000 $ 249,423
2001 249,423
2002 234,658
2003 213,986
2004 152,672
-------
Total minimum lease payments 1,100,162
Less amount representing interest (287,284)
Present value of minimum lease payments 812,878
Less current portion (227,197)
Long-term portion $ 585,681
============
F-11
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. NOTES PAYABLE:
<TABLE>
<CAPTION>
March 31,
1999 1998
Note payable to ABC, an affiliate (Note 1), bearing interest
at 5% per annum. Converted with accrued interest of $33,333, into
1,533,333 shares of Series E Preferred Stock.
<S> <C> <C>
$ - $ 1,500,000
Note payable to BWI, an affiliate (Note 1), bearing
interest at 15% per annum, paid in ten monthly installments
of $25,000 plus accrued interest through maturity on
December 31, 1998. Note was subordinate to the FINOVA
Financing (Note 10).
- 250,000
Note payable to stockholder of Toys International
non-interest bearing, guaranteed by United Textiles, an
affiliate (Note 1), paid in quarterly installments of
$25,000 through its maturity on January 16, 1999.
- 100,000
Note payable to Shopnet, an affiliate (Note 1), bearing
interest at 9% per annum, payable in monthly installments of
$25,000 with an original maturity of June 15, 1999. Note has
been verbally extended to an unspecified date.
75,000 -
Note payable to Full Moon Development, Inc., an
unaffiliated entity, bearing interest at 12%, payable in
monthly installments of $50,000 through maturity on July 30,
1999.
200,000 -
Note payable to Full Moon Development, Inc., an
unaffiliated entity, bearing interest at 12%, payable in
monthly installments of $66,667, except for the final
installment which is due at maturity on June 30, 1999,
twenty days after previous payment.
200,000 -
Convertible debenture to Frampton, an affiliate (Note
1), bearing interest at 5% per annum, with interest only
payments due monthly beginning March 1, 1999, convertible to
Series E Preferred Stock, due at maturity on December 31,
1999.
500,000 -
Convertible debenture to EACF, an affiliate (Note 1),
bearing interest at 5% per annum, with interest only
payments due monthly beginning March 1, 1999, convertible to
Series E Preferred Stock, due at maturity on December 31,
1999.
150,000 -
Total notes payable 1,125,000 1,850,000
Less current portion (1,125,000) (350,000)
Long-term portion $ - $ 1,500,000
========================= =================
</TABLE>
<PAGE>
NOTE 12. NOTES PAYABLE (continued):
The above notes, which are carried by Play Co., may carry interest rates
that differ from prevailing interest rates. Play Co. has not provided for
imputed interest on rate discounts or premiums as the effects are immaterial to
the financial statements.
The above convertible debentures to Frampton and EACF are both convertible
into Series E preferred stock. The debenture holder has the right at any time
prior to the maturity date to convert all or part of the outstanding principal
plus any accrued interest. The conversion price is $.20 per share, i.e. for
every $100,000 converted, the holder would receive 500,000 shares. Each share of
Series E preferred stock is convertible into six shares of Play Co.'s common
stock, at the option of the holder, subject to holding periods.
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, of which
$57,820 remains outstanding on one settlement.
The settlement of operations for the year ended March 31, 1999 and 1998
includes $27,659 and $583,541 of "litigation related expenses" which comprise
the settlement costs on the aforementioned leases, legal fees which comprises
the settlement costs on the aforementioned leases and legal fees associated with
negotiations.
Play Co. currently has one remaining landlord/tenant matter which has yet
to be resolved as of March 31, 1999, Play Co. has accrued a liability related to
this matter, which is an estimate by management on its analysis. Play Co.'s
management expects this matter to be resolved without further material effects
on the financial statements.
F-12
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. INCOME TAXES:
The reconciliation of income taxes computed at the federal statutory tax
rate to income taxes at the effective income tax rate in the statements of
operations is as follows:
<TABLE>
<CAPTION>
March 31,
1999 1998
---- ----
<S> <C> <C>
Federal statutory income tax (benefit) rate 34.0% (34.0)%
Permanent adjustments 4.4 -
State income taxes, net of federal benefit 1.5 0.1
Change in valuation allowance (38.4) 33.9
------ ----
Effective income tax rate 1.5% - %
========= ========
</TABLE>
At March 31, 1999, the Company has net operating loss (NOL) carryforwards
of approximately $5,800,000 for federal tax purposes and approximately
$5,600,000 for state purposes. The federal NOLs are available to offset future
taxable income and expire at various dates through March 31, 2013 while the
state NOLs are available and expire at various dates through March 31, 2003.
A portion of the NOLs described above is subject to provisions of the
Internal Revenue Code, Sections 382, which limits use of net operating loss
carryforwards when changes in ownership of more than 50% occur during a three
year testing period.
