As filed with the Securities and Exchange Commission on May 2, 2000
Registration No. 333-87251
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2/Amendment No. 1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
PLAY CO. TOYS & ENTERTAINMENT CORP.
(Name of Small Business Issuer in Its Charter)
Delaware 2330 95-3024222
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
550 Rancheros Drive, San Marcos, California 92069, (760) 471-4505
(Address and Telephone Number of Principal Executive Offices)
(Address of Principal Place of Business or Intended Principal Place of Business)
Richard Brady, 550 Rancheros Drive, San Marcos, California 92069, (760) 471-4505
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(Name, Address and Telephone Number of Agent for Service)
Copies to: Marie Elena Cocchiaro, Esq. Beth S. Barash, Esq.
Millennium Ventures Law Group Todtman, Nachamie, Spizz & Johns, P.C.
113 Crosby Court, Suite 2 425 Park Avenue
Walnut Creek, California 94598 New York, New York 10022
(925) 934-9531 (212) 754-9400
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, please check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed
Title Of Each Class Of Aggregate Price Per Maximum Aggregate
Securities Amount To Be Unit 1 Offering Price 1
To Be Registered Registered Amount Of
Registration Fee
Common Stock, par value
$0.01 per share 2 1,500,000 $ 1.11 $1,665,000 $574.10
Common Stock, par value
$0.01 per share 3 350,000 $ 3.00 4 $1,050,000 $362.04
Common Stock, par value
$0.01 per share 5 100,000 To be provided To be provided To be provided
Total........... To be provided To be provided
(1) Total estimated solely for the purpose of determining the registration
fee.
(2) Shares into which 750,000 shares of Series F Preferred Stock, par value
$0.01 (the "Series F Stock"), are convertible, the price for which is based on
the average of the bid and asked price per share of Common Stock on August 26,
1999.
(3) Shares issuable upon the exercise of options (the "Options") issued in
accordance with the Securities Purchase Agreement entered into by and between
the Company and the Selling Securityholders, together with such indeterminate
number of securities as may be issuable by reason of anti-dilution provisions
contained therein.
(4) Represents the exercise price of the Options.
(5) Shares to be issued on effectiveness of this registration statement in
connection with final settlement of a legal action commenced against the Company
by a former lessor.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended (the "Act"), or until the Registration
Statement shall become effective on such date as the Commission, acting pursuant
to said Section 8(a), may determine.
Cross Reference Sheet Pursuant to Rule 404(a)
Showing the Location In Prospectus of
Information Required by Items of Form SB-2
Item in Form SB Prospectus Caption
1. Front of Registration Statement and Outside Cover Page and Cover Page of Registration Statement
Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of Continued Cover Page, Table of Contents
Prospectus
3. Summary Information and Risk Factors Prospectus Summary, The Offering, Summary Financial Data,
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Risk Factors, Dilution
7. Selling Securityholders Selling Securityholders
8. Plan of Distribution Cover Page, Plan of Distribution for the Securities of the
9. Legal Proceedings Business of the Company
10. Directors, Executive Officers, Promoters and Control Management
11. Security Ownership of Certain Beneficial Owners and Principal Securityholders
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Interest of Named Experts and Counsel
14. Disclosure of Commission Position on Indemnification Management and Item 24. Indemnification of Directors and
15. Organization Within Last Five Years Prospectus Summary, Business of the Company, Principal
Securityholders, Certain Relationships and Related
Transactions, Risk Factors
Item in Form SB (cont'd) Prospectus Caption (cont'd)
- ------------------------ ---------------------------
16. Description of Business Business of the Company
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of Financial Condition
Operation and Results of Operations
18. Description of Property Business of the Company
19. Certain Relationships and Related Transactions Certain Relationships and Related Transactions
20. Market for Common Equity and Related Stockholder Market for Common Equity and Related Stockholder Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountants and Not Applicable
Financial Disclosure
Preliminary Prospectus subject to completion, dated May 2, 2000
PROSPECTUS
PLAY CO. TOYS & ENTERTAINMENT CORP.
1,600,000 Shares of Common Stock Offered by Selling Securityholders
350,000 Shares of Common Stock Underlying Options Offered
by Selling Securityholders
This Prospectus relates to the resale by certain selling
securityholders (the "Selling Securityholders") of an aggregate of 1,950,000
shares (the "Shares") of Play Co. Toys & Entertainment Corp. (the "Company")
common stock, par value $0.01 per share (the "Common Stock"), 1,500,000 of which
are issuable upon the conversion of 750,000 shares of Series F Preferred Stock
(the "Series F Stock"), 350,000 of which are issuable upon the exercise of
options (the "Options"), and 100,000 of which (the "Settlement Shares") will be
issued on effectiveness of this registration statement in final settlement (the
"Settlement") of a legal action commenced by a former lessor. Each share of
Series F Stock is convertible into two shares of Common Stock, at the option of
the holder, on the date this Registration Statement is declared effective by the
Securities and Exchange Commission. Each share shall convert automatically on
the earlier of two years after issuance or in the event the Common Stock
achieves a closing price of $5.00 for 30 consecutive days.
The Series F Stock offered herein was issued on May 27, 1999 in a
private placement exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Act"), in accordance with ss.4(2) thereof and Rule
506 of the General Rules and Regulations Under the Securities Act of 1933 (the
"Securities Act Rules"), and is subject to the terms and conditions of a
Securities Purchase Agreement entered into by and between the Company and (i)
David Stefansky, (ii) Aaron Stefansky, (iii) Solomon Libenthal, (iv) Samuel
Krieger, (v) Birdie Capital Corp., (vi) Harbourcreek Investments, Ltd., and
(vii) Valentia Properties, Inc. The Options offered herein are subject to the
terms and conditions of the Option Agreements entered into by and between the
Company and (i) Robb Peck McCooey Clearing Corporation ("RPMCC"), (ii) Redwood
Capital Partners, Inc., (iii) Gushnut Consulting, Inc., (iv) Vince Calicchia,
and (v) Don Sinsabaugh. None of the aforesaid individuals or entities is
affiliated with the Company. The Settlement Shares shall be issued to Foothill
Marketplace, Ltd. a former lessor of the Company. The owners of the Securities
offered hereby for resale are collectively referred to herein as the Selling
Securityholders. The Securities are being offered by the Selling Securityholders
and may be sold from time to time in negotiated transactions, at fixed prices
(which may be changed), and at market prices prevailing at the time of sale, or
a combination thereof. The Company's Common Stock, on April 20, 2000, closed at
$0.25 per share. The Company will not receive any of the proceeds from the
resale of any Securities sold by the Selling Securityholders but shall receive
proceeds from the exercise of any Options. See "Plan of Distribution for the
Securities of the Selling Securityholders."
The Company's Common Stock, Series E Preferred Stock ("Series E
Stock"), and Series E Preferred Stock Redeemable Purchase Warrants ("Series E
Warrants") are quoted on the over-the-counter market on the OTC Bulletin Board
under the symbols "PLCO," "PLCOP," and PLCOW," respectively. Quotation on the
OTC Bulletin Board does not imply that there is a meaningful sustained market
for the Company's Securities or that if one develops, it will be sustained for
any period of time.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION; NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 2, 2000.
Prior to this Offering, there has been a limited public market for the
Company's Common Stock, Series E Stock, and Series E Warrants and no public
market for the Series F Stock. There can be no assurance (i) that any meaningful
market for the Company's Securities will develop or (ii) that if one does
develop, it will be sustained for any period of time. Quotation on the OTC
Bulletin Board, Nasdaq, or on any exchange does not imply that a meaningful
sustained market for the Company's Securities will develop or that if developed,
such market will be sustained for any period of time.
Until September 24, 1997, the Company's Common Stock was listed on the
Nasdaq SmallCap Stock Market ("Nasdaq") under the symbol "PLCO." Effective with
the close of business on September 23, 1997, the Company's Common Stock was
delisted from trading on Nasdaq. The Company appealed an earlier Nasdaq
determination and presented its argument in August 1997 at an oral hearing
before the Nasdaq Qualifications Panel (the "Panel"). On September 23, 1997, the
Company received a decision from the Panel that based its decision to delist on
its belief that the Company did not meet the stockholders' equity maintenance
requirement of $1 million and based on transactions it deemed "detrimental to
the investing public and the public interest" concerning transactions undertaken
in February 1996 with respect to options issued to an investor which provided a
$2 million letter of credit ("L/C") as security for a credit line the Company
maintained with Congress Financial Corporation (Western) ("Congress," the
"Congress Financing"). The Company appealed this matter to the Nasdaq Listing
and Hearing Review Committee (the "Review Committee") which, on October 29,
1997, remanded the Panel's determination for reconsideration by a new Nasdaq
analyst and a new Panel due in part to the Company's allegations of bias.
In December 1997, the Company presented written evidence to the new Panel
which, in a determination dated January 20, 1998, affirmed the delisting. The
Company appealed this determination to the Review Committee. In a decision dated
May 21, 1998, the Review Committee affirmed the delisting citing as its basis
therefor, inter alia, as follows: ". . . given the Company's history of losses,
we do not have confidence in the Company's ability to maintain compliance [with
the capital and surplus requirement] for the long term." In addition, the Review
Committee determined that "substantial dilution to the public shareholders by
stock issuance . . . and by the conversion of preferred stock issued . . . at
prices substantially below the market price" supported the Review Committee's
argument of purported affiliate self-dealing. In further support of its
determination, the Review Committee cited the Company's failure to provide
information requested with respect to entities, which were not affiliated with
the Company. (In response to the Review Committee's request for such
information, the Company informed same that it did not believe it appropriate to
make representations regarding the transactions or the composition of any
entities with which it was not affiliated and recommended that the Review
Committee redirect such inquiries directly to such entities.)
The Company sought all administrative remedies available from Nasdaq and
believes that Nasdaq erred in its determination. Given the extreme cost
associated with appealing Nasdaq's decision to the Securities and Exchange
Commission, however, the Company decided not to file such an appeal.
AVAILABLE INFORMATION
For further information with respect to the Company and the Securities
offered hereby, reference is made to the Public Reference Section of the
Securities and Exchange Commission (the "Commission") at its principal office at
450 Fifth Street, N.W., Washington, D.C., 20549. The Commission maintains a web
site that contains reports, proxy and information statements, and other
information, which is filed electronically through the Commission's Edgar
system, all of which may be viewed through accessing the Commission's web site
located at http://www.sec.gov.
The Company's fiscal year end is March 31. The Company is subject to
the informational reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and in accordance therewith, files periodic
reports, proxy statements, and other information with the Commission. In the
event the Company's obligation to file such periodic reports, proxy statements,
and other information is suspended, the Company will voluntarily continue to
file such information with the Commission. The Company will distribute to its
stockholders annual reports containing audited financial statements, together
with an opinion by its independent auditors. In addition, the Company may, in
its discretion, furnish quarterly reports to stockholders containing unaudited
financial information for the first three quarters of each year.
PROSPECTUS SUMMARY
The following summary is intended to set forth certain pertinent facts
and highlights from material contained in the body of this Prospectus. The
summary is qualified in its entirety by the detailed information and financial
statements appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information in this Prospectus gives effect to the 1 for 3 reverse stock
split effected in July 1997.
Play Co. Toys & Entertainment Corp. (the "Company"), a Delaware
corporation, was founded in 1974, at which time it operated one store under the
name Play Co. Toys in Escondido, California. At present, the Company and its
subsidiary, Toys International.COM, Inc. ("Toys," formerly known as Toys
International, Inc.), operate an aggregate of thirty-one stores throughout
Southern California (in the Los Angeles, Orange, San Diego, Riverside, and San
Bernardino Counties) and in (i) Tempe, Arizona, (ii) Las Vegas, Nevada, (iii)
Dallas and Houston, Texas, (iv) Auburn Hills, Michigan, (v) Chicago, Illinois,
and (vi) Charlotte, North Carolina. The Company intends to expand its operations
geographically and in accordance therewith has executed leases to open seven
additional stores by the end of calendar year 2000. These stores shall be
located in Nevada, Tennessee, Illinois, Colorado, Florida, Maryland, and
Minnesota. The Company and its subsidiaries are hereinafter referred to in the
aggregate as the "Company" except as otherwise required for clarity.
Approximately 75% of the Company's stores offer educational, new
electronic interactive, and specialty and collectible toys and items for sale
and are strategically located in highly trafficked, upscale malls. The remaining
25% sell traditional toys and games and are located in strip shopping centers.
Given the favorable results obtained from a two year market test of the sale of
children's swimwear in its stores, the Company recently expanded its product mix
and now offers a limited number of children's swimwear and accessories for sale
in many of its stores.
Since 1997, the Company has embraced and implemented a new store design
and layout, remodeled most of its older stores, closed non-profitable stores,
and expanded its geographic market from exclusively Southern California to the
mid-western United States. Since 1996, the Company has opened twenty stores
(inclusive of the three it purchased in January 1997) and remodeled one store,
all of which are considered by management to be high-end retail toy and
educational, electronic interactive stores. These outlets, and those the Company
expects to open in the future, offer items comparable in quality and choice to
those offered by FAO Schwarz, Warner Brothers, and Disney Stores and are
expected to attract clientele similar to those attracted by such stores.
In April 1999, the Company debuted the first of two dedicated
electronic commerce web sites. This site, www.toyswhypayretail.com, represents a
new trade name for the Company and allows consumers to purchase, at near
wholesale prices, overstocks, special buys, and overruns on mostly name-brand
toys purchased by the Company out of season. The Company offers approximately
3,000 items for sale on the web site. The second site, www.webjumbo.de, debuted
in October 1999 and is a full line site retailing approximately 5,000 items.
This site is exclusively in German, and a sizable portion of the items sold
thereon will represent German toys not sold in the Company's retail stores.
Because the Company's new and newly remodeled stores focus on the sale
of educational and electronic interactive games and toys, specialty products,
and collector's toys which generally carry higher gross margins than traditional
toys, such stores have shown and are expected to continue to show higher gross
profits than the Company's older stores (which focused primarily on the sale of
traditional toys).
In May 1999, pursuant to ss.506 of Regulation D of the Securities Act
Rules, the Company sold 750,000 shares of Series F Stock at a purchase price of
$1.00 per share, through RPMCC as placement agent. The Company received $750,000
for the sale less (i) legal and administrative expenses, (ii) the placement
agent's 10% commission, and (iii) a 1% nonaccountable expense allowance. Each
share of Series F Stock is convertible into two fully paid and non-assessable
shares of Common Stock, at the option of the holder, on the date this
Registration Statement is declared effective by the Commission. The Series F
Stock shall convert automatically on the earlier of two years after issuance or
in the event the Common Stock achieves a closing price of $5.00 for 30
consecutive days.
This Prospectus covers the resale of the 1,500,000 shares of Common
Stock underlying the Series F Stock sold in the above described private
placement, an additional 350,000 shares of Common Stock underlying Options which
were granted to the placement agent and its designees as part of the private
placement, and 100,000 shares of Common Stock which will be issued on
effectiveness of this registration statement to a former commercial lessor as
part of a settlement of an action commenced by same against the Company.
The Company's executive offices are located at 550 Rancheros Drive, San
Marcos, California 92069; the Company's phone number is (760) 471-4505.
THE OFFERING 1
Securities Offered: 1,950,000 Shares of Common Stock being sold by the
Selling Securityholders. The Shares offered hereby
will be tradable immediately upon issuance.
Price Per Share: Not applicable
Securities Outstanding Prior to the Offering
Common Stock 2: 19,677,016 shares
Series E Preferrred Stock 3: 6,952,510 shares
Series F Preferred Stock 4: 750,000 shares
Securities Outstanding After the Offering
Common Stock 2: 21,627,016 shares
Series E Preferrred Stock 3: 6,952,510 shares
Series F Preferred Stock 4: 0 shares
Use of Proceeds:
The Company will receive no proceeds from the sale of
the Common Stock offered for resale hereby. The net
proceeds of the Company's sale of the 750,000 shares
of Series F Stock, aggregating $657,500, have been
used for general working capital. See "Use of Proceeds."
Risk Factors: An investment in the Securities offered hereby is
highly speculative and involves potentially substantial
dilution. The statements contained in this Prospectus
which are not historical facts contain forward-looking
information with respect to plans, projections, or future
performances of the Company, the occurrences of which involve
certain risks and uncertainties as detailed herein. See "Risk
Factors."
Symbols 7: Common Stock.............PLCO
Series E Stock...............PLCOP
Series E Warrants..........PLCOW
(footnotes from previous page)
(1) Unless otherwise indicated, no effect is given in this Prospectus to
(i) the 2,000,000 shares of Series E Stock reserved for issuance upon exercise
of the Series E Warrants and the 12,000,000 million shares of Common Stock into
which said Series E Stock is convertible or (ii) 41,715,060 shares of Common
Stock into which the 6,952,510 shares of Series E Stock outstanding are
convertible.
(2) Does not include (i) the 41,715,060 shares of Common Stock into which
the 6,952,510 shares of Series E Stock currently outstanding are convertible,
(ii) the 12,000,000 shares of Common Stock into which the 2,000,000 million
shares of Series E Stock underlying the 2,000,000 Series E Warrants currently
outstanding are convertible, (iii) the 1,500,000 shares of Common Stock into
which the Series F Stock are convertible, (iv) the 350,000 shares of Common
Stock underlying the Options, or (v) the 100,000 shares of Common Stock to be
issued on effectiveness of this registration statement in connection with the
Settlement.
(3) Does not include the 2,000,000 shares of Series E Stock underlying the
2,000,000 Series E Warrants outstanding.
(4) Each share of Series F Stock is convertible into two shares of Common
Stock on effectiveness of this Registration Statement. The Series F Stock shall
convert automatically on the earlier of two years after issuance or in the event
the Common Stock achieves a closing price of $5.00 for 30 consecutive days.
(5) Includes the 1,500,000 shares of Common Stock into which the Series F
Stock are convertible on effectiveness of this Registration Statement, the
350,000 shares of Common Stock underlying the Options, and the 100,000 shares to
be issued in connection with the Settlement.
(6) On effectiveness of this Registration Statement, each share of Series F
Stock is convertible, at the option of the holder, into two shares of Common
Stock, which Common Stock is registered hereby. Given that the Company's Common
Stock is listed on the OTC Bulletin Board, while the Series F Stock is not
listed at all, it is highly probable that the holders of the Series F Stock will
convert such shares into Common Stock immediately on effectiveness hereof.
(7) Until September 24, 1997 the Company's Common Stock was listed on
Nasdaq. The Company's Common Stock, Series E Stock, and Series E Warrants are
now listed on the OTC Bulletin Board. Quotation thereon does not imply that a
meaningful, sustained market for the Company's Securities has developed or will,
in fact, develop. See "Risk Factors" and "Market for Common Equity and Related
Stockholder Matters."
SUMMARY FINANCIAL DATA
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. The selected operating data for the nine month
periods ended December 31, 1998 and 1999 and balance sheet data as of December
31, 1999 are derived from the Company's unaudited financial statements.
Operating results for the nine month period ended December 31, 1999 are not
necessarily indicative of the results that may be expected for any other interim
period or for the year ending March 31, 2000.
March 31, December 31,
1998 1999 1999
---- ---- ----
Balance Sheet Data:
Working capital $4,452,481 $5,763,509 $18,491,136
Total assets 14,139,887 21,081,758 40,448,964
Total current liabilities 4,581,831 7,558,647 10,198,081
Long term obligations 7,055,549 8,527,116 1,392,151
Stockholders' equity 2,502,507 4,995,995 16,258,600
Common stock dividends --- --- ---
Year Ended March 31, Nine Months Ended December 31,
1998 1999 1998 1999
---- ---- ---- ----
Operating Data:
Net sales $22,568,527 $34,371,230 $27,171,662 $30,691,508
Gross profit 8,878,928 14,780,446 11,505,941 13,320,673
Gross margin 39.3% 43.0% 42.3% 43.4%
Total operating expenses 10,119,430 13,741,011 9,853,192 14,785,816
Net income (loss) before taxes (2,054,470) (575,616) 1,008,143 (2,928,213)
Net income (loss) (2,054,470) (577,766) 1,008,143 (2,928,213)
Net income (loss) applicable to common
shares (3,528,276) (2,285,491) (221,609) (5,112,132)
Income (loss) per common share (0.86) (0.50) (0.05) (0.92)
- ------------------------------------------ ---------------- ----------------- ----------------- ---------------
Weighted average shares outstanding 4,098,971 4,590,642 4,291,883 5,541,076
RISK FACTORS
The Securities offered hereby are speculative and involve a high degree
of risk. In addition to the other information contained in this Prospectus, the
following factors regarding risks associated with the Company's business and
risks related to the Offering should be carefully considered before purchasing
the Securities offered by this Prospectus. The purchase of Securities should not
be considered by anyone who cannot afford the risk of loss of his entire
investment. The statements contained in this Prospectus which are not historical
facts contain forward-looking information with respect to plans, projections, or
future performances of the Company, the occurrences of which involve certain
risks and uncertainties as detailed herein. No assurance can be made that this
plan or projections will be realized or that if realized, such plan or
projections will produce the results anticipated by the Company.
1. Instability of Revenues; Declining Same Store Sales; History of
Operating Losses and Retained Earnings/Accumulated Deficit. While the Company's
revenues for the years ended March 31, 1999 and 1998 increased by $11,802,703 to
$34,371,230 and $2,944,251 to $22,568,527, respectively, its revenues for the
years ended March 31, 1995, 1996, and 1997 steadily declined from $25,374,722 to
$21,230,853 to $19,624,276, respectively. In addition, although same store sales
during fiscal 1999 increased by 21.3% from fiscal 1998 and increased during
fiscal 1998 by 3.7% from fiscal 1997, since the first quarter of the fiscal year
ended March 31, 2000, same store sales have steadily declined, plunging 22.5%
during the nine months ended December 31, 1999 as compared to the same period of
1998. Moreover, during each of the fiscal years ended March 31, 1999, 1998, the
Company has suffered net losses of $577,766 and $2,054,470, respectively.
Similarly, for the nine months ended December 31, 1999, the Company sustained a
net loss of $2,928,213 as compared to a net income of $1,008,143 during the
corresponding 1998 period.
The losses in the 1999 period are primarily due to decreases
in same store sales, which resulted in lower profit contribution from those
stores, coupled with the costs of opening new stores and establishing the
Company's Internet operations. There can be no assurance that same store sales
will not continue to decline and that the Company will not continue to sustain
net losses. Moreover, such losses may increase, and there can be no assurance
that the Company will be able to fund those losses.
At December 31, 1999, the Company had (i) working capital of
$18,491,136, (ii) an accumulated deficit of $21,838,445; and (iii) total
stockholders' equity of $16,258,600.
2. Future Losses and Negative Cash Flow. The Company has executed
leases to open an additional seven stores by the end of calendar year 2000. The
construction costs associated with opening such stores have averaged, during the
last two fiscal years, approximately $300,000 to $400,000 per store, an amount
which does not account for the inventory required to be purchased for each
location or the salaries of the employees to be hired to operate each location.
In addition, the Company expects to incur approximately $1.5 million in expenses
over the next sixteen months in developing its marketing and web site operations
and expanding its product offerings and web site content.
As a result of the above factors, the Company expects a
significant negative cash flow for the next sixteen months. Therefore, the
Company's operating losses are expected to increase considerably, or at a
minimum, not to decrease at all in the near future. Since cash flow is expected
to remain negative, the Company believes it may require additional capital, in
the way of subsequent equity financing, within the next sixteen months. In the
event the Company cannot obtain such financing or such financing is insufficient
to offset the Company's expenses, the Company's net loss during any given period
could be greater than expected and the market price of the Company's stock could
decline. See "Dilution" and Risk Factor No. 17 "Possible Future Dilution."
3. Decrease in Same Store Sales. The Company's same store
sales decreased by 22.5% for the nine months ended December 31, 1999. The
Company believes that this decline, which followed a period of two years of
continuous increases (during fiscal years ended March 31, 1999 and 1998),
occurred for several reasons. During the period ended December 31, 1999, the
flow of allocated or "hot" selling merchandise was spread over 25% more stores
(given recent new store openings). Despite the opening of such new stores, a
considerable number of the Company's vendors either failed to increase their
lines of credit (thereby requiring that the same number of goods be shared by
more stores) or failed to increase them enough to allow the Company to stock its
new stores while maintaining adequate inventory for its existing ones. The
Company is working to increase its lines of credit with its vendors to more
adequately address not only the past growth but its expected future growth as
well. In addition to the foregoing, the Company believes that Ty, Inc.'s limited
distribution of its popular Beanie Babies(TM) toys is a significant factor in
the Company's decrease in same store sales. A final factor in the decline is
that the Company withheld a substantial amount of critical inventory from its
existing stores in order to distribute same to the six new stores it opened in
the September through late October 1999 timeframe.
4. Unpredictable Operating Results. The Company's operating results
have fluctuated in the past and may fluctuate significantly in the future due to
a variety of factors, many of which are outside of the Company's control.
Because such results are volatile and difficult to predict, quarter-to-quarter
comparisons of same are not a good indication of future performance. It is
likely that in some future quarter, the Company's operating results may fall
below the expectations of securities analysts and investors. In this event, the
trading price of the Company's Common Stock may decline significantly. Factors
that may harm the Company's business or cause operating results to fluctuate
include the following: an inability to purchase product at reasonable cost; an
inability to attract new customers, retain existing customers, or encourage
repeat purchases; an inability to convert web site visitors into customers; a
change in the mix of toys, video games, software, plush toys, and other products
sold by the Company; the seasonality of the toy industry; an inability to manage
inventory levels or control inventory theft or manage distribution operations;
an inability to adequately maintain, upgrade, and develop the web sites or the
systems used to process customer orders and payments; the ability of competitors
to offer new or enhanced web sites, services, or products; price competition; an
increase in the number of product returns; fluctuations in the demand for
children's products associated with movies, television, and other entertainment
or recreational trends; an inability to obtain fashionable children's toys and
hobby products from vendors; fluctuations in the dollar amount of consumer
spending on children's toys and hobby products; the amount and timing of
operating costs and capital expenditures relating to expansion of the Company's
operations; unexpected increases in shipping costs or delivery times,
particularly during the holiday season; technical difficulties or internet or
system downtime; government regulations related to use of the internet for
commerce or for sales and distribution of toys and hobby products; and economic
conditions which might otherwise result in decreased expendable income per
household.
A number of factors will cause the Company's gross margins to
fluctuate in future periods, including the mix of toys and hobby products sold,
inventory management, inbound and outbound shipping and handling costs, the
level of product returns, and the level of discount pricing. Any change in one
or more of these factors could reduce gross margins in future periods.
5. Change in Business Focus. In 1996, management realized the need to
change the Company's focus, finding there was a large demand for educational and
promotional toys and collectibles, and thus decided to change its business plan
to focus on these markets. Accordingly, the Company developed a new store
design, marketing format, and product mix and decided to redesign some of its
existing stores and open new stores under this format. The marketing format
calls for the opening of new stores in malls rather than in strip centers where
most of the Company's older stores are located. While the Company believes this
change in focus was necessitated by the then and now prevailing children's
entertainment trends and is a positive step which increases the likelihood of
profitability for the Company, there can be no assurance that this new direction
and marketing focus will be successful in the long run or that the Company will
have the funding to continue to implement its business plan.
6. Dependence on Specialty Toys; Changes in Consumer Preferences;
Limited Suppliers. As children's consumer preferences and tastes continually
change, the Company's success depends on its ability also to change and adapt to
new trends and to supply merchandise then in demand. Because the Company does
not have long-term or exclusive vendor contracts, it may be unable to purchase
sufficient quantities of product in a timely manner and thus may lose customers.
Moreover, since children's entertainment products are often characterized by
fads of limited life cycles, there can be no assurance that the Company
accurately will be able to forecast such preferences in a timely fashion. If the
Company cannot so forecast or provide its customers with products then in
demand, profit margins will be significantly adversely affected.
In addition to the foregoing, the Company cannot guarantee
that specialty toys will continue to have higher profit margins. Moreover, most
of the companies with which the Company competes have more extensive research
and development, marketing, and customer support capabilities and greater
financial, technological, and other resources than the Company. There can be no
assurance that the Company will be able to distinguish itself from such larger,
more well-known entities or that it will be successful. Moreover, the Company
does not believe there are any significant barriers to entry which might
otherwise discourage new companies from entering the specialty toy industry and
competing with the Company for business, and there can be no assurance that the
Company's competitors will not also embrace the Company's business concept and
vary their product mix so as to compete directly with the Company. See "Risk
Factor No. 11 - Competition."
7. Inventory Risk. The Company currently holds approximately $4.4
million in inventory for distribution to its thirty-one stores across the United
States and approximately $7.7 million in inventory in such stores. Since
consumer demand can change for products between the time the Company orders such
products and the time it receives them, the rapidly changing trends in consumer
tastes in the market for children's entertainment products subjects the Company
to significant inventory risk. The Company must accurately predict these trends
and not overstock unpopular products. The Company is particularly exposed to
this risk because it derives a majority of its net sales in the fourth calendar
quarter of each year. Any failure to sufficiently stock popular toys and other
products in advance of such quarter would harm the Company's operating results
for the entire fiscal year. Furthermore, in the event that one or more products
do not achieve widespread consumer acceptance, the Company may be required to
take significant inventory markdowns, which could reduce net sales and gross
margins. This risk may be greatest in the first calendar quarter of each year,
after the Company has significantly increased inventory levels for the holiday
season. This risk likely will increase as new inventory is purchased or as the
Company becomes more involved in web site sales due to the lack of experience in
purchasing products for these categories. In addition, to the extent that demand
for the Company's products increases over time, the Company may be forced to
increase inventory levels which would subject the Company to additional
inventory risks.
8. Dependence on Supplier Credit and Short-Term Loans. The Company
purchases a significant portion of its products from approximately five
manufacturers and ships them to its stores from its distribution center. There
are no written contracts and/or agreements with any individual manufacturer or
supplier, except for Shopnet.com, Inc. ("Shopnet," see "Certain Relationships
and Related Transactions"); rather, all orders are on a purchase order basis
only. The Company requires certain lines of credit and banking relations to
conduct its business. The Company relies on credit terms from its suppliers and
manufacturers to purchase nearly all of its inventory. Credit terms vary from
company to company and are based upon many factors including the ordering
company's financial condition, account history, type of product, and the time of
year the order is placed. Such credit arrangements vary for reasons both within
and outside the control of the Company. Prior to fiscal 1998, the Company's
credit lines decreased due to the Company's then poor financial condition. While
the Company's credit lines recently increased based on its improved financial
condition, due to its expansion, the Company remains unable to keep current with
its accounts payable. Therefore, there can be no assurance that the Company's
credit lines or the terms thereof will not once again be reduced or terminated
altogether in the future. The reduction or termination of existing credit lines
or the loss of major suppliers would have a material adverse effect on the
Company's business.
The Company's dependence on its principal suppliers involves
risk, and if there is a disruption in supply from a principal supplier or
distributor, the Company's business could be adversely affected. Business could
also be adversely affected if key specialty suppliers sell more products through
mass market retailers. Many of the Company's suppliers currently provide the
Company with certain incentives including volume purchasing allowances and
cooperative advertising. A reduction or discontinuation of these incentives
could have a material adverse effect on the Company's business.
Since the beginning of fiscal year 1999, the Company has
entered into approximately forty-eight financing agreements for the leasing of
fixtures and security equipment for its remodeled and new stores. These
agreements were entered into with various entities, none of which is affiliated
with the Company, and bear terms of between three and five years. The agreements
are payable monthly and provide fixture financing in the approximate aggregate
amount of $1,750,000. All such financings are secured by the Company's store
fixtures and equipment. The Company is currently negotiating additional
financing of this type, though there can be no assurance that the Company will
obtain such additional financing or that if it does obtain same, it will
generate revenues sufficient to make the payments thereon in a timely fashion.
See Risk Factor No. 13 - "Need for Additional Financing."
The Company also relies on short-term loans in order to meet
its cash flow needs. In October 1999, the Company borrowed an aggregate of
$127,922 from Tudor Technologies, Inc. ("Tudor"), an entity of which Mr. Moses
Mika (a director of the company) is a shareholder, pursuant to a demand
promissory note. Between January and April 1999, the Company borrowed an
aggregate of $400,000 from an unaffiliated entity and $300,000 from an
affiliate, pursuant to promissory notes executed therewith: such notes have been
repaid in full. In November 1998, the Company entered into an agreement with
each of (i) Frampton Industries, Ltd. ("Frampton"), then under the common
control of Europe American Capital Foundation ("EACF"), an entity which
beneficially controls the Company, and (ii) EACF to secure additional financing.
Pursuant to the respective agreements, Frampton loaned the Company $500,000, and
EACF loaned the Company $150,000; each loan was in the form of a convertible,
subordinated debenture due December 31, 1999. The debentures bore a 5% interest
rate and initially were convertible into Series E Stock at a price of $0.10 per
share at Frampton's and EACF's respective options. This price represents a 50%
discount from the then current (November 10, 1998) market price reflecting a
discount for the illiquidity of the shares, which do not carry any registration
rights. In May 1999, Frampton and EACF each agreed to amend such conversion
price to $0.20 per share, which represents the full market price on the date of
the original transaction. In December 1999, Frampton assigned its debenture to
EACF, and on March 3, 2000, EACF advised the Company of its intention to convert
the debenture effective February 29, 2000. Accordingly, in March 2000, in
accordance with the terms of the debenture, the Company issued 3,423,300 shares
of Series E Stock to EACF. There can be no assurance that additional short-term
funds will be available to the Company.
9. Dependence on FINOVA Credit Line (Secured by all of the Company's
Assets). On January 21, 1998, the Company entered into a $7.1 million secured,
revolving Loan and Security Agreement (the "FINOVA Agreement") with FINOVA
Capital Corporation ("FINOVA"). The credit line offered under the FINOVA
Agreement replaced the $7 million credit line the Company previously had with
Congress Financial Corporation (Western) ("Congress"). Neither FINOVA nor
Congress is affiliated with the Company. The Company repaid the Congress loan on
February 3, 1998. The FINOVA credit line is secured by substantially all of the
Company's assets and expires on August 3, 2000. The FINOVA Agreement is
guaranteed by United Textiles & Toys Corp. ("United Textiles"), an entity which
owns approximately 22.3% of the Company, and accrues interest at a rate of
floating prime plus one and one-half percent. Effective July 30, 1998, the
Company and FINOVA amended the Agreement to increase the maximum level of
borrowings thereunder from $7.1 million to $7.6 million. Effective September 24,
1998, the Company and FINOVA entered into a second amendment to increase the
maximum level of borrowings thereunder from $7.6 million to $8.6 million through
December 31, 1998. As of January 1, 1999, the maximum level of borrowings
returned to the $7.6 million level. In December 1998, the FINOVA Agreement was
amended a third time to reflect FINOVA's taking of a subordinate position with
respect to its lien on only such equipment as has been leased by the Company
from Phoenix Leasing, Inc.
