U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-21178
UNITED TEXTILES & TOYS CORP.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-3626613
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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1385 BROADWAY, SUITE 814, NEW YORK, NEW YORK 10018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(212) 391-1111
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PAST 12
MONTHS (OR FOR SUCH SHORTER PERIOD THAT REGISTRANT WAS REQUIRED TO FILE SUCH
REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90
DAYS. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
STATE THE NUMBER OF SHARES OF EACH OF THE ISSUER'S CLASSES OF COMMON EQUITY
OUTSTANDING AS OF THE LATEST PRACTICABLE DATE: COMMON STOCK, PAR VALUE $.001 PER
SHARE: 4,550,236 SHARES OUTSTANDING AS OF DECEMBER 8, 1999.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES [ ] NO [X]
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION Page Number
Item 1. FINANCIAL STATEMENTS
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CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 (UNAUDITED) 3
and March 31, 1999.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) for the three and six
months ended September 30, 1999 and 1998. 4
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) for the six
months ended September 30, 1999 and 1998. 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6-10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
11-16
PART II. OTHER INFORMATION 17
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UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A SUBSIDIARY OF MULTIMEDIA CONCEPTS INTERNATIONAL, INC.)
CONSOLIDATED BALANCE SHEETS
As of September 30, 1999 and March 31, 1999
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Sept. 30, March 31,
1999 1999
(UNAUDITED) (NOTE 1)
ASSETS
CURRENT ASSETS:
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Cash and cash equivalents ........................................................ $ 363,202 $ 126,625
Accounts receivables-net ......................................................... 172,442 118,518
Inventories ...................................................................... 15,127,625 11,506,284
Stock subscription receivable (Note 5) ........................................... 723,678 --
Prepaid expenses and other current assets ........................................ 2,431,290 1,315,851
Loans and advances-officer ....................................................... (78,572) (37,061)
Total current assets ..................................................... 18,739,665 13,030,217
PROPERTY AND EQUIPMENT-NET ......................................................... 7,245,790 5,348,175
OTHER ASSETS
Deposits and other assets ........................................................ 3,462,737 2,768,647
Total other assets ....................................................... 3,462,737 2,768,647
TOTAL ASSETS ............................................................. $ 29,448,192 $ 21,147,039
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................. 24,246,099 14,498,578
Accrued expenses and other current liabilities ................................... 305,839 626,815
Due to affiliates ................................................................ 817,155 831,897
Current portion of notes payable and capital lease obligation .................... 864,429 1,352,197
Total current liabilities ................................................ 26,233,522 17,309,487
LONG-TERM LIABILITIES:
Borrowings under financing agreement ............................................. 10,725,774 7,814,666
Note payable and capital leases, net of current portion .......................... 1,000,637 585,681
Deferred rent liability .......................................................... 130,881 126,769
Total long-term liabilities .............................................. 11,857,292 8,527,116
Total liabilities ........................................................ 38,090,814 25,836,603
MINORITY INTEREST IN SUBSIDIARY .................................................... (2,326,798) (165,058)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000,000 shares authorized, 4,550,236
shares issued and outstanding ................................................. 4,550 4,550
Additional paid-in capital ....................................................... 8,142,281 8,142,281
Retained earnings (deficit) ...................................................... (14,462,655) (12,671,337)
Total stockholders' equity ............................................... (6,315,824) (4,524,506)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $ 29,448,192 $ 21,147,039
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
3
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UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A SUBSIDIARY OF MULTIMEDIA CONCEPTS INTERNATIONAL, INC.)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
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For the Three Months Ended For the Six Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
Restated Restated
(Note 8) (Note 8)
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Net sales .................................................. $ 6,867,119 $ 6,098,315 $ 13,375,684 $ 12,460,021
Cost of sales .............................................. 3,645,543 3,414,054 7,364,115 7,120,385
Gross profit ............................................... 3,221,576 2,684,261 6,011,569 5,339,636
Operating expenses:
Operating expenses ......................................... 3,684,031 2,620,444 7,464,041 5,219,903
Depreciation and amortization ............................ 228,514 193,794 452,982 382,211
Total operating expenses ......................... 3,912,545 2,814,238 7,917,023 5,602,114
Operating income (loss) .................................... (690,969) (129,977) (1,905,454) (262,478)
Interest expense:
Interest and finance charges ............................. 300,269 156,860 584,933 295,312
Amortization of debt issuance costs ...................... 47,424 27,202 78,154 54,402
Total interest expense ........................... 347,693 184,062 663,087 349,714
(LOSS) BEFORE MINORITY INTEREST ............................ (1,038,662) (314,039) (2,568,541) (612,192)
Minority interest in net income (loss)
of consolidated subsidiary (Note 3) ....................... 1,010,110 311,894 2,161,740 495,666
Net income (loss) .......................................... (28,552) (2,145) (406,801) (116,526)
Effect of non-cash dividends on convertible