F-13
<PAGE>
NOTE 14. INCOME TAXES (continued):
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's net deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
March 31,
1999 1998
<S> <C> <C>
Inventories ..................................................... $ (329,264) $ (227,696)
AMT tax credits ................................................. (23,260) (23,260)
Accrued expenses ................................................ 72,760 (19,779)
Current portion of net deferred income tax
(assets) liabilities ............................ (279,764) (270,735)
Depreciation and amortization ................................... (211,108) (28,388)
Loss on disposal of assets ...................................... 127,043 25,926
Net operating loss carryforwards ................................ (3,471,124) (3,652,294)
Deferred rent liability ......................................... (50,099) (43,891)
Income taxes .................................................... 794 508
Amortization of stock options ................................... (200,520) (202,049)
Long-term portion of net deferred income tax (assets) liabilities
(3,805,014) (3,900,188)
Total net deferred income tax (assets) liabilities .............. (4,084,778) (4,170,923)
Valuation allowance ............................................. 4,084,778 4,170,923
Net deferred income taxes ............................. $ -- $ --
=========== ===========
</TABLE>
NOTE 15. COMMITMENTS AND CONTINGENCIES:
Operating Leases:
The Company, until June 30, 1999, occupied space at 1410 Broadway, New
York, NY. It vacated these premises and relocated to 1385 Broadway, New York,
NY. U.S. Apparel Corp. is the prime tenant on the lease.
The lease which was signed on June 29, 1999 runs for a period of three
years and provides for annual lease payments under this noncancellable lease as
follows:
Year Ending
March 31,
2000 $24,503
2001 33,486
2002 34,576
2003 8,712
Play Co. leases its retail store properties under non-cancelable operating
lease agreements which expire through October 2009 and require various minimum
annual rentals. Several of the leases provide for renewal options to extend the
leases for additional five or ten year periods.
Certain store leases also require the payment of property taxes, normal
maintenance and insurance on the properties and additional rents based on
percentages of sales in excess of various specified retail sales levels.
During the years ended March 31, 1999 and 1998, the Company incurred rental
expense under all operating leases of $4,104,073 and $3,112,822, respectively.
Contingent rent expense was insignificant during the years ended March 31, 1999
and 1998.
At March 31, 1999, the aggregate future minimum lease payments due under
these non-cancelable leases, including approximately $448,000 for the remaining
term of the lease for a closed retail location through November 2003, are as
follows:
<TABLE>
<CAPTION>
Year ending Related Party Office/ Retail
March 31, Warehouse (Note 17) Locations Total
--------- ------------------- --------- -----
<S> <C> <C> <C> <C>
2000 $ 247,289 $ 5,148,190 $ 5,395,479
2001 20,624 4,952,250 4,972,874
2002 -- 4,536,291 4,536,291
2003 -- 4,374,766 4,374,766
2004 -- 3,472,774 3,472,774
Thereafter -- 7,447,655 7,447,655
Total minimum lease payments $ 267,913 $29,931,926 $30,199,839
=========== =========== ===========
</TABLE>
F-
<PAGE>
NOTE 15. COMMITMENTS AND CONTINGENCIES (continued):
Convertible Debt Agreement:
As discussed in Note 12, Play Co. has a $1.5 million note payable to ABC,
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 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.
In June 1998, ABC, a Belize corporation which is (i) an affiliate of the
Company and Play Co. under common control and (ii) the holder of a 5%
convertible secured subordinated Play Co. debenture - dated January 21, 1998 and
due August 15, 2000 - offered to amend the terms of the debenture to enable the
conversion of the principal amount and accrued interest thereon into shares of
Play Co.'s Series E preferred stock, at a conversion price of $1.00 per share.
Play Co. agreed to convert the debenture since the conversion of the debt into
equity would result in a strengthened equity position which Play Co. believed
would provide confidence to its working capital lender, FINOVA, and trade
creditors. Further, converting the debt to equity eliminated on-going interest
expense requirements as well as the cash flow required to repay the debenture.
Simultaneously with its offer to amend the debenture, ABC elected to convert
same as of June 30, 1998, whereby $1.5 million in principal amount and $33,333
in accrued interest were converted into 1,533,333 shares of Series E preferred
stock. ABC did not receive any registration rights regarding the shares.
Simultaneously, ABC terminated the Subordinated Security Agreement between the
parties and the Intercreditor and Subordination Agreement, dated January 21,
1998, by and between ABC and FINOVA.
The debenture provided for the conversion, at the option of ABC, of the
debenture into shares of common stock of either (i) a subsidiary which Play Co.
intended to form for the purpose of acquiring those stores operated by Play Co.