In November 1998, pursuant to an agreement with ZD Group,
L.L.C. ("ZD") - a related New York limited liability company, the beneficiary of
which is a member of the family of the Company's chairman - ZD issued a $700,000
irrevocable standby L/C in favor of FINOVA. As consideration for its issuance of
the L/C, ZD is entitled (i) to a one-third profit percentage after application
of corporate overhead beginning April 1, 1999 through the end of the terms of
the store leases from three of the Company's stores (Venetian Hotel in Las
Vegas, Nevada; Auburn Hills, Michigan; and Gurnee, Illinois) and (ii) to
nominate and appoint one-third of the Company's directors during the aforesaid
store lease terms (but in no event later than fiscal year end 2013). Such stores
did not generate a profit after application of corporate overhead in the
nine-month period ended December 31, 1999, thus, no payments have accrued or
been made to ZD to date. As a result of the L/C, FINOVA lent a matching $700,000
to the Company in the form of a term loan, pursuant to a fourth amendment to the
FINOVA Agreement entered into on February 11, 1999. The term loan from FINOVA
expires on August 3, 2000 and bears interest at prime plus one percent. In March
1999, the Company and FINOVA entered into a Fifth Amendment to Loan and Security
Agreement which stretches the agreed upon (in the FINOVA Agreement) decrease in
advance rate against the Company's cost value of its inventory over a five month
period. In August 1999, the Company and FINOVA entered into a Sixth Amendment to
Loan and Security Agreement pursuant to which the Company's maximum level of
borrowings was increased to $11.3 million. The amendment also (1) increased the
minimum net worth financial covenant from $750,000 to $2.9 million as of June
30, 1999 with the $2.9 million threshold increasing by 60% of any equity raised
by the Company and by 60% of any annual profits generated by the Company; (2)
allows the Company to sell a minority equity interest (up to 49%) in its Toys
subsidiary; and (3) increased the maximum levels of capital expenditures,
capital leases and unsecured debt allowed under the financing agreement.
In December 1999, at the Company's request, FINOVA agreed to
reduce the maximum borrowing level of the credit facility from $11.3 million to
$9.3 million and to terminate a $2 million standby L/C that previously helped
support the credit facility. The termination of the L/C allowed the Company
access to a $2 million certificate of deposit which previously was restricted
and was used as collateral for the L/C by the issuing bank. On December 31,
1999, the Company had $54,170 outstanding under its revolving credit facility
with FINOVA (representing only the interest accrued during the month of December
1999 as the principal balance was paid down to zero during the December quarter)
and $6,990,395 available thereunder.
On March 13, 2000, the Company and FINOVA agreed that FINOVA
would release its interest as beneficiary in $1.7 million of standby letters of
credit. These standby letters of credit had originally been provided by
Multimedia Concepts International, Inc. ("Multimedia," an affiliate) for $1
million, and by ZD for $700,000. Further, the total amount available under the
facility was reduced to $5 million. Beginning April 30, 2000, the facility shall
be further reduced by $1 million at each month-end, until reduced to zero in
August 2000.
During fiscal year 1999, the Company breached three negative
covenants in the FINOVA Agreement by exceeding maximum levels of capital
expenditures, unsecured debt, and lease financing. FINOVA waived such defaults.
The Company is currently seeking an alternative lending
arrangement with a bank or finance company. Although the Company has received
three letters of intent for such a facility, there can be no assurance that it
will be able to obtain such a facility on acceptable terms, or at all.
10. Inventory Shrinkage and Theft. In calendar 1999, the Company hired
a Director of Security to analyze and increase security measures in its stores
and warehouse. The Company has experienced an increasing amount of employee and
customer theft from its stores and is taking steps to monitor its stores more
closely. In addition, the Company is prosecuting all who are caught stealing to
the fullest extent under the law. While the Company has security alarms and
surveillance monitors in its warehouse and in all its stores, the Company has
discovered that employees are disengaging the monitors in an attempt to steal
products. There can be no assurance that the Company will be able to deter such
thefts in the future, its preventive security measures notwithstanding.
Considerable inventory theft will adversely affect the Company's gross profit
margins.
11. Competition. The toy and hobby products market is highly
competitive. Though the Company's newer stores offer a combination of
traditional, educational, new electronic interactive, specialty, and collectible
toys and items, the Company remains in direct competition with local, regional,
and national toy retailers and department stores. The toy and hobby retail
industry faces a number of potentially adverse business conditions including
price and gross margin pressures and market consolidation. The Company competes
with a variety of mass merchandisers, superstores, and other toy retailers,
including Toys R Us and Kay Bee Toy Stores. Competitors that emphasize specialty
and educational toys include Disney Stores, Warner Bros. Stores, Learning Smith,
Lake Shore, Zainy Brainy, and Noodle Kidoodle. The Company also competes both
through its electronic commerce operations and through its stores against
internet oriented toy retailers such as eToys, Inc. There can be no assurance
that the Company's business strategy will enable it to compete effectively in
the toy industry. The toy market is particularly characterized by large
retailers and discount stores with intensive advertising and marketing campaigns
and with deeply discounted pricing of such products. The Company competes as to
price, personnel, service, speed of delivery, and breadth of product line. There
can be no assurance that the Company can succeed in such competition, however,
and an inability of the Company to provide merchandise and service of, at the
very least, comparable quality would have a material adverse effect on the
Company.
Given that children's consumer preferences and tastes
continually change and children's entertainment products are often characterized
by fads of limited life cycles, the Company's success depends on its ability
also to change and adapt to new trends and to supply merchandise then in demand.
There can be no assurance, however, that the Company will be able to recognize
such trends in the time required to prepare for it or supply merchandise then in
demand. Combining the traditional and educational toy segments of the market
into one retail location is believed to be a unique concept that should prove to
differentiate the Company's stores from those of its larger or similar size
competitors. However, while management has been unable to locate any other
retailer currently using this combined marketing concept, the Company competes
for the educational toy customer with the specialty stores indicated above, and
there can be no assurance that such competitors will not also embrace this
concept or a variation of same and vary their product mix so as to compete
directly with the Company. In addition, the Company may not be able to capture
and/or maintain a profitable share of the retail toy market.
Furthermore, most of the companies with which the Company
competes have more extensive research and development, marketing, and customer
support capabilities and greater financial, technological, and other resources
than those of the Company, and there can be no assurance that the Company will
be successful in competing against such companies or in distinguishing itself
from larger, more well known entities. In addition, the Company does not believe
there are any significant barriers to entry, which might otherwise discourage
new companies from entering the specialty toy industry and competing with the
Company for business. See Risk Factor No. 8 - "Dependence on Supplier Credit and
Short-Term Loans."
In addition to the above issues concerning competition, the
Company faces new and unknown competition from its foray into the business of
Internet commerce. The online commerce market is new, rapidly evolving, and
intensely competitive. Increased competition is likely to result in price
reductions, reduced gross margins, and loss of market share, any of which could
harm net sales and results of operations. Competition in the industry is
expected to intensify as current and new competitors can enter the market with
little difficulty and launch new web sites at relatively low cost.
12. Narrow Profit Margins and Need to Control Expenses and Other
Charges. The Company's operating history has been characterized by narrow profit
margins, though recently its margins have increased through the refocus of its
product mix. Nonetheless, the Company's earnings will continue to depend
significantly on its ability to (i) purchase product on favorable terms; (ii)
obtain store locations on favorable price and credit terms; (iii) retail a large
volume and variety of products efficiently; and (iv) provide quality support
services. Moreover, small increases in expenses or other charges to income could
have a material adverse effect on the Company's results of operations. There can
be no assurance that the Company will be able to generate sufficient revenues or
maintain sufficient control over expenses and other charges to increase
profitability. Though the Company has experienced increased gross profit margins
for the last two fiscal years and the nine-month period ended December 31, 1999,
there can be no assurance that the Company will be able to increase its gross
profit margins or post income, as opposed to a loss, in the future.
13. Need for Additional Financing. In order to continue its growth, the
Company may require funds to (i) open new stores; (ii) redesign one or two
existing stores and (iii) finance its losses, if any. If, for any reason, the
Company cannot obtain such funds, its only recourse - outside its existing line
of credit with FINOVA and such loans as are set forth in Risk Factor No. 8 -
will be to seek additional financing via the sale of equity or debt securities
in a future public or private offering. There can be no assurance, however, that
such financing will be available or that it will be available at prices and/or
on terms acceptable to the Company. See Risk Factor No. 8 - "Dependence on
Supplier Credit and Short-Term Loans" and Risk Factor No. 9 - "Dependence on
FINOVA Credit Line (Secured by all of the Company's Assets)."
14. Seasonality. The Company's business is highly seasonal with a large
portion of its revenues (approximately 30-40% of the Company's annual net sales)
and profits being derived during the months of October through December.
Accordingly, the Company's quarterly operating results fluctuate significantly.
During the fourth calendar quarter, the Company employs a considerable number of
temporary employees to assist its permanent staff and purchases considerably
more inventory. The Company must obtain substantial short-term borrowings during
the first three quarters of the calendar year to purchase inventory and finance
capital and operating expenditures. Historically, these borrowings have been
repaid after the fourth quarter. Factors that could negatively affect the
Company during the fourth quarter include adverse weather conditions,
unfavorable economic conditions, an inability to hire adequate temporary
personnel, an inability to maintain appropriate inventory levels, and a late
Thanksgiving which reduces the number of days between Thanksgiving and
Christmas.
15. Reliance Upon Management. The Company depends upon the continued
personal efforts and abilities of its management. The loss of services of
Richard Brady (chief executive officer and a founder of the Company), James
Frakes (chief financial officer and secretary), or Harold Rashbaum (the
Company's chairman of the board) would adversely affect the business of the
Company. Each of the above signed a three-year employment agreement with the
Company's Toys subsidiary in November 1999. The Company obtained "key-man" life
insurance policies, each in the amount of $5 million, on Richard Brady and Ilan
Arbel, president of United Textiles and Multimedia.
16. Possible Inability to Utilize Benefit of Tax Loss Carryforwards. At
March 31, 1999, the Company had net operating loss carryforwards ("NOL's") of
approximately $9.4 million for federal purposes and approximately $5 million for
state purposes. Such carryforwards may be utilized to offset future taxable
income subject to the limitations set forth in the Internal Revenue Code ("IRC")
ss.382. Specifically, IRC ss.382 limits NOL's after an ownership change to an
annual amount equal to the value of a company's outstanding stock immediately
before the date of the ownership change multiplied by the federal long-term
tax-exempt rate. While the Company's federal NOL's are available to offset
future taxable income and expire at various dates through March 31, 2013 and the
state NOL's are available and expire at various dates through March 31, 2003, a
portion of the NOL's is subject to provisions of IRC ss.382 which limits use
thereof when changes of more than 50% of a company's stock ownership occur
during a three year testing period.
During the years ended March 31, 1994 and 1995, the Company's
ownership changed by more than 50% as a result of the May 1993 acquisition of a
majority interest in the Company and the Company's November 1994 completion of
an initial public offering of its Common Stock. Further changes in Common and
Preferred Stock ownership during each of the years ended March 31, 1997 through
1999 have also potentially limited the use of NOL's. The effect of such
limitations has yet to be determined. NOL's could be limited further by (i) the
exercise of outstanding Options and Series E Warrants, (ii) the May 1999 private
issuance of Series F Stock, (iii) grants of options under the Company's 401(k)
Employee Stock Option Plan (the "Plan" or the "ESOP") or Stock Option Plan (the
"SOP"), or (iv) a consistent achievement of profitable operations. Any
significant limitation on the utilization of NOL's will increase the Company's
tax liability and reduce income and available cash resources.
17. Possible Future Dilution. The Company has authorized capital stock
of 190,500,000 shares consisting of 160 million shares of Common Stock, 25
million shares of Series E Stock, and 5,500,000 shares of Series F Stock.
Inasmuch as the Company may use authorized but unissued shares of Common Stock
and/or Series E or F Stock without shareholder approval, there may be further
dilution of shareholders' interests. The Company may additionally sell equity
and/or debt securities in a future public offering or private transaction to
raise additional capital which may dilute the interests of potential investors
in this Offering. In addition, the Company may, in the future, donate shares of
its Common Stock to its ESOP plan, which donation may dilute the interests of
potential investors in this Offering. There are 6,952,510 shares of Series E
Stock currently outstanding. Of same, 5,625,953 shares are restricted. All
shares of Series E Stock are convertible into Common Stock as of February 4,
2000. Conversion of the Series E Stock or exercise of the Company's 2 million
outstanding Series E Warrants will decrease the net tangible book value per
share of Common Stock.
There are 750,000 shares of Series F Stock currently
outstanding, all of which are restricted, and each of which is convertible, at
the option of the holder, into two shares of Common Stock commencing the date
the Commission declares this Registration Statement effective. The Series F
Stock shall convert automatically on the earlier of two years after issuance or
in the event the Common Stock achieves a closing price of $5.00 for 30
consecutive days. The conversion of the Series F Stock will decrease the net
tangible book value per share of Common Stock.
In the event the price of the Series E Stock rises above $5.00
per share, the 2 million outstanding Series E Warrants likely will be exercised
and thus converted into 2 million shares of Series E Stock, each share of which
is then convertible into six shares of Common Stock. Accordingly, in the event
(i) the Series E Warrants are exercised and the Series E Stock underlying same
are issued and converted into Common Stock (12 million shares), and (ii) the
currently outstanding 6,952,510 shares of Series E Stock are converted into
Common Stock (41,715,060 shares), the Company will be required to issue
53,715,060 shares of Common Stock. See "Dilution."
The tangible net book value as of December 31, 1999 is
$16,258,600, or approximately $2.93 per outstanding share of Common Stock of
which there were 5,548,857 shares outstanding as of December 31, 1999. On a pro
forma basis, assuming the immediate conversion of the 6,952,510 outstanding
shares of Series E Stock into 41,715,060 shares of Common Stock and the 750,000
outstanding shares of Series F Stock into 1,500,000 shares of Common Stock, the
tangible net book value per share of Common Stock would be $.33 based on the
$16,258,600 tangible net book value and the 48,763,917 shares of Common Stock
outstanding on a pro forma basis. This represents an immediate dilution of $2.60
per share of Common Stock. Outstanding Series E Warrants and stock options have
not been included in the pro forma calculation as the Series E Warrants are not
"in the money" and outstanding stock options are not significant.
18. Dilutive Effect of Employee Stock Ownership Plan. In May 1994, the
Company adopted resolutions approving the ESOP, which covers substantially all
employees of the Company. The Plan includes provisions for both an ESOP and a
401(k) Plan. The ESOP allows only contributions by the Company, which
contributions can be made annually at the discretion of the Company's board of
directors. The ESOP has been designed to invest primarily in the Company's
stock. The 401(k) portion of the Plan is contributed to by the employees of the
Company through payroll deductions. The Company does not match contributions to
the 401(k). Contributions to the ESOP may result in an expense resulting in a
reduction in earnings and may dilute the ownership interests of persons who
acquire Securities in this Offering.
19. Limited Market for Securities; Unpredictable Trading. At present,
there is a limited market for the Company's Common Stock, Series E Stock, and
Series E Warrants and no market for the Company's Series F Stock. There is no
assurance that a regular trading market will develop for such Securities or that
if one does develop, it will be sustained; therefore, purchasers may be unable
to resell the Securities offered herein at or near their original offering price
or at any price. In addition, it is unlikely that a lending institution will
accept the Company's Securities as pledged collateral for loans even if a
regular trading market for such Securities does develop.
Since inception, the Company's Securities have exhibited
significant volatility with respect to bid, ask, close, and sales prices. The
Company believes that such volatility is affected by shareholder responses to
events both within and without the Company's control, i.e., variations in
periodic operating results, announcements of technological innovations or new
products or services by the Company or its competitors, changes in financial
estimates by securities analysts, conditions or trends in the industry, changes
in the economic performance and/or market valuations of other retail companies,
release of lock-up or other transfer restrictions on outstanding Securities or
sales of additional Securities, and actual and potential litigation. In the
past, following periods of volatility in the market price of their stock, many
companies have been the subject of securities class action litigation. If the
Company were sued in such an action, it could result in substantial costs and a
diversion of management's attention and resources and would cause the Company's
Securities prices to fall.
20. No Dividends and None Anticipated. The Company has not paid any
dividends; nor, because of its present financial status, does it have any
intention to issue any dividends in the future. The Company expects that it will
reinvest any profits in its business.
21. Significant Influence by Ilan Arbel. Ilan Arbel is the president
and a director of United Textiles, the former majority stockholder of the
Company, which now owns approximately 22.3% of the Company's Common Stock. Mr.
Arbel is also the president and a director of Multimedia, which owns
approximately 24.5% of the Company and 78.5% of United Textiles. Breaking Waves,
Inc. ("Breaking Waves"), a wholly owned subsidiary of Shopnet, owns
approximately 6.4% of the Company's Common Stock. The president of both Breaking
Waves and Shopnet is the father-in-law of Mr. Arbel who is also the president of
European Ventures Corp. ("EVC"), the entity having substantial control of
Shopnet. As a result, through his role as president of each of United Textiles,
Multimedia, and EVC and said entities' holdings of the Company's Common Stock,
Mr. Arbel influences to a significant degree the policies and direction of the
Company. The chart below depicts the Company's linear ownership structure as of
April 20, 2000. (Breaking Waves is not presented thereon as it has no
affiliation with EACF and its subsidiaries.)
Europe American Capital Foundation
||
\/
American Telecom PLC (83.7%) => ABC Fund, Ltd. (20%)
(100%)
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\/
U.S. Stores Corp.
(67.7%)
||
\/
Multimedia Concepts International, Inc.
(78.5%)
||
\/
United Textiles & Toys Corp.
(22.3%)
||
\/
Play Co. Toys & Entertainment Corp.
The Company has two subsidiaries: (i) Toys, of which the
Company owns 58.4%, and (ii) Play Co. Toys Canyon Country, Inc. ("Canyon"),
which is wholly-owned by the Company. Toys is the only working subsidiary,
however, operating twenty-seven stores, one of which is the Santa Clarita store
which Canyon recently assigned to Toys. See "Business of the Company - Ownership
of the Company."
22. Future Sales of Stock by Stockholders. The Company's outstanding
capital stock consists of 19,677,016 shares of Common Stock, 6,952,510 shares of
Series E Stock, 2,000,000 Series E Warrants, and 750,000 shares of Series F
Stock. In accordance with the Company's Series E Offering in December 1997, all
Securities held by the Company's officers, directors, and principal stockholders
were subject to a two year lock-up agreement which expired on December 29, 1999.
All "restricted securities" as that term is defined under the Securities Act,
thus may be sold only pursuant to Rule 144 or an effective registration
statement. The sale of Securities by current stockholders, whether pursuant to
Rule 144 or otherwise, may have a depressing effect upon the market price of the
Company's Securities.
23. Penny Stock Regulation. The Commission has adopted regulations that
generally define a "penny stock" to be any equity security that has a market
price of less than $5.00 per share or an exercise price of less than $5.00 per
share, other than a security whose issuer has (a) net tangible assets of at
least $2 million, if such issuer has been in continuous operation for three
years; (b) net tangible assets of at least $5 million, if such issuer has been
in continuous operation for less than three years; or (c) average revenues of at
least $6 million for the preceding three years or that is (a) registered or
approved for registration and traded on a national securities exchange that
meets Commission requirements or (b) authorized for quotation on an automated
quotation system sponsored by a registered securities association which system
was operating prior to 1990 and meets Commission requirements or (c) issued by
an investment company registered under the Investment Company Act of 1940 or (d)
excluded, on the basis of exceeding a minimum price, net tangible assets of the
issuer, or other relevant criteria, from the designation of such term by rule or
regulation which the Commission shall prescribe or (e) exempted, in whole or in
part, conditionally or unconditionally, from the definition of such term by the
Commission. Since the Company has had more than $6 million in revenues for the
preceding three years, its Securities are not designated penny stocks. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a risk disclosure schedule explaining
the penny stock market and the risks associated therewith. If the Company's
Securities were to become subject to the regulations applicable to penny stocks,
the market liquidity for the Securities would be severely affected, limiting the
ability of broker-dealers to sell the Securities and the ability of purchasers
in this Offering to sell their Securities in the secondary market. There is no
assurance that trading in the Company's Securities will not be subject to these
or other regulations that would adversely affect the market for such Securities.
24. Indemnification of Officers and Directors. As permitted under the
Delaware General Corporation Law, the Company's Certificate of Incorporation
provides for the indemnification and elimination of the personal liability of
the directors to the Company or any of its shareholders for damages related to
breaches of their fiduciary duties as directors. As a result of the inclusion of
such provision, shareholders may be unable to recover damages against directors
for actions taken by them, which constitute negligence, or gross negligence or
that are in violation of their fiduciary duties. The inclusion of this provision
in the Company's Certificate of Incorporation may reduce the likelihood of
derivative litigation against directors and other types of shareholder
litigation.
Insofar as indemnification for liabilities arising under the
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
Commission, such indemnification is against public policy as expressed in the
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 pursuant to this Registration
Statement, 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 by
such court of such issue.
25. Physical Location of the Company's Warehouse and Stores. The
majority of the Company's stores and its warehouse are located in Southern
California and thus are vulnerable to natural disasters such as earthquakes and
fire and other unexpected problems. The occurrence of a natural disaster or
other unexpected problems could cause interruption or delay in the Company's
business, loss of data, or render the Company unable to accept and fulfill
customer orders. The Company has no formal disaster recovery plan and its
business interruption insurance may not adequately compensate the Company for
losses that may occur.
26. Potential Internet Security and Credit Card Fraud. The Company's
relationships with its customers may be adversely affected if the security
measures it utilizes on its web sites to protect personal information (such as
credit card numbers) are ineffective. If the Company loses customers as a result
of ineffective security measures, its net sales and gross margins could decrease
and its reputation could be materially adversely affected. The Company relies on
security and authentication technology it licenses from third parties. With this
technology, the Company performs real-time credit card authorization and
verification with its bank. The Company cannot predict whether events or
developments will result in a compromise or breach of the technology the Company
uses to protect its customers' personal information. Furthermore, servers may be
vulnerable to computer viruses, physical or electronic break-ins, and similar
disruptions. The Company may need to expend significant additional capital and
other resources to protect against a security breach or to alleviate problems
caused by any breaches and cannot assure that it can prevent all security
breaches.
In addition to the foregoing, the Company's net sales and
reputation could be materially adversely affected if the Company experiences
significant credit card fraud. A failure to adequately control fraudulent credit
card transactions would reduce net sales and gross margins because the Company
does not carry insurance against this risk. The Company has developed technology
to help it detect the fraudulent use of credit card information. Nonetheless, to
date, the Company has suffered losses as a result of orders placed with
fraudulent credit card data even though the associated financial institution
approved payment of the orders. Under current credit card practices, the Company
is liable for fraudulent credit card transactions because it does not obtain a
cardholder's signature.
27. Rapid Technological Change. The Company's business, both online and
in its stores, is subject to rapid technological advancement. If the Company
cannot maintain an edge on the market and continue to adapt with technological
advancements, especially computerized change, the Company's services could
become commonplace and the Company could lose customers. If the Company faces
material delays in introducing new services, products, and enhancements,
customers may leave the Company and purchase products sold by the Company's
competitors. In order to remain competitive, therefore, the Company must
continue to enhance and improve the functionality and features of its online and
physical stores, which task requires significant capital. The Company expects to
expend approximately $1.5 million in developing, enhancing, and marketing its
internet and physical store sites during fiscal year 2000. Such task entails
significant technical and business risks. The Company may use new technologies
ineffectively or may fail properly to adapt its web site or the systems it uses
to process customer orders and payments and to customer requirements or emerging
industry standards. As the internet and the online commerce industries are
rapidly changing, if competitors introduce new products and services embodying
new technologies, or if new industry standards and practices emerge, the
Company's existing web sites and proprietary technology and systems may not
sufficiently address such change.
28. Government Regulation. The adoption or modification of laws or
regulations relating to the internet could adversely affect the manner in which
the Company conducted its business. In addition, the growth and development of
the market for online commerce may lead to more stringent consumer protection
laws, both in the United States and abroad, that may impose additional burdens
on the Company. Laws and regulations directly applicable to communications or
commerce over the internet are becoming more prevalent. The United States
Congress recently enacted internet laws regarding children's privacy,
copyrights, taxation, and the transmission of sexually explicit material. The
European Union recently enacted its own privacy regulations. The law of the
internet, however, remains largely unsettled, even in areas in which there has
been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy, libel, and
taxation apply to the internet. In order to comply with new or existing laws
regulating online commerce, the Company (i) may need to spend time and money
revising the process by which it fulfills customer orders to ensure that such
shipments comply with applicable laws or (ii) may need to hire additional
personnel to monitor compliance with applicable laws or (iii) may need to modify
its software to protect customers' personal information.
In addition to the foregoing, as a publisher of online
content, the Company faces potential liability for defamation, negligence,
copyright, patent, or trademark infringement or other claims based on the nature
and content of materials published or distributed. If the Company faces such
liability, then its reputation and business may suffer. In the past, plaintiffs
have brought these types of claims and sometimes successfully litigated them
against online services. Although the Company carries general liability
insurance, such insurance does not cover claims of these types. There can be no
assurance that the Company will be able to obtain insurance to protect against
such liability in the future or that same will be adequate to indemnify the
Company for all liability that may be imposed thereon.
29. Sales and Other Taxes. The Company has recently been notified by
the State of Arizona that it requires that the Company assess sales tax on
internet orders purchased by Arizona residents. If more states or any foreign
countries successfully assert that the Company should collect such or other
taxes on the sales of its products, the Company's net sales and results of
operations could be harmed. Prior hereto, the Company did not collect sales or
other similar taxes for physical shipments of goods into states other than
California. If the Company becomes obligated to collect sales taxes, it will
need to update the system that processes customer orders to calculate the
appropriate sales tax for each customer order and then remit the collected sales
taxes to the appropriate authorities. These upgrades will increase operating
expenses and may discourage customers from purchasing products from the Company
because they have to pay sales tax. As a result, the Company may need to lower
prices to retain these customers.
30. Lease Commitment and Liability. The Company is party to or the
guarantor of thirty-one store leases, averaging ten to fifteen years in length
and having approximate base rentals of $83,000 to $450,000 per year. Given the
length and expense associated with such leases, the Company may face significant
pecuniary penalty in the event it or its subsidiary(ies) seek(s) to terminate
such leases, good cause notwithstanding. In the event the Company is unable to
generate sufficient revenue from a particular store location, given the terms of
the lease with the landlord thereof, the Company may find it difficult to close
such location without significant cost or litigation expense. See "Business of
the Company - Description of Property."
31. Forward-looking Statements. The statements contained herein that
are not historical facts are "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates," the negatives or other
variations thereof, or comparable terminology and include statements as to the
intent, belief, or current expectations of the Company and its directors,
officers, and management with respect to the future operations, performance, or
position of the Company. These forward-looking statements are predictions. No
assurances can be given that the future results indicated, whether expressed or
implied, will be achieved. While sometimes presented with numerical specificity,
these forward-looking statements are based upon a variety of assumptions
relating to the business of the Company, which, although considered reasonable
by the Company, may not be realized. Because of the number and range of the
assumptions underlying the Company's forward-looking statements, many of which
are subject to significant uncertainties and contingencies beyond the reasonable
control of the Company, some of the assumptions inevitably will not materialize,
and unanticipated events and circumstances may occur subsequent to the date
herein. These forward-looking statements are based on current information and
expectations, and the Company assumes no obligation to update. Therefore, the
actual experience of the Company and results achieved during the period covered
by any particular forward-looking statement may differ materially from those
anticipated. Consequently, the inclusion of forward-looking statements should
not be regarded as a representation by the Company or any other person that
these estimates will be realized, and actual results may vary substantially.
There can be no assurance that any of these expectations will be realized or
that any of the forward-looking statements contained herein will prove accurate.
USE OF PROCEEDS
The Company will not generate any revenue from this Offering, as the
Securities registered herein are to be sold not by the Company but by the
Selling Securityholders. The Company shall generate revenue, however, from the
exercise of the Options issued pursuant to the private placement, unless the
exercise price of such Options ($3.00 per share) remains less than the sales
price of the Common Stock.
The Company raised $657,500 from the May 1999 private placement of
750,000 shares of Series F Stock, after deducting underwriting commissions and
legal and administrative expenses. All of such proceeds were used by the Company
to open the store located in the Venetian Resort & Casino and for general
working capital purposes. No proceeds were paid to any officer or director of
the Company, to any Company affiliates or associates as reimbursement for
expenses of the Offering, or for any type of fee or remuneration other than as
indicated herein. The Company did not use any of the proceeds from the private
placement to merge into or acquire the assets of another company; nor does it
have any plans, commitments, or agreements or is involved in any discussions
with regards to any such acquisition or merger.
The Company believes that the proceeds generated by (i) the Series F
Stock private placement, (ii) the exercise by Tudor of its option to purchase
25% of Toys common stock from the Company, (iii) the private sale of 6.6% of the
common stock of Toys, (iv) the cash flow from operations and currently available
financing sources, as well as (v) the proceeds from Toys' initial public
offering consummated in November 1997 will suffice to meet the Company's
anticipated cash requirements for a period of twelve months following completion
of this Offering. See "Business of the Company" and "Certain Relationships and
Related Transactions." The Company does not believe it will require additional
capital during such time. If such belief proves incorrect, however, the Company
may be forced to seek additional financing, and there can be no assurance that
same will be available to the Company, or that if it is available, it will be on
terms acceptable to the Company. The problems, expenses, and complications
sometimes encountered by a relatively small business, as well as changes in
economic conditions, the regulatory environment, or the Company's operations,
may make shifts in the allocation of funds necessary or desirable.
Any of the Offering proceeds apportioned to working capital, while not
being used as described above, will be deposited in interest-bearing bank or
money market accounts or held as short-term United States Government securities
or bank certificates of deposit. No other type of investment will be made with
such proceeds.
DILUTION
The Company has authorized capital stock of 190,500,000 shares
consisting of 160 million shares of Common Stock, 25 million shares of Series E
Stock, and 5,500,000 shares of Series F Stock. Inasmuch as the Company may use
authorized but unissued shares of Common Stock and/or Series E or F Stock
without shareholder approval, there may be further dilution of shareholders'
interests. The Company may additionally sell equity and/or debt securities in a
future public offering or private transaction to raise additional capital which
may dilute the interests of potential investors in this Offering. In addition,
the Company may, in the future, donate shares of its Common Stock to its ESOP
plan, which donation may dilute the interests of potential investors in this
Offering.
There are 19,677,016 shares of Common Stock, 2 million Series E
Warrants, and 6,952,510 shares of Series E Stock currently outstanding. Of the
Series E Stock outstanding, 5,625,953 are restricted. Each share of Series E
Stock is convertible, at the option of the holder, into six shares of Common
Stock on the earlier of February 4, 2000 or two years after issuance. Conversion
of the Series E Stock (or exercise of the Company's 2 million outstanding Series
E Warrants) will decrease the net tangible book value per share of Common Stock.
In addition to the foregoing securities, there are 750,000 shares of
Series F Stock currently outstanding, all of which are restricted and each of
which is convertible, at the option of the holder, into two shares of Common
Stock commencing the date the Commission declares this Registration Statement
effective. The Series F Stock shall convert automatically on the earlier of two
years after issuance or in the event the Common Stock achieves a closing price
of $5.00 for 30 consecutive days. The conversion of the Series F Stock will
decrease the net tangible book value per share of Common Stock.
In the event the price of the Series E Stock rises above $5.00 per
share, the 2 million outstanding Series E Warrants likely will be exercised and
thus converted into 2 million shares of Series E Stock, each share of which is
then convertible into six shares of Common Stock. Accordingly, in the event (i)
the Series E Warrants are exercised and the Series E Stock underlying same are
issued and converted into Common Stock (12 million shares), and (ii) the
currently outstanding 6,952,510 shares of Series E Stock are converted into
Common Stock (41,715,060 shares), the Company will be required to issue
53,715,060 shares of Common Stock.
The tangible net book value as of December 31, 1999 is $16,258,600 or
approximately $2.93 per outstanding share of Common Stock of which there were
5,548,857 shares outstanding as of December 31, 1999. On a pro forma basis,
assuming the immediate conversion of the 6,952,510 outstanding shares of Series
E Stock into 41,715,060 shares of Common Stock and the 750,000 outstanding
shares of Series F Stock into 1,500,000 shares of Common Stock, the tangible net
book value per share of Common Stock would be $.33 based on the $16,258,600
tangible net book value and the 48,763,917 shares of Common Stock outstanding on
a pro forma basis. This represents an immediate dilution of $2.60 per share of
Common Stock. Outstanding warrants and stock options have not been included in
the pro forma calculation as the warrants are not "in the money" and outstanding
stock options are not significant.
SELLING SECURITYHOLDERS
The following table sets forth (a) the identities of the individuals
and/or entities - none of whom has had any material position, office, or
affiliation with the Company or its predecessors or affiliates within the past
three years - who were issued securities in the Company's May 1999 private
placement offering or who will be issued Settlement Shares on effectiveness of
this registration statement and (b) their respective holdings:
SHARES OF
SHARES OF COMMON COMMON STOCK
STOCK INTO WHICH OFFERED FOR PERCENT
SHARES OF SERIES F STOCK ARE RESALE HEREBY OWNERSHIP
SERIES F STOCK CONVERTIBLE2 AFTER RESALE
ISSUED1 OPTIONS HEREBY
SELLING SECURITYHOLDER ISSUED 3
Birdie Capital Corp. 100,000 200,000 -- 200,000 --
Harbourcreek Investments Ltd. 100,000 200,000 -- 200,000 --
Valentia Properties Inc. 200,000 400,000 -- 400,000 --
David Stefansky 130,000 260,000 -- 260,000 --
Aaron Stefansky 50,000 100,000 -- 100,000 --
Solomon Liebenthal 155,000 310,000 -- 310,000 --
Samuel Krieger 15,000 30,000 -- 30,000 --
Gushnut Consulting, Inc. -- -- 32,500 32,500 --
Redwood Capital Partners, Inc. -- -- 167,500 167,500 --
Donald Sinsabaugh -- -- 5,000 5,000 --
Vincent Calicchia -- -- 5,000 5,000 --
Foothill Marketplace, Ltd.4 -- -- -- 100,000 --
TOTAL 750,000 1,500,000 350,000 1,950,000 --
(see footnotes on subsequent page)
(footnotes applicable to table from previous page)
1. The Series F Stock were purchased by the Selling Securityholders at a price
of $1.00 per share. The Private Placement closed on May 27, 1999, providing
net cash proceeds of $667,500 to the Company before legal and other
administrative expenses.
2. Each share of Series F Stock is convertible, at the option of the holder,
into two shares of Common Stock commencing the date the Commission declares
this Registration Statement effective. The Series F Stock shall convert
automatically on the earlier of two years after issuance or in the event
the Common Stock achieves a closing price of $5.00 for 30 consecutive days.
3. As part of the Private Placement, the Company granted Options to the
Placement Agent and its assignees to purchase an aggregate of 350,000
shares of Common Stock, at an exercise price of $3.00 per share until May
26, 2003. Additionally, as commission, the Placement Agent received a 10%
fee, or $75,000, and a 1% fee, or $7,500, to cover administrative expenses.
4. These shares will be issued to the Selling Securityholder on effectiveness
of this registration statement in settlement of an action commenced by same
against the Company for breach of lease.
PLAN OF DISTRIBUTION FOR THE SECURITIES
OF THE SELLING SECURITYHOLDERS
This Prospectus covers the resale of 1,950,000 shares of Common Stock
owned by the Selling Securityholders designated herein and shall be delivered by
said Selling Securityholders upon their sale of such Shares. The Shares in this
Offering are not being sold through an underwriter and may be sold from time to
time by the Selling Securityholders, in negotiated transactions, at fixed prices
which may be changed, and at market prices prevailing at the time of sale, or in
a combination thereof. Such sales or even the potential of such sales at any
time may have an adverse effect on the market prices of the Securities offered
hereby. See "Risk Factors."