preferred stock ........................................... (799,402) (477,973) (1,384,517) (751,779)
(LOSS) APPLICABLE TO COMMON SHARES ......................... $ (827,954) $ (480,118) $ (1,791,318) $ (868,305)
============ ============ ============
Basic and diluted loss per common share and share equivalent $ (.18) $ (.11) $ (.39) $ (.19)
============ ============ ============
Weighted average number of common shares outstanding ....... 4,550,236 4,550,236 4,550,236 4,550,236
============ ============ ============ ============
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
4
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UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A SUBSIDIARY OF MULTIMEDIA CONCEPTS INTERNATIONAL, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Increase (Decrease) in Cash
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Six Months Ended
Sept. 30, Sept. 30,
1999 1998
Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income (loss) ................................................................. $ (406,801) $ (116,526)
Adjustments to reconcile net loss to cash (used) provided for operating activities:
Depreciation and amortization .................................................. 452,982 382,211
Deferred rent .................................................................. 4,112 9,102
Minority interest in net loss of subsidiary .................................... (2,161,740) (495,666)
Compensation options and stock issued by subsidiary ............................ -- 21,876
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ........................................ (53,924) 58,654
(Increase) in merchandise inventories ............................................. (3,621,341) (4,312,326)
(Increase) decrease in prepaid expenses and other current assets .................. (1,115,439) (750,243)
(Increase) decrease in deposits and other assets .................................. (694,090) 83,152
Increase (decrease) in accounts payable ........................................... 8,363,004 3,342,576
Increase (decrease) in accrued expenses and other liabilities ..................... (320,976) (522,174)
Total adjustments ....................................................... 852,588 (2,182,838)
Net cash provided (used) by operating activities ........................ 445,787 (2,299,364)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................ (2,350,597) (1,149,757)
Advances from affiliates ....................................................... (14,742) 53,484
Net cash from (used for) investing activities ........................... (2,365,339) (1,096,273)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit ............................................ 2,911,108 3,036,798
Loans and repayment - officer .................................................. 41,511 110,917
Repayment of notes payable ..................................................... (72,812) 16,469
Stock subscription ............................................................. (723,678) --
Net cash provided by (used for) investing activities .................... 2,156,129 3,164,184
NET INCREASE (DECREASE) IN CASH ................................................... 236,577 (231,453)
Cash, beginning of period ......................................................... 126,625 659,378
CASH, END OF PERIOD ............................................................... $ 363,202 $ 427,925
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Supplemental disclosure of cash flow information:
Interest paid ..................................................................... $ 584,933 $ 295,312
Taxes paid ........................................................................ $ -- $ --
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
5
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UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A SUBSIDIARY OF MULTIMEDIA CONCEPTS INTERNATIONAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for more complete financial statements. In the opinion of
management, the interim financial statements include all adjustments considered
necessary for a fair p resentation of the Company's financial position and the
results of its operations for the three months ended September 30, 1999 and are
not necessarily indicative of the results to be expected for the full fiscal
year. For further information, refer to the Company's annual report on Form
10-KSB for the fiscal year ended March 31, 1999, as filed with the Securities
and Exchange Commission.
NOTE 2 - DESCRIPTION OF COMPANY:
United Textiles & Toys Corp. (the "Company") is a Delaware corporation
which was organized in March 1991 and commenced operations in October 1991. the
company formerly designed, manufactured, and marketed a variety of lower priced
women's dresses, gowns, and separates (blouses, camisoles, jackets, skirts, and
pants) for special occasions and formal events. in April 1998, the Company
ceased all operating activities; it now operates solely as a holding company. in
September 1999, the Company sold 55,000 shares of Play Co. Toys & Entertainment
Corp. ("Play Co.") common stock on the open market, reducing its ownership
percentage to 43.9%. (see note 6). as a result of this sale, at September 30,
1999 the Company owned 2,434,910 shares of the common stock of Play Co. the
Company still is considered to have a controlling influence over Play Co. which
is still consolidated into the Company. (see note 3).
NOTE 3 - MINORITY INTERESTS:
The minority interest in Play Co. represents the minority shareholders'
interest (56.1%) of Play Co.'s equity at September 30, 1999. The minority
interest, as reflected in the accompanying consolidated balance sheet, consists
of Play Co.'s Series E preferred stock only. Due to operating losses of Play
Co., the minority interest in common stock has been written down to zero.
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NOTE 3 - MINORITY INTERESTS (CONTINUED):
On November 24, 1998, pursuant to a sales agreement entered into by and
between Play Co. and Breaking Waves, Inc. ("BWI"), a wholly-owned subsidiary of
Shopnet.com, Inc. ("Shopnet"), a related party, BWI purchased 1.4 million
unregistered shares of Play Co.'s common stock in a private transaction. The
President of Breaking Waves and Shopnet is also the Chairman of Play Co.'s Board
of Directors. Shopnet is a publicly traded company. The shares purchased by BWI
represented approximately 25.4% of the total common stock issued and outstanding
at the time of the transaction.