(or its subsidiaries) which conduct business as "Toys International," or (ii)
any other subsidiary (such as Toys International.COM, Inc.) which might acquire
a portion of the assets and business of Play Co. This option to convert was
exercisable at the net book value of the subsidiary's shares on the date ABC
exercised the option with a limitation on such share ownership being 25% of the
total outstanding shares of said subsidiary. In September 1998, in accordance
with the terms of the debenture ABC assigned its option to Tudor Technologies,
Inc. ("Tudor"), an entity of which Mr. Moses Mika (a director of the Company and
Play Co. and the father of the Company's president) is a shareholder. On July
15, 1999, Tudor elected to exercise its right to purchase the Toys common stock
and requested that the exercise price be amended to reflect the book value of
Toys at the most recent fiscal quarter, June 30, 1999. Play Co. agreed to
Tudor's request.
NOTE 15. COMMITMENTS AND CONTINGENCIES (continued):
Dependence on Suppliers:
For the year ended March 31, 1998, United Textiles ceased manufacturing
activities. All remaining inventory has been disposed of.
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. U.S. Apparel typically manufactures its products upon receipt of orders
from customers and delivers finished goods within four weeks of receipt of an
order. U.S. Apparel 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.
Approximately forty-one percent (41%) of Play Co.'s inventory purchases are
made directly from five (5) manufacturers. Play Co. typically purchases products
from its suppliers on credit arrangements provided by the manufacturers. The
termination of a credit line or the loss of a major supplier or the
deterioration of 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 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.
Financing Agreement:
In November 1998, Play Co. entered into an agreement with ZD, a related
party (Note 1), to secure additional financing. Pursuant to this agreement, ZD
issued a $700,000 irrevocable standby letter of credit ("L/C") in favor of
FINOVA, Play Co.'s working capital lender. FINOVA then lent a matching $700,000
to Play Co. in the form of a term loan (Note 10). The term loan expires on
August 3, 2000 and bears interest at prime plus one percent.
<PAGE>
NOTE 15. COMMITMENTS AND CONTINGENCIES (continued):
Financing Agreement (continued):
As consideration for its issuance of the L/C, ZD will receive payments
representing one-third (33%) of the net profits from three of Play Co.'s stores,
Great Lakes Crossing, Gurnee Mills, and Woodfield Mall (scheduled to open late
summer 1999). The net profit of each store will include an appropriate
allocation of corporate overhead. The expense related to the net profits
interest due to ZD will be accrued beginning April 1, 1999, the effective date
of the agreement. The duration of the agreement with ZD is equal to the current
lease term of each of the stores, including any renewals, but in any event not
beyond the Company's fiscal year ending March 31, 2013. The store leases
currently expire, including options for renewal, at various dates through June
2009. The Company will categorize this expense as (effective) interest since
these costs represent compensation to secure additional financing.
Additionally, as long as the agreement is in effect, ZD will have the right
to nominate and appoint one-third of Play Co.'s Board of Directors.
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 assurances that another entity's failure to ensure year 2000 capability would
not have an adverse effect on the Company and its subsidiary, Play Co.
F-24
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. RELATED PARTY TRANSACTIONS:
Office and warehouse lease:
Play Co. leases an office/warehouse building from a partnership of which
one of the partners is Play Co.'s Chief Executive Officer and Director. The
original lease was executed in October 1986. The lease term was for a 10-year
period, with increases in the monthly rent tied to the CPI, adjusted every three
years. The lease was amended in 1993 to extend the term through April 2000, with
an option to extend for a period of five years under the same terms and
conditions of the lease. Rent expense under this lease totaled $247,289 for each
of the years ended March 31, 1999 and 1998.
Consulting Fees:
Play Co. made payments aggregating $33,000 and $25,000 to the Chairman of
its Board of Directors for various consulting services during the years ended
March 31, 1999 and 1998, respectively.
Commitment of Financing:
The individual, beneficiary 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 18. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes and interest was as follows:
<TABLE>
<CAPTION>
Years ended March 31,
1999 1998
<S> <C> <C>
Interest paid $ 809,601 $ 511,924
================
Income taxes $ 805 $ 800
===================
</TABLE>
F-25
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. SUBSEQUENT EVENTS:
Consulting Agreement:
In April 1999, U.S. Apparel entered into a verbal consulting agreement with
Yu Jin International, Inc. ("Yu Jin") pursuant to which Yu Jin oversees the day
to day production of garments and operating activities of U.S. Apparel's
subcontractor. During the 1st fiscal quarter of 2000, U.S. Apparel remitted
$51,800 to Yu Jin in accordance with the terms of the aforesaid agreement.