The Selling Securityholders may effect such transactions by selling
directly to purchasers or to or through broker-dealers which may act as agents
or principals, including via block trade transactions in which the broker or
dealer will attempt to sell the Securities as agent but may position and resell
a portion of the block as principal to facilitate the transactions or purchases
by a broker or dealer as principal and resale by such broker or dealer for its
own account pursuant to this Prospectus, or in ordinary brokerage transactions
and transactions in which the broker solicits purchasers. In effecting sales,
brokers or dealers engaged by the Selling Securityholders may arrange for other
brokers or dealers to participate, and such broker-dealers may receive
compensation in the form of discounts, concessions, or commissions from the
Selling Securityholders and/or the purchasers of the Securities, as applicable,
for which such broker-dealers may act as agents or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer might be
in excess of customary commissions). The Selling Securityholders and any
broker-dealers that act in connection with the sale of the shares of Common
Stock by the Selling Securityholders might be deemed to be "underwriters" within
the meaning of Section 2(11) of the Act. In that connection, the Company has
agreed to indemnify the Selling Securityholders, and the Selling Securityholders
have agreed to indemnify the Company against certain civil liabilities including
liabilities under the Act.
At the time a particular offer of Securities is made by or on behalf of
the Selling Securityholders, to the extent required, a Prospectus Supplement
will be distributed which will set forth the number of shares of Common Stock
being offered and the terms of the offering, including the name(s) of any
underwriter(s), dealer(s), or agent(s); the purchase price paid by any
underwriter(s) for shares purchased from the Selling Securityholders; any
discounts, commissions, or concessions allowed or reallowed or paid to dealers;
and the proposed selling price to the public.
Under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder, any person engaged in a
distribution of the Securities offered by this Prospectus may not simultaneously
engage in market-making activities with respect to such Securities during the
applicable "cooling off" period (nine days) prior to the commencement of such
distribution. In addition, and without limiting the foregoing, the Selling
Securityholders will be subject to applicable provisions of the Exchange Act and
rules and regulations thereunder, including without limitation, Rules 10b-6 and
10b-7, in connection with transactions in such securities, which provisions may
limit the timing of purchases and sales of Securities by the Selling
Securityholders.
The following table sets forth all estimated expenses of the Offering
other than underwriting discounts and commissions:
Registration fees To be provided
Federal taxes and fees --
State taxes and fees --
Trustees' fees --
Transfer agents' fees --
Printing and engraving fees 2,500
Legal fees 25,000
Accounting fees 10,000
Listing fees --
Premiums paid by the Company or any Selling Securityholder on any
Total To be provided
PRINCIPAL SECURITYHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's outstanding Common Stock as of April 20, 2000 (on
which date there were 19,677,016 shares outstanding) by (i) each beneficial
owner of 5% or more of the Company's Common Stock; (ii) each of the Company's
executive officers, directors, and key employees; and (iii) all executive
officers, directors, and key employees as a group:
Name and Address Number of Shares of Common Stock
of Beneficial Owner Beneficially Owned 1 Percent of Common Stock
Beneficially Owned 2,3
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Harold Rashbaum 4
c/o Play Co. Toys & Entertainment Corp.
550 Rancheros Drive -- --
San Marcos, CA 92069
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Richard Brady
c/o Play Co. Toys & Entertainment Corp.
550 Rancheros Drive 25,587 *
San Marcos, CA 92069
- ------------------------------------------------------- ----------------------------------- ------------------------------------
James B. Frakes 5
c/o Play Co. Toys & Entertainment Corp.
550 Rancheros Drive 20,000 *
San Marcos, CA 92069
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Moses Mika
c/o Play Co. Toys & Entertainment Corp.
550 Rancheros Drive -- --
San Marcos, CA 92069
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Breaking Waves, Inc. 4
112 West 34th Street 1,270,000 6.4%
New York, New York 10120
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Shopnet.com, Inc. 4
14 East 60th Street, Suite 402 1,270,000 6.4%
New York, New York 10022
- ------------------------------------------------------- ----------------------------------- ------------------------------------
United Textiles & Toys Corp. 6
1410 Broadway, Suite 1602
New York, New York 10018 4,384,910 22.3%
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Multimedia Concepts International, Inc.7
1410 Broadway, Suite 1602
New York, New York 10018 4,818,420 24.5%
- ------------------------------------------------------- ----------------------------------- ------------------------------------
U.S. Stores Corp. 8
1385 Broadway, Suite 814 -- --
New York, New York 10018
- ------------------------------------------------------- ----------------------------------- ------------------------------------
(table continued from previous page)
Name and Address Number of Shares of Common Stock
of Beneficial Owner Beneficially Owned 1 Percent of Common Stock
Beneficially Owned 2,3
- ------------------------------------------------------- ----------------------------------- ------------------------------------
American Telecom, PLC 9
8-13 Chiswell Street 2,400,000 10.9%
London EC 1Y 4UP
- ------------------------------------------------------- ----------------------------------- ------------------------------------
ABC Fund, Inc.10
P.O. Box 47 Road Town
Tortola, BVI 3,757,920 16.0%
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Europe American Capital Foundation 11
c/o Vermogenstreuhand GMBH
14 Kaiser Street
Bregenz, Austria A-6900 20,539,800 51.1%
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Officers and Directors as a Group
(4 persons)4,5 45,587 *
- ------------------------------------------------------- ----------------------------------- ------------------------------------
* Less than 1%
1. Unless otherwise noted, all of the shares shown are held by individuals
or entities possessing sole voting and investment power with respect to such
shares. Shares not outstanding but deemed beneficially owned by virtue of the
right of an individual or entity to acquire them within 60 days, whether by the
exercise of options or warrants, are deemed outstanding in determining the
number of shares beneficially owned by such person or entity.
2. The "Percent of Common Stock Beneficially Owned" is calculated by
dividing the "Number of Shares Beneficially Owned" by the sum of (i) the total
outstanding shares of Common Stock of the Company, and (ii) the number of shares
of Common Stock that such person or entity has the right to acquire within 60
days, whether by exercise of options or warrants. The "Percent of Common Stock
Beneficially Owned" does not reflect shares beneficially owned by virtue of the
right of any person, other than the person named and affiliates of said person,
to acquire them within 60 days, whether by exercise of options or warrants.
3. Does not include 41,715,060 shares of Common Stock issuable upon the
conversion of 6,952,510 shares of Series E Stock outstanding, or any portion
thereof, except where directly applicable and in accordance with footnote 2
above.
4. Mr. Rashbaum, the Company's chairman of the board, is also the president
and the sole director of Breaking Waves which is a wholly owned subsidiary of
Shopnet, a publicly traded company. Mr. Rashbaum is also the president and a
director of Shopnet. By virtue of its ownership of Breaking Waves, Shopnet may
be deemed the beneficial owner of the Company's Common Stock owned by Breaking
Waves.
5. Represents shares underlying an option, 20,000 of which have vested and
the remaining 10,000 of which shall vest on July 1, 2000.
(footnotes continued from previous page)
6. The president of United Textiles, a publicly traded company, is Ilan
Arbel who is also the president, chief executive officer, and a director of
Multimedia, a publicly traded company which is the parent company of United
Textiles (owning approximately 78.5% of same). Multimedia is owned approximately
67.7% by U.S. Stores Corp. ("U.S. Stores"), a company of which Mr. Arbel is the
president and a director. U.S. Stores is owned 100% by American Telecom, PLC
("ATPLC"), a British corporation.
7. By virtue of its majority ownership of United Textiles, Multimedia also
may be deemed a beneficial owner of the Company's Common Stock held by United
Textiles.
8. By virtue of its majority ownership of Multimedia, U.S. Stores may be
deemed a beneficial owner of the Company's Common Stock held by Multimedia.
9. Represents shares of Common Stock into which ATPLC's 400,000 shares of
Series E Stock are convertible. By virtue of its ownership of U.S. Stores, ATPLC
also may be deemed a beneficial owner of the Company's Common Stock beneficially
owned by U.S. Stores.
10. Represents shares of Common Stock into which its EACF's shares of
Series E Stock are convertible.
11. Represents shares of Common Stock into which its 3,423,300 shares of
Series E Stock are convertible. By virtue of its ownership of ATPLC, EACF also
may be deemed a beneficial owner of the Company's Common Stock beneficially
owned by ATPLC.
DESCRIPTION OF SECURITIES
The Company has authorized capital stock of 190,500,000 shares
consisting of 160 million shares of Common Stock, 25 million shares of Series E
Stock, and 5.5 million shares of Series F Stock. As of April 20, 2000, there
were 19,677,016 shares of Common Stock, 6,952,510 shares of Series E Stock, 2
million Series E Warrants, and 750,000 shares of Series F Stock issued and
outstanding, all of which Securities were fully paid and non-assessable. The
following summary description of the Common Stock, Series E Stock, Series E
Warrants, and Series F Stock is qualified in its entirety by reference to the
Company's Certificate of Incorporation and all amendments thereto.
Common Stock
The Company has authorized 160 million shares of Common Stock, of which
19,677,016 shares are outstanding. Holders of Common Stock are entitled to one
vote for each share held. They do not have the right to cumulate their votes in
the election of directors; accordingly, holders of more than 50% of all the
shares outstanding can elect all directors, except that as consideration for
ZD's issuance of the L/C to FINOVA, ZD is entitled to nominate and appoint
one-third of the Company's directors during the terms of the three store leases
from which ZD is entitled to a profit percentage (but in no event later than
fiscal year end 2013). See Risk Factor No. 9 - "Dependence on FINOVA Credit Line
(Secured by all of the Company's Assets)," "Business of the Company," and
"Certain Relationships and Related Transactions."
Subject to the liquidation rights of the Company's Series F Stock,
holders of Common Stock are entitled to such dividends as may be declared by the
board of directors out of assets legally available therefor. They are not
entitled to any preemptive, subscription, conversion, or redemption rights. The
Company's Certificate of Incorporation, as amended, contains no provision to
delay, defer, or prevent a change in control of the Company.
Series E Warrants
The Company has 2 million Series E Warrants outstanding, each of which
entitles the holder thereof to purchase one share of Series E Stock (which share
and the shares of Common Stock underlying same were registered in the Company's
December 1997 public offering) at an exercise price of $5.00 per share from
December 29, 1998 until December 29, 2002. Unexercised Warrants automatically
expire at the end of such four-year period. Although the Company has no
intention of decreasing the exercise price or extending the exercise period of
the Series E Warrants, it is possible that either or both of such changes may be
effected by resolution of the board of directors in the future. In the event
that the exercise price of the Series E Warrants is reduced or the exercise
period of the Series E Warrants is extended, the Company will be required to
file a post-effective amendment which must be declared effective by the
Commission before the Series E Warrants can be exercised.
The Series E Warrants are redeemable by the Company at any time,
commencing December 29, 1998, upon 30 days' prior notice, at a redemption price
of $0.05 each, provided that the closing bid quotation of the Series E Stock for
at least 20 consecutive trading days, ending on the third day prior to the date
on which the Company gives notice, has been at least 170% of the exercise price
of the Series E Warrants being redeemed. The Series E Warrants will remain
exercisable during the 30-day notice period. In the event the Company decides to
redeem the Series E Warrants, the Company shall notify all warrantholders
thereof by mail and shall publish a Notice of Redemption in the Wall Street
Journal as to the date of redemption. Redemption of the Series E Warrants could
cause the holders thereof to exercise same at an exercise price which may be
disadvantageous for the holders, to sell the Series E Warrants at the then
current market price when they might otherwise wish to continue to hold the
Series E Warrants, or to accept the redemption price, which is likely to be
substantially less than the market value of the Series E Warrants at the time of
redemption. The Company will not redeem the Series E Warrants at any time in
which its registration statement is not current, enabling investors to exercise
their Series E Warrants during the 30-day notice period in the event of such a
redemption.
The exercise price and the number of shares or other securities
purchasable upon exercise of any Series E Warrants are subject to adjustment
upon the occurrence of certain events, including the issuance of shares of
Series E Stock as a dividend and any recapitalization, reclassification, or
split-up or reverse split of the Series E Stock. No adjustment in the exercise
price will be required to be made with respect to the Series E Warrants until
cumulative adjustments amount to $0.01 or more per Series E Warrant; however,
any such adjustment not required to be made at any given time due to such
exception will be carried forward and taken into account in any subsequent
adjustment.
In the event of any reclassification, capital reorganization, or other
similar change of outstanding Series E Stock, any consolidation or merger
involving the Company (other than a consolidation or merger which does not
result in any reclassification, capital reorganization, or other similar change
in the outstanding Series E Stock), or a sale or conveyance to another
corporation of the property of the Company as, or substantially as, an entirety,
each Series E Warrant will thereupon become exercisable only for the kind and
number of shares of stock or other securities, assets, or cash to which a holder
of the number of shares of Series E Stock purchasable (at the time of such
reclassification, reorganization, consolidation, merger or sale) upon exercise
of such Series E Warrant would have been entitled upon such reclassification,
reorganization, consolidation, merger, or sale. In the case of a cash merger of
the Company into another corporation or any other cash transaction of the type
mentioned above, the effect of these provisions would be that the holder of a
Series E Warrant would thereafter be limited to exercising such Series E Warrant
at the exercise price in effect at such time for the amount of cash per share
that the holder would have received had he exercised such Series E Warrant and
received shares of Series E Stock immediately prior to the effective date of
such cash merger or transaction. Depending upon the terms of such cash merger or
transaction, the aggregate amount of cash so received could be more or less than
the exercise price of the Series E Warrant.
Warrantholders, by virtue of their ownership of Series E Warrants
alone, have no right to vote on matters submitted to the Company's stockholders
or to receive dividends; nor are they entitled to share in the Company's assets
in the event of dissolution, liquidation, or winding up.
In order for a warrantholder to exercise his Series E Warrant, the
Company must have a current Registration Statement on file with the Commission
and, unless otherwise exempt, the State Securities Commission of the state in
which the warrantholder resides. Accordingly, the Company would be required to
file post-effective amendments to its Registration Statement when subsequent
events require such amendments in order to continue the registration of the
Series E Stock underlying the Series E Warrants. Although the Company has
undertaken and intends to keep its Registration Statement current, there can be
no assurance that the Company will keep its Registration Statement current and,
if for any reason it is not kept current, the Series E Warrants will not be
exercisable and will lose all value. The Company's transfer agent has also been
appointed as its warrant agent responsible for all record keeping and
administrative functions in connection with the Series E Warrants.
Series E Preferred Stock
The Company has authorized 25 million shares of Series E Stock, of
which 6,952,510 shares are outstanding. Each share of Series E Stock is
convertible, at the option of the holder, into six fully paid and non-assessable
shares of Common Stock on the earlier of February 4, 2000 or two years after
issuance. Holders of Series E Stock possess no voting rights, except as provided
by law with respect to altering the rights and preferences of the Series E
Stock, and are not entitled to dividends. In the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the affairs of the
Company, holders of Series E Stock are entitled to a $1.00 per share liquidation
preference. The Series E Stock is not redeemable by the Company but is subject
to certain anti-dilution provisions in the case of any recapitalization, merger,
or acquisition.
Series F Preferred Stock
The Company has authorized 5.5 million shares of Series F Stock, of
which 750,000 shares are outstanding. Each share of Series F Stock is
convertible, at the holder's option, into two fully paid and non-assessable
shares of Common Stock, at any time commencing on the date the Commission
declares this Registration Statement effective. Each outstanding share of Series
F Stock, by virtue of and simultaneously with the occurrence of the earlier of
either of the following events and without any action on the part of the holder
thereof, shall convert automatically into shares of Common Stock: (i) two years
from issuance or (ii) in the event the closing price per share of Common Stock
has been at least $5.00 for a consecutive 30 day period.
Holders of Series F Stock possess no voting rights, except as provided
by law with respect to altering the rights and preferences of the Series E
Stock. Holders are entitled to receive, when and as declared by the board of
directors, out of funds legally available for the payment of dividends,
cumulative dividends at $0.08 per share payable upon conversion of the shares in
preference to dividends on junior securities (i.e., Common Stock). Dividends may
be paid in cash or in kind (i.e., in shares of Series F Stock) at the discretion
of the Company and shall be fully cumulative and shall accrue (whether or not
declared), without interest, from the date they are payable.
In the event of any voluntary or involuntary liquidation, dissolution,
or winding up of the affairs of the Company, holders of Series F Stock are
entitled to be paid out of the assets of the Company available for distribution
to its stockholders an amount in cash equal to $0.50 per share. The Series F
Stock, with respect to rights on liquidation, winding up, and dissolution, ranks
junior to the Series E Stock and senior to the Common Stock. The Series F Stock
is not redeemable by the Company.
Dividend Policy
The Company has not paid cash dividends on any of its Securities and is
prohibited from doing so pursuant to the terms of its financing agreement with
FINOVA. The Company intends to retain earnings, if any, in the foreseeable
future for use in its activities. Future payment of cash dividends is wholly
dependent upon the Company's earnings, financial condition, capital
requirements, and other factors deemed relevant by the board of directors. It is
not likely that such dividends will be paid in the foreseeable future.
Transfer Agent and Warrant Agent
The Company's transfer and warrant agent for its Common Stock, Series E
Stock, and Series E Warrants is Continental Stock Transfer & Trust Company, New
York, New York.
INTEREST OF NAMED EXPERTS AND COUNSEL
No expert or counsel (i) was hired by the Company on a contingent basis
or (ii) will receive a direct or indirect interest in the Company or (iii) was a
promoter, underwriter, voting trustee, director, officer, or employee of the
Company.
Legal matters relating to the shares of Common Stock offered hereby
will be passed on for the Company by its outgoing general counsel, Millennium
Ventures Law Group, Walnut Creek, California or new general counsel, Todtman,
Nachamie, Spizz & Johns, P.C., New York, New York.
The financial statements of the Company as of and for the years ended
March 31, 1999 and 1998 have been audited by Haskell & White LLP, Independent
Certified Public Accountants, to the extent and for the period set forth in
their report appearing elsewhere herein and are included in reliance upon such
report given upon the authority of that firm as experts in giving said reports.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until September 24, 1997, the Company's Common Stock was quoted on the
Nasdaq SmallCap Stock Market ("Nasdaq"). The following table sets forth
representative high and low bid quotes as reported by the OTC Bulletin Board,
whereon the Company's securities are quoted, during the periods stated below.
Bid quotations reflect prices between dealers, do not include resale mark-ups,
markdowns, or other fees or commissions, and do not necessarily represent actual
transactions.
Calendar Series E (2) Series E (2)
Period Common Stock (1) Warrants (1) Preferred Stock Warrants
------ ---------------- ------------ ---------------- --------
Low High Low High Low High Low High
--- ---- --- ---- --- ---- --- ----
1997
01/01/97 - 03/31/97 1 11/4 1 11/4
04/01/97 - 06/30/97 1 1 1/8
07/01/97 - 09/23/97(3) 1 1 1/8
10/14/97 - 12/31/97 2 3
1998
01/01/98 - 03/31/98 .67 1.25 1 4.75 .5 1.75
04/01/98 - 06/30/98 .58 1.75 .87 3.5 .5 1.25
07/01/98 - 09/30/98 .75 1.56 .31 3.5 .12 1.12
10/01/98 - 12/31/98 .56 1.22 .20 .67 .01 .37
1999
01/01/99 - 03/31/99 .75 2.56 .20 1.72 .03 .25
04/01/99 - 06/30/99 1.06 2.03 .50 3.37 .10 .58
07/01/99 - 9/30/99 .75 1.50 .84 1.62 .13 .29
10/01/99 - 12/31/99 .50 1.44 .63 4.13 .13 .95
2000
01/01/00 - 03/31/00 .31 2.00 1.88 3.94 .28 .56
04/01/00 - 04/18/00 .20 .46 1.12 2.62 .28 .44
(footnotes applicable to previous page)
(1) The Common Stock and Warrants issued in the Company's initial public
offering in November 1994 started to trade separately on February 6, 1995.
The Warrants expired in February 1997.
(2) The Company consummated an offering of its Series E Stock and Series E
Warrants in December 1997. These securities commenced trading on the OTC
Bulletin Board on January 5, 1998.
(3) The Company's Common Stock was delisted from Nasdaq effective with the
close of business on September 23, 1997. It began trading on the OTC
Bulletin Board in October 1997.
As of April 20, 2000, there were approximately 435 holders of record of
the Company's Common Stock, although the Company believes that there are
approximately 1,530 additional beneficial owners of shares of Common Stock held
in street name. As of April 20, 2000, the number of outstanding shares of the
Company's Common Stock was 19,677,016 (This number is subject to change,
nominally, as the pre-July 1997 reverse split shares which have not been
exchanged as yet are offered for such exchange by the Company's shareholders.)
Effective with the close of business on September 23, 1997, the
Company's Common Stock was delisted from trading on Nasdaq. The Company appealed
an earlier Nasdaq determination and presented its argument in August 1997 at an
oral hearing before the Nasdaq Qualifications Panel (the "Panel"). On September
23, 1997, the Company received a decision from the Panel that based its decision
to delist on its belief that the Company did not meet the stockholders' equity
maintenance requirement of $1 million and based on transactions it deemed
"detrimental to the investing public and the public interest" concerning
transactions undertaken in February 1996 with respect to options issued to an
investor which provided a $2 million L/C as security for a credit line the
Company maintained with Congress Financial Corporation (Western) ("Congress,"
the "Congress Financing"). The Company appealed this matter to the Nasdaq
Listing and Hearing Review Committee (the "Review Committee") which, on October
29, 1997, remanded the Panel's determination for reconsideration by a new Nasdaq
analyst and a new Panel due in part to the Company's allegations of bias.
In December 1997, the Company presented written evidence to the new Panel,
which, in a determination dated January 20, 1998, affirmed the delisting. The
Company appealed this determination to the Review Committee. In a decision dated
May 21, 1998, the Review Committee affirmed the delisting citing as its basis
therefor, inter alia, as follows: ". . . given the Company's history of losses,
we do not have confidence in the Company's ability to maintain compliance [with
the capital and surplus requirement] for the long term." In addition, the Review
Committee determined that "substantial dilution to the public shareholders by
stock issuance . . . and by the conversion of preferred stock issued . . . at
prices substantially below the market price" supported the Review Committee's
argument of purported affiliate self-dealing. In further support of its
determination, the Review Committee cited the Company's failure to provide
information requested with respect to entities, which were not affiliated with
the Company. (In response to the Review Committee's request for such
information, the Company informed same that it did not believe it appropriate to
make representations regarding the transactions or the composition of any
entities with which it was not affiliated and recommended that the Review
Committee redirect such inquiries directly to such entities.) The Company sought
all administrative remedies available from Nasdaq and believes that Nasdaq erred
in its determination. Given the extreme cost associated with appealing Nasdaq's
decision to the Securities and Exchange Commission, however, the Company decided
not to file such an appeal.
MANAGEMENT
Directors, Executive Officers, Promoters and Control Persons
The following table sets forth the names, ages, and titles of all
directors and officers of the Company:
Name Age Position
Harold Rashbaum 73 Chairman of the Board
Richard Brady 47 Chief Executive Officer, President and Director
James Frakes 43 Chief Financial Officer, Secretary and Director
Moses Mika 78 Director
All directors are elected at an annual meeting of the Company's
shareholders and hold office for a period of one year or until the next annual
meeting of stockholders or until their successors are duly elected and
qualified. Vacancies on the board of directors may be filled by the remaining
directors. Officers are appointed annually by, and serve at the discretion of,
the board of directors. There are no family relationships between or among any
officers or directors of the Company except that Mr. Rashbaum is the
father-in-law of Ilan Arbel, Mr. Mika's son.
As permitted under the Delaware General Corporation Law, the Company's
Certificate of Incorporation eliminates the personal liability of the directors
to the Company or any of its shareholders for damages caused by breaches of said
directors' fiduciary duties. As a result of such provision, stockholders may be
unable to recover damages against directors for actions, which constitute
negligence or gross negligence or are in violation of their fiduciary duties.
This provision in the Company's Certificate of Incorporation may reduce the
likelihood of derivative and other types of shareholder litigation against
directors.
Richard Brady is a co-founder of the Company and has acted as the
Company's chief executive officer and president since December 1995. Mr. Brady
was the executive vice president, secretary, and a director from the Company's
inception in 1974 until December 1996. He was re-elected director of the Company
in January 1998. Mr. Brady has been the president of Toys since January 1997 and
a director thereof since May 1998.
Harold Rashbaum has been the chairman of the board of directors since
September 10, 1996. Mr. Rashbaum was a management consultant to the Company from
July 1995 to September 10, 1996. In May 1998, he was elected as a director of
Toys. Mr. Rashbaum has been the president, chief executive officer, and a
director of Shopnet since January 1997. From May 1996 to January 1997, Mr.
Rashbaum served as secretary and treasurer of Shopnet. Since May 1999, he has
also been the president and a director of Hollywood Productions, Inc.
("Hollywood," a wholly-owned subsidiary of Shopnet) and since September 1996, he
has been the president, secretary, and sole director of Breaking Waves (also a
wholly-owned subsidiary of Shopnet). Since February 1996, Mr. Rashbaum has been
the president and a director of H.B.R. Consultant Sales Corp. ("HBR"), of which
his wife is the sole shareholder. Prior thereto, from February 1992 to June
1995, Mr. Rashbaum was a consultant to 47th Street Photo, Inc., an electronics
retailer. Mr. Rashbaum held this position at the request of the bankruptcy court
during the time 47th Street Photo, Inc. was in Chapter 11. From January 1991 to
February 1992, Mr. Rashbaum was a consultant for National Wholesale Liquidators,
Inc., a major retailer of household goods and housewares.
James Frakes was appointed chief financial officer and secretary of the
Company in July 1997. In August 1997, he was elected as a director of the
Company. In January 1998, Mr. Frakes was appointed secretary and chief financial
officer of Toys. He was a director from May 1998 to July 1999. In January 1998,
Mr. Frakes was elected as a director of Shopnet. From June 1990 to March 1997,
Mr. Frakes was chief financial officer of Urethane Technologies, Inc. ("UTI")
and two of its subsidiaries, Polymer Development Laboratories, Inc. ("PDL") and
BMC Acquisition, Inc. These were specialty chemical companies, which focused on
the polyurethane segment of the plastics industry. Mr. Frakes was also vice
president and a director of UTI during this period. In March 1997, three
unsecured creditors of PDL filed a petition for the involuntary bankruptcy of
PDL. This matter is pending before the United States Bankruptcy Court, Central
District of California. From 1985 to 1990, Mr. Frakes was a manager for Berkeley
International Capital Corporation, an investment banking firm specializing in
later stage venture capital and leveraged buyout transactions. In 1980, Mr.
Frakes obtained a Masters in Business Administration from University of Southern
California. He obtained his Bachelor of Arts degree in history from Stanford
University, from which he graduated with honors in 1978.
Moses Mika was appointed as a director of the Company in March 1998 and was
elected a director of Toys in May 1998. Mr. Mika was appointed director of
United Textiles in March 1998. He is also the president of H.D.S. Capital Corp.
and the majority shareholder of European Ventures Corp. Mr. Mika has been
retired since 1989.
Significant Employees of the Company
Howard Labow has been the vice president of advertising of the Company
(a non-executive officer position) since June 1998. He has been employed by the
Company since 1977.
Donna Hogan has been the vice president of merchandising of the Company
(a non-executive officer position) since June 1998. She has been employed by the
Company since 1983.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's officers,
directors, and persons who beneficially own more than ten percent of a
registered class of the Company's equity securities to file reports of
securities ownership and changes in such ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors, and greater than ten percent
beneficial owners also are required by rules promulgated by the SEC to furnish
the Company with copies of all Section 16(a) forms they file.
No person ("a Reporting Person") who during the fiscal year ended March
31, 2000 was a director, officer, or beneficial owner of more than ten percent
of the Company's Common Stock or Series E Stock [which are the only classes of
equity securities of the Company registered under ss.12 of the Exchange Act],
failed to file on a timely basis reports required by ss.16 of the Act during the
most recent fiscal year except as follows: (i) Richard Brady failed timely to
file a Form 4, (ii) Harold Rashbaum failed timely to file a Form 4, (iii)
Breaking Waves failed timely to file a Form 4, (v) EACF failed timely to file a
Form 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.
Commission Position on Indemnification for Securities Act Liabilities
As permitted under the Delaware General Corporation Law, the Company's
Certificate of Incorporation and By-Laws provide for indemnification of a
director or officer under certain circumstances against reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of an action brought against him by reason of his being a director
or officer. In addition, the Company's charter documents provide for the
elimination of directors' liability to the Company or its stockholders for
monetary damages except in certain instances of bad faith, intentional
misconduct, a knowing violation of law, or illegal personal gain.
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 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
pursuant to this Registration Statement, 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 by such court of such issue.
Executive Compensation
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
or paid by the Company during the years ended March 31, 2000, 1999, and 1998 to
each of the named executive officers of the Company.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
Securities
Restricted Underlying All Other
Stock Award(s) Options/ LTIP Compen-sation
($) SARs Payouts ($)
Name and Principal Year Salary Bonus(#) ($) Other Annual
Position Compen-sation
Richard Brady
President, CEO,
and Director 2000 175,000 5,000 9,147 (1) -- -- -- --
1999 124,500 -- 8,579 (1) -- -- -- --
1998 120,000 -- 8,579 (1) 25,000(2) -- -- --
James B. Frakes
Chief Financial
Officer, Secretary,
and Director 2000 110,000 -- 3,797(3) -- -- -- --
1999 101,200 -- -- -- -- -- --
1998 N/A
(footnotes)
1. Includes an automobile allowance of $7,200 for each of 2000, 1999, and
1998, and the payment of life insurance premiums of $1,947 for 2000 and $1,379
for each of 1999 and 1998.
2. Mr. Brady received 25,000 shares of Series E Stock as a bonus in March
1998: these shares vested equally over a 12 month period commencing in April
1998 and were sold by Mr. Brady in March 2000.
3. Represents lease payments on a Company car.
During fiscal 2000, Harold Rashbaum, the Company's chairman of the
board, received an aggregate of $48,000 in compensation from the Company in
consideration of the consulting services he provided therefor. In March 1998,
the Company issued 25,000 shares of Series E Stock, subject to a vesting
schedule, to each of Mr. Brady and Mr. Rashbaum, both of whom sold their
respective shares during the fourth quarter of the fiscal year ended March 31,
2000. Mr. Rashbaum devotes a significant portion of his time to the Company.
Among other things, he reviews potential store sites, assists in strategic
planning, reviews all cash outflows, and otherwise works closely with management
in further developing and implementing the Company's ongoing business strategy.
1994 Stock Option Plan
In 1994, the Company adopted a Stock Option Plan (the "SOP"). The board
believes that the SOP is desirable to attract and retain executives and other
key employees of outstanding ability. Under the SOP, options to purchase an
aggregate of not more than 50,000 shares of Common Stock may be granted from
time to time to key employees, officers, directors, advisors, and independent
consultants to the Company and its subsidiaries. The Company granted to James
Frakes, chief financial officer and secretary, pursuant to his hire, an option
to purchase 30,000 shares of Common Stock at an exercise price of $3.25 per
share, vesting at the rate of 10,000 shares per annum in each of July 1998,
1999, and 2000. On June 17, 1998, the board elected to adjust the exercise price
of the option to $1.15, representing approximately 110% of the closing price of
the Common Stock on said date.
The board of directors is charged with administration of the SOP and is
generally empowered to interpret the SOP, prescribe rules and regulations
relating thereto, determine the terms of the option agreements, amend them with
the consent of the Optionee, determine the employees to whom options are to be
granted, and determine the number of shares subject to each option and the
exercise price thereof. The per share exercise price for incentive stock options
("ISOs") will not be less than 100% of the fair market value of a share of the
Common Stock on the date the option is granted (110% of fair market value on the
date of grant of an ISO if the Optionee owns more than 10% of the Common Stock
of the Company).
Options will be exercisable for a term (not less than one year)
determined by the board. Options may be exercised only while the original
grantee has a relationship with the Company or at the sole discretion of the
board, within ninety days after the original grantee's termination. In the event
of termination due to retirement, the Optionee, with the consent of the board,
shall have the right to exercise his option at any time during the thirty-six
month period following such retirement. Options may be exercised up to
thirty-six months after the death or total and permanent disability of an
Optionee. In the event of certain basic changes in the Company, including a
change in control of the Company as defined in the SOP, in the discretion of the
board, each option may become fully and immediately exercisable. ISOs are not
transferable other than by will or by the laws of descent and distribution.
Options may be exercised during the holder's lifetime only by the holder or his
guardian or legal representative.
Options granted pursuant to the SOP may be designated as ISOs with the
attendant tax benefits provided therefor pursuant to Sections 421 and 422A of
the Internal Revenue Code of 1986. Accordingly, the SOP provides that the
aggregate fair market value (determined at the time an ISO is granted) of the
Common Stock subject to ISOs exercisable for the first time by an employee
during any calendar year (under all plans of the Company and its subsidiaries)
may not exceed $100,000. The board may modify, suspend, or terminate the SOP,
provided, however, that certain material modifications affecting the SOP must be
approved by the shareholders, and any change in the SOP that may adversely
affect an Optionee's rights under an option previously granted under the SOP
requires the consent of the Optionee.
1994 401(k) Employee Stock Option Plan ("ESOP")
In May 1994, the Company adopted corporate resolutions approving a
401(k) Employee Stock Ownership Plan (the "401(k) ESOP Plan") which covers
substantially all employees of the Company. The 401(k) ESOP Plan was filed on
July 14, 1995 with the Internal Revenue Service and includes provisions for both
employee stock ownership and a 401(k) Plan. The 401(k) ESOP Plan allows
contributions only by the Company: these can be made annually at the discretion
of the Company's board of directors. The 401(k) ESOP Plan has been designed to
invest primarily in the Company's stock. The employees of the Company will
contribute to the 401(k) portion of the Plan through payroll deductions. The
Company does not intend to match contributions to the 401(k). Contributions to
the 401(k) ESOP Plan may result in an expense, resulting in a reduction in
earnings, and may dilute the ownership interests of persons who currently own
securities of the Company. On January 26, 1995, Messrs. Brady and Tom Davidson
(a founder of the Company and the Company's former president) and the Company's
then parent company contributed an aggregate of 15,333 shares of the Company's
Common Stock to the 401(k) ESOP Plan. In August 1998, pursuant to the ESOP
portion of the plan, the Company issued 5,673 shares of Common Stock to certain
former employees.
BUSINESS OF THE COMPANY
General
The Company was founded in 1974, at which time it operated one store
under the name Play Co. Toys in Escondido, California. At present, the Company
and its subsidiary, Toys, operate an aggregate of thirty-one stores throughout
Southern California (in the Los Angeles, Orange, San Diego, Riverside, and San
Bernardino Counties) and in (i) Tempe, Arizona, (ii) Las Vegas, Nevada, (iii)
Dallas and Houston, Texas, (iv) Auburn Hills, Michigan, (v) Chicago, Illinois,
and (vi) Charlotte, North Carolina. The Company intends to expand its operations
geographically and in accordance therewith has executed leases to open four
additional stores by the end of calendar year 2000. These stores shall be
located in Nevada, Tennessee, Illinois, Colorado, Florida, Maryland, and
Minnesota.
Approximately 75% of the Company's stores offer educational, new
electronic interactive, and specialty and collectible toys and items for sale
and are strategically located in highly trafficked, upscale malls. The remaining
25% sell traditional toys and games and are located in strip shopping centers.
Given the favorable results obtained from a two year market test of the sale of
children's swimwear in its stores, the Company recently expanded its product mix
and now offers a limited number of children's swimwear and accessories for sale
in many of its stores.
Since 1997, the Company has embraced and implemented a new store design
and layout, remodeled most of its older stores, closed non-profitable stores,
and expanded its geographic market from exclusively Southern California to
across the United States. Since 1996, the Company has opened twenty stores,
which are considered by management to be high-end retail toy and educational,
electronic interactive stores. These outlets, and those the Company expects to
open in the future, offer items comparable in quality and choice to those
offered by FAO Schwarz, Warner Brothers, and Disney Stores and are expected to
attract clientele similar to those attracted by such stores.
In April 1999, the Company debuted the first of two dedicated
electronic commerce web sites. This site, www.toyswhypayretail.com, represents a
new trade name for the Company and allows consumers to purchase, at near
wholesale prices, overstocks, special buys, and overruns on mostly name-brand
toys purchased by the Company out of season. The Company offers approximately
3,000 items for sale on the web site. The second site, www.webjumbo.de, debuted
in October 1999 and is a full line site retailing approximately 5,000 items.
This site is exclusively in German, and a sizable portion of the items sold
thereon will represent German toys not sold in the Company's retail stores.
Because the Company's new and newly remodeled stores focus on the sale
of educational and electronic interactive games and toys, specialty products,
and collector's toys which generally carry higher gross margins than traditional
toys, such stores have shown and are expected to continue to show higher gross
profits than the Company's older stores (which focused primarily on the sale of
traditional toys).
Acquisition of Toys International.COM, Inc. f/k/a Toys International, Inc.
In January 1997, the Company acquired substantially all of the assets
of Toys. The acquisition, in principal, included the assignment to the Company
of the three store leases then held by Toys and Toys' entire inventory. As part
of the purchase agreement, the Company obtained the rights to the "Toys
International" and "Tutti Animali" operating name trademarks and also assumed
the existing leases at Toys' three store locations: two of such locations
operate under the tradename "Toys International," and the third operates under
the "Tutti Animali" tradename. The total purchase price was $1,024,184, which
consisted mainly of inventory and certain prepaid expenses and deposits. The
purchase price was tendered in the form of a $759,184 cash payment remitted in
January 1997 and the execution of two promissory notes, aggregating $265,000,
payable over a two year period. Both promissory notes were repaid in full under
agreed terms. In order to ensure a smooth transition in operations, the former
president of Toys, Mr. Gayle Hoepner, continued his relationship as a consultant
to the Company through April 1997, during which time he advised the Company
regarding Toys' then operations, vendors, policies, employees, etc.
Ownership of the Company
Ilan Arbel is the president and a director of United Textiles, the
former majority stockholder of the Company, which now owns approximately 22.3%
of the Company's Common Stock. Mr. Arbel is also the president and a director of
Multimedia, which owns approximately 24.5% of the Company and 78.5% of United
Textiles. Breaking Waves, a wholly owned subsidiary of Shopnet, owns
approximately 6.4% of the Company's Common Stock. The president of both Breaking
Waves and Shopnet is the father-in-law of Mr. Arbel who is also the president of
EVC, the entity having substantial control of Shopnet. As a result, through his
role as president of each of United Textiles, Multimedia, and EVC and said
entities' holdings of the Company's Common Stock, Mr. Arbel influences to a
significant degree the policies and direction of the Company. The chart below
depicts the Company's linear ownership structure as of April 20, 2000. (Breaking
Waves is not presented thereon as it has no affiliation with EACF and its
subsidiaries.)
Europe American Capital Foundation
||
\/
American Telecom PLC (83.7%) => ABC Fund, Ltd. (20%)
(100%)
||
\/
U.S. Stores Corp.
(67.7%)
||
\/
Multimedia Concepts International, Inc.
(78.5%)
||
\/
United Textiles & Toys Corp.
(22.3%)
||
\/
Play Co. Toys & Entertainment Corp.
The Company has two subsidiaries: (i) Toys, of which the Company owns 58.4%
and (ii) Canyon, which is wholly owned by the Company. Toys is the only working
subsidiary, however, operating twenty-seven stores, one of which is the Santa
Clarita store which Canyon recently assigned to Toys. See Risk Factor No. 21. -
Significant Influence by Ilan Arbel.
Product Lines
The Company's older stores, which are located in strip shopping
centers, sell children's and adult toys, games, bicycles and other wheel goods,
sporting goods, puzzles, Nintendo and Sony electronic game systems (and
cartridges therefor), cassettes, and books. These stores offer in excess of
15,000 items for sale, most of which are major brand name toys and hobby
products.
The Company's new (post 1996) and remodeled stores, while also offering
the aforesaid products for sale, stock a mix of educational toys, specialty
stuffed animals such as Steiff and North America Bears, Small World toys, LBG
trains, CD-ROMs, computer software games, and Learning Curve and Ty products.
The Company's Tutti Animali store, located in the Crystal Court Mall in Costa
Mesa, California, primarily sells stuffed animals.
The Company periodically reviews each individual store's sales history
and prospects on an individual basis to decide on the appropriate product mix to
stock thereat. During calendar years 1997 and 1998, the Company market tested
the sale in its stores of a limited number of pieces of children's swimwear
manufactured by Breaking Waves, an affiliate. The Company's chairman is also the
president of Shopnet, Breaking Waves' parent. Those market tests proved
successful. As a result, in November 1998, the Company entered into a sales
agreement with Breaking Waves pursuant to which Breaking Waves agreed to sell to
the Company on a wholesale basis, and the Company agreed to purchase from
Breaking Waves, during each season during which swimwear is purchased, an agreed
upon number of pieces of merchandise for its retail locations. The Company
further agreed to provide advertising, promotional materials, and ads of the
merchandise in all of its brochures, advertisements, catalogs, and all other
promotional materials, merchandising programs, and sales promotion methods, in
all mediums utilized by same. The Company's swimwear sales comprise a small
portion (less than 1%) of its total sales.
Suppliers and Manufacturers
The Company purchases a significant portion of its products from
approximately five manufacturers and ships them to its stores from its warehouse
distribution center. There are no written contracts and/or agreements with any
individual manufacturer or supplier; rather, all orders are on a purchase order
basis only. The Company relies on credit terms from suppliers and manufacturers
to purchase nearly all of its inventory. Credit terms vary from company to
company and are based upon many factors, including the ordering company's
financial condition, account history, type of product, and the time of year the
order is placed. Such credit arrangements vary for reasons both within and
outside the control of the Company.
Merchandising Strategy
Store Design
The Company believes it important to offer an environment that is less
intimidating and more "user friendly" than the environments provided by some of
the larger toy retailers whose businesses compete with the Company. In view of
this belief, the Company actively embraces a policy of affording its customers
courtesy, respect, and ease of convenience. The Company provides trained store
clerks to assist customers with all of their shopping needs and stocks its
merchandise at eye level for its patrons' convenience.
In 1996, management determined that current and prospective consumers,
whose needs and desires are influenced by prevailing musical, fashion,
recreational, and entertainment trends, require variety and demand in addition
to traditional products; namely, they desire the most fashionable products. In
an effort to meet the rapidly changing needs of its consumers, the Company
designed new outlets which provide a combination of (i) new educational,
electronic interactive, specialty, hobby, and collectible toys and goods and
(ii) traditional toys and games. In addition, it sought out, has opened, and
continues to open outlets located in highly trafficked malls, rather than in the
strip shopping centers where it originally opened its stores. In addition, the
Company developed a new store design and marketing format, which provides an
interactive setting together with a retail operation. This format and design has
formed the foundation for the Company's future direction and growth plans,
thereby allowing the Company to meet current and imminent industry demands.
In June 1999, the Company opened its 26th store in the Venetian Hotel
in Las Vegas, Nevada. In September 1999, the Company opened one store in San
Francisco (Pier 39) and two stores near Charlotte, North Carolina. In October
1999, the Company opened one store in Mission Viejo, California and two stores
near Houston, Texas. During fiscal year 1999, the Company opened six new stores.
With the closure of the Company's Simi Valley store in February 2000, the
Company's store count was brought to its current level of thirty-one stores. The
Company intends to open seven additional stores by the end of calendar year
2000.
Product and Trend Analysis
The Company continually assesses trends and demands in the industry,
refines its store formats and/or product lines as needed, and analyzes and
evaluates markets for future store openings, merchandise lines, and marketing
strategies. The Company operates its stores under the names "Play Co. Toys,"
"Toys International," "Toy Co.," and "Tutti Animali" depending upon the product
mix and location.
The Company offers a broad in-stock selection of products at prices
generally competitive within the industry. While the Company does not stock the
depth or breadth of selection of toys for its stores as some of its larger
competitors do, the Company does strive to stock all basic categories of toys
and all television advertised items. The Company continues to emphasize
specialty and educational toys in its stores.
Termination of Military Base Sales
In June 1994, the Company began to sell toy and hobby items on a
wholesale basis to military bases located in Southern California. In accordance
with its new corporate focus, and given that wholesale sales to military bases
were minimal in fiscal year 1998 (2% of sales) and fiscal year 1997 (3% of
sales), the Company ceased such sales as of July 1998. Wholesale sales to
military bases were approximately 1% of sales in fiscal year 1999.
Seasonality
Since inception, the Company's business has been highly seasonal, with
the majority of its sales and profits being generated in the fourth calendar
quarter of the year, particularly during the November and December holiday
season.
Competition
The toy market is highly competitive. Though the Company's new stores
offer a combination of traditional, educational, new electronic interactive,
specialty, and collectible toys and items, the Company remains in direct
competition with local, regional, and national toy retailers and department
stores, including Toys R Us, Kay Bee Toy Stores, K-Mart, and Wal Mart. Most of
the Company's larger competitors are located in freestanding stores rather than
in malls. Kay Bee stores, however, are located in malls, though their product
line is different than the Company's. The Company also competes with on-line toy
retailers, such as eToys Inc. The toy market is particularly characterized by
large retailers and discount stores with intensive advertising and marketing
campaigns and with deeply discounted pricing of such products. The Company
competes as to price, personnel, service, speed of delivery, and breadth of
product line.
As a result of the continually changing nature of children's consumer
preferences and tastes, the success of the Company is dependent on its ability
to change and adapt to new trends and to supply the merchandise then in demand.
Children's entertainment products are often characterized by fads of limited
life cycles. Combining the traditional and educational toy segments of the
market into one retail location is believed to be a unique concept that should
prove to differentiate the Company's stores from those of its larger or similar
size competitors. Management has been unable to locate any other retailer
currently using this combined marketing concept. The Company will compete for
the educational toy customer with other specialty stores such as Disney Stores,
Warner Bros. Stores, Learning Smith, Lake Shore, Zainy Brainy, and Noodle
Kidoodle.
Most of the companies with which the Company competes have more
extensive research and development, marketing, and customer support capabilities
and greater financial, technological, and other resources than those of the
Company. There can be no assurance that the Company will be successful or that
it will be able to distinguish itself from such larger, better known entities.
In addition, the Company does not believe there are any significant barriers to
entry to discourage new companies from entering into this industry.
Warehousing, Shipping and Inventory Systems
The Company's stores are serviced from one distribution facility, which
is approximately 37,000 square feet. Inventory and shipment of products
continues to be monitored by a computerized point-of-sale system. The
point-of-sale system is a sophisticated scanning, inventory control, purchasing,
and warehouse system which allows each store manager to monitor sales activity
and inventory at each store and enables the Company's officers to obtain reports
on all stores. It monitors sales at all store locations and automatically
notifies the warehouse and shipping department each time stock of a particular
item is low or out, depending upon the item and the instructions programmed into
it. Through this system, the Company analyzes product sales and adjusts product
mix in order to maximize return and effectively manage its retail space.
The Company's stores generally are restocked on a weekly basis,
although certain stores and certain items may be restocked at more frequent
intervals. In addition, restocking of products is increased in the fourth
calendar quarter, during the holiday season, during which period some stores are
restocked on a daily basis. The Company ships to its stores in California by its
own leased vehicles. The Company ships to stores located outside of California
via truckload or less than truckload independent trucking companies.
Trademarks
In 1976, 1994, and 1998, the Company received federal registrations for the
trademarks "Play Co. Toys," "TKO" and "Toy Co." respectively. Play Co. Toys and
Toy Co. are trademarks utilized by the Company in connection with certain of its
stores. "TKO" was used for certain items the Company previously manufactured.
The Company also utilizes the tradenames "Toys International" and "Tutti
Animali."
Employees
At April 20, 2000, the Company had three executive officers,
approximately 149 full time employees, and approximately 349 part time
employees. None of the employees of the Company is represented by a union, and
the Company considers employee relations to be good. Each store employs a store
manager, an assistant manager, and between fifteen to twenty-five full-time and
part-time employees. Each of the Company's store managers reports to the
Company's vice president of retail operations and vice president of
merchandising who in turn report directly to the Company's executive officers.
Financing through FINOVA Capital Corporation
On January 21, 1998, the Company entered into a $7.1 million secured,
revolving Loan and Security Agreement with FINOVA. The credit line offered under
the FINOVA Agreement replaced the $7 million credit line the Company previously
had with Congress. Neither FINOVA nor Congress is affiliated with the Company.
The Company repaid the Congress loan on February 3, 1998. The FINOVA credit line
is secured by substantially all of the Company's assets and expires on August 3,
2000. The FINOVA Agreement is guaranteed by United Textiles and accrues interest
at a rate of floating prime plus one and one-half percent. Effective July 30,
1998, the Company and FINOVA amended the Agreement to increase the maximum level
of borrowings thereunder from $7.1 million to $7.6 million. Effective September
24, 1998, the Company and FINOVA entered into a second amendment to increase the
maximum level of borrowings thereunder from $7.6 million to $8.6 million through
December 31, 1998. As of January 1, 1999, the maximum level of borrowings
returned to the $7.6 million level. In December 1998, the FINOVA Agreement was
amended a third time to reflect FINOVA's taking of a subordinate position with
respect to its lien on only such equipment as has been leased by the Company
from Phoenix Leasing, Inc.
In November 1998, pursuant to an agreement with ZD - a related New York
limited liability company, the beneficiary of which is a member of the family of
the Company's chairman - ZD issued a $700,000 irrevocable standby L/C in favor
of FINOVA. As consideration for its issuance of the L/C, ZD is entitled (i) to a
one-third profit percentage after application of corporate overhead beginning
April 1, 1999 through the end of the terms of the store leases from three of the
Company's stores (Venetian Hotel in Las Vegas, Nevada; Auburn Hills, Michigan;
and Gurnee, Illinois) and (ii) to nominate and appoint one-third of the
Company's directors during the aforesaid store lease terms (but in no event
later than fiscal year end 2013). Such stores did not generate a profit after
application of corporate overhead in the nine-month period ended December 31,
1999, thus, no payments have accrued or been made to ZD to date. As a result of
the L/C, FINOVA lent a matching $700,000 to the Company in the form of a term
loan, pursuant to a fourth amendment to the FINOVA Agreement entered into on
February 11, 1999. The term loan from FINOVA expires on August 3, 2000 and bears
interest at prime plus one percent. In March 1999, the Company and FINOVA
entered into a Fifth Amendment to Loan and Security Agreement which stretches
the agreed upon (in the FINOVA Agreement) decrease in advance rate against the
Company's cost value of its inventory over a five month period. In August 1999,
the Company and FINOVA entered into a Sixth Amendment to Loan and Security
Agreement pursuant to which the Company's maximum level of borrowings was
increased to $11.3 million. The amendment also (1) increased the minimum net
worth financial covenant from $750,000 to $2.9 million as of June 30, 1999 with
the $2.9 million threshold increasing by 60% of any equity raised by the Company
and by 60% of any annual profits generated by the Company; (2) allows the
Company to sell a minority equity interest (up to 49%) in its Toys subsidiary;
and (3) increased the maximum levels of capital expenditures, capital leases and
unsecured debt allowed under the financing agreement.
In December 1999, at the Company's request, FINOVA agreed to reduce the
maximum borrowing level of the credit facility from $11.3 million to $9.3
million and to terminate a $2 million standby L/C that previously helped support
the credit facility. The termination of the L/C allowed the Company access to a
$2 million certificate of deposit which previously was restricted and was used
as collateral for the L/C by the issuing bank. On December 31, 1999, the Company
had $54,170 outstanding under its revolving credit facility with FINOVA
(representing only the interest accrued during the month of December 1999 as the
principal balance was paid down to zero during the December quarter) and
$6,990,395 available thereunder.
On March 13, 2000, the Company and FINOVA agreed that FINOVA would
release its interest as beneficiary in $1.7 million of standby letters of
credit. These standby letters of credit had originally been provided by
Multimedia Concepts International, Inc. for $1 million, and by ZD for $700,000.
Further, the total amount available under the facility was reduced to $5
million. Beginning April 30, 2000, the facility is to be further reduced by $1
million at each month-end, until reduced to zero in August 2000.
During fiscal year 1999, the Company breached two negative covenants in
the FINOVA Agreement by exceeding maximum levels of capital expenditures,
unsecured debt, and lease financing. FINOVA waived such defaults. See "Risk
Factor No. 9 - Dependence on FINOVA Credit Line (Secured by all of the Company's
Assets)."
The Company is currently seeking an alternative lending arrangement
with a bank or finance company. Although the Company has received three letters
of intent for such a facility, there can be no assurance that it will be able to
obtain such a facility on acceptable terms, or at all.
Trade Financing
The Company relies on credit terms from its suppliers and manufacturers
to purchase nearly all of its inventory. Credit arrangements vary for reasons
both within and outside the control of the Company. See "-- Suppliers and
Manufacturers."
Fixture Financing
Since the beginning of fiscal year 1999, the Company has entered into
approximately forty-eight financing agreements for the leasing of fixtures and
security equipment for its remodeled and new stores. These agreements were
entered into with various entities, none of which is affiliated with the
Company, and bear terms of between three and five years. The agreements are
payable monthly and provide fixture financing in the approximate aggregate
amount of $1,750,000 All such financings are secured by the Company's store
fixtures and equipment. The Company is currently negotiating additional
financing of this type.
Former Financing through Congress Financial Corporation (Western)
In February 1996, pursuant to the terms of the Congress Financing,
Europe American Capital Corporation ("EACC"), an affiliate of the Company,
delivered a $2 million L/C to Congress. The Congress Financing was also
guaranteed by United Textiles, the then majority shareholder of the Company. As
compensation for the issuance of the L/C, the Company granted to EACC options,
subject to shareholder approval, (i) to purchase up to an aggregate of 1,250,000
shares of Common Stock at a purchase price of 25% of the closing bid price for
the Common Stock on the last business day prior to exercise, for a period of six
months from issuance (this option expired unexercised); and (ii) to purchase up
to an aggregate of 20 million shares of the Company's Series E Stock. From April
1996 to June 1997, EACC exercised its options and purchased an aggregate of
3,562,070 shares of the Series E Stock for $3,562,070. An aggregate of 361,500
of such shares were converted into Common Stock. In March 1997, EACC issued an
additional $1 million L/C to Congress in order for the Company to obtain
additional financing from Congress. This L/C enabled the Company to receive
additional advances of up to $1 million from Congress. EACC did not receive any
compensation for the issuance of this L/C. With the closing of the Company's
December 1997 offering of Series E Stock, EACC's option to purchase shares of
Series E Stock (granted in accordance with the Congress Financing) terminated.
The proceeds of the funds received from EACC's investment enabled the Company
(i) to acquire the assets of Toys (a three store chain) in January 1997, (ii) to
finance the openings of the Santa Clarita, Arizona Mills, Redondo Beach, Ontario
Mills, and Clairemont Mesa stores, (iii) to redesign four store locations, and
(iv) to support the Company's operations during the Company's business
turnaround.
Recent Developments
On November 19, 1999, the Company's subsidiary, Toys, consummated an
initial public offering of its common stock on the SMAX segment of the Frankfurt
Stock Exchange. The Offering was underwritten by Concord Effekten AG of
Frankfurt, Germany. Toys sold 2 million shares, or a 16.7% interest, in the
Offering for net proceeds of approximately $23.3 million. The Offering was
priced at 13 Euros per share, or approximately US $13.52 per share. The Company
retained majority ownership of Toys (58.4%).
On July 20, 1999, the Company and Toys entered into an investment
agreement whereby an unaffiliated investment bank (Concord) and CDMI Capital
Corp. ("CDMI," a British Virgin islands corporation of which Moses Mika, a
director of the Company, is a shareholder) each purchased 330,000 shares (or
3.3%) of Toys common stock for an aggregate of $2.8 million as a bridge
financing to the aforementioned public offering. This placement of securities
reduced the Company's ownership of Toys from 100% to 58.4%.
On July 15, 1999, Tudor, a British Virgin Islands corporation of which
Mr. Mika is a shareholder, as an assignee of an option to acquire from the
Company 25% of the outstanding shares of the common stock of Toys, elected to
exercise such option. The option called for the purchase price to be 25% of the
subsidiary's book value at June 30, 1999, which book value was determined to be
$2,894,711. In October 1999, Tudor paid the Company $723,678 (25% of the book
value as of June 30, 1999) for its shares of Toys common stock.
In May 1999, the Company sold 750,000 shares of Series F Stock, at a
purchase price of $1.00 per share, in a private placement. The Company received
$657,500 in net proceeds from the sale.
In March 1999, the Company borrowed an aggregate of $400,000 from Full
Moon Development, Inc., a corporation not affiliated with the Company, pursuant
to two promissory notes, each in the amount of $200,000. The Company has repaid
both notes.
In February 1999, the Company entered into a one year agreement with
Typhoon Capital Consultants, LLC ("Typhoon") pursuant to which Typhoon was to
provide financial consulting services and other consulting services encompassing
assistance in the production of a summary business plan and corporate profile,
the creation of an advisory committee to assist the Company in assessing certain
proposed actions, and the marketing of the Company's web sites. In exchange for
its services, Typhoon was to be granted an option to purchase an aggregate of
150,000 shares of Common Stock, exercisable at $1.75 per share until their
expiration on August 30, 2001. The Company terminated this agreement in August
1999, however, due to Typhoon's breach of its obligations thereunder.
In November 1998, the Company borrowed $250,000 from Amir Overseas
Capital Corp. ("Amir"), a corporation not affiliated with the Company, under a
promissory note which bore interest at 12%. The note was repaid in January 1999.
In September 1998, the Company borrowed $1,000,000 from Amir, under a promissory
note, which bore interest at 12%. This note was repaid in December 1998.
In July 1998, the Company entered into a Lead Generation/Corporate
Relations Agreement with Corporate Relations Group, Inc. ("CRG"), a Florida
corporation not affiliated with the Company, pursuant to which CRG was to
provide investor and public relations services to the Company for a period of
five years. Under the terms of the Agreement, the Company paid $100,000 to CRG
upon execution of the agreement, and a Company shareholder remitted 50,000
shares of the Company's Series E Stock as a reimbursement for expenses. In
addition, in exchange for CRG's services, the agreement provided for the grant
to CRG and four of its principals options to purchase an aggregate 450,000
shares of Common Stock at an exercise price of $0.78125 per share and an
aggregate 700,000 shares of Series E Stock at an exercise price of $2.25 per
share. The Company has recorded an aggregate value for this transaction of
$143,750, representing only the $100,000 cash payment and $43,750 for the Series
E Stock (based on a closing market price of $0.875 per share on August 27,
1998), as the Company did not execute the option agreements given CRG's failure
to perform material duties required of it by the agreement.
In June 1998, ABC, a Belize corporation and an affiliate of the Company
under common control, the holder of a 5% convertible secured subordinated
debenture - dated January 21, 1998 and due August 15, 2000 - offered to amend
the terms of the debenture to enable the conversion of the principal amount and
accrued interest thereon, into shares of Series E Stock, at a conversion price
of $1.00 per share. Management agreed to convert the debenture since the
conversion of the debt into equity would result in a strengthened equity
position which management believed would provide confidence to the Company's
working capital lender, FINOVA, and trade creditors. Further, converting the
debt to equity eliminated on-going interest expense requirements as well as the
cash flow required to repay the debenture. Simultaneously with its offer to
amend the debenture, ABC elected to convert same as of June 30, 1998, whereby
$1.5 million in principal amount and $33,333 in accrued interest were converted
into 1,533,333 shares of Series E Stock. ABC did not receive any registration
rights regarding the shares. Simultaneously, ABC terminated the Subordinated
Security Agreement between the parties and the Intercreditor and Subordination
Agreement, dated January 21, 1998, by and between ABC and FINOVA.
The debenture provided for the conversion of same, at ABC's option,
into shares of common stock of either (i) a subsidiary which the Company
intended to form for the purpose of acquiring those stores operated by the
Company (or its subsidiaries) which conduct business as "Toys International," or
(ii) any other subsidiary (such as Toys) which might acquire a portion of the
assets and business of the Company. This option to convert was exercisable at
the net book value of the subsidiary's shares on the date ABC exercised the
option with a limitation on such share ownership being 25% of the total
outstanding shares of said subsidiary. In September 1998, in accordance with the
terms of the debenture, ABC assigned its option to Tudor as discussed above.
In May 1998, the Company commenced an offering of units, each unit
comprising one share of Series F Stock and one Series F Preferred Stock Purchase
Warrant (the "Series F Warrants"), at a purchase price of $3.00 per unit,
through Morgan Grant Capital Group, Inc. as placement agent. The Company
terminated the offering in June 1998, and no funds were raised thereby.
In July 1997, the Company effected a 1 for 3 reverse split of its
Common Stock. To date, not all shareholders have exchanged their pre-reverse
split shares for post-reverse split shares; therefore, the number of shares
outstanding as of the date set forth herein is subject to change, nominally, as
such shareholders submit their shares for exchange.
Description of Property
The Company leases (i) 40,000 square feet of combined office and
warehouse space (approximately 3,000 square feet is office space, and the
remaining 37,000 square feet is warehouse space) located at 550 Rancheros Drive,
San Marcos, California and (ii) approximately 2,600 square feet of separate
space which houses defective merchandise until same is either returned to the
manufacturers or the Company is authorized by the manufacturers to destroy the
goods. The latter lease is on a month to month basis, which the Company intends
to terminate in the near future. The 40,000 square foot facility is leased at an
approximate annual cost of $247,000 from a partnership of which one of the
partners is Richard Brady, the president and a director of the Company. This
lease, which was renewed March 2000 for a two-year period ending April 2002,
contains an option to extend the lease for an additional three-year period. The
fixed minimum rent has increased, effective May 1, 2000, to $25,000 per month,
or $300,000 per year. As part of the renewal, the lease was assigned to the
Company's Toys subsidiary. The Company believes that this lease is on terms no
more or less favorable than terms it might otherwise have negotiated with an
unaffiliated party.
The following table sets forth the leased properties on which the
Company's currently operating stores (aggregating 31) are located:
===============================================================================================================================
SIZE IN SQUARE FEET
LEASE BASE RENT
STORE LOCATION EXPIRATION ANNUAL COST
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 12,000 July 2006 $108,000.00
Santa Clarita
19232 Soledad Canyon Rd
Santa Clarita, CA 91351
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 7,800 January 2001 $84,840.00
Santa Margarita
27690-B Santa Margarita
Mission Viejo, CA 92691
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 8,250 December 1999 $87,549.72
Chula Vista
1193 Broadway
Chula Vista, CA 91911
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,030 June 2000 $127,880.64
El Cajon
327 N. Magnolia
El Cajon, CA 92020
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,000 September 2005 $110,753.88
Encinitas
280 N. El Camino Real
Encinitas, CA 92024
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 9,800 December 2004 $117,330.72
Pasadena
885 S. Arroyo Parkway
Pasadena, CA 91105
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 13,125 January 2001 $96,360.00
Orange
1349 E. Katella
Orange, CA 92513
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,478 March 2005 $113,162.40
Redlands
837 Tri-City
Redlands, CA 92373
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,156 August 2002 $88,053.00
Clairemont
4615-A Clairemont Drive
San Diego, CA 92117
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 11,597 March 2004 $91,020.00
Rancho Cucamonga
9950 W. Foothill Blvd, Suite U
Rancho Cucamonga, CA 91730
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 10,000 October 2004 $64,926.60
Corona
1210 W. Sixth Street
Corona, CA 91720
===============================================================================================================================
(table continued from previous page)
===============================================================================================================================
STORE LOCATION SIZE IN SQUARE FEET LEASE BASE RENT
EXPIRATION ANNUAL COST
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys 9,400 December 2003 $178,980.00
Woodland Hills
19804 Ventura Blvd., #366
Woodland Hills, CA 91364
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 5,183 January 2004 $159,900.00
South Coast Plaza, Ste. 1020
3333 Bristol Street, Suite 1030
Costa Mesa, CA 92626
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 3,869 January 2001 $145,920.00
Century City
10250 Santa Monica Blvd
Los Angeles, CA 90067
- -------------------------------------------------------------------------------------------------------------------------------
Tutti Animali 1,220 January 2000 5% of Sales
Crystal Court
3333 Bear Street
Cost Mesa, CA 92626
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 3,620 August 2007 $83,260.08
Galleria at South Bay
1815 Hawthorne Blvd., #366
Redondo Beach, CA 90278
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 5,642 January 2003 $112,840.00
Ontario Mills
One Mills Circle, #302
Ontario, CA 91764
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 7,103 October 2002 $163,369.00
Arizona Mills
5000 Arizona Mills Circle, #689
Tempe, AZ 85282
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 7,002 May 2008 $175,483.32
Fashion Outlet of Las Vegas
32100-320 Las Vegas Blvd. So.
Primm, NV 89019
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 9,369 May 2003 $175,483.32
Grapevine Mills
3000 Grapevine Mills Pkwy, Ste. 312
Grapevine, TX 76051
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 5,339 December 2008 $133,475.04
Thousand Oaks
208 W. Hillcrest Drive
Thousand Oaks, CA 91360
===============================================================================================================================
(table continued from previous page)
===============================================================================================================================
STORE LOCATION SIZE IN SQUARE FEET LEASE BASE RENT
EXPIRATION ANNUAL COST
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 10,000 May 2008 $195,000.00
Great Lakes Crossing
4236 Baldwin Rd., #551
Auburn Hills, MI 48326
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 12,496 July 2003 $168,696.00
Gurnee Mills Mall
06170 W. Grand Ave., Sp. #559
Gurnee, IL 60031
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 9,400 March 2008 $221,424.00
The Block
20 City Dr. West, Ste. 203
Orange, CA 92868
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 7,002 June 2004 $450,000.00
The Venetian Resort & Casino
3311 Las Vegas Blvd. South, Ste.1212
Las Vegas, NV 89109
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 5,500 August 2009 $115,500.00
Pier 39
The Embarcadero
San Francisco, CA 94133
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. 4,594 July 2008 $105,662.00
Concord Mills
8111 Concord Mills Blvd.
Concord, NC 28027
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 10,402 July 2008 $228,844.00
Concord Mills
8111 Concord Mills Blvd.
Concord, NC 28027
- -------------------------------------------------------------------------------------------------------------------------------
Toy Co. 8,988 October 2009 $197,736.00
Katy Mills
5000 Katy Mills Circle, Ste. 514
Katy, TX 77494
- -------------------------------------------------------------------------------------------------------------------------------
Play Co. 4,476 October 2009 $102,948.00
Katy Mills
5000 Katy Mills Circle, Ste. 722
Katy, TX 77494
- -------------------------------------------------------------------------------------------------------------------------------
Toys International 5,959 January 2010 $154,934.00
The Shops at Mission Viejo
30 Shops at Mission Viejo
Mission Viejo, CA 92691
===============================================================================================================================
Legal Proceedings
In October 1997, in the Superior Court of the State of California,
County of San Bernardino, Foothill Marketplace, Ltd., a former lessor, commenced
suit against the Company for breach of contract pertaining to premises located
in Rialto, California. During the third quarter of fiscal year end 2000, the
parties settled the action pursuant to a stipulated agreement whereby the
Company remitted an initial cash payment of $35,000 and agreed to remit an
aggregate $186,138 over the ensuing 36-month period. In addition, the Company
agreed to issue 100,000 shares of Common Stock to Foothill Marketplace, which
shares are registered for resale hereby.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
Prospectus.
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. The selected operating data for the nine month
periods ended December 31, 1998 and 1999 and balance sheet data as of December
31, 1999 are derived from the Company's unaudited financial statements.
Operating results for the three month period ended December 31, 1999 are not
necessarily indicative of the results that may be expected for any other interim
period or for the year ending March 31, 2000.
March 31, December 31,
1998 1999 1999
---- ---- ----
Balance Sheet Data:
Working capital $4,452,481 $5,763,509 $18,491,136
Total assets 14,139,887 21,081,758 40,448,964
Total current liabilities 4,581,831 7,558,647 10,198,081
Long term obligations 7,055,549 8,527,116 1,392,151
Stockholders' equity 2,502,507 4,995,995 16,258,600
Common stock dividends --- --- ---
Year Ended March 31, Nine Months Ended December 31,
1998 1999 1998 1999
---- ---- ---- ----
Operating Data:
Net sales $22,568,527 $34,371,230 $27,171,662 $30,691,508
Gross profit 8,878,928 14,780,446 11,505,941 13,320,673
Gross margin 39.3% 43.0% 42.3% 43.4%
Total operating expenses 10,119,430 13,741,011 9,853,192 14,785,816
Net income (loss) before taxes (2,054,470) (575,616) 1,008,143 (2,928,213)
Net income (loss) (2,054,470) (577,766) 1,008,143 (2,928,213)
Net income (loss) applicable to common
shares (3,528,276) (2,285,491) (221,609) (5,112,132)
Income (loss) per common share (0.86) (0.50) (0.05) (0.92)
Weighted average shares outstanding 4,098,971 4,590,642 4,291,883 5,541,076
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.
Results of Operations
At December 31, 1999, the Company's operations were influenced to a
significant degree by United Textiles & Toys Corp. ("United Textiles") and
Breaking Waves, Inc. ("Breaking Waves") which owned 43.9% and 22.9%,
respectively, of the then issued and outstanding shares of the Company's Common
Stock (then totaling 5,548,857). By virtue of Breaking Waves' status as a wholly
owned subsidiary of Shopnet.com, Inc. ("Shopnet"), a Delaware public company,
Shopnet may be deemed the beneficial owner of the shares of Common Stock owned
by Breaking Waves.
United Textiles is a Delaware corporation and public company, which was
organized in March 1991 and operates solely as a holding company. Breaking Waves
is a New York corporation and private company which manufactures swimwear.
As of April 20, 2000 United Textiles and Breaking Waves own 22.3% and
6.4%, respectively, of the Company's issued and outstanding shares of Common
Stock (now totaling 19,677,016 shares given the recent conversions of Series E
Preferred Stock ("Series E Stock") into Common Stock). The president of United
Textiles is also (a) the president of Multimedia Concepts International, Inc.
("Multimedia"), the parent of United Textiles and (b) the son-in-law of Harold
Rashbaum who is the chairman of the board of the Company and the president of
both Shopnet and Breaking Waves.
Nine months ended December 31, 1999 compared to nine months ended December 31,
1998
The Company generated net sales of $30,691,508 in the nine-month period
ended December 31, 1999. This represented an increase of $3,519,846, or 13.0%,
from net sales of $27,171,662 in the nine-month period ended December 31, 1998.
Of this sales growth, $1,063,666 can be attributed to the Company's Internet
operations in the United States and Germany; the remainder of the sales growth
can be attributed to the Company's new stores as same store sales declined by
22.5% for the period.
The Company believes that this decline, which followed a period of two
years of continuous increases (during fiscal years ended March 31, 1999 and
1998), occurred for several reasons. During the period ended December 31, 1999,
the flow of allocated or "hot" selling merchandise was spread over 25% more
stores (given recent new store openings). Despite the opening of such new
stores, a considerable number of the Company's vendors either failed to increase
their lines of credit (thereby requiring that the same number of goods be shared
by more stores) or failed to increase them enough to allow the Company to stock
its new stores while maintaining adequate inventory for its existing ones. The
Company is working to increase its lines of credit with its vendors to more
adequately address not only the past growth but its expected future growth as
well. In addition to the foregoing, the Company believes that Ty, Inc.'s limited
distribution of its popular Beanie Babies(TM) toys is a significant factor in
the Company's decrease in same store sales. A final factor in the decline is
that the Company withheld a substantial amount of critical inventory from its
existing stores in order to distribute same to the six new stores it opened in
the September through late October 1999 timeframe.