Unsecured Promissory Notes:
On April 22, 1999, Play Co. entered into an unsecured promissory note with
Shopnet, an affiliate, (Note 1) for $100,000 at an interest rate of 9% per
annum. The principal payments and accrued interest are due monthly beginning May
31, 1999, with a maturity date of August 31, 1999.
On May 17, 1999, Play Co. entered into an unsecured promissory note with
Shopnet, an affiliate (Note 1) for $100,000 at an interest rate of 9% per annum.
The principal payments and accrued interest are due monthly beginning June 30,
1999, with a maturity date of September 30, 1999.
Private Placement of Series F Stock:
On May 18, 1999, the Board of Directors of Play Co. unanimously adopted a
Corporate Resolution to enter into a Securities Purchase Agreement (the Private
Placement) with several investors. The Private Placement was for 750,000 shares
of Play Co.'s Series F Preferred Stock ("Series F Stock"), par value of $.01 per
share, for gross proceeds of $750,000. Play Co. was also authorized to amend its
articles of incorporation to change the terms and privileges of the Series F
Stock. The Series F Stock is convertible into two shares of Common Stock at any
time following the effective date of the registration statement registering the
Series F Stock and underlying shares of Common Stock for resale.
The Corporate Resolution also authorized Play Co. to file a Registration
Statement with the Securities and Exchange Commission for the securities issued
under the Private Placement.
F-26
<PAGE>
MULTIMEDIA CONCEPTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. SUBSEQUENT EVENTS (continued):
Private Placement of Series F Stock (continued):
As part of the Private Placement, Play Co. granted an option to the
Placement Agent and its assignees to purchase an aggregate 350,000 share of
Common Stock, with an exercise price of $3.00 per share for a period of four
years from the date of closing of the Private Placement. Additionally, as
commission, the Placement Agent received a 10% fee, or $75,000, and a 1% fee, or
$7,500, to cover administrative expenses. The Private Placement closed on May
27, 1999, providing net cash proceeds of $667,500 to Play Co. before legal and
other administrative expenses.
On the May 27, 1999 closing date of the Private Placement, Play Co.'s
Common Stock had a closing price of $1.69. As such, the Series F Stock has a
beneficial conversion feature which will result in accounting treatment to
reflect non-cash dividends in future periods in a manner similar to the Series E
Stock transactions.
Common Stock Compensation of Consultant:
In May 1999, Play Co. issued 45,333 shares of Common Stock to a consultant
as compensation for site selections and negotiation of retail location leases.
These services are being provided for new Play Co. stores opening in fiscal
2000. Play Co. has valued the shares based on the May 17, 1999 closing price of
$1.375 per share, less a 10% discount for marketability restrictions for an
aggregate value of approximately $56,000.
Private Placement of Common Stock:
In July 1999, pursuant to Regulation S of the General Rules and Regulations
Under the Securities Act of 1933, as amended, Toys International.COM, Inc.
("Toys") sold 6.6% of its common stock in a private transaction in exchange for
$2.8 million.
Proposed Public Offering:
In July 1999, Toys also entered into an investment agreement with an
investment banking firm to take Toys public in an initial public offering. Toys
expects to raise approximately $20 million to $25 million through the sale of
22% of its common stock within approximately 90 days.
F-27
<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 5th day of August 1999.
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 8/5/99
Ilan Arbel Date
/s/ Rivka Arbel Director 8/5/99
Rivka Arbel Date
/s/ Yair Arbel Director 8/5/99
Yair Arbel Date
</TABLE>
F-29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.1
FINANCIAL DATA SCHEDULE
ARTICLE 5 OF REGULATION S-X
The schedule contains summary financial information extracted from the
financial statements for the year ended March 31, 1999 and is qualified in its
entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> mar-31-1999
<PERIOD-END> mar-31-1999
<CASH> 1,110,966
<SECURITIES> 0
<RECEIVABLES> 692,266
<ALLOWANCES> 0
<INVENTORY> 11,595,284
<CURRENT-ASSETS> 15,538,939
<PP&E> 9,447,040
<DEPRECIATION> (4,096,755)
<TOTAL-ASSETS> 23,599,316
<CURRENT-LIABILITIES> 12,119,228
<BONDS> 0
0
0
<COMMON> 3,005
<OTHER-SE> 1,946,267
<TOTAL-LIABILITY-AND-EQUITY> 23,599,316
<SALES> 37,791,421
<TOTAL-REVENUES> 37,881,663
<CGS> 10,897,966
<TOTAL-COSTS> 10,897,966
<OTHER-EXPENSES> 5,855,751
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 384,901
<INCOME-PRETAX> (353,770)
<INCOME-TAX> (353,770)
<INCOME-CONTINUING> (353,770)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (353,770)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