The Company posted a gross profit of $13,320,673 in the nine-month
period ended December 31, 1999, representing an increase of $1,814,732, or
15.8%, from the gross profit of $11,505,941 in the nine month period ended
December 31, 1998. This gross profit increase was due to the increase in sales
noted above and in the Company's gross margin. The gross margin of 43.4% for the
nine-month period ended December 31, 1999 represented an increase of 1.1% over
the Company's gross margin of 42.3% in the nine-month period ended December 31,
1998.
Operating expenses (excluding litigation settlement expenses and
depreciation and amortization expenses) in the nine month period ended December
31, 1999 were $13,742,120. This represented a $4,627,118, or 50.8%, increase
over the Company's operating expenses of $9,115,002 in the nine-month period
ended December 31, 1998. The primary reasons for the operating expense increase
were an increase in payroll and related expenses of $1,431,265, an increase in
rent expense of $1,517,642 and operating expenses relating to the Company's new
Internet activities of $921,231. The payroll expense increase was due to the
hiring of several middle managers and employees at new stores. The growth in
rent expense was caused by the additional stores.
During the nine months ended December 31, 1999, the Company settled its
final store closing related litigation. Under this settlement the Company agreed
to an upfront cash payment of $35,000, to issue 100,000 shares of its common
stock, and to pay an aggregate $186,138 over a 36-month period. The Company has
estimated the total net present value of the settlement to be $233,905 and
accrued an additional amount of $270,206 in the nine months ended December 1999
to cover the estimated value of the settlement and other litigation related
expenses.
During the nine-month period ended December 31, 1999, the Company
recorded non-cash depreciation and amortization expenses of $773,490, a $66,304,
or 9.4%, increase from $707,186 in the nine-month period ended December 31,
1998. This increase was largely due to depreciation on the fixed assets
purchased for the newly opened stores. Total operating expenses (operating
expenses combined with litigation settlement expense and depreciation and
amortization) in the December 1999 period were $14,785,816, representing a
$4,932,624, or 50.1%, increase from total operating expenses of $9,853,192 in
the December 1998 period.
Since the $1,814,732 increase in gross profit was less than the
$4,932,624 increase in total operating expenses, the Company's operating loss
increased by $3,117,892 from an operating profit of $1,652,749 during the
nine-month period ended December 31, 1998 to an operating loss of $1,465,143
during the nine-month period ended December 31, 1999.
Interest expense totaled $1,648,089 for the nine-month period ended
December 31, 1999. This represented a $1,003,483, or 155.7%, increase over the
interest expense of $644,606 in the nine-month period ended December 31, 1998.
The primary reason for the increased level of interest expense was the
recognition of $650,000 in non-cash effective interest expense, which was
allocable to the proceeds of the beneficial conversion feature of the amended
Frampton Industries, Ltd. ("Frampton") and Europe American Capital Foundation
("EACF") convertible debentures during the nine-month period ended December 31,
1999. The effective interest expense represents a non-cash item that is
effectively offset dollar for dollar in stockholders' equity by an increase in
additional paid-in capital.
The Company also recorded an extraordinary gain of $650,000 as a result
of the modification of terms for the Frampton and EACF convertible debentures.
As a result of the above-mentioned factors, the Company recorded a loss
before the minority interest in its consolidated subsidiary of $(3,113,232)
compared to a profit of $1,008,143, representing a decrease of $4,121,375. Since
there was no minority interest in the 1998 period, profit before minority
interest may be a more relevant position on the statements of operations to
compare the two periods than the net income (loss) position.
During the nine months ended December 31, 1999, the Company recorded a
minority interest in the profit of consolidated subsidiary of $464,981. This
minority interest arose out of various sales of stock of the Company's Toys
International.COM, Inc. ("Toys") subsidiary, as described below in Liquidity and
Capital Resources. Since Toys posted a profit during the nine months ended
December 31, 1999 of $455,387, this minority interest represented a reduction in
the Company's profits.
As a result of the above-mentioned factors, the Company recorded a net
loss of $(2,928,213) for the nine-month period ended December 31, 1999. This
represented a $3,936,356 decrease from the net profit of $1,008,143 recorded in
the nine-month period ended December 31, 1998. For the nine month periods ended
December 31, 1999 and 1998, the net loss of $(2,928,213) and net profit of
$1,008,143, respectively, were increased by non-cash dividends of $2,183,919 and
$1,229,752, respectively, in order to determine the net loss applicable to
common shares. The non-cash dividends represent amortization of the discount
recorded upon the issuance of Series E Stock with a beneficial conversion
feature. No dividends in the form of securities or other assets were actually
paid out.
The basic and diluted net loss per common share for the December 1999
nine-month period was $(0.92) compared to a basic and diluted net loss per
common share in the December 1998 nine-month period of $(0.05).
For the year ended March 31, 1999 as compared to the year ended March 31, 1998
The Company generated net sales of $34,371,230 in the year ended March
31, 1999 (also referred to as fiscal year 1999). This represented an increase of
$11,802,703, or 52.3%, over net sales of $22,568,527 in the year ended March 31,
1998 (also referred to as fiscal year 1998). Approximately $7.6 million of this
sales growth came from new stores, and the remaining $4 million came from a
21.3% increase in same store sales. Sales from the Company's wholesale
operations were insignificant in both fiscal years.
The Company ended fiscal year 1999 with 25 retail locations in six
states, compared to 19 retail locations in two states at the end of fiscal year
1998. During fiscal year 1999, the Company opened six new stores.
The Company posted a gross profit of $14,780,446 in the year ended
March 31, 1999. This represented an increase of $5,901,518, or 66.5%, over the
gross profit of $8,878,928 in the year ended March 31, 1998. The gross profit
increase was due to the above noted growth in net sales and to an improvement in
the Company's gross margin from 39.3% in fiscal year 1998 to 43% in fiscal year
1999. This 3.7% gross margin improvement was the result of a change in the
Company's merchandising mix to augment its historical product base of lower
margin traditional toys with educational and specialty toys which generally
produce better margins than traditional toys. This change in merchandising mix
has been the centerpiece of the Company's business plan for fiscal years 1997,
1998, and 1999.
Operating expenses (total operating expenses less litigation related
expenses and depreciation and amortization) in the year ended March 31, 1999
were $12,727,010. This represented a $3,862,403, or 43.6%, increase over the
Company's operating expenses of $8,864,607 in the year ended March 31, 1998. The
primary reasons for the operating expense increase were a growth in rent expense
of approximately $673,000 and in payroll and related expenses of $1,770,000. The
increases in rent and salary expenses were largely due to the opening of the six
new stores in fiscal year 1999. As a percentage of sales, operating expenses
decreased by 2.3% to 37% of net sales for fiscal year 1999 from 39.3% in fiscal
year 1998.
The Company incurred $27,659 of litigation related expenses in fiscal
year 1999 compared to $583,541 of litigation related expenses in fiscal year
1998. The expenses in fiscal year 1998 were associated with the closure of five
store locations and related subsequent litigation. This expense includes
settlement amounts relating to four of the five closed locations and the related
legal fees and costs. The $27,659 of litigation related expenses in fiscal year
1999 are largely related to the fifth closed location.
Depreciation and amortization expense in the year ended March 31, 1999
was $986,342. This represented a $315,060, or 46.9%, increase over the Company's
depreciation and amortization expense of $671,282 in the year ended March 31,
1998. Depreciation and amortization are non-cash charges. The primary reason for
the depreciation and amortization expense increase was the depreciation related
to the fixed assets purchased for the six new stores opened during fiscal year
1999.
Total operating expenses (the sum of operating expenses, litigation
related expenses, and depreciation and amortization expense) in the year ended
March 31, 1999 were $13,741,011. This represented a $3,621,581, or 35.8%,
increase over the Company's total operating expenses of $10,119,430 in the year
ended March 31, 1998. The reasons for this increase are noted in the three
preceding paragraphs.
The Company recorded operating income of $1,039,435 in fiscal year 1999
compared to an operating loss of $(1,240,502) in fiscal year 1998. This
represented an improvement of $2,279,937. This improvement was a result of the
$5,901,518 increase in gross profit being partially offset by the $3,621,581
increase in total operating expenses.
Total interest expense amounted to $1,615,051 in the year ended March
31, 1999. This represented a $801,083, or 98.4%, increase over the Company's
interest expense of $813,968 in fiscal year 1998. The primary reasons for the
increased level of interest expense were a higher level of borrowings in fiscal
year 1999 than in fiscal year 1998, and $650,000 of effective interest expense
for the beneficial conversion feature of the convertible debentures issued by
the Company. The effective interest expense represents a non-cash item that is
effectively offset dollar for dollar in stockholders' equity by an increase in
additional paid-in capital.
The Company issued two similar convertible debentures that contained an
embedded privilege to convert the outstanding debt into Series E Stock. This is
a beneficial feature, the intrinsic value of which is accounted for separately
and based on the underlying value of the stock. On the date of the funding of
the convertible debentures, in February 1999, the Company recorded a discount
for $650,000, the amount of the proceeds, and immediately recognized the
amortization of this discount as non-cash effective interest for the beneficial
conversion feature, since the debenture allowed for immediate conversion.
In May 1999, the Company and two of its creditors, EACF and Frampton,
agreed to modify certain terms of their convertible debentures. The debentures
originally contained a 50% discount factor to the market price of the Series E
Stock. The amended debenture was changed to eliminate the discount based on the
market price on the date of the original agreement. This changed the conversion
price from $.10 per share to $.20 per share; i.e., for every $100,000 converted,
the holder would receive only 500,000 shares, as a result of the modification in
terms. This modification resulted in an extraordinary gain of $650,000 in the
quarter ended June 30, 1999 as an extinguishment of debt. However, as the debt
modification is treated as a new agreement for accounting purposes and due to
the significant increase in Series E stock market price at the modification
date, the $650,000 proceeds have again been allocated to the beneficial
conversion feature, and therefore recognized as non-cash effective interest
expense in the quarter ended June 30,1999.
In fiscal year 1999, the Company recorded income tax expense of $2,150,
representing various state income taxes. The Company's net operating loss
carryforward sheltered the Company from federal income taxes in fiscal year
1999.
In fiscal year 1998, the Company recorded net income tax provisions
consisting only of the current portion of the minimum income taxes required by
various jurisdictions including the States of California and Delaware; such
amounts were immaterial and are included in operating expenses. Changes in
deferred taxes were offset dollar for dollar by adjustments to the Company's
valuation allowance which has reduced its net deferred tax assets to zero as of
March 31, 1999 and 1998 and resulted in a net zero dollar provision for deferred
income taxes for each of the years ended March 31, 1999 and 1998.
As a result of the above-mentioned factors, the Company recorded a net
loss of $(577,766) for the fiscal year ended 1999 compared to a net loss of
$(2,054,470) for the fiscal year ended March 31, 1998. Excluding the $650,000
non-cash effective interest expense from the beneficial conversion feature of
the debt instruments, the Company would have reported a net income of $72,234
for the year ended March 31, 1999.
In fiscal year 1999, the net loss of $(577,766) was increased by
non-cash dividends of $1,707,725 in order to determine the net income applicable
to common shares. The non-cash dividends represent amortization of the discount
recorded upon issuance of Series E Stock with a beneficial conversion feature.
No dividends in the form of securities or other assets were actually paid out. A
non-cash dividend of $1,473,806 was recorded for fiscal year 1998. As a result,
the net loss applicable to common shares was $(2,285,491), or $(.50) per share,
for the year ended March 31, 1999 and $(3,528,276), or $(.86) per share, for the
year ended March 31, 1998.
Liquidity and Capital Resources
At December 31, 1999, the Company had working capital of $18,491,196
compared to working capital of $5,763,509 at March 31, 1999. The primary factor
in the $12,727,687 increase in working capital was the completion of an initial
public offering of a minority interest in the Company's Toys subsidiary on the
Frankfurt Stock Exchange on November 19, 1999.
The Company has historically financed operations and working capital
requirements through financing agreements and sales of the Company's equity
securities, primarily through the sale of the Company's Series E Stock. There
can be no assurance that the Company will be able to generate sufficient
revenues or have sufficient controls over expenses and other charges to achieve
profitability.
During the nine month period ended December 31, 1999, the Company used
$4,411,483 of cash in its operations compared to $852,162 used in operations in
the nine-month period ended December 31, 1998. The primary reason for the
significant difference between the amount of cash used in operations in the two
periods was the net loss of $(2,928,213) in the 1999 period compared to the net
income of $1,008,143 in the 1998 period.
The Company used $2,581,206 of cash in its investing activities during
the nine-month period ended December 31, 1999 compared to $1,497,673 in the
nine-month period ended December 31, 1998. In both periods, the primary
investing activity was the purchase of equipment and fixtures for new stores.
Additionally, in 1999, the Company loaned $650,000 to affiliated entities.
The Company generated $19,161,917 from its financing activities in the
nine-month period ended December 31, 1999 compared to the generation of
$2,920,838 from financing activities in the nine-month period ended December 31,
1998. The primary contributors to the Company's financing activities were
borrowings on the Company's line of credit and proceeds from the sale of the
Company's Series F Preferred Stock ("Series F Stock") and the sale of common
stock of the Toys subsidiary, as discussed herein. Those proceeds were used to
finance the Company's working capital requirements, capital expenditures and
operating losses during the nine-month period ended December 31, 1999.
As a result of the above factors, the Company had a net increase in
cash of $12,169,228 in the nine-month period ended December 31, 1999 compared to
a net increase in cash of $571,003 in the nine month period ended December 31,
1998.
For the year ended March 31, 1999, the Company used $1,231,117 of cash
in its operations compared to $2,288,736 used in operations in the year ended
March 31, 1998. The primary reason for the $1,057,619 reduction in the use of
cash in operations was the Company's net loss of $577,766 compared to the prior
year's loss of $2,054,470. Beyond the $1,476,704 decrease in net loss, the
Company recorded an incremental amount of $312,177 of non-cash depreciation and
amortization, amortization of debt issuance costs, and $650,000 in non-cash
effective interest expense that are added back to the Company's operating cash
flow.
The Company used cash in its operating activities in fiscal year 1999
because of a $1,162,268 growth in the Company's net investment in inventories
(increase in inventories less increase in accounts payable). The Company has
invested in its inventory position to supply its growing number of stores and
its increased level of sales.
The Company used $2,799,819 of cash in its investing activities during
fiscal year 1999 compared to $3,273,273 in fiscal year 1998. All but $100,000 of
the cash used in investing activities represented purchases of property and
equipment. These purchases primarily related to the six new stores the Company
opened in fiscal year 1999. The $2,799,819 represents capital expenditures net
of landlord tenant improvement contributions and of capital lease financing.
In fiscal year 1998, $2,250,000 of the investing activities related to
the purchase of restricted certificates of deposit. Of that amount, $2,000,000
was used to collateralize a letter of credit ("L/C") in the same amount in favor
of FINOVA Capital Corp. ("FINOVA" - see below), the Company's working capital
lender. The other $250,000 is collateral for a facility for letters of credit.
The remaining $1,023,273 of investing activities related to purchases of
property and equipment, largely at four new stores that the Company opened.
The Company generated $3,507,917 from its financing activities in the
year ended March 31, 1999 compared to the generation of $6,033,273 from
financing activities in the year ended March 31, 1998. The largest contribution
to the Company's financing activities in the 1999 fiscal year was from net
borrowings under the Company's financing agreement. The largest contributions to
the Company's financing activities in the 1998 fiscal year were the receipt of
$3,390,450 of net proceeds from the sale of preferred stock through a
combination of public and private offerings and $1,750,000 in proceeds from
notes payable.
As a result of the above factors, the Company had a net decrease in
cash of $523,019 in fiscal year 1999 compared to a net increase in cash of
$471,264 in fiscal year 1998.
During the nine-month period ended December 31, 1999, the Company
opened seven new stores. In June 1999, the Company opened a store in the
Venetian Hotel in Las Vegas, Nevada. In September 1999, the Company opened three
stores located at Pier 39 in San Francisco, California and two stores near
Concord, North Carolina. In October 1999, the Company opened three additional
stores located near Houston, Texas (two stores) and in Mission Viejo,
California. These stores are located in high traffic shopping malls or tourist
locations. These seven stores represented an aggregate capital investment of
approximately $2.55 million, net of landlord contributions. The Company
postponed the construction of its planned new store in Schaumburg, Illinois
until the spring of 2000. The Company then had 32 stores located in seven
states.
During fiscal 1999, the Company opened six new stores in high traffic
shopping malls for a total cost (excluding inventory) of approximately $3.4
million. The stores are located in Primm (near Las Vegas), Nevada; Gurnee (near
Chicago), Illinois; Auburn Hills (near Detroit), Michigan; Grapevine (near
Dallas), Texas; Thousand Oaks and Orange (both near Los Angeles), California.
The Company had planned to finance the above store opening costs
through a combination of capital lease financing, use of the Company's working
capital, and the sale of additional equity. The Company has obtained
approximately $806,000 in capital lease financing during the nine months ended
December 31, 1999 and approximating $850,000 in lease financing during fiscal
1999.
In May 1999, pursuant to ss.506 of Regulation D, the Company sold
750,000 shares of Series F Stock, at a purchase price of $1.00 per share,
through Robb Peck McCooey Clearing Corporation as placement agent. The Company
received $657,500 in net proceeds from the sale. Each share of Series F Stock is
convertible, at the holder's option, into two full paid and non-assessable
shares of Common Stock, at any time commencing on the date the registration
statement registering the Common Stock underlying same is declared effective by
the Securities and Exchange Commission. Each share of Series F Stock shall
convert automatically on the occurrence of the earlier of either of the
following events, without action on the part of the holder thereof: (i) two
years from issuance or (ii) in the event the closing price per share of Common
Stock has been at lease $5.00 for a consecutive 30-day period.
Due to the beneficial conversion feature of the Series F Stock, the
proceeds have initially been recorded as additional paid-in capital, which is
being amortized over a 7-month period in the form of a non-cash dividend.
Management has used a 7-month period to correspond to the estimated time
necessary to have a registration statement declared effective by the Securities
and Exchange Commission. Although more than seven months have passed since the
registration statement was filed, same has not yet been declared effective.
In connection with the private placement of the Series F Stock, the
Company granted options to the placement agent to purchase 350,000 shares of
Common Stock at an exercise price of $3.00 per share for a period of four years
from the date of closing of the private placement. The Company has valued these
options at approximately $507,000 using the Black-Scholes option valuation
model. As the options were granted in connection with the private placement, the
compensation effect of these was effectively offset against the proceeds into
additional paid-in capital with no net effect on the Company's stockholders'
equity or result of operations. The placement agent also received a 10%
commission, or $75,000, and a 1% allowance, or $7,500, to cover administrative
expenses. The private placement closed on May 27, 1999.
On July 15, 1999, Tudor Technologies, Inc. ("Tudor") - an entity of
which Mr. Moses Mika (a director of the Company) is a shareholder - elected to
exercise its right to purchase a 25% ownership interest in the Company's Toys
subsidiary. Tudor was the assignee of an option to acquire 25% of the
outstanding shares of the common stock of Toys at book value. The book value of
Toys as of June 30, 1999 was determined to be $2,894,711. In October 1999, Tudor
paid the Company $723,678 (25% of the book value as of June 30, 1999).
This option arose out of the June 30, 1998 conversion, by ABC Fund,
Inc. ("ABC," an affiliate of the Company), of a $1.5 million debenture into
Series E Stock as of June 30, 1998. Pursuant to the terms of the debenture, in
September 1998, ABC assigned its right to purchase the Toys common stock to
Tudor.
On July 20, 1999, the Company's subsidiary, Toys, sold a 6.6% interest
in Toys to two investors for $2.8 million in gross proceeds in a private
transaction. The investors were an unaffiliated investment-banking firm, Concord
Effekten AG ("Concord") of Frankfurt, Germany and CDMI Capital Corp. ("CDMI"), a
British Virgin Islands corporation. Mr. Mika is a shareholder of CDMI. Each
party invested $1.4 million in the transaction.
In early October 1999, the Company loaned $50,000 to Shopnet and
$200,000 to Breaking Waves, Inc., both of which entities are affiliated with the
Company. The loans bore interest at 9% and were repaid in March 2000.
On October 25, 1999, Tudor lent the Company $127,922 under a Demand
Promissory Note ("Demand Note") bearing an interest rate of eight percent per
annum. The Demand Note was a bridge loan designed to be paid off after the
completion of the then contemplated initial public offering of Toys and has been
paid in full.
On November 19, 1999, Toys completed an initial public offering (the
"Offering") on the SMAX segment of the Frankfurt Stock Exchange in Germany. The
Offering was underwritten by Concord of Frankfurt, Germany. Toys sold 2 million
shares, or a 16.7% interest, in the Offering for net proceeds of approximately
$23.3 million. The Offering was priced at 13 Euros per share, or approximately
US $13.52 per share. The Company retained majority ownership of Toys with a
58.4% equity interest in the subsidiary and, as a result, will continue to
consolidate Toys' operations in its financial statements. No gain or loss was
recorded on the sales of Toys' shares in the public offering or in earlier
private placements per Staff Accounting Bulletin No. 84.
As a result of the transactions involving Toys stock, the Company has
recorded a minority interest in its consolidated financial statements to reflect
the ownership of the minority owners. This represents the minority shareholders'
basis in Toys, along with their respective portion of the net profits recorded
for Toys through December 31, 1999.
On November 29, 1999, the Company loaned Shopnet $400,000 under a
Demand Promissory Note ("Demand Note") bearing an interest rate of nine percent
per annum. The Demand Note required a principal repayment of $100,000 plus
accrued interest on January 30, 2000 and requires that the balance be paid on
April 30, 2000. The Company expects that Shopnet will repay the Demand Note
within a few days of the agreed upon deadline.
In December 1999, Frampton, a holder of one of the Company's
convertible subordinated debentures issued during fiscal 1999, assigned its
debenture to the other holder, EACF. In March 2000, EACF informed the Company of
its plan to convert the aggregate $650,000 of subordinated debt plus accrued
interest into the Company's Series E Stock, effective February 29, 2000.
Accordingly, in March 2000, the Company issued 3,423,300 shares of Series E
Stock to EACF.
At December 31, 1999, the Company has a line of credit facility with
FINOVA Capital Corporation, as amended. On December 31, 1999, $54,170 was
outstanding under this borrowing arrangement representing interest for the month
of December 1999, as the principal balance had been reduced to zero. The line of
credit reached a peak facility level of $11.3 million. In December 1999, FINOVA
released its interest as a beneficiary in a standby line of credit in the amount
of $2 million, and reduced the facility to $9.3 million. On March 13, 2000, the
Company and FINOVA agreed that FINOVA would release its interest as beneficiary
in $1.7 million of standby letters of credit. These standby letters of credit
were originally provided by Multimedia for $1 million, and by ZD for $700,000.
Further, the total amount available under the facility was reduced to $5
million. Beginning April 30, 2000, the facility shall be further reduced by $1
million at each month-end, until reduced to zero in August 2000.
During fiscal year 1999, the Company breached three negative covenants
in the FINOVA Agreement by exceeding maximum levels of capital expenditures and
unsecured and lease financing. FINOVA subsequently waived those defaults.
The following transactions entered into during the second half of
fiscal year 1999 were equity and debt transactions structured to help the
Company with the cost of the capital expenditures associated with opening the
six new stores:
On November 24, 1998, Breaking Waves, Inc. ("Breaking Waves"), a
wholly-owned subsidiary of Shopnet (formerly known as Hollywood Productions,
Inc.), an affiliate, purchased 1.4 million unregistered shares of the Company's
Common Stock in a private transaction. The president of Shopnet and Breaking
Waves is also the chairman of the Company. Shopnet is a publicly traded company.
The shares purchased by Breaking Waves represented approximately 25.4% of the
total Common Stock then issued and outstanding after the transaction.
The consideration for the Common Stock was $665,000, which represented
a price of $0.475 per share. The price represented an approximate 33% discount
from the then current market price of $.718 reflecting a discount for the
illiquidity of the shares, which do not carry any registration rights. $300,000
of the consideration was in cash and the remaining $365,000 was in product from
Breaking Waves, primarily girl's swimsuits. The $365,000 value of the swimsuit
inventory was determined by the Company based on its analysis of the net
realizable value of the inventory received. The Company had previously carried
swimsuits from Breaking Waves in its stores on a trial basis.
In November 1998, the Company entered into agreements with ZD Group,
L.L.C. ("ZD"), a related party, Frampton, and EACF to secure additional
financing. ZD is a New York trust, the beneficiary of which is a relative of the
Company's chairman. Frampton is a British Virgin Islands company.
Pursuant to the ZD agreement, ZD issued a $700,000 irrevocable standby
L/C in favor of FINOVA. FINOVA then lent a matching $700,000 to the Company in
the form of a term loan. The term loan expires on August 3, 2000 and bears
interest at prime plus one percent. As consideration for its issuance of the
L/C, ZD will receive a one-third profit percentage after application of
corporate overhead beginning April 1, 1999 from three of the Company's stores
(Woodfield Mall in Schaumburg, Illinois scheduled to open in late summer 1999;
Auburn Hills, Michigan; and Gurnee, Illinois).
Pursuant to the Frampton and EACF agreements, Frampton lent the Company
$500,000 and EACF, an affiliate, lent $150,000, each in the form of a
convertible, subordinated debenture due December 31, 1999. The debentures each
bore a 5% interest rate and were convertible into the Company's Series E Stock
at the lenders' respective options. The conversion price initially was $0.10 per
share. That price was discounted 50% from the then current market price
(November 10, 1998) reflecting a discount for the illiquidity of the shares,
which do not carry any registration rights. The Company recorded a $650,000
non-cash effective interest expense to recognize the beneficial conversion
feature of this debenture. The effective interest expense represents a non-cash
item that is effectively offset dollar for dollar in stockholders' equity by an
increase in additional paid-in capital. In May 1999, Frampton and EACF agreed to
amend the conversion price to $0.20 per share, which equaled the full market
price on the date of the original business transaction. The Company had
previously recognized in the fiscal year ending March 31, 1999 a $650,000
effective interest expense for the beneficial conversion. Upon this amendment,
the Company applied the provision of EITF 96-19 to recognize this modification
of debt terms as an extinguishment of debt. This resulted in an extraordinary
gain of $650,000, which was recognized in the first quarter ending June 30,
1999. Additionally, due to the change in the Series E Stock price at the
modification date, the proceeds would be allocable to the beneficial conversion
feature, and therefore recognized as interest expense.
In March 1999, the Company borrowed an aggregate of $400,000 from Full
Moon Development, Inc., a corporation not affiliated with the Company, pursuant
to two promissory notes, each in the amount of $200,000. The Company has repaid
both notes.
In the fourth quarter of the year ended March 31, 1999, the Company
borrowed $100,000 from Shopnet under an unsecured note, with interest at 9%.
This note has been repaid in full. In each of April and May 1999, the Company
borrowed an additional $100,000 under unsecured notes, with interest at 9%, both
of which notes have been repaid in full.
Year 2000
The Company believes that its computer systems completed the transition
to the year 2000 without any discernible issues. The Company is not aware of any
year 2000 related computer problems which any of its key vendors may have
encountered.
Trends Affecting Liquidity, Capital Resources and Operations
The Company believes that its same store sales showed a decline after a
period of two years of continuous increases (during fiscal years ended March 31,
1999 and 1998) for several reasons. During the period ended December 31, 1999,
the flow of allocated or "hot" selling merchandise was spread over 25% more
stores (given recent new store openings). Despite the opening of such new
stores, a considerable number of the Company's vendors either failed to increase
their lines of credit (thereby requiring that the same number of goods be shared
by more stores) or failed to increase them enough to allow the Company to stock
its new stores while maintaining adequate inventory for its existing ones. The
Company is working to increase its lines of credit with its vendors to more
adequately address not only the past growth but its expected future growth as
well. In addition to the foregoing, the Company believes that Ty, Inc.'s limited
distribution of its popular Beanie Babies(TM) toys is a significant factor in
the Company's decrease in same store sales. A final factor in the decline is
that the Company withheld a substantial amount of critical inventory from its
existing stores in order to distribute same to the six new stores it opened in
the September through late October 1999 timeframe. As noted above, the Company
has recently significantly strengthened its balance sheet by raising
approximately $25 million in additional equity (through its subsidiary's initial
public offering) which should result in expanded lines of credit with its trade
vendors.
The Company believes that its growth and the availability of "hot" or
allocated merchandise within certain sectors of its core business - such as
action figures, video games, and collector plush - could have an impact on
continuing store sales in the future. The Company is working diligently to
address this issue.
The Company's future financial performance will depend upon continued
demand for toys and the Company's ability to choose locations for new stores,
the Company's ability to purchase product at favorable prices and on favorable
terms, and the effects of increased competition and changes in consumer
preferences.
The toy and hobby retail industry faces a number of potentially adverse
business conditions including price and gross margin pressures and market
consolidation. The Company competes with a variety of mass merchandisers,
superstores, and other toy retailers, including Toys R Us and Kay Bee Toy
Stores. Competitors that emphasize specialty and educational toys include Disney
Stores, Warner Bros. Stores, Learning Smith, Lake Shore, Zainy Brainy, and
Noodle Kidoodle. The Company also competes both through its electronic commerce
operations and through its stores against Internet oriented toy retailers such
as eToys, Inc. There can be no assurance that the Company's business strategy
will enable it to compete effectively in the toy industry.
Seasonality
The Company's operations are highly seasonal with approximately 30-40% of
its net sales falling within the Company's third quarter, which coincides with
the Christmas selling season. Impact of Inflation
The impact of inflation on the Company's results of operations has not
been significant. The Company attempts to pass on increased costs by increasing
product prices over time.
Net Operating Loss Carryforwards
At March 31, 1999, the Company has net operating loss ("NOL")
carryforwards of approximately $9,400,000 for federal purposes and approximately
$5,000,000 for state purposes. The federal NOL's are available to offset future
taxable income and expire at various dates through March 31, 2013 while the
state NOL's are available and expire at various dates through March 31, 2003.
A portion of the NOL's described above is subject to provisions of the
Internal Revenue Code ss.382 which limits use of NOL carryforwards when changes
of ownership of more than 50% occur during a three year testing period. During
the years ended March 31, 1994 and 1995, the Company's ownership changed by more
than 50% as a result of the May 1993 purchase of a majority interest in the
Company by American Toys, Inc. and the Company's November 1994 completion of an
initial public offering of its Common Stock. Further changes in common and
preferred stock ownership during each of the years ended March 31, 1997 through
1999 have also potentially limited the use of NOL's. The effect of such
limitations has yet to be determined. NOL's could be further limited upon the
exercise of outstanding stock options and stock purchase warrants or as result
of the May 1999 private offering of Series F Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Shopnet.com, Inc.
On November 29, 1999, the Company loaned Shopnet $400,000 under a
Demand Promissory Note bearing an interest rate of nine percent per annum. The
Demand Note required a principal repayment of $100,000 plus accrued interest on
January 30, 2000 and requires that the balance be paid on April 30, 2000. The
January 30, 2000 payment was remitted as agreed, and the Company expects that
Shopnet shall remit the remaining payment within a few days of the agreed upon
deadline.
In October 1999, the Company loaned $200,000 to Shopnet. The loan bore
interest at 9% and was repaid in March 2000.
In January 1999, the Company borrowed $100,000 from Shopnet under an
unsecured note, with interest at 9%. In each of April and May 1999, the Company
borrowed an additional $100,000 under unsecured notes, with interest at 9% and
maturity on August 31, 1999 and September 30, 1999, respectively. These notes
were repaid.
Breaking Waves, Inc.
In October 1999, the Company loaned $50,000 to Breaking Waves, an
affiliate. The loan bore interest at 9% and was repaid in March 2000.
On November 24, 1998, pursuant to a sales agreement entered into by and
between the Company and Breaking Waves, Breaking Waves purchased 1.4 million
unregistered shares of the Company's Common Stock in a private transaction. The
shares purchased by Breaking Waves represent approximately 25.2% of the total
Common Stock currently issued and outstanding. The consideration for the stock
was $665,000, which represents a price of $0.475 per share. The price represents
an approximate 33% discount from the then current market price of $0.718
reflecting a discount for the illiquidity of the shares, which do not carry any
registration rights. $300,000 of the consideration was remitted in cash, and the
remaining $365,000 consisted of product from Breaking Waves (primarily girl's
swimsuits). The $365,000 value of the swimsuit inventory was determined by the
Company based on its analysis of the net realizable value of the inventory
received. The Company had previously carried swimsuits from Breaking Waves in
its stores on a trial basis.
Pursuant to the sales agreement (which has a term of one year and
automatically extends for one year terms unless terminated by either of the
parties), the Company agreed to purchase a minimum of 250 pieces of merchandise
for each of its retail locations and to provide advertising promotional
materials and ads of the merchandise in all of its brochures, advertisements,
catalogs, and all other promotional materials, merchandising programs, and sales
promotion methods.
On July 15, 1998, the Company borrowed $300,000 from Breaking Waves and
issued an unsecured promissory note (at 9% interest per annum) to same in
exchange therefor. The note called for five monthly installments of principal
and interest commencing August 15, 1998 and ending December 30, 1998 and has
been repaid in full.
On March 1, 1998, the Company borrowed $250,000 from Breaking Waves and
issued an unsecured promissory note (at 15% interest per annum) to same in
exchange therefor. The note called for ten monthly installments of principal and
interest commencing on March 31, 1998 and ending on December 31, 1998 and has
been repaid in full.
ZD Group, L.L.C.
In November 1998, pursuant to an agreement with ZD - a related New York
limited liability company, the beneficiary of which is a relative of the
Company's chairman - ZD issued a $700,000 irrevocable standby L/C in favor of
FINOVA. As consideration for its issuance of the L/C, ZD is entitled (i) to a
one-third profit percentage after application of corporate overhead beginning
April 1, 1999 from three of the Company's stores (Woodfield Mall in Schaumburg,
Illinois, now scheduled to open in the late fall of 1999; Auburn Hills,
Michigan; and Gurnee, Illinois) and (ii) to nominate and appoint one-third of
the Company's directors during the aforesaid store lease terms (but in no event
later than fiscal year end 2013). Such stores did not generate a profit after
application of corporate overhead in the nine-month period ended December 31,
1999, thus, no payments have accrued or been made to ZD to date. FINOVA then
lent a matching $700,000 to the Company in the form of a term loan, pursuant to
a fourth amendment to the FINOVA Agreement entered into on February 11, 1999.
The beneficiary interest in the $700,000 standby letter of credit was released
by FINOVA in March 2000. See "Risk Factor No. 9. - Dependence on FINOVA Credit
Line (Secured by all of the Company's Assets)" and "Business of the Company -
Financing through FINOVA Capital Corporation."
Frampton Industries, Ltd. And Europe American Capital Foundation
In January 1999, the Company and Frampton, then an affiliated British
Virgin Islands company under the common control of EACF, an entity which
beneficially controls the Company, executed a letter agreement pursuant to which
Frampton agreed to act as the exclusive placement agent and financial advisor
for the Company in connection with a contemplated proposed offering of
convertible debentures. The agreement, which provided that Frampton shall be
provided an investment banking fee of 8% of the face amount of each debenture
funded, initially bore a six month term and was extended on mutual agreement
until March 31, 2000 whereupon it terminated.
In November 1998, the Company entered into agreements with each of (i)
Frampton and (ii) EACF to secure additional financing. Pursuant to the
agreements, Frampton loaned $500,000 to the Company and EACF loaned $150,000 to
the Company, each loan in the form of a convertible, subordinated debenture due
December 31, 1999. The debentures bore a 5% interest rate and initially were
convertible into Series E Stock at a price of $0.10 per share at Frampton's and
EACF's respective options. This price represents a 50% discount from the then
current (November 10, 1998) market price reflecting a discount for the
illiquidity of the shares, which do not carry any registration rights. In May
1999, Frampton and EACF each agreed to amend such conversion price to $0.20 per
share, which represents the full market price on the date of the original
transaction. In December 1999, Frampton assigned its debenture to EACF, and on
March 3, 2000, EACF advised the Company of its intention to convert the
debenture effective February 29, 2000. Accordingly, in March 2000, in accordance
with the terms of the debenture, the Company issued 3,423,300 shares of Series E
Stock to EACF.
United Textiles & Toys Corp.
The Company's former majority stockholder, United Textiles, has
guaranteed the Company's loan from FINOVA.
On July 27, 1998, the Company sold 100,000 shares of Series E Stock to
United Textiles, the Company's parent, for $100,000. In determining the purchase
price paid by United Textiles, the trading price of the Company's Series E Stock
- - along with the applicable discounts for illiquidity, lack of marketability,
and lack of registration rights - were considered. The trading price of
approximately $2.00 per share was discounted by 50% for the above reasons.
ABC Fund, Ltd.
In June 1998, ABC, a Belize corporation and an affiliate of the Company
under common control, the holder of a 5% convertible secured subordinated
Debenture - dated January 21, 1998 and due August 15, 2000 - offered to amend
the terms of the Debenture to enable the conversion of the principal amount and
accrued interest thereon, into shares of Series E Stock, at a conversion price
of $1.00 per share. Management agreed to convert the Debenture since the
conversion of the debt into equity would result in a strengthened equity
position which management believed would provide confidence to the Company's
working capital lender, FINOVA, and trade creditors. Further, converting the
debt to equity eliminated on-going interest expense requirements as well as the
cash flow required to repay the Debenture. Simultaneously with its offer to
amend the Debenture, ABC elected to convert same as of June 30, 1998, whereby,
$1.5 million in principal amount and $33,333 in accrued interest were converted
into 1,533,333 shares of Series E Stock. ABC did not receive any registration
rights regarding the shares. Simultaneously, ABC terminated the Subordinated
Security Agreement between the parties and the Intercreditor and Subordination
Agreement, dated January 21, 1998, by and between ABC and FINOVA.
The Debenture provided for the conversion of same, at ABC's option,
into shares of common stock of either (i) a subsidiary which the Company
intended to form for the purpose of acquiring those stores operated by the
Company (or its subsidiaries) which conduct business as "Toys International," or
(ii) any other subsidiary (such as Toys) which might acquire a portion of the
assets and business of the Company. This option to convert was exercisable at
the net book value of the subsidiary's shares on the date ABC exercised the
option with a limitation on such share ownership being 25% of the total
outstanding shares of said subsidiary. In September 1998, in accordance with the
terms of the Debenture, ABC assigned its option to Tudor, an entity of which Mr.
Moses Mika (a director of the Company) is a shareholder.
Tudor Technologies, Inc.
On July 15, 1999, Tudor elected to exercise its right to purchase the
Toys common stock, assigned from ABC, and requested that the exercise price be
amended to reflect the book value of Toys at the most recent fiscal quarter,
June 30, 1999. The Company agreed to Tudor's request and, on September 15, 1999,
provided Tudor with a compilation of the Toys June 30, 1999 financial statements
as the formal basis for the exercise price. In October 1999, Tudor received
2,335,000 shares of Toys' common stock, representing 25% of the outstanding
shares of the Toys subsidiary, in exchange for $723,678.
On October 25, 1999, Tudor lent the Company $127,922 under a Demand
Promissory Note. The Demand Note carried an interest rate of eight percent per
annum and was utilized as a bridge loan, which was paid off after the completion
of Toys' initial public offering.
CDMI Capital Corporation
On July 20, 1999, the Company and Toys entered into an investment
agreement whereby Concord (an unaffiliated investment bank) and CDMI (a British
Virgin islands corporation of which Moses Mika, a director of the Company, is a
shareholder) each purchased 330,000 shares (or 3.3%) of Toys common stock for an
aggregate of $2.8 million as a bridge financing to the Toys German public
offering.
Officers and Directors
The Company leases 40,000 square feet of combined office and warehouse
space (approximately 3,000 square feet is office space, and the remaining 37,000
square feet is warehouse space), at an approximate annual cost of $247,000, from
a partnership of which one of the partners is Richard Brady, the president and a
director of the Company.
During fiscal 2000, the Company remitted an aggregate of $48,000 to Mr.
Rashbaum in consideration of the consulting services he provided therefor.
During fiscal year 1999, the Company remitted $33,000 to Mr. Rashbaum for his
services. Mr. Rashbaum devotes a significant portion of his time to the Company.
Among other things, he reviews potential store sites, assists in strategic
planning, reviews all cash outflows, and otherwise works closely with management
in further developing and implementing the Company's ongoing business strategy.
In March 1998, each of Messrs. Brady and Rashbaum was issued 25,000
shares of Series E Stock as bonuses in recognition of their efforts to further
the Company's turnaround toward profitability. Both sold their shares in the
fourth quarter of fiscal year end 2000.
Pursuant to the Company's SOP, in July 1997, the Company granted to
James Frakes (chief financial officer and secretary), pursuant to his hire, an
option to purchase 30,000 shares of Common Stock at an exercise price of $3.25
per share, vesting at the rate of 10,000 shares per annum in July 1998, 1999,
and 2000. On June 17, 1998, the board elected to adjust the exercise price of
the option to $1.15, representing 110% of the closing price of the Common Stock
on said date. No portion of the option has been exercised.
See "Management" for a detailed description of the Company's
compensation of its officers and directors.
Multimedia Concepts International, Inc.
In January 1998, in accordance with certain financing provided by
FINOVA, the Company received $3.0 million in standby L/Cs. Of same, $2 million
was established by the Company and was secured by a $2 million certificate of
deposit, which was acquired with $1.5 million in proceeds from a subordinated
debt arrangement and $500,000 from the proceeds of the Company's December 1997
public offering of Series E Stock. The remaining $1 million was provided by
Multimedia, an affiliate of the Company by virtue of its 78.5% ownership of
United Textiles. The letter of credit was terminated in March 2000. See
"Business of the Company - Financing Through FINOVA Capital Corporation."
Europe American Capital Corporation
From April 1996 to June 1997, EACC, an entity of which Ilan Arbel
and/or his relatives is/are officer(s) and/or director(s), exercised its options
and purchased an aggregate of 3,562,070 shares of the Series E Stock for
$3,562,070. An aggregate of 361,500 shares were converted to Common Stock which,
inclusive of the 250,000 shares of Series E Stock issued in June 1997,
constituted an aggregate of 3,450,570 shares of Series E Stock outstanding prior
to the Series E Stock public offering in December 1997. The proceeds of the
funds received from this investment enabled the Company (i) to acquire the
assets of Toys (a three store chain) in January 1997, (ii) to finance the
openings of the Santa Clarita, Arizona Mills, Redondo Beach, Ontario Mills, and
Clairemont Mesa stores, (iii) to redesign four store locations, and (iv) to
support the Company's operations during the Company's business turnaround.
Toys International Inc. Consulting Agreement
In January 1997, the Company entered into a consulting agreement with
Gayle Hoepner, a selling stockholder and former chief executive officer of Toys.
Mr. Hoepner was not an affiliate of the Company. The term of the agreement
commenced on January 16, 1997, expired on April 16, 1997, and called for three
monthly payments of $10,000 each. Pursuant to the consulting agreement, Mr.
Hoepner, among other things, (i) advised the Company on specialty toys
purchasing, (ii) introduced management to his contacts in the specialty toy
industry and accompanied management to the Nurnberg, Germany toy show, and (iii)
advised management on potential store sites. The Company believes that this
agreement was on terms no less favorable than terms it might otherwise have
negotiated with any other unrelated third party.
FINANCIAL STATEMENTS
See attached Financial Statements.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Table of Contents
Page
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheets at March 31, 1998 and 1999, and June 30, 1999 (unaudited) F-3
Statements of Operations and Comprehensive Net Income (Loss) for the Years
Ended March 31, 1998 and 1999, and the Nine
Months Ended December 31, 1998 and 1999 (unaudited) F-5
Statements of Stockholders' Equity for the Years Ended March 31, 1998
and 1999, and the Nine Months Ended December 31, 1999 (unaudited) F-6
Statements of Cash Flows for the Years Ended March 31, 1998 and 1999,
and the Nine Months Ended December 31, 1998 and 1999 (unaudited) F-8
Notes to Financial Statements F-10
Haskell & White
Certified Public Accountants
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Play Co. Toys & Entertainment Corp.
We have audited the accompanying balance sheets of Play Co. Toys & Entertainment
Corp. (a subsidiary of United Textiles & Toys Corp.) as of March 31, 1999 and
1998 and the related statements of operations and comprehensive net income
(loss), stockholders' equity, and cash flows for each of the two years in the
period ended March 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Play Co. Toys & Entertainment
Corp. at March 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the two years in the period ended March 31, 1999 in conformity
with generally accepted accounting principles.
HASKELL & WHITE LLP
Irvine, California
June 24, 1999, except for
Notes 6, 11, and 14, which
are as of April 10, 2000
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Balance Sheets
ASSETS (Note 4)
March 31,
-------------------
1999
December 31, 1999 Restated
(unaudited) (Note 14) 1998
----------------- --------------- ----------
Current
Cash $ 12,295,195 $ 125,967 $ 648,986
Restricted certificates of deposit
(Notes 2 and 4) 250,000 350,000 250,000
Accounts receivable 985,422 98,276 78,594
Notes receivable - affiliates 650,000 - -
Merchandise inventories 14,175,841 11,506,284 7,872,804
Other current assets 332,759 1,241,629 183,928
--------------- --------------- ----------------
Total current assets 28,689,217 13,322,156 9,034,312
Property and equipment, net of
accumulated depreciation and
amortization of $4,283,071, $4,058,603
and $3,414,235, respectively (Note 3) 7,312,257 5,348,175 2,782,386
Restricted certificate of deposit
(Notes 2 and 4) - 2,000,000 2,000,000
Deposits and other assets (Note 4) 4,447,490 411,427 323,189
--------------- --------------- ----------------
$ 40,448,964 $ 21,081,758 $ 14,139,887
=============== =============== ================
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Balance Sheets
Liabilities and Stockholders' Equity
March 31,
1999 1998
December 31, 1999 Restated Restated
(unaudited) (Note 14) (Note 11)
-------------- --------------- -------------
Current
Accounts payable $ 7,902,620 $ 5,611,442 $ 3,505,230
Accrued expenses and other liabilities 1,392,517 595,008 726,601
Current portion of capital lease obligations (Note 5) 158,771 227,197 -
Current portion of notes payable (Note 6) 690,000 1,125,000 350,000
---------------- --------------- ----------------
Total current liabilities 10,143,911 7,558,647 4,581,831
Borrowings under financing agreement (Note 4) 54,170 7,814,666 5,445,198
Capital lease obligations, net of current portion (Note 5) 1,257,091 585,681 -
Notes payable, net of current portion (Note 6) - - 1,500,000
Deferred rent liability (Note 9) 135,060 126,769 110,351
---------------- --------------- ----------------
Total liabilities 11,590,232 16,085,763 11,637,380
---------------- --------------- ----------------
Commitments and contingencies
(Notes 2, 4, 5, 6, 7, 9, 10 and 13)
Minority interest 12,600,132 - -
Stockholders' equity (Note 11)
Series E convertible preferred stock,
$1 par value, 25,000,000 shares
authorized as of December 31, 1999; 6,952,510,
6,952,510 and 4,200,570 shares outstanding,
respectively, full liquidation value of $6,952,510,
$6,952,510 and $4,200,570, net of unamortized
discount of $1,364,279, $1,842,252 and $1,916,644
for beneficial conversion feature, respectively
(Note 11) 7,195,020 5,761,101 3,974,376
Series F convertible preferred stock, $.01 par
value, 5,500,000 shares
authorized, 750,000 shares outstanding 750,000 - -
Common stock, $.01 par value, 160,000,000
shares authorized as of December 31, 1999;
5,548,852, 5,503,519 and 4,103,519 shares
outstanding, respectively 55,488 55,035 41,035
Additional paid-in capital 30,096,537 15,906,172 12,927,918
Accumulated deficit (21,838,445) (16,726,313) (14,440,822)
---------------- --------------- ----------------
Total stockholders' equity 16,258,600 4,995,995 2,502,507
---------------- --------------- ----------------
$ 40,448,964 $ 21,081,758 $ 14,139,887
================ =============== ================
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Statements of Operations and Comprehensive Net Income (Loss)
Nine Months Ended December 31, Years Ended March 31,
------------------------------ ---------------------
1999 1998
1999 1998 Restated Restated
(unaudited) (unaudited) (Note 14) (Note 11)
-------------- ------------- --------------- --------------
Net sales $ 30,691,508 $ 27,171,662 $ 34,371,230 $ 22,568,527
Cost of sales 17,370,835 15,665,721 19,590,784 13,689,599
------------- ------------- --------------- --------------
Gross profit 13,320,673 11,505,941 14,780,446 8,878,928
------------- ------------- --------------- --------------
Operating expenses
Operating expenses (Notes 9 and 10) 13,742,120 9,115,002 12,727,010 8,864,607
Litigation related expenses (Note 7) 270,206 31,004 27,659 583,541
Depreciation and amortization 773,490 707,186 986,342 671,282
------------- ------------- --------------- --------------
Total operating expenses 14,785,816 9,853,192 13,741,011 10,119,430
------------- ------------- --------------- --------------
Operating income (loss) (1,465,143) 1,652,749 1,039,435 (1,240,502)
-------------- ------------- --------------- --------------
Interest expense (Note 4)
Interest and finance charges 823,200 517,172 855,074 617,119
Amortization of debt issuance costs 174,889 127,434 109,977 196,849
Effective non-cash interest for beneficial
conversion feature 650,000 - 650,000 -
------------- ------------- --------------- --------------
Total interest expense 1,648,089 644,606 1,615,051 813,968
------------- ------------- --------------- --------------
Net income (loss) before income taxes and
minority interest in subsidiary (3,113,232) 1,008,143 (575,616) (2,054,470)
Provision for income taxes (Note 8) - - 2,150 -
------------- ------------- --------------- --------------
Net income (loss) before minority interest (3,113,232) 1,008,143 (577,766) (2,054,470)
Minority interest income (464,981) - - -
------------- ------------- --------------- --------------
Net income(loss) before extraordinary gain (3,578,213) 1,008,143 (577,766) (2,054,470)
Extraordinary gain 650,000 - - -
------------- ------------- --------------- --------------
Comprehensive net income (loss) $ (2,928,213) $ 1,008,143 $ (577,766) $ (2,054,470)
============= ============= =============== ==============
Basic and diluted income (loss) per share:
Net income (loss) (2,928,213) 1,008,143 $ (577,766) $ (2,054,470)
Effects of non-cash dividends on convertible
preferred stock (Note 11) (2,183,919) (1,229,752) (1,707,725) (1,473,806)
-------------- -------------- --------------- --------------
Net loss applicable to common shares $ (5,112,132) $ (221,609) $ (2,285,491) $ (3,528,276)
============= ============== =============== ==============
Basic and diluted income (loss) per common share
and share equivalents $ (.92) $ (.05) $ (.50) $ (.86)
============= ============ =============== ==============
Weighted average number of common shares
and share equivalents outstanding 5,541,076 4,291,883 4,590,642 4,098,971
============= ============= =============== ==============
Statements of Stockholders' Equity
Years Ended March 31, 1999 and 1998 and Nine Months Ended December 31, 1999 (unaudited)
Preferred Stock
-----------------------------------------------------------
Series E Series F Common Stock
-------------------------- ----------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
----------- ------------ ----------- ------------- ------------ -----------
Balance, April 1, 1997 2,500,570 $ 2,500,570 - $ - 4,083,519 $ 40,835
Issuance of Common Stock for cash - - - - 20,000 200
Issuance of Series E Preferred Stock
for cash 950,000 - - - - -
Issuance of Series E warrants for cash - - - - - -
Issuance of Series E Preferred
Stock and warrants for cash,
net of offering expenses 750,000 - - - - -
Non-cash dividend to amortize
discount on Series E (Note 11) - 1,473,806 - - - -
Net loss for the year - - - - - -
----------- ------------ ----------- ------------ ------------ -----------
Balance, March 31, 1998 4,200,570 3,974,376 - - 4,103,519 41,035
Conversion of debt and accrued
interest to Series E
Preferred Stock 1,533,333 - - - - -
Issuance of Series E Preferred Stock
for cash 100,000 - - - - -
Issuance of Series E Preferred Stock
to consultants - - - - - -
Issuance of Series E Preferred Stock
to officers 50,000 79,000 - - - -
Issuance of Common Stock for cash
and inventories - - - - 1,400,000 14,000
Non-cash dividend to amortize discount
on Series E (Note 11) - 1,707,725 - - - -
Beneficial conversion feature for
convertible debentures(Note 6) - - - - - -
Miscellaneous adjustments - - - - - -
Net income for the year - - - - - -
----------- ------------ ----------- ------------ ------------ -----------
Balance, March 31, 1999 5,883,903 5,761,101 - - 5,503,519 55,035
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Statements of Stockholders' Equity
Years Ended March 31, 1999 and 1998 and Nine Months Ended December 31, 1999 (unaudited)
Additional Total
Paid-In Accumulated Stockholders'
Capital Deficit Equity
------------- ------------- -------------
Balance, April 1, 1997 $ 9,374,177 $ (10,912,546) $ 1,003,036
Issuance of Common Stock for cash 300 - 500
Issuance of Series E Preferred Stock
for cash 1,200,000 - 1,200,000
Issuance of Series E warrants for cash 50,000 - 50,000
Issuance of Series E Preferred
Stock and warrants for cash,
net of offering expenses 2,303,441 - 2,303,441
Non-cash dividend to amortize
discount on Series E (Note 11) - (1,473,806) -
Net loss for the year - (2,054,470) (2,054,470)
------------ ------------- ------------
Balance, March 31, 1998 12,927,918 (14,440,822) 2,502,507
Conversion of debt and accrued
interest to Series E
Preferred Stock 1,533,333 - 1,533,333
Issuance of Series E Preferred Stock
for cash 100,000 - 100,000
Issuance of Series E Preferred Stock
to consultants 43,750 - 43,750
Issuance of Series E Preferred Stock
to officers - - 79,000
Issuance of Common Stock for cash
and inventories 651,000 - 665,000
Non-cash dividend to amortize discount
on Series E (Note 11) - (1,707,725) -
Beneficial conversion feature for
convertible debentures(Note 6) 650,000 - 650,000
Miscellaneous adjustments 171 - 171
Net income for the year - (577,766) (577,766)
------------ ------------- ------------
Balance, March 31, 1999 15,906,172 (16,726,313) 4,995,995
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Statements of Stockholders' Equity
Years Ended March 31, 1999 and 1998 and Nine Months Ended December 31, 1999 (unaudited)
Preferred Stock
-----------------------------------------------------------
Series E Series F Common Stock
-------------------------- ----------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
----------- ------------ ----------- ------------- ------------ -----------
Issuance of Series F Stock - - 750,000 - - -
Issuance of Common Stock - - - - 45,333 453
Net loss for the nine months - - - - - -
Non-cash dividend to amortize
discount on Series E (Note 11) - 1,433,919 - - - -
Non-cash dividend to amortize
discount on Series F - - - 750,000 - -
Issuance of Toys stock in private placement - - - - _ _
Exercise of Tudor option - - - - - -
Issuance of shares for litigation settlement - - - - 100,000 -
Issuance of Toys stock for initial public
offering - - - - - -
Allocation of minority interest - - - - - -
----------- ------------ ----------- ------------ ------------ -----------
Balance, December 31, 1999
(unaudited) 5,883,903 $ 7,195,020 750,000 $ 750,000 5,648,852 $ 55,488
=========== ============ =========== ============ ============ ===========
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Statements of Stockholders' Equity
Years Ended March 31, 1999 and 1998 and Nine Months Ended December 31, 1999 (unaudited)
Additional Total
Paid-In Accumulated Stockholders'
Capital Deficit Equity
------------- ------------- ------------
Issuance of Series F Stock 657,500 - 657,500
Issuance of Common Stock 55,647 - 56,100
Net loss for the nine months - (2,928,213) (2,928,213)
Non-cash dividend to amortize
discount on Series E (Note 11) - (1,433,919) -
Non-cash dividend to amortize
discount on Series F - (750,000) -
Issuance of Toys stock in private placement 2,800,000 - 2,800,000
Exercise of Tudor option 723,677 - 723,677
Issuance of shares for litigation settlement 41,500 - 41,500
Issuance of Toys stock for initial public
offering 22,047,191 - 22,047,191
Allocation of minority interest (12,135,150) - (12,135,150)
-------------- ------------- ------------
Balance, December 31, 1999
(unaudited) $ 30,096,537 $ (21,838,445) $ 16,258,600
============== ============= ============
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Statements of Cash Flows (Note 12)
Nine Months Ended
December 31, Years Ended March 31,
----------------------------- -------------------------
1999
1999 1998 Restated 1998
(unaudited) (unaudited) (Note 14)
Cash flows from operating activities:
Net income (loss) $ (2,928,213) $ 1,008,143 $ (577,766) $ (2,054,470)
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Depreciation and amortization 773,490 707,186 983,459 671,282
Effective interest for beneficial
conversion feature 650,000 - 650,000 -
Loss on abandonment of assets - - - 45,255
Minority interest income 464,981 - - -
Extraordinary gain (650,000) - - -
Amortization of debt issuance costs 105,521 127,434 109,977 196,849
Deferred rent 8,291 4,552 16,418 (16,574)
Amortization of stock options - - - -
Stock compensation - 32,814 79,000 -
Increase (decrease) from changes in:
Accounts receivable (887,146) (32,140) (19,682) (18,388)
Merchandise inventories (2,669,557) (2,951,966) (3,268,480) (1,779,874)
Other current assets 1,627,026 (1,302,841) (1,123,757) 63,385
Deposits and other assets (4,036,063) (213,123) (88,238) (195,241)
Accounts payable 2,291,178 1,713,009 2,106,212 381,379
Accrued expenses and other liabilities 839,009 54,770 (98,260) 417,661
-------------- ------------- -------------- --------------
Cash used for operating activities (4,441,483) (852,162) (1,231,117) (2,288,736)
-------------- ------------- -------------- --------------
Cash flows from investing activities:
Purchase of restricted certificates of deposit - - (100,000) (2,250,000)
Purchases of property and equipment (1,931,206) (1,497,673) (2,699,819) (1,023,273)
Issuance of N/R to affiliates (650,000) - - -
-------------- ------------- -------------- --------------
Cash used for investing activities (2,581,206) (1,497,673) (2,799,819) (3,273,273)
-------------- ------------- -------------- --------------
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Statements of Cash Flows (Note 12) (continued)
Nine Months Ended
December 31, Years Ended March 31,
----------------------------- -------------------------
1999
1999 1998 Restated
(unaudited) (unaudited) (Note 14) 1998
Cash flows from financing activities:
Change in bank overdraft - - - (135,325)
Borrowings under financing agreements 27,061,000 33,321,000 43,239,568 33,560,443
Repayments under financing agreements (34,821,496) (31,012,017) (40,870,100) (32,554,120)
Proceeds from notes payable - - 2,700,000 1,750,000
Borrowings under notes payable - 1,550,000
Reclass restricted cash 2,000,000 -
Repayment of notes payable (375,000) (100,000) (1,925,000) (141,666)
Repayments under capital leases (263,379) (1,544,293) (36,551) -
Proceeds from issuance of common stock 24,903,292 706,148 14,000 500
Proceeds from issuance of preferred stock 657,500 - 386,000 3,390,450
Proceeds from issuance of preferred stock
warrants - - - 162,991
-------------- ------------- -------------- --------------
Cash provided by financing
activities 19,161,917 2,920,838 3,507,917 6,033,273
-------------- ------------- -------------- --------------
Net increase (decrease) in cash 12,169,228 571,003 (523,019) 471,264
Cash, beginning of period 125,967 648,986 648,986 177,722
-------------- ------------- -------------- --------------
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
1. Summary of Accounting Policies
Business Organization and Revenue Recognition
Play Co. Toys & Entertainment Corp. (the "Company") is a Delaware
corporation that owns and operates retail stores which sell educational,
specialty, collectible, and traditional toys. The Company had twenty-five (25)
retail stores located within southern California, Arizona, Illinois, Michigan,
Nevada, and Texas at March 31, 1999, as compared to nineteen (19) stores located
in California and Arizona as of March 31, 1998. The Company's retail stores,
which are located in high-traffic malls and strip centers, operate under the
names "Play Co. Toys," "Toys International," and "Toy Co."
In August 1996, the Company became a subsidiary of United Textiles & Toys
Corp. ("UTTC"). As of March 31, 1999, UTTC owns approximately 45.2% of the
outstanding shares of the Company's Common Stock.
Revenues are recognized at the point of sale for retail locations and at
the shipping date for wholesale operations. Wholesale operations represent a
minor portion of the Company's operations.
Basis of Presentation - Nine Months Ended December 31, 1999 and 1998
The unaudited interim financial statements for the nine-month periods ended
December 31, 1999 and 1998 included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and, in the opinion of the Company, reflect all adjustments
(consisting only of normal recurring adjustments) and disclosures which are
necessary for a fair presentation. The results of operations for the nine-month
period ended December 31, 1999 is not necessarily indicative of the results that
may be expected for any other interim period or for the year ending March 31,
2000.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
1. Summary of Accounting Policies (continued)
Nature of Relationships with Affiliates
Affiliates Under Common Control
Name of Entity and Nature of Affiliation
United Textiles & Toys Corp. ("UTTC"): A company that held a majority of
the Company's common stock through November 1998 and 45.2% since the Breaking
Waves, Inc. investment in common stock (see below and Note 11). Ilan Arbel is
the President of UTTC. The Company is influenced to a significant degree by
UTTC. The Company basis its conclusion that it is influenced to a significant
degree by UTTC on several factors. During the period of April 1, 1998 through
November 23, 1998, which represented a majority of the fiscal year ended March
31, 1999, UTTC owned approximately 61% of the Company's common stock. From
November 24, 1998 through March 31, 1999, UTTC owned 44.9% of the Company's
common stock. Therefore, for over seven months of the fiscal year, UTTC
maintained a majority voting interest in the Company. It is the Company's
position that UTTC's 44.9% ownership position also represented de facto voting
control over the Company's common stock at fiscal year-end, since it would be
extremely difficult for the various small block shareholders that represent the
remaining 55.1% interest to actually achieve the necessary votes to garner 45%
(the percentage needed to outvote UTTC) of the vote. Additionally there are
significant affiliate relationships that help enforce UTTC's influence, to a
significant degree, over the Company. The President of UTTC is the son-in-law of
Harold Rashbaum, the President of Shopnet.com ("Shopnet") and Breaking Waves,
Inc. ("Breaking Waves"), who in turn is the Chairman of the Company. Breaking
Waves owns approximately 25% of the Company's Common Stock. The combination of
Breaking Waves' 25% position and UTTC's 44.9% position yields a 69.9% voting
interest in the Company. Moses Mika, the father of the President of UTTC, and
Harold Rashbaum occupy two of the four seats on the Company's Board of
Directors.
Multimedia Concepts International, Inc. ("MMCI"): Majority stockholder in
UTTC. The president and director of MMCI is Ilan Arbel.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
1. Summary of Accounting Policies (continued)
Nature of Relationships with Affiliates (continued)
Name of Entity and Nature of Affiliation
Europe American Capital Foundation ("EACF"): Foundation of which Ilan Arbel
and/or his relatives is/are officer(s) and/or director(s). EACF is the sole
stockholder/beneficiary of Frampton Industries, Ltd. through January 2000, and
ABC Fund, Ltd., and the majority stockholder of American Telecom, PLC.
Europe American Capital Corporation ("EACC"): Entity of which Ilan Arbel
and/or his relatives is/are officer(s) and/or director(s).
Frampton Industries, Ltd. ("Frampton"): Entity, which is wholly owned by
EACF until January 2000.
American Telecom PLC: Entity 80% owned by EACF.
ABC Fund, Ltd. ("ABC"): Entity, which is wholly owned by EACF.
U.S. Stores Corp. ("USSC"): A private company whose president is Ilan
Arbel, who is also a director. Parent company of MMCI.
Other Affiliates
Name of Entity and Nature of Affiliation
ZD Group L.L.C. ("ZD"): ZD is a New York Trust, the beneficiary of which is
a relative of the Company's Chairman.
European Ventures Corp. ("EVC"): Parent company of Shopnet.com. Ilan Arbel
is the president.
Shopnet.com ("Shopnet"): The Chairman of Play Co. is the president and a
director of Shopnet.
Breaking Waves, Inc. ("BWI"): This entity is a wholly owned subsidiary of
Shopnet, and also owns 25% of Play Co.'s Common Stock (Note 11). The president
of BWI is also the Chairman of the Board of the Company and a relative of Ilan
Arbel.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
1. Summary of Accounting Policies (continued)
Nature of Relationships with Affiliates (continued)
The following chart graphically depicts the Company's ownership structure
at March 31, 1999 for those entities under common control:
Europe American Capital Foundation
||
\/
American Telecom PLC (83.7%) => ABC Fund, Ltd. (20%)
(100%)
||
\/
U.S. Stores Corp.
(67.7%)
||
\/
Multimedia Concepts International, Inc.
(78.5%)
||
\/
United Textiles & Toys Corp.
(22.3%)
||
\/
Play Co. Toys & Entertainment Corp.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
1. Summary of Accounting Policies (continued)
Merchandise Inventories
Merchandise inventories are stated at the lower of cost (first-in,
first-out method - "FIFO") or market.
Concentration of Credit Risk
The Company maintains cash balances at three banks. Accounts at each bank
are insured by the Federal Deposit Insurance Corporation up to $100,000 in
aggregate. Uninsured balances are approximately $2,466,645 at December 31, 1999,
and $2,603,308 and $2,698,986 at March 31, 1999 and 1998, respectively.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives (3 -
15 years) of the related assets. Leasehold improvements are amortized over the
lesser of the related lease terms or the estimated useful lives of the
improvements. Maintenance and repairs are charged to operations as incurred.
Store Opening and Closing Costs
Costs incurred to open a new retail location such as advertising, training
expenses and salaries of newly hired employees are generally expensed as
incurred and improvements to leased facilities are capitalized. Upon permanently
closing a retail location, the costs to relocate fixtures, terminate employees
and other related costs are expensed as incurred. In addition, the unamortized
balances of any abandoned leasehold improvements are expensed.
In April 1998, the AICPA's Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities.
The SOP, which is effective for fiscal years beginning after December 15, 1998
with earlier application encouraged, requires entities to expense start-up and
organization costs for establishing new operations. The Company adopted the
provisions of this statement as of March 31, 1999 without impact given its
historical treatment of store opening costs.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
Summary of Accounting Policies (continued)
Income Taxes
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Deferred income taxes are recognized based on the
differences between financial statement and income tax bases of assets and
liabilities using enacted rates in effect for the year in which the differences
are expected to reverse. Valuation allowances are established, when necessary,
to reduce the deferred tax assets to the amount expected to be realized. The
provision for income taxes represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities, including the
effect of change in the valuation allowance, if any.
Net Loss Per Share
During the three-month period ended December 31, 1997, the Company adopted
the provisions of SFAS No. 128, Earnings Per Share, which requires the
disclosure of "basic" and "diluted" earnings (loss) per share. Basic earnings
(loss) per share is computed by dividing net income (loss), after reduction for
preferred stock dividends and the accretion of any redeemable preferred stock,
by the weighted average number of common shares outstanding during each period.
Diluted earnings (loss) per share is similar to basic earnings (loss) per share
except that the weighted average number of common shares outstanding is
increased to reflect the dilutive effect of potential common shares, such as
those issuable upon the exercise of stock or warrants and the conversion of
preferred stock, as if they had been issued.
Non-cash dividends recorded to amortize the discount on Series E Preferred
Stock totaled $1,707,725 and $1,473,806 for the years ended March 31, 1999 and
1998, respectively (Note 11). Non-cash dividends recorded to amortize discounts
on preferred stock totaled $2,183,919 and $1,229,752 for the nine-month periods
ended December 31, 1999 and 1998, respectively.
For each of the years ended March 31, 1999 and 1998, as well as the
three-month periods ended December 31, 1999 and 1998, there is no difference
between basic and diluted loss per common share as the effects of stock options
or warrants and conversion of preferred stock are anti-dilutive given the net
loss applicable to common shares for each year.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
Summary of Accounting Policies (continued)
Net Loss Per Share (continued)
As of December 31, 1999, March 31, 1999 and 1998, potentially dilutive
securities outstanding which were not included in the calculation of basic and
diluted net loss per common share consist of the following:
December 31, Potential Common Shares
1999 March 31,
(unaudited) 1999 1998
----------- ---------- ------
Common shares issuable upon:
Conversion of Series E Preferred Stock;
5,888,903, 5,888,903 and 4,200,570 shares
outstanding, respectively, each convertible into
six shares of Common Stock, subject to holding periods. 35,303,418 35,303,418 25,203,420
Exercise of 2,000,000 outstanding warrants
to purchase 2,000,000 shares of convertible
Series E Preferred Stock, each share of Series E then
convertible into six shares of Common Stock, subject
to holding periods. 12,000,000 12,000,000 12,000,000
Conversion of debentures (Note 6) into
6,500,000 shares of Series E Preferred Stock,
each share of Series E then convertible into six
shares of Common Stock, subject to holding periods.
Reduced to 19,500,000 upon amendment of debenture
(Note 6). 19,500,000 39,000,000 -
Conversion of Series F Preferred Stock;
750,000 shares outstanding, each convertible into
two shares of common stock, subject to holding
periods. 1,500,000 - -
Exercise of employee stock options 30,000 30,000 30,000
-------------- ------------- ----------
68,333,418 86,333,418 37,233,420
============== ============= ==========
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
1. Summary of Accounting Policies (continued)
Statements of Cash Flows
For purpose of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, consisting of
accounts receivable, accounts payable, and borrowings, approximates their fair
value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses, and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual amounts could differ from those estimates.
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of," requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For the purposes of
evaluating potential impairment, the Company's assets are grouped by physical
location, namely the corporate office/warehouse, and individual retail
locations. The Company adopted SFAS 121 effective April 1, 1997. There was no
impact of such adoption on the Company's financial condition and results of
operations. Since adopting SFAS 121 in April 1997, the Company gives
consideration to events or changes in circumstances for each of its locations
and has not identified circumstances other than the closure of retail locations
(see Note 7) which resulted in the write-off of unamortized balances of tenant
improvements for the year ended March 31, 1998. The expense related to the write
off of such assets was immaterial.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
1. Summary of Accounting Policies (continued)
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," established
financial accounting and reporting standards for stock-based employee
compensation plans and certain other transactions involving the issuance of
stock. The Company adopted the disclosure requirements of SFAS 123 for
stock-based employee compensation effective April 1, 1996. However, the Company
continues to use the intrinsic value method for recording compensation expenses
as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees.
The fair value method prescribed by SFAS No. 123 is used to record stock-based
compensation to non-employees.
Effect of New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in an entity's financial statements. This statement requires an entity to
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the equity
section of a statement of financial position. This pronouncement, which is
effective for fiscal years beginning after December 15, 1997, was adopted by the
Company during the fiscal year ending March 31, 1999 without impact to the
financial statements for either of the years ended March 31, 1999 or 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." This statement requires public
enterprises to report financial and descriptive information about its reportable
operating segments and establishes standards for related disclosures about
product and services, geographic areas, and major customers. This pronouncement
is effective for fiscal years beginning after December 15, 1997. Management
reviewed the provision of this statement during the year ended March 31, 1999.
While the Company has expanded into several states during the year, management
believes the Company's operations to be limited to one reporting segment being a
retailer of educational, specialty, collectible, and traditional toys. All of
the Company's sales have been domestic, and there are no foreign operations.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
2. Restricted Certificates of Deposit
At March 31, 1999 and 1998, the Company has three certificates of deposit
which are restricted as to their nature. The first, in the amount of $2,000,000,
represents collateral against a letter of credit securing financing under the
FINOVA Capital Corporation agreement ("FINOVA Financing") (Note 4) and is
classified as a non-current asset since the funds in the certificate of deposit
will remain restricted until the letter of credit expires or is released by
FINOVA Capital Corporation ("FINOVA"). The second, in the amount of $250,000, is
collateral for a facility for letters of credit. The third, in the amount of
$100,000, is to cover an increase on the previously mentioned letter of credit
facility.
3. Property and Equipment
Property and equipment consisted of the following:
December 31, 1999 March 31,
----------------------
(unaudited) 1999 1998
----------------- --------------- ----------
Furniture, fixtures and equipment $ 7,666,486 $ 5,968,292 $ 4,222,586
Leasehold improvements 3,783,036 2,763,711 1,551,760
Signs 537,472 501,798 317,363
Vehicles 104,912 104,912 104,912
Construction in progress 52,444 68,065 -
--------------- --------------- ----------------
12,144,350 9,406,778 6,196,621
Accumulated depreciation and
amortization (4,832,093) (4,058,603) (3,414,235)
--------------- --------------- ----------------
$ 7,312,257 $ 5,348,175 $ 2,782,386
=============== =============== ================
The following is a summary of property and equipment held under capital
leases (Note 5):
December 31, 1999 March 31,
----------------------
(unaudited) 1999 1998
--------------- --------------- ----------------
Furniture and fixtures $ 1,746,257 $ 849,429 $ -
Less accumulated depreciation (277,788) (112,584) -
--------------- --------------- ----------------
$ 1,468,469 $ 736,845 $ -
=============== =============== ================
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
4. Financing Agreements
On February 7, 1996, the Company borrowed, under an agreement with Congress
Financial Corporation (Western) (the "Congress Financing"), approximately
$2,243,000, the proceeds of which were used to repay the then outstanding
borrowings under a bank line of credit agreement. The Congress Financing
provided for maximum borrowings up to $7,000,000 based upon a percentage of the
cost value of eligible inventory, as defined. Outstanding borrowings bore
interest at 1.5% above the prime rate, as defined.
In connection with the Congress Financing, and the previous bank line of
credit agreement, European American Capital Corp. ("EACC"), an affiliate (Note
1), provided a $2,000,000 letter of credit for collateral. As compensation to
EACC, the Company granted EACC options ("EACC Options"), to acquire shares of
Common Stock and Preferred Stock, the aggregate value of which was $458,000. The
method used to value these option is discussed in Note 11. The aggregate
$458,000 was initially included in other assets, as debt issuance costs, and
additional paid-in capital. The option values were amortized in prior fiscal
years into interest expense through the February 1, 1998 maturity of the
Congress Financing. The final period of amortization resulted in aggregate
interest charges of $196,849 for the year ended March 31, 1998, and as such, no
interest expense was amortized for the year ended March 31, 1999.
In March 1997, the Congress Financing was amended to provide for, among
other things, increased borrowing ratios and an additional $1,000,000 letter of
credit as collateral from EACC. Thereafter, the Congress Financing was
collateralized by an aggregate $3,000,000 in letters of credit through its
maturity on February 1, 1998.
On February 3, 1998, the Company borrowed $4,866,324 under the FINOVA
Financing, the proceeds of which were used primarily to repay the then
outstanding borrowings under the Congress Financing and to pay fees related to
the FINOVA Financing.
The FINOVA Financing, as amended currently, provides for maximum borrowings
up to $8,300,000 based on a percentage of the cost value of eligible inventory,
as defined. Outstanding borrowings bear interest at 1.5% above prime rate, as
defined (the prime rate at March 31, 1999 and 1998 was 7.75% and 8.5%,
respectively). The agreement matures on August 3, 2000 and can be renewed for
one additional year at the lender's option.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
Financing Agreements (continued)
Total fees related to the FINOVA Financing aggregated approximately
$272,000 and are being amortized over the 30-month term of the agreement. The
unamortized portion of these debt issuance costs was $133,876 and $253,858, as
of March 31, 1999 and 1998, respectively, and is included in "Deposits and other
assets" in the balance sheets. Additional costs were incurred and capitalized
during the year relating to amendments to the agreement that increased the
borrowing capacity.
The FINOVA Financing includes a financial covenant requiring the Company to
maintain, at all times, net worth, as defined, of $750,000. At March 31, 1999
and 1998, the Company was in compliance with this financial covenant.
The FINOVA Financing also includes various other covenants, two of which
the Company violated during the year by exceeding the specified maximum levels
of capital expenditures and debt financing. The Company has received a waiver of
these defaults. The waiver was granted for the specific defaults noted and did
not cover a specific period of time. The waiver was granted in connection with
negotiations to amend the FINOVA financing. The proposed amendment, which was
executed in August 1999, increased the available borrowing level and established
new covenants with which the Company expects compliance to be probable through
the maturity date of August 2000. The arrangement has been classified as a
long-term obligation as of March 31, 1999, since it is not callable by the
creditor.
The FINOVA Financing is guaranteed by UTTC and is secured by substantially
all of the assets of the Company and $3,000,000 in letters of credit. Of the
$3,000,000 in letters of credit, $2,000,000 is collateralized by amounts held in
a restricted certificate of deposit (Note 2). The remaining $1,000,000 letter of
credit, has been provided by MMCI, an affiliate of the Company (Note 1).
At March 31, 1999, the Company also has $700,000 included in its borrowings
from FINOVA under a term loan due concurrently with the overall FINOVA
Financing, with interest at prime plus one percent, secured by a letter of
credit (Note 9).
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
5. Capital Lease Obligations
During the year ending March 31, 1999, the Company entered into several
leases with financing companies that have been classified as capital lease
obligations. The amounts financed ranged from $49,901 to $232,098, with varying
monthly installment payments from $849 to $5,313, at interest rates varying from
12.6% to 19.6%. The leases, which have maturity dates ranging from October 15,
2001 to March 1, 2004, require minimum payments as follows:
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
================
6. Notes Payable
December 31, 1999 March 31,
----------------------
(unaudited) 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
(Note 11). $ - $ - $ 1,500,000
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
6. Notes Payable (continued)
December 31, 1999 March 31,
----------------------
(unaudited) 1999 1998
---------------- --------------- ----------
Note payable to BWI, an affiliate
(Note 1), bearing interest at
15% per annum, paid in ten monthly
installments of $25,000 plus accrued
interest through maturity on December
31, 1998. Note was subordinate to the
FINOVA Financing (Note 4). - - 250,000
Note payable to stockholder of Toys
International non-interest bearing,
guaranteed by UTTC, an affiliate
(Note 1), paid in quarterly
installments of $25,000 through its
maturity on January 16, 1999. - - 100,000
Note payable to Shopnet, an affiliate
(Note 1), bearing interest at 9% per
annum, payable in monthly installments
of $25,000 with an original maturity of
June 15, 1999. Note has been verbally
extended to July 22, 1999, at which time
it was paid in full. - 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 -
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
6. Notes Payable (continued)
December 31, 1999 March 31,
----------------------
(unaudited) 1999 1998
----------------- --------------- ----------
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 December 31, 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.
(Converted in March 2000, see below). 500,000 500,000 -
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.
(Converted in March 2000, see below.) 150,000 150,000 -
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
6. Notes Payable (continued)
December 31, 1999 March 31,
----------------------
(unaudited) 1999 1998
----------------- --------------- -----------------
Note payable to insurance company,
payable in nine monthly installments
of $4,627, maturing September 2000. 40,000 - -
--------------- --------------- -----------------
Total notes payable 690,000 1,125,000 1,850,000
Less current portion (690,000) (1,125,000) (350,000)
--------------- --------------- -----------------
Long-term portion $ - $ - $ 1,500,000
=============== ====-----====== =================
The above notes may carry interest rates that differ from prevailing
interest rates. The Company has not provided for imputed interest on rate
discounts or premiums as the effects are immaterial to the financial statements.
The above convertible debentures to Frampton and EACF are both convertible
into Series E Preferred Stock. The debenture holder has the right at any time
prior to the maturity date to convert all or part of the outstanding principal,
plus accrued interest. The conversion price is $.10 per share, i.e. for every
$100,000 converted, the holder would receive 500,000 shares. In May 1999, the
conversion price was amended to $.20 per share, see below for a detailed
explanation. Each share of Series E Preferred Stock is convertible into six
shares of Common Stock (Note 11).
The embedded privilege to convert the outstanding debt into Series E
Preferred Stock is a beneficial feature, which is accounted for separately, in
accordance with Topic D-60 of the Emerging Issues Task Force ("EITF"). Topic
D-60 of the EITF communicated the views of the staff of the Securities and
Exchange Commission ("SEC"), in that for such convertible debentures, that
portion of the proceeds upon issuance of the debentures allocable to the
beneficial conversion feature should be recorded as additional paid-in capital
and recognized as interest expense over the minimum period in which the holder
can realize the conversion. The intrinsic value is calculated based on the value
of the underlying stock into which the debenture can be converted, limited to
the proceeds.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
6. Notes Payable (continued)
On the date of funding the convertible debentures in February 1999, the
Company recorded a discount for $650,000, and immediately recognized the
amortization of this discount as non-cash effective interest for the beneficial
conversion feature, since the debenture allowed for immediate conversion, which
was effectively offset by the dollar-for-dollar increase in additional paid-in
capital.
In May 1999, the Company and these two creditors, EACF and Frampton, agreed
to modify certain terms of their convertible debentures. The debentures
originally contained a 50% discount factor to the market price of the Series E
Preferred Stock. The amended debenture was changed to eliminate the discount
based on the market price on the date of the original agreement. This changed
the conversion price from $.10 per share to $.20 per share; i.e., for every
$100,000 converted, the holder would receive only 500,000 shares as a result of
the modification in terms. The Company had previously recognized a $650,000
non-cash effective interest expense for the year ended March 31, 1999. The
Company has subsequently applied the provisions of EITF 96-19 to recognize this
modification of debt terms as an extinguishment of debt. This extraordinary gain
of $650,000 was subsequently recognized in the quarter ended June 30, 1999.
However, since the agreement was revised in May 1999, the revised agreement is
treated as a new arrangement for accounting purposes. At the date of the amended
agreement, the $.20 conversion price was substantially lower than the
approximate $2.00 per share closing market price for the Series E Preferred
Stock. As such, the modified agreement contains a beneficial conversion feature,
the amount of which is limited to the proceeds of $650,000 under Topic D-60 of
the EITF. Therefore, the Company also subsequently recognized $650,000 in
non-cash effective interest expense for the beneficial conversion feature in the
quarter ended June 30, 1999.
The debentures were converted into 3,423,300 shares of Series E Stock in
March 2000 (unaudited).
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
7. Closure of Retail Stores - Litigation
During the year ended March 31, 1998, the Company closed, and ultimately
vacated, five retail locations prior to the end of their lease terms. As a
result, four of the five landlords filed lawsuits against the Company to collect
unpaid rent as well as rental obligations remaining under the terms of the
respective leases.
Subsequent to the filing of actions by the landlords and through May 1998,
the Company with assistance of outside counsel reached settlement agreements
with the various landlords. These settlements aggregated $469,600, of which
$57,820 remains outstanding on one settlement.
The statement of operations for the year ended March 31, 1999 and 1998
includes $27,659 and $583,541, respectively, of "litigation related expenses"
which comprise the settlement costs on the aforementioned leases, and legal fees
associated with the negotiations. Litigation related expenses totaled $270,206
and $31,004 for the nine-month periods ended December 31, 1999 and 1998,
respectively.
The Company currently has one remaining landlord/tenant matter which has
yet to be resolved with a potential range of loss of $300,000. As of March 31,
1999, the Company has accrued a liability of $41,000 related to this matter,
which is an estimate by management based on its assessment of the matter,
including management's belief that the landlord allowed the retail mix of the
mall site to change from a contractually agreed minimum percentage level of
retain tenants.
8. Income Taxes
The components of the provision for income taxes are as follows:
Year Ended March 31,
---------------------------
1999 1998
--------------- ----------
Current:
Federal $ - $ -
State 2,150 -
--------------- ----------------
Total current 2,150 -
--------------- ----------------
Deferred:
Federal 40,424 750,224
State 45,726 156,280
--------------- ----------------
Total deferred 86,150 906,504
--------------- ----------------
Valuation allowance (86,150) (906,504)
--------------- ----------------
Total provision for income taxes $ 2,150 $ -
=============== ================
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
8. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's net deferred income tax assets and
liabilities are as follows:
March 31,
----------------------
1999 1998
--------------- ----------
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 $ - $ -
=============== ================
At March 31, 1999 and 1998, a 100% valuation allowance has been provided on
the net deferred income tax assets since the Company can not determine that it
is "more likely than not" to be realized.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
8. Income Taxes (continued)
The reconciliation of income taxes computed at the federal statutory tax
rate to income taxes at the effective income tax rate in the statements of
operations is as follows:
Year Ended March 31,
---------------------------
1999 1998
--------------- --------------
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% -%
=========== ================
At March 31, 1999, the Company has net operating loss (NOL) carryforwards
of approximately $9,400,000 for federal purposes and approximately $5,000,000
for state purposes. The federal NOL's are available to offset future taxable
income and expire at various dates through March 31, 2013 while the state NOL's
are available and expire at various dates through March 31, 2003.
A portion of the NOL's described above are subject to provisions of the
Internal Revenue Code ss.382 which limits use of net operating loss
carryforwards when changes of ownership of more than 50% occur during a three
year testing period. During the years ended March 31, 1994 and 1995, the
Company's ownership changed by more than 50% as a result of the May 1993
acquisition of a majority interest in the Company and the Company's November
1994 completion of an initial public offering of its Common Stock. Further
changes in Common and Preferred Stock ownership during each of the years ended
March 31, 1997 through 1999, as described in Note 11, have also potentially
limited the use of NOL's. The effect of such limitations has yet to be
determined. NOL's could be further limited upon the exercise of outstanding
stock options and stock purchase warrants or as a result of the May 1999 private
offering of Series F Preferred Stock (Note 13).
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
9. Commitments and Contingencies
Operating Leases
The Company leases its retail store properties under noncancelable
operating lease agreements which expire through June 2009 and require various
minimum annual rentals. Several of the leases provide for renewal options to
extend the leases for additional five or ten-year periods. Certain store leases
also require the payment of property taxes, normal maintenance and insurance on
the properties and additional rents based on percentages of sales in excess of
various specified retail sales levels.
During the years ended March 31, 1999 and 1998, the Company incurred rental
expense under all operating leases of $4,104,073 and $3,112,822, respectively.
Contingent rent expense was insignificant during the years ended March 31, 1999
and 1998. Rent expense totaled $4,416,695 and $2,622,887 for the nine-month
periods ended December 31, 1999 and 1998.
At March 31, 1999, the aggregate future minimum lease payments due under
these noncancelable leases, including approximately $448,000 for the remaining
term of the lease for the closed Rialto, California retail location (Note 7)
through November 2003, are as follows:
Related
Party
Office/
Year Ending Warehouse Retail
March 31, (Note 10) Locations Total
---------------- --------------- --------------- -----------
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
=============== =============== ================
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
9. Commitments and Contingencies (continued)
Operating Leases (continued)
As of the date of this report the Company has executed leases for the
opening of ten (10) additional stores in California, Nevada, North Carolina,
Texas, Illinois, and Tennessee. The stores are expected to open on various dates
in August 1999 through November 2000, and have varying expiration dates through
2010. The new leases will require expected minimum rental payments aggregating
approximately $27,434,000 over the life of the leases. Accordingly, existing
minimum lease commitments as of March 31, 1999, plus those expected minimum
commitments for the proposed retail locations would aggregate minimum lease
commitments of approximately $57,634,000.
Delisting of Securities
Until September 24, 1997, the Company's Common Stock was quoted on the
NASDAQ SmallCap Stock Market.
Since September 24, 1997, the Company's Common Stock, as well as its Series
E Preferred Stock and Series E Preferred Stock purchase warrants sold in a
public offering completed in December 1997, have been quoted over-the-counter on
the OTC Bulletin Board.
Dependence on Suppliers
For the years ended March 31, 1999 and 1998, approximately forty-one (41%)
and thirty-one percent (31%) of the Company's inventory purchases were made
directly from five (5) manufacturers. The Company typically purchases products
from its suppliers on credit arrangements provided by the manufacturers. The
termination of a credit line or the loss of a major supplier or the
deterioration of the Company's relationship with a major supplier could have a
material adverse effect on the Company's business.
401(k) Employee Stock Ownership Plan
In May 1994, the Company adopted a 401(k) Employee Stock Ownership Plan
(the "Plan") which covers substantially all employees of the Company. The Plan
includes provisions for both an Employee Stock Ownership Plan ("ESOP") and a
401(k) Plan.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
9. Commitments and Contingencies (continued)
401(k) Employee Stock Ownership Plan (continued)
The ESOP allows only contributions by the Company which can be made
annually at the discretion of the Company's Board of Directors. The ESOP is
designed to invest primarily in the Company's Common Stock. During the year
ended March 31, 1999, 5,673 shares of common stock were contributed to the ESOP.
However, these shares were contributed by individuals, not by the Company.
Therefore, the Company has recorded no expense with regard to the ESOP.
The 401(k) portion of the Plan is contributed to by the employees of the
Company through payroll deductions. The Company makes no matching contributions
to the 401(k) portion of the Plan.
Financing Agreement
In November 1998, the Company entered into an agreement with ZD, a related
party (Note 1), to secure additional financing. Pursuant to this agreement, ZD
issued a $700,000 irrevocable standby letter of credit ("L/C") in favor of
FINOVA, the Company's working capital lender. FINOVA then lent a matching
$700,000 to the Company in the form of a term loan (Note 4). The term loan
expires on August 3, 2000 and bears interest at prime plus one percent.
As consideration for its issuance of the L/C, ZD will receive payments
representing one-third (33%) of the net profits from three stores, Great Lakes
Crossing, Gurnee Mills, and Woodfield Mall (scheduled to open late summer 1999).
The net profit of each store will include an appropriate allocation of corporate
overhead. The expense related to the net profits interest due to ZD will be
accrued beginning April 1, 1999, the effective date of the agreement. The
duration of the agreement with ZD is equal to the current lease term of each of
the stores, including any renewals, but in any event not beyond the Company's
fiscal year ending March 31, 2013. The store leases currently expire, including
options for renewal, at various dates through June 2009. The Company will
categorize this expense as (effective) interest since these costs represent
compensation to secure additional financing. As these stores did not generate a
profit after application of corporate overhead in the nine-month period ended
December 31, 1999, no payments were earned or made to ZD during this period.
Additionally, as long as the agreement is in effect, ZD will have the right
to nominate and appoint one-third of the Company's Board of Directors.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
9. Commitments and Contingencies (continued)
1994 Stock Option Plan
In June 1994, the Company adopted a Stock Option Plan (the "Plan") which
provides for options to purchase an aggregate of not more than 50,000 shares of
Common Stock as may be granted from time to time by the Company's Board of
Directors. Pursuant to the hire of the Company's current Chief Financial Officer
and Secretary, the Company granted an option to purchase 30,000 shares of Common
Stock at an exercise price of $3.25 per share was authorized, vesting at the
rate of 10,000 shares per annum in each of July 1998, 1999 and 2000. In June
1998, the Board of Directors adjusted the exercise price of the option to $1.15
per share. The option award granted initially was recorded as a fixed award
under APB 25. Due to the subsequent modification in terms, it is to be valued as
a variable award, rather than a fixed award. Under APB 25, such a variable award
has the associated compensation expense adjusted, up or down, to reflect
subsequent changes in the market price. The Company has not recorded any
compensation expense related to this change in award due to the change in the
subsequent market price being immaterial. As of March 31, 1999, no portion of
the option to purchase Common Stock had been exercised.
Seasonality
The Company's business is highly seasonal with a large portion of its
revenues and profits being derived during the months of November and December.
Accordingly, in order for the Company to operate, it must obtain substantial
short-term borrowings from lenders and the Company's suppliers during the first
three-quarters of each fiscal year to purchase inventory and for operating
expenditures. Historically, the Company has been able to obtain such credit
arrangements and substantially repay the amounts borrowed from suppliers and
reduce outstanding borrowings from its lender during the fourth quarter of its
fiscal year.
Year 2000
In 1998, the Company developed a plan to upgrade its existing management
information system ("MIS") and computer hardware and to become year 2000
compliant. The Company has completed the hardware upgrade and has installed a
year 2000 compliant upgrade to its accounting software. The Company expects to
finish the year 2000 compliance work by the end of September 1999.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
9. Commitments and Contingencies (continued)
Year 2000 (continued)
To finance the cost of the new hardware in the computer upgrade project,
the Company entered into a lease in the amount of $82,472, bearing an interest
rate of 10.8%. The total cost of the hardware and software purchased for the
project was approximately $100,000. This lease is included with the capital
lease obligations described in Note 5.
Beyond the above noted internal year 2000 system issue, the Company has no
current knowledge of any outside third party year 2000 issues that would result
in a material negative impact on its operations. Management has reviewed its
significant vendors' and financial institution's recent SEC filings vis-a-vis
year 2000 risks and uncertainties and, on the basis thereof, is confident that
the steps the Company has taken to become year 2000 compliant are sufficient. In
continuation of this review, the Company shall continue to monitor or otherwise
obtain confirmation from the aforesaid entities - and such other entities as
management deems appropriate - as to their respective degrees of preparedness.
To date, nothing has come to the attention of the Company that would lead it to
believe that its significant vendors and/or service providers will not be year
2000 ready.
Year 2000 readiness is a priority of the Company. The Company believes that
it is taking such reasonable and prudent steps as are necessary to mitigate the
risks associated with potential year 2000 difficulties. However, the effect, if
any, of year 2000 problems on the Company's results of operations if the
Company's or its customers, vendors, or service providers are not fully
compliant cannot be estimated with any degree of certainty.
10. Related-Party Transactions
Office and Warehouse Lease
The Company leases an office/warehouse building from Davidson, Welker, &
Brady, a partnership of which one of the partners, Richard Brady, is the
Company's Chief Executive Officer and Director. The original lease was executed
in October 1986. The lease term was for a 10-year period, with increases in the
monthly rent tied to the CPI, adjusted every three years. The lease was amended
in 1993 to extend the term through April 2000 (Note 9), with an option to extend
for a period of five years under the same terms and conditions of the lease.
Rent expense under this lease totaled $247,289 for each of the years ended March
31, 1999 and 1998 and $185,466 for each of the nine-month periods ended December
31, 1999 and 1998.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
10. Related-Party Transactions (continued)
Consulting Fees
The Company made payments aggregating $33,000 and $25,000 to the Chairman
of the Board of Directors for various consulting services during the years ended
March 31, 1999 and 1998, respectively, and $31,500 and $22,500 during the
nine-month periods ended December 31, 1999 and 1998, respectively.
Commitment of Financing
The individual, beneficial majority stockholder of UTTC, in a letter dated
May 15, 1998, has represented his intent and ability to provide additional
working capital to the Company, should such be necessary, through September
1999.
Purchase Agreement With Breaking Waves, Inc. ("BWI")
The Company has entered into an agreement with BWI, an affiliate (Note 1),
to purchase a minimum of 250 pieces of merchandise for each of its retail
stores. BWI sells children's swimsuits. The agreement has a term of one year,
and automatically extends each year, unless terminated by either party. The
agreement additionally calls for the Company to provide advertising, promotional
materials, and ads for this merchandise in all of its brochures, advertisements,
catalogs, and all other promotional materials, merchandising programs, and sales
promotions.
Financing Provided by BWI
On July 15, 1998, the Company borrowed $3,000,000 from BWI and issued an
unsecured promissory note at an interest rate of 9% per annum. The repayment
terms of the note were for five monthly installments of principal and interest
commencing on August 15, 1998 and ending December 30, 1998, at which time the
note was repaid in full.
Additionally, the Company had a $250,000 note payable with BWI as of March
31, 1998, which was repaid during the year ended March 31, 1999. The terms of
this note are disclosed in Note 6.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
10. Related-Party Transactions (continued)
Placement Agent Agreement With Frampton Industries, Ltd.
In January 1999, the Company and Frampton Industries, Ltd., an affiliated
entity (Note 1), executed a letter agreement pursuant to which Frampton has
agreed to act as the exclusive placement agent and financial advisor for the
Company in connection with a contemplated offering of convertible debentures.
The agreement is for a term of six months and provides that Frampton shall be
provided an investment-banking fee of 8% of the face amount of each debenture
funded. Frampton has the option to extend the agreement for two months after the
expiration. During the year ending March 31, 1999, Frampton arranged two such
transactions for a face amount of $650,000 involving itself and EACF (Note 6).
11. Equity Transactions
Capital Structure
The following summarizes the Company's capital structure as of March 31,
1999, as amended in April 1998, and the subsequent change thereto approved at
the annual meeting of its shareholders on May 5, 1999 and effected May 12, 1999:
March 31, May 12,
1999 1999
--------------- ----------
Common Stock
Authorized shares of $.01 par value common stock 51,000,000 160,000,000
Preferred Stock
Authorized 15,500,000 shares of preferred
stock designated as:
$1.00 par convertible Series E 10,000,000 25,000,000
$.01 par convertible Series F 5,500,000 5,500,000
Each share of Series E Preferred Stock ("Series E Stock") is convertible
into six shares of Common Stock at the option of the holder commencing two years
from the date of issuance for a period of five years. The Series E Stock has a
liquidation preference of $1.00 per share. Prior to June 30, 1997, the Series E
Stock was convertible into 20 shares of Common Stock upon issuance.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
11. Equity Transactions (continued)
Capital Structure (continued)
Each share of Series F Preferred Stock ("Series F Stock") is convertible
into two shares of Common Stock at the option of the holder commencing at any
time following the date the registration statement is declared effective.
Holders of Series F Stock are also entitled to, when and as declared by the
Board of Directors, cumulative dividends at $.08 per share. Dividends are fully
cumulative and accrue (whether or not declared), without interest, from the date
such dividends are payable. The Series F Stock will be automatically converted
in the event of the earlier of two years or the Company's Common Stock having a
closing price of at least $5.00 per share for a consecutive thirty-day period.
The Series F Stock has a liquidation preference of $0.50 per share, subject only
to the Series E Stock preference.
Issuance of Common Stock
In November 1998, the Company issued 1,400,000 shares of Common Stock to
Breaking Waves, Inc., an affiliate (Note 1), in consideration for cash and
inventory. The Company received $300,000 in cash and inventory valued at
$365,000 based upon the Company's analysis of the net realizable value of the
inventory received.
EACC Options
In connection with the Congress Financing (Note 4), and the previous bank
line of credit agreement, EACC provided a $2,000,000 letter of credit for
collateral. As compensation to EACC, the Company granted EACC options ("EACC
Options") to acquire shares of 350,000 Common Stock, the value of such options
estimated at $224,000 by the Company; and options to acquire (i) up to an
additional 1,250,000 shares of Common Stock at a purchase price of 25% of the
closing bid price for the Company's Common Stock on the last business day prior
to exercise for a period of six months commencing February 1996, the value of
such options was considered to be insignificant, and (ii) an option to purchase
up to an aggregate 20,000,000 shares of the Series E Stock at a purchase price
of $1.00 per share during the period from May 9, 1996 through January 30, 1998,
the value of such options was estimated to be $234,000 by the Company.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
11. Equity Transactions (continued)
EACC Options (continued)
The option values were based on the Company's analysis of its market
capitalization value immediately prior to each stock option grant as compared to
its market capitalization value immediately after the assumed exercise of each
grant. The analysis gave consideration to assumed cash that would be received
upon exercise and the liquidation values of outstanding series of preferred
stock to determine a market capitalization value attributable to the common
shares. This value was then discounted for market factors such as the thin
trading volume and price volatility of the Company's common stock and
restrictions on the underlying securities which required a two-year holding
period and had no registration rights. The option to acquire 1,250,000 shares of
common stock was considered to be insignificant based on the market
capitalization analysis given its relative insignificance in relation to the
options to acquire 20,000,000 shares of Series E Stock, each share of which was
convertible into 20 shares of common stock at the time. The aggregate value of
the options, $458,000, was treated as debt issuance costs (Note 4). All of the
options to acquire shares of Common Stock expired unexercised.
During the year ended March 31, 1997, the Company issued an aggregate
2,862,070 shares of Series E Stock for aggregate consideration of $2,862,070
upon exercise of a portion of the EACC Options on various dates. Of these
shares, EACC transferred 334,000 shares to UTTC. Subsequently, during the year
ended March 31, 1997, UTTC and EACC each converted 334,000 and 27,500 of Series
E Stock, respectively, into Common Stock at the 20 to 1 conversion rate, with no
holding requirement, provided for in the definition of the Series E Stock at the
time (7,230,000 shares of Common Stock before the retroactive effect of July
1997, one for three reverse split), or 2,410,000 post-reverse split shares of
Common Stock.
In June 1997, the Company issued 700,000 shares of Series E Stock to EACC
which had previously advanced $700,000 in funds subsequent to March 31, 1997
against the EACC Option to acquire shares of Series E Stock. The remainder of
the EACC Options were then terminated in December 1997, upon consummation of the
Company's public offering of Series E Stock.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
11. Equity Transactions (continued)
Issuance of Series E Stock
In an agreement dated June 30, 1997, the Company agreed to issue 250,000
shares of Series E Stock for $500,000 and 500,000 warrants to purchase shares of
Series E Stock for an additional $50,000 in a private sale. The $550,000 was
collected on August 12, 1997 and the shares and warrants were issued. The shares
of Series E Stock and warrants were registered and sold by the holder in
connection with the Company's public offering of Series E Stock, discussed
below.
On December 29, 1997, the Company completed a public offering of 750,000
shares of Series E Stock and 1,500,000 redeemable Series E Stock purchase
warrants. The gross proceeds from the offering were $3,150,000 and the net
proceeds to the Company totaled $2,303,441 after deduction of offering expenses
including such items as underwriter discounts and commissions, legal,
accounting, printing and filing fees.
On June 30, 1998, ABC offered to amend the terms of a $1.5 million
debenture (Note 6) to enable the conversion of the principal and accrued
interest into shares of Series E Stock at a conversion price of $1.00 per share.
The conversion price reflects a 33% discount to the trading price of the Series
E Stock and was determined on the basis of the trading price, the illiquidity of
the restricted Series E Stock and the absence of registration rights.
Simultaneously, ABC converted the debenture, and $33,333 of accrued
interest into 1,533,333 shares of Series E Preferred Stock. This transaction
has, in substance, been accounted for as a capital transaction since ABC and the
Company were entities under common control through majority ownership greater
than 50%, at the time the conversion occurred. (See chart in Note 1.)
The debenture originally provided for the conversion, at the option of ABC,
of the debenture into shares of common stock of either (i) a subsidiary which
the Company intended to form for the purpose of acquiring certain stores
operated by the Company, or (ii) any other subsidiary which might acquire a
portion of the assets and business of the Company. This option to convert was
exercisable at the net book value of the subsidiary's shares with a limitation
on such share ownership being 25% of the total outstanding shares of said
subsidiary. ABC did, however, as part of the above mentioned amendment, retain
this option to acquire up to 25% of the common stock of the subsidiary to be
formed at book value at the time of the exercise, if any. ABC subsequently
assigned this right to Tudor Technologies, Inc. ("Tudor"), an entity affiliated
with the Company. Tudor is an affiliate due to the fact that Mr. Moses Mika is a
director on the boards of directors of both Tudor and the Company.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
11. Equity Transactions (continued)
Issuance of Series E Stock (continued)
On July 28, 1998, the Company sold 100,000 shares of Series E Preferred
Stock to UTTC, its principal shareholder and owner of more than 50% of the
Company's common stock as of the date of the transaction. As such, the Company
is an entity under common control of UTTC. The sale was $1.00 per share, or
$100,000. The Company has recorded the amount as additional paid-in capital
since the related party transaction was with a commonly controlled entity. The
Series E Preferred Stock is convertible into Common Stock, and therefore,
contains a beneficial conversion feature, the value of which exceeded the
proceeds. The amount of the beneficial conversion is being amortized as a
dividend over the required two-year holding period. (See "Series E Stock
Dividends Resulting From Beneficial Conversion Feature" in Note 11.)
Issuance of Options
In February 1999, the Company entered into a Consulting Agreement (the
"Agreement") with Typhoon Capital Consultants, LLC ("Typhoon") pursuant to which
Typhoon is to provide financial and other consulting services. In exchange for
Typhoon's services, the Agreement provides for the grant of an option to
purchase 150,000 shares of the Company's Common Stock with an exercise price of
$1.75 per share, in the following increments: an initial increment of 50,000
options followed by five monthly increments of 20,000 options. The options will
expire on August 30, 2001. Each increment is valued by the Company using an
option valuation model. The initial values would be capitalized and amortized
through the term of the Agreement. However, the Company has not been able to
locate and communicate with any representatives at Typhoon. The Company has
received no services and doubts that any services will be performed by Typhoon
in the future, and has accordingly not executed the option agreements, and does
not ever expect to issue such options. Therefore, no amounts have been recorded
for these options as of March 31, 1999.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
11. Equity Transactions (continued)
Issuance of Options (continued)
In July of 1998, the Company entered into a five-year consulting agreement
with Corporate Relations Group ("CRG") to provide corporate relations services.
As compensation for their services, CRG received $100,000 in cash upon execution
of the agreement and received 50,000 shares of Series E Stock. The Company did
not issue the shares of Series E Stock, however, such were provided to CRG by a
Company shareholder. In addition, in exchange for CRG's services, the agreement
provided for the grant of options to CRG and four of its principals. The options
are for an aggregate 450,000 shares of Common Stock exercisable at $.78 per
share, and an aggregate 700,000 shares of the Series E Stock exercisable at
$2.25.
The Company has recorded an aggregate value for this transaction of
$143,750, including the $100,000 cash payment, and $43,750 for the Series E
Stock based on a closing market price on August 27, 1998 of $0.875 per share.
The Company felt CRG did not fully perform under the contract and has,
therefore, not issued the above-mentioned options, for the 450,000 shares of
Common Stock and 700,000 shares of Series E Stock. Should services ultimately be
provided and options issued, the fair value of the option compensation will be
determined when earned. Accordingly, no amounts have been recorded for the
option portion of this transaction. The $143,750 for the cash and stock tendered
has been capitalized by the Company, and is being pro-ratably expensed over the
term of the agreement, since the Company has received corporate brochures and
other promotional material from CRG that it will continue to utilize over future
periods.
Series E Stock Bonus
In March 1998, the Company's Board of Directors granted to its Chairman of
the Board and to its President, 25,000 shares each of its Series E Stock in
recognition of their efforts to further the Company's turnaround towards
profitability. The shares vested on a monthly basis over a one-year period
commencing April 1, 1998, being fully vested April 1999. On the date of grant
management determined the compensation value of this stock grant to be
approximately $79,000 in the aggregate, based on a closing market price of $1.86
per share, which was subjected to a 15% marketability discount given the
restrictive nature and vesting requirement of the securities, as well as their
relatively low trading volume.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
11. Equity Transactions (continued)
Series E Stock Dividends Resulting from Beneficial Conversion Feature
For the years ended March 31, 1999 and 1998, the Company recorded non-cash
dividends of $1,707,725 and $1,473,806 in applying the provisions of Topic No.
D-60 of the Emerging Issues Task Force as described below.
In April 1999, the Company filed with the Securities and Exchange
Commission restated financial statements for the year ended March 31, 1998 to
conform with Topic No. D-60 of the Emerging Issues Task Force. Topic D-60
communicated the views of the staff of the Securities and Exchange Commission
that the portion of the proceeds upon issuance of the convertible stock
allocable to the beneficial conversion feature should be recorded as additional
paid-in capital and recognized as a dividend over the minimum period in which
the preferred shareholders can realize the conversion.
The Company's Series E Stock, of which shares were issued in varying
amounts on various dates as described above, includes a beneficial conversion
feature in that each share of Series E Stock is convertible into six shares of
the Company's Common Stock at the option of the holder commencing two years from
the date of issuance. Shares of Series E Stock issued through June 30, 1997,
were originally convertible into twenty shares of Common Stock, at the option of
the holder, with no holding period requirement.
The beneficial conversion feature is measured at the date of issuance of
the Company's Series E Stock as the difference between the conversion price and
the market value of the Common Stock into which the Series E Stock is
convertible, limited to the proceeds received from the issuance of the Series E
Stock. Based on the calculations prescribed by Topic No. D-60, all proceeds
initially received by the Company from the issuance of Series E Stock have been
initially recorded as additional paid in capital as 100% of the proceeds is
allocable to the beneficial conversion feature. Over the required holding
period, if any, a non-cash dividend is recorded reducing the retained earnings
(or increasing the accumulated deficit) and increasing the balance recorded as
Series E Stock in the balance sheet. Thus, there is no net effect on the total
stockholders' equity of the Company. Since shares of Series E Stock issued prior
to June 30, 1997, were originally convertible upon issuance, 100% of the
non-cash dividend was recorded upon issuance of the Series E Stock. Non-cash
dividends associated with shares of Series E Stock issued after June 30, 1997,
are being recorded over the required two-year holding period of the security.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
11. Equity Transactions (continued)
Series E Stock Dividends Resulting from Beneficial Conversion Feature
(continued)
However, the Company has also restated its net loss per common share as
presented in the statement of operations for the year ended March 31, 1998, as
the dividend attributable to the beneficial conversion feature of the Series E
Stock reduces the amount of net income (or increases the amount of net loss)
applicable to the common shares.
In applying the provisions of Topic No. D-60, the Company has recorded
non-cash dividends of $1,473,806 for the year ended March 31, 1998. This amount
represents $0, $1,200,000, $0, and $273,806 for each of the three-month periods
ended June 30, 1997, September 30, 1997, December 31, 1997, and March 31, 1998.
For the year ended March 31, 1999, these non-cash dividends aggregated
$1,707,725. These non-cash dividends were recorded as $273,806 in the
three-month period ended June 30, 1998 and $477,973 in each of the three-month
periods ended September 30, 1998, December 31, 1998, and March 31, 1999.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
11. Equity Transactions (continued)
Series E Stock Dividends Resulting from Beneficial Conversion Feature
(continued)
As a result of the application of Topic No. D-60, the Company has
reclassified the initial proceeds of issuance of Series E Stock to additional
paid-in capital and the resulting non-cash dividends which affect the
accumulated deficit and the amount recorded as Series E Stock. The impact on the
financial statements for the year ended March 31, 1998 is summarized as follows:
March 31, 1998
As Reported As Restated
Series E Stock $ 5,891,020 $ 3,974,376
Common Stock 41,035 41,035
Additional paid-in capital 6,675,398 12,927,918
Accumulated deficit (10,104,946) (14,440,822)
--------------- ----------------
Total stockholders' equity $ 2,502,507 $ 2,502,507
Net loss for the year ended $ (2,054,470) $ (2,054,470)
Effects of non-cash dividends - (1,473,806)
--------------- ----------------
Net loss applicable to common shares $ (2,054,470) $ (3,528,276)
Basic and diluted loss per common share and share equivalent $ (.50) $ (.86)
12. Supplemental Cash Flow Information
Cash paid for income taxes and interest was as follows:
Nine Months Ended
December 31, Years Ended March 31,
----------------------------------- ----------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ----------
Interest paid $ 902,054 $ 621,143 $ 809,601 $ 511,924
=============== =============== =============== ================
Income taxes $ 18,659 $ 1,800 $ 850 $ 800
=============== =============== =============== ================
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
12. Supplemental Cash Flow Information (continued)
Non-cash investing and financing activities for the years ended March 31,
1999 and 1998 consisted of the following:
The Company acquired leasehold improvements and equipment during the year
ended March 31, 1999, by entering into capital lease obligations for $849,429
(Notes 3 and 5).
Convertible debt and accrued interest outstanding of $1,533,333 was
converted into 1,533,333 shares of Series E Stock during the year ended March
31, 1999 (Note 11).
Common Sock was issued in exchange for cash and inventory during the year
ended March 31, 1999. The inventory acquired had a value of $365,000 (Note 11).
For the years ended March 31, 1999 and 1998 non-cash dividends of
$1,707,725 and $1,473,806, respectively, were recorded to amortize the discount
recorded on Series E Sock resulting from the beneficial conversion features
(Note 11).
Non-cash investing and financing activities for the nine-month periods
ended December 31, 1999 and 1998 consisted of the following:
The Company acquired leasehold improvements and equipment by entering into
capital lease obligations for $806,000 during the nine months ended December 31,
1999.
In June 1998, a note payable to ABC, an affiliate, was converted with
accrued interest into 1,533,333 shares of Series E Preferred Stock (Notes 6 and
11).
In June 1998, the Company entered into a five-year capital lease for
approximately $84,000 to partially finance the improvements and relocate on of
its stores.
13. Events Subsequent to March 31, 1999
Unsecured Promissory Notes
On April 22, 1999, the Company entered into an unsecured promissory note
with Shopnet, an affiliate, (Note 1) for $100,000 at an interest rate of 9% per
annum. The principal payments and accrued interest are due monthly beginning May
31, 1999, with a maturity date of August 31, 1999.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
Events Subsequent to March 31, 1999 (continued)
On May 17, 1999, the Company entered into an unsecured promissory note with
Shopnet, an affiliate (Note 1) for $100,000 at an interest rate of 9% per annum.
The principal payments and accrued interest are due monthly beginning December
31, 1999, with a maturity date of September 30, 1999.
Private Placement of Series F Stock
On May 18, 1999, the Board of Directors of the Company unanimously adopted
a Corporate Resolution to enter into a Securities Purchase Agreement (the
Private Placement) with several investors. The Private Placement was for 750,000
shares of the Company's Series F Preferred Stock ("Series F Stock"), par value
of $.01 per share, for gross proceeds of $750,000. The Company was also
authorized to amend its articles of incorporation to change the terms and
privileges of the Series F Stock. The Series F Stock is convertible into two
shares of Common Stock at any time following the effective date of the
registration statement registering the Series F Stock and underlying shares of
Common Stock for resale. The Corporate Resolution also authorized the Company to
file a Registration Statement with the Securities and Exchange Commission for
the securities under Private Placement.
As part of the Private Placement, the Company granted an option to the
Placement Agent and its assignees to purchase an aggregate 350,000 shares of
Common Stock, with an exercise price of $3.00 per share for a period of four
years from the date of closing of the Private Placement. Utilizing the
Black-Scholes valuation model, the option was valued at $507,000, or $1.45 per
option. The model utilized several variables to determine the value including
the current price of the stock and its expected volatility, and the risk-free
interest rate for the expected term. The current stock price was $1.69 on May
27, 1999, the closing date. Based on an analysis of the stock price over the
previous 20 months, the volatility factor utilized for the model was 155%.
Additionally, the model used a risk-free interest rate of 6.0%. Additionally, as
commission, the Placement Agent received a 10% fee, or $75,000, and a 1% fee, or
$7,500, to cover administrative expenses. The Private Placement closed on May
27, 1999, providing net cash proceeds of $667,500 to the Company before legal
and other administrative expenses.
As noted above, the Company's Common Stock had a closing price of $1.69 on
the closing date of the Private Placement. As such, the Series F Stock has a
beneficial conversion feature which will result in accounting treatment to
reflect non-cash dividends in future periods in a manner similar to the Series E
Stock transactions described in Note 11. The Company intends to recognize the
effects of this non-cash dividend over a period of seven months. This period is
based on the Company's estimate as to the length of time to complete the
registration of the shares through an SB-2 filing with the Securities and
Exchange Commission.
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
Events Subsequent to March 31, 1999 (continued)
Common Stock Compensation of Consultant
In May 1999, the Company issued 45,333 shares of Common Stock to a
consultant as compensation for site selections and negotiation of retail
location leases. These services are being provided for new Company stores
opening in fiscal 2000. This Company 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.
14. Restatement of Amounts Previously Reported
The March 31, 1999 financial statements contain certain restatements of
amounts previously reported. The restatements were the result of inquiries made
by the SEC regarding the accounting treatment for transactions revolving around
the Company's debt and equity securities, including grants of options/stock
(Note 11), convertible debentures (Note 6), and convertible preferred stock
(Note 11). As a result, the Company has restated several amounts. The table
below identifies significant changes to balances in the financial statements.
The following is a summary of the impact of the restatements on the 1999 consolidated balance sheet.
1. Reduction of other current assets for options not ultimately issued $ 68,634
2. Increase in Series E Preferred Stock for issuance of shares 79,000
3. Increase in additional paid-in capital for beneficial conversion feature
of convertible debentures 650,000
4. Reduction in additional paid-in capital for cancellation of options 79,000
5. Additional net loss in accumulated deficit (from above items) 718,634
The following is a summary of the impact of the restatements on the
1999 consolidated statement of operations and comprehensive net income
(loss).
1. Increase in operating expenses from recognition of compensation expense $ 79,000
2. Reduction in operating expenses from reversing amortization for options
not ultimately issued (10,366)
3. Additional effective non-cash interest expense attributable to the
beneficial conversion feature of convertible debentures 650,000
Decrease in 1999 net income $ 718,634
===============
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A Subsidiary of United Textiles & Toys Corp.)
Notes To Financial Statements
Years Ended March 31, 1999 and 1998
Restatement of Amounts Previously Reported (continued)
The effects on the Company's previously issued 1999 financial
statements are summarized as follows.
Previously Increase
Reported (Decrease) Restated
Consolidated Balance Sheet:
Other current assets $ 1,310,263 $ (68,634) $ 1,241,629
Total assets $ 21,150,392 $ (68,634) $ 21,081,758
=============== ================ ===============
Series E convertible preferred stock $ 5,682,101 $ 79,000 $ 5,761,101
Additional paid-in capital 15,335,172 571,000 15,906,172
Total liabilities and stockholders'
equity $ 21,150,392 $ (68,634) $ 21,081,758
================ ================ =============
Consolidated Statement of Operations and
Comprehensive Income (Loss):
Operating expenses $ 12,658,376 $ 68,634 $ 12,727,010
Effective interest for beneficial
conversion feature - 650,000 650,000
Net income (loss) and comprehensive
net loss $ 140,868 $ (718,634) $ (577,766)
=============== ================ ===============
Net income (loss) applicable to
common shares $ (1,566,857) $ (718,634) $ (2,285,491)
================ ================ ===============
Basic and diluted income(loss) per
common share and share equivalents $ (.34) $ (.16) $ (.50)
================ ================ ===============
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER 1,950,000 SHARES OF
THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH COMMON STOCK
THE OFFERING CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH BY SELLING SECURITYHOLDERS
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A PLAY CO. TOYS &
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED ENTERTAINMENT CORP
HEREBY IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH AN OFFER. THE DELIVERY OF THIS PROSPECTUS AT ANY
TIME DOES NOT IMPLY THAT THE INFORMATION STATED IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
=======
TABLE OF CONTENTS
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . .. . . . . .3
__________, 2000
PROSPECTUS SUMMARY. . . . . . . . . . . . . . . . . . .4
THE OFFERING. . . . . . . . . . . . . . . . . . . . . 6
SUMMARY FINANCIAL DATA. . . . . . . . . . . . . . . . 8
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . 9
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . 24
DILUTION. . . . . . . . . . . . . . . . . . . . . . . 25
SELLING SECURITYHOLDERS. . . . . . . . . . . . . . . 26
PLAN OF DISTRIBUTION FOR SECURITIES
OF SELLING SECURITYHOLDERS. . . . . . . . . . . . . 27
PRINCIPAL SECURITYHOLDERS. . . . . . . . . . . . . .. 29
DESCRIPTION OF SECURITIES. . . . . . . . . . . . . . 31
INTEREST OF NAMED EXPERTS AND COUNSEL. . . . . . . . . 34
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . .35
MANAGEMENT. . . . . . . . . . . . . .. . . . . . . . 37
BUSINESS OF THE COMPANY. . . . . . . . . . . . . .. . 42
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. . . . . . . . . . . . . .. . . . . . . . 57
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS. . . . . . . . . . . . . . . . . 71
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . F-1
UNTIL 25 DAYS AFTER THE DATE OF THIS PROSPECTUS ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
-----------------------------------------
As permitted under the Delaware General Corporation Law, the Company's
Certificate of Incorporation and By-Laws provide for indemnification of a
director or officer under certain circumstances against reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of an action brought against him by reason of his being a director
or officer. In addition, the Company's charter documents provide for the
elimination of directors' liability to the Company or its stockholders for
monetary damages except in certain instances of bad faith, intentional
misconduct, a knowing violation of law, or illegal personal gain.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "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 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 pursuant to this Registration Statement, 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 by such
court of such issue.
Item 25. Other Expenses of Issuance and Distribution.
-------------------------------------------
The following table sets forth the expenses incurred by the Company in
the May 1999 private placement:
Underwriter's Commission $75,000
Underwriter's Non-Accountable Expense Allowance 7,500
Legal Fees and Expenses 10,000
- ------
Total $92,500
=======
Item 26. Recent Sales of Unregistered Securities.
---------------------------------------
Except where otherwise indicated, sales of the Company's Securities
described below were exempt from registration under the Securities Act in
reliance upon the exemption afforded by ss.4(2) of the Act for transactions not
involving a public offering. All certificates evidencing such sales bear an
appropriate restrictive legend.
Series F Preferred Stock
In May 1999, pursuant to ss.506 of Regulation D of the General Rules
and Regulations Under the Securities Act of 1933, as amended (the "General Rules
and Regulations"), the Company sold 750,000 shares of Series F Stock, at a
purchase price of $1.00 per share, through Robb Peck McCooey Clearing
Corporation as placement agent. The Company received $657,500 from the private
placement, after deducting underwriting commissions and legal and administrative
expenses. Each share of Series F Stock is convertible, at the holder's option,
into two fully paid and non-assessable shares of Common Stock, at any time
commencing on the date this Registration Statement is declared effective by the
Commission. Each outstanding share of Series F Stock, by virtue of and
simultaneously with the occurrence of the earlier of either of the following
events and without any action on the part of the holder thereof, shall convert
automatically into shares of Common Stock: (i) two years from issuance or (ii)
in the event the closing price per share of Common Stock has been at least $5.00
for a consecutive 30 day period.
Series E Preferred Stock
In March 2000, pursuant to ss.4(2) of the Act, the Company issued
3,423,300 shares of Series E Stock to EACF on conversion by same of two
debentures, one of which was issued to EACF by the Company and the other of
which was issued to Frampton who assigned same to EACF in December 1999.
In July 1998, the Company sold 100,000 shares of Series E Stock to
United Textiles for $100,000. In determining the purchase price paid by United
Textiles, the trading price of the Company's Series E Stock - along with the
applicable discounts for illiquidity, lack of marketability, and lack of
registration rights - were considered. The trading price of approximately $2.00
per share was discounted by 50% for the above reasons.
In June 1998, pursuant to ss.4(2) of the Act, the Company issued
1,533,333 shares of Series E Stock to ABC on conversion by ABC of a debenture
issued it by the Company.
In March 1998, pursuant to ss.4(2) of the Act, the Company issued
25,000 shares of Series E Stock to each of Richard Brady (the Company's
president) and Harold Rashbaum (the Company's chairman of the board) as bonuses
in recognition of their efforts to further the Company's turnaround toward
profitability. These shares were sold in the fourth quarter of fiscal year end
2000.
In July 1997, for aggregate proceeds of $550,000, the Company issued
250,000 shares of Series E Stock and 500,000 Series E Warrants to Volcano
Trading, Ltd. in a private transaction pursuant to ss.ss.4(2) and 4(6) of the
Act.
From April 1996 to June 1997, EACC exercised its option and purchased
an aggregate of 3,562,070 shares of Series E Stock. 361,500 of such shares were
converted (between September 1996 and February 1997) into 2,410,000 shares of
Common Stock. See "Business of the Company - Former Financing through Congress
Financial Corporation (Western)" and " -- Common Stock."
Each share of Series E Stock is convertible, at the option of the
holder, into six fully paid and non-assessable shares of Common Stock on the
earlier of February 4, 2000 or two years after issuance.
Common Stock
In May 1999, pursuant to ss.4(2) of the Act, the Company issued 45,333
shares of Common Stock to Brian Hunter, a real estate consultant, as
compensation for services rendered in negotiating certain commercial leases on
behalf of the Company. This transaction was valued by the Company at
approximately $56,000 based on the closing stock price on May 17, 1999 and a 10%
discount related to the unregistered nature of the Common Stock.
In November 1998, pursuant to a sales agreement entered into by and
between the Company and Breaking Waves, Breaking Waves purchased 1.4 million
shares of the Company's Common Stock in a private transaction pursuant to
ss.4(2) of the Act. The consideration for the stock was $665,000, which
represents a price of $0.475 per share. The price represents an approximate 33%
discount from the then current market price of $0.718 reflecting a discount for
the illiquidity of the shares, which do not carry any registration rights.
$300,000 of the consideration was remitted in cash, and the remaining $365,000
consisted of product from Breaking Waves (primarily girl's swimsuits).
In August 1998, pursuant to ss.4(2) of the Act and the Company's 401(k)
ESOP Plan, the Company issued 5,673 shares of Common Stock to certain former
employees. While there existed an ESOP designated certificate [in the aggregate
amount of 15,333 shares contributed on January 26, 1995 by Messrs. Brady and Tom
Davidson (a founder of the Company and the Company's former president) and the
Company's then parent company)] at the time of such issuance, such number of
shares were inadvertently issued as new stock (rather than from said
certificate). The 5,673 shares of Common Stock have since been returned to
authorized but unissued status, and the contributed ESOP certificate has been
adjusted to reflect deduction of the 5,673 shares therefrom.
In June 1997, pursuant to ss.4(2) of the Act, the Company issued 20,000
shares of Common Stock to Klarman & Associates n/k/a Millennium Ventures Law
Group for legal fees of $500.
Between September 1996 and February 1997, the Company issued 2,410,000
shares of Common Stock on conversion of Series E Stock previously issued to
EACC. See "-- Series E Preferred Stock."
In August 1996, the one share of the Company's Series D Preferred Stock
was converted into 385,676 shares of the Company's Common Stock based on the
initial amount of the debt divided by the average price of the shares for a 90
day period prior to the conversion. This was performed in order for American
Toys, Inc., the Company's then parent corporation, to spin such shares off to
its stockholders and divest its interest in the Company.
Item 27. Exhibits.
--------
All exhibits, except those designated with an asterisk (*) which are
filed herewith and those designated with a double asterisk (**) which shall be
filed by amendment hereto, have been filed previously with the Commission (i) in
connection with the Company's Registration Statement on Form SB-2, dated
November 2, 1994, under file No. 33-81940-NY; (ii) with the Company's
Registration Statement on Form SB-2, Registration No. 333-32051; or (iii) as
otherwise indicated and, pursuant to 17 C.F.R. ss.230.411, are incorporated by
reference herein.
1.1 Form of Underwriting Agreement. See (ii) above.
3.1 Certificate of Incorporation of the Company dated June 15, 1995. See (i) above.
3.2 Amendment to Certificate of Incorporation of the Company, filed July 2, 1997. See (ii) above).
3.2(a) Amendment to Certificate of Incorporation of the Company, filed August 11, 1997. See (ii) above.
3.2(b) Amendment to Certificate of Incorporation of the Company, filed May 9, 1996 (incorporated by
reference herein to exhibit 3.2 (b) of the Company's 10-KSB for the year ended March 31, 1999).
3.2(c) Amendment to Certificate of Incorporation of the Company, filed August 13, 1996 (incorporated by
reference herein to exhibit 3.2 (b) of the Company's 10-KSB for the year ended March 31, 1999).
3.2(d) Amendment to Certificate of Incorporation of the Company, filed March 24, 1997 (incorporated by
reference herein to exhibit 3.2 (b) of the Company's 10-KSB for the year ended March 31, 1999).
3.2(e) Amendment to Certificate of Incorporation of the Company, filed May 29, 1998 (incorporated by
reference herein to exhibit 3.2 (b) of the Company's 10-KSB for the year ended March 31, 1999).
3.2(f) Amendment to Certificate of Incorporation of the Company, filed May 12, 1999 (incorporated by
reference herein to exhibit 3.2 (b) of the Company's 10-KSB for the year ended March 31, 1999).
3.2(g) Amendment to Certificate of Incorporation of the Company, filed May 25, 1999 (incorporated by
reference herein to exhibit 3.2 (b) of the Company's 10-KSB for the year ended March 31, 1999).
3.3 By-Laws of the Company. See (i) above.
4.1 Specimen Common Stock Certificate See (i) above).
4.2 Specimen Series E Redeemable Purchase Warrant Certificate. See (ii) above
4.3 Specimen Series E Preferred Stock Certificate. See (ii) above
4.4 ESOP Plan See (i) above).
4.5 Form of Warrant Agreement between the Company, the Underwriter and Continental Stock Transfer
& Trust Company. See (ii) above.
5.0** Opinion of Counsel
10.26 Lease Agreement for Store - Chula Vista. See (i) above.
10.27 Lease Agreement for Store - El Cajon. See (i) above.
10.29 Lease Agreement for Store - Simi Valley. See (i) above.
10.30 Lease Agreement for Store - Encinitas. See (i) above.
10.34 Lease Agreement for Store - Redlands. See (i) above.
10.35 Lease Agreement for Store - Rancho Cucamonga. See (i) above.
10.36 Lease Agreement for Store - Woodland Hills. See (i) above.
10.37 Lease Agreement for Warehouse - Executive Offices. See (i) above.
10.38 Lease Agreement for Store - Pasadena. See (i) above.
10.41 The Company Incentive Stock Option. Plan See (i) above.
10.44 Lease Agreement for Store - Corona Plaza. See (i) above.
10.50 Extension of Warehouse Lease. See (i) above.
10.75 Asset Purchase Agreement for the purchase of Toys International - (incorporated by reference herein to exhibit
10.75 of the Company's 10-QSB for the period ended December 31, 1996 filed with the Commission).
10.77 Lease Agreement for Store - Santa Clarita International (incorporated by reference herein to exhibit 10.77 of
the Company's 10-KSB for the year ended March 31, 1997, filed with the Commission).
10.78 Lease Agreement for Store - South Coast Plaza International (incorporated by reference herein to exhibit 10.78
of the Company's 10-KSB for the year ended March 31,1997, filed with the Commission).
10.79 Lease Agreement for Store - Century City International (incorporated by reference herein to exhibit 10.79 of
the Company's 10-KSB for the year ended March 31, 1997, filed with the Commission).
10.80 Lease Agreement for Store - Crystal Court International (incorporated by reference herein to exhibit 10.80 of
the Company's 10-KSB for the year ended March 31, 1997, filed with the Commission).
10.81 Lease Agreement for Store - Orange County (incorporated by reference herein to exhibit (i) of the Company's
10-QSB/A-1 for the period ended September 30, 1995 filed with the Commission).
10.85 Lease Agreement for Store - Mission Viejo (incorporated by reference herein to exhibit (iv) of the Company's
10-QSB for the period ended December 31, 1995).
10.86 Subscription Agreement between the Company and Volcano Trading Limited dated June 30, 1997. (incorporated by
reference herein to exhibit 10.86 to the Company's Registration Statement on Form SB-2, Registration No.
333-32051.
10.87 Lease Agreement for Store - Clairemont (incorporated by reference herein to exhibit 10.87 of the Company's
10-QSB/A-1 for the period ended September 30, 1997).
10.88 Lease Agreement for Store - Redondo Beach (incorporated by reference herein to exhibit 10.88 of the Company's
10-QSB/A-1 for the period ended September 30, 1997).
10.89 Lease Agreement for Store - Arizona Mills (incorporated by reference herein to exhibit 10.89 of the Company's
10-QSB/A-1 for the period ended September 30, 1997).
10.90 FINOVA Loan and Security Agreement (incorporated by reference herein to exhibit 10.90 of the Company's 10-QSB
for the period ended December 31, 1997)
10.91 Schedule to Loan and Security Agreement (incorporated by reference herein to exhibit 10.91 of the Company's
10-QSB for the period ended Dec. 31, 1997).
10.92 Lease Agreement for Store - City Mills (incorporated by reference herein to exhibit 10.92 of the Company's
10-KSB for the fiscal year ended March 31, 1998).
10.93 Lease Agreement for Store - Fashion Outlet of Las Vegas (incorporated by reference herein to exhibit 10.93 of
the Company's 10-KSB for the fiscal year ended March 31, 1998).
10.93(a) Fixture Financing Agreements
10.93(b) Letter from Ilan Arbel, dated May 15, 1998, re: funding of Company's operations (incorporated by reference
herein to exhibit 10.93(b) of the Company's 10-KSB/A-2 for the fiscal year ended March 31, 1998).
10.94 Lease Agreement for Store-Concord Mills (Play Co. Toys) (incorporated by reference herein to exhibit 10.94 of
the Company's 10-QSB for the period ended June 30, 1998).
10.95 Lease Agreement for Store-Katy Mills (Play Co. Toys) (incorporated by reference herein to exhibit 10.95 of
the Company's 10-QSB for the period ended June 30, 1998).
10.96 Lease Agreement for Store-Concord Mills (Toy Co.) (incorporated by reference herein to exhibit 10.96 of the
Company's 10-QSB for the period ended June 30, 1998).
10.97 Lease Agreement for Store-Katy Mills (Toy Co.) (incorporated by reference herein to exhibit 10.97 of the
Company's 10-QSB for the period ended June 30, 1998).
10.98 Lease Agreement for Store-Ontario Mills (Toy Co.) (incorporated by reference herein to exhibit 10.98 of the
Company's 10-QSB for the period ended June 30, 1998).
10.99 Amendment No. 1 to Finova Loan Agreement (incorporated by reference herein to exhibit 10.99 of the Company's
10-QSB for the period ended June 30, 1998).
10.100 Amendment No. 1 to Lease Agreement for Store-Rancho Cucamonga (Play Co. Toys) (incorporated by reference
herein to exhibit 10.100 of the Company's 10-QSB for the period ended June 30, 1998).
10.101 Company & Corporate Relations Group, Inc. Lead Generation/Corporate
Relations Agreement, dated July 22, 1998 (incorporated by reference herein to
exhibit 10.101 of the Company's 10-QSB for the period ended June 30, 1998).
10.103 Promissory Note with Amir Overseas Capital Corp. (dated September 18,
1998) (incorporated by reference herein to exhibit 10.103 of the Company's
10-QSB for the period ended September 30, 1998).
10.104 Promissory Note with Amir Overseas Capital Corp. (dated November 9, 1998) (incorporated by reference herein to
exhibit 10.104 of the Company's 10-QSB for the period ended September 30, 1998).
10.105 Lease Agreement for Store - Dallas (incorporated by reference herein to exhibit 10.105 of the Company's 10-QSB
/A-1 for the period ended September 30, 1998).
10.106 Lease Agreement for Store - Thousand Oaks (incorporated by reference herein to exhibit 10.106 of the Company's
10-QSB/A-1 for the period ended September 30, 1998).
10.107 Lease Agreement for Store - Detroit (incorporated by reference herein to exhibit 10.107 of the Company's 10-QSB
/A-1 for the period ended September 30, 1998).
10.108 Lease Agreement for Store - Chicago (incorporated by reference herein to exhibit 10.108 of the Company's
10-QSB/A-1 for the period ended September 30, 1998).
10.109 Lease Agreement for Store - Orange County (incorporated by reference herein to exhibit 10.109 of the Company's
10-QSB/A-1 for the period ended September 30, 1998).
10.110 Phoenix Leasing Incorporated Loan and Security Agreement and Ancillary Documents (October 1998) (incorporated
by reference herein to exhibit 10.109 of the Company's 10-QSB/A-1 for the period ended September 30, 1998).
10.111 Agreement by and between the Company and ZD Group, L.L.C., dated November 11, 1998 (incorporated by reference
herein to exhibit 10.111 of the Company's 10-QSB for the period ended December 31, 1998).
10.112 Intercreditor and Subordination Agreement by and between ZD Group, L.L.C. and FINOVA Capital Corporation, dated
February 11, 1999 (incorporated by reference herein to exhibit 10.112 of the Company's 10-QSB for the period
ended December 31, 1998).
10.113 5% Convertible Secured Subordinated Debenture in favor of Frampton Industries, Ltd., dated November 11, 1998
(incorporated by reference herein to exhibit 10.113 of the Company's 10-QSB for the period ended December 31,
1998).
10.114 Subordinated Security Agreement by and between the Company and Frampton Industries, Ltd., dated November 11,
1998 (incorporated by reference herein to exhibit 10.114 of the Company's 10-QSB for the period ended December
31, 1998).
10.115 Intercreditor and Subordination Agreement by and between Frampton Industries, Ltd. and FINOVA Capital
Corporation, dated February 11, 1999 (incorporated by reference herein to exhibit 10.115 of the Company's 10-
QSB for the period ended December 31, 1998).
10.115(a) Third Amendment to Loan and Security Agreement by and between the Company and FINOVA Capital Corporation,
dated December 1998 (incorporated by reference herein to exhibit 10.115(a) of the Company's 10-QSB/A-1 for the
period ended December 31, 1998).
10.116 Fourth (initially filed as "Third") Amendment to Loan and Security Agreement by and between the Company and
FINOVA Capital Corporation, dated February 11, 1999 (later renamed "Fourth" Amendment) (incorporated by
reference herein to exhibit 10.116 of the Company's 10-QSB for the period ended December 31, 1998).
10.117 Letter of Intent by and between the Company and Frampton Industries, Inc., dated January 4, 1999 (incorporated
by reference herein to exhibit 10.117 of the Company's 10-QSB for the period ended December 31, 1998).
10.118 Fifth Amendment to Loan and Security Agreement by and between the Company and FINOVA Capital Corporation, dated
March 1999 (incorporated by reference herein to exhibit 10.118 of the Company's 10-QSB/A-1 for the period ended
December 31, 1998).
10.119 Typhoon Capital Consultants, LLC agreement dated February 1,1999 (incorporated by reference herein to exhibit
10.118 of the Company's 10-QSB/A-1 for the period ended December 31, 1998).
10.120 5% Convertible Secured Subordinated Debenture in favor of Europe American Capital Foundation,
dated November 11, 1998. (incorporated by reference herein to exhibit 10.120 of the Company's
10-KSB for the year ended March 31, 1999).
10.121 Amendment to Lease Agreement - Tutti Animali. (incorporated by reference herein to exhibit
10.121 of the Company's 10-KSB for the year ended March 31, 1999).
10.122 Lease Agreement for Store - Aladdin (incorporated by reference herein to exhibit 10.122 of the
Company's 10-KSB for the year ended March 31, 1999).
10.123 Lease Agreement for Store - Pier 39 (incorporated by reference herein to exhibit 10.123 of the
Company's 10-KSB for the year ended March 31, 1999).
10.124 Lease Agreement for Store - Opry Mills (incorporated by reference herein to exhibit 10.124 of
the Company's 10-KSB for the year ended March 31, 1999).
10.125 Lease Agreement for Store - Mission Viejo (incorporated by reference herein to exhibit 10.125
of the Company's 10-KSB for the year ended March 31, 1999).
10.126 Fixture Financing Agreement with Premier Capital Corp., dated October 15, 1998 (incorporated
by reference herein to exhibit 10.126 of the Company's 10-KSB for the year ended March 31, 1999).
10.127 Lease Agreement for Store - Venetian (incorporated by reference herein to exhibit 10.127 of
the Company's 10-KSB for the year ended March 31, 1999).
10.128 Lease Agreement for Store - Woodfield Mall (incorporated by reference herein to exhibit 10.128
of the Company's 10-KSB for the year ended March 31, 1999).
10.129 Amendment to Lease Agreement - Rancho Cucamonga (incorporated by reference herein to exhibit
10.129 of the Company's 10-KSB for the year ended March 31, 1999).
10.130 Promissory Notes - Full Moon Development, Inc. (incorporated by reference herein to exhibit
10.130 of the Company's 10-KSB for the year ended March 31, 1999).
10.131 ABC Fund, Inc. Assignment of Debenture to Tudor Technologies, Inc. dated September 15, 1998
(incorporated by reference herein to exhibit 10.131 of the Company's 10-QSB for the period ended
June 30, 1999).
10.132 Tudor Technologies, Inc. Election to Exercise dated July 15, 1999 (incorporated by reference
herein to exhibit 10.131 of the Company's 10-QSB for the period ended June 30, 1999).
10.133 Sixth Amendment to Loan and Security Agreement by and between the Company and FINOVA Capital
Corporation, dated August 1999 (incorporated by reference herein to exhibit 10.131 of the Company's
10-QSB for the period ended June 30, 1999).
10.134 Fixture Financing Agreement With Longwater Capital Corporation (incorporated by reference
herein to exhibit 10.131 of the Company's 10-QSB for the period ended June 30, 1999).
10.135 Lease Agreement for Store - International Gateway
10.136 Investment Agreement
10.137 Amendment to Lease Agreement - Concord Mills (Toy Co.) (incorporated by reference herein to
exhibit 10.137 of the Company's 10-QSB for the period ended September 30, 1999).
10.138** Amendment No. 2 to Chula Vista Lease Agreement
10.139* Amendment and Assignment of Warehouse Lease Agreement
10.140* Assignment of Rancho Cucamonga Lease
10.141** Lease Agreement - Arundel Mills
21.1* Subsidiaries
23.1* Consent of Haskell & White LLP
Item 28. Undertakings.
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The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
Post-Effective Amendment to this Registration Statement:
(i) To include any Prospectus required byss.10(a)(3) of the Act;
(ii) To reflect in the Prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
Registration Statement. Notwithstanding the foregoing, any increase or decrease
in volume of Securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
Prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement.
(iii) To include any additional or changed material information with
respect to the Plan of Distribution.
(2) To, for the purpose of determining any liability under the Act, treat
each Post-Effective Amendment as a new Registration Statement of the securities
offered and the offering of securities at the time to be the initial bona fide
offering.
(3) To file a Post-Effective Amendment to remove from registration any of
the securities which remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, and controlling persons of the Company,
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the 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 action, suit,
or proceeding) is asserted by such director, officer, or controlling person 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 by such court. See Item 24.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
the Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of San Marcos, State of California on the 1st day of
May, 2000
PLAY CO. TOYS & ENTERTAINMENT CORP.
By: /s/ Richard Brady
Richard Brady, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933 as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
/s/ Harold Rashbaum Chairman of the Board 05/01/00
Harold Rashbaum Date
/s/ Richard Brady Chief Executive Officer, 05/01/00
Richard Brady President and Director Date
/s/ James B. Frakes Chief Financial Officer 05/01/00
James B. Frakes and Secretary Date
/s/ Moses Mika Director 05/01/00
Moses Mika Date