The consideration for the stock was $665,000, which represented an
approximate price of $.475 per share. This price was discounted 33% from the
then current market price reflecting a discount for the illiquidity of the
shares, which do not carry any registration rights. $300,000 of the
consideration remitted was in cash and the remaining $365,000 was provided in
BWI product, primarily girls' swimsuits. Play Co. had previously carried
swimsuits from BWI in its stores on a trial basis. Pursuant to the sales
agreement (which has a term of one year and automatically extends for one year
terms unless terminated by either of the parties), Play Co. 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.
As a result of this transaction, the Company saw its majority interest
change from 60.6% to 45.2%. The Company still is considered to have a
controlling influence over Play Co., which is still consolidated into the
Company.
In May 1999, Play Co. issued 45,333 shares of its common stock to a
consultant as compensation for site selections and negotiation of retail
location leases, thereby diluting the Company's ownership to 44.9%.
The Company's President is also the President and sole Director of European
Ventures Corp. ("EVC") which is the majority shareholder of Shopnet.
Accordingly, it is considered that the Company, through commonality of control,
still exercises a controlling influence over Play Co.'s operations.
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NOTE 4 - INVESTMENT BY MULTIMEDIA CONCEPTS INTERNATIONAL, INC.:
In January 1998, the Company issued 3,571,429 shares of its common stock to
Multimedia Concepts International, Inc. ("Multimedia"), a company of which the
Company's President is also President, Chief Executive Officer, and a Director.
The issuance of these common shares at a price of $.28 per share ($.01 above the
closing price on December 31, 1997) represented a conversion into equity of a
$1,000,000 loan owed by the Company to Multimedia. As a result of this
transaction, Multimedia ow ns 78.5% of the outstanding shares of common stock of
the Company, effectively making the Company a subsidiary of Multimedia. As the
Company owns 43.9% of the outstanding shares of common stock of Play Co.,
Multimedia and its management have obtained beneficial voting control of Play
Co.
On January 20, 1998, U.S. Stores Corp. ("U.S. Stores") acquired 1,465,000
shares of Multimedia's common stock. U.S. Stores was incorporated on November
10, 1997. The Company's President is also President and a Director of U.S.
Stores.
After this transaction, U.S. Stores held an aggregate of 1,868,000 shares
of Multimedia's common stock, or 63% of the outstanding shares, effectively
making Multimedia a subsidiary of U.S. Stores.
On February 28, 1998, American Telecom Corporation ("American Telecom")
acquired 100% of the outstanding common shares of U.S. Stores. American Telecom
was incorporated on July 18, 1997. The Company's President is also President and
a Director of American Telecom. After this transaction, American Telecom
effectively obtained beneficial voting control of the Company and its
subsidiary, Play Co.
In April 1998, American Telecom exchanged all of its outstanding common
shares with American Telecom, PLC, a publicly traded company in Great Britain.
After this transaction, American Telecom effectively became a subsidiary of
American Telecom, PLC. Additionally, as part of this transaction, American
Telecom, PLC acquired 100% of the outstanding common shares of U.S. Stores,
thereby effectively making U.S. Stores a direct subsidiary of American Telecom,
PLC and the Company and Play Co. indirect subsidiaries.
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NOTE 5 - STOCK SUBSCRIPTION RECEIVABLE:
On July 15, 1999, an entity of which a director of Play Co. is a
shareholder, exercised its right to purchase a 25% ownership interest in a
consolidated subsidiary of Play Co. This entity was the assignee of an option to
acquire 25% of the outstanding shares of the subsidiary at book value as of June
30, 1999. The book value was determined to be $2,894,711 and 25% was determined
to be $723,678. This amount was recorded on the accompanying balance sheet as
Stock Subscription Receivable. The amount was paid to Play Co. in October 1999.
NOTE 6 - YEAR 2000:
The Company does not believe that the impact of the year 2000 computer
issue will have a significant impact on its operations and financial position.
Furthermore, the Company does not believe that it will have to significantly
modify its internal computer systems. However, if internal systems do not
correctly date information when the year changes to 2000, there could be an
adverse impact on the Company's operations. Furthermore, there can no more
assurances that another entity's failure to ens ure year 2000 capability would
not have an adverse effect on the Company and its subsidiary, Play Co.
NOTE 7 - RESTATEMENT OF FINANCIAL STATEMENTS - SEPTEMBER 30, 1998
The consolidated financial statements for the three and six months ended
September 30, 1998 have been restated to reflect a restatement by Play Co. of
its dividend attributable to the beneficial conversion feature of its Series E
preferred stock. This restatement resulted in an increase of $288,330 for the
three months and $455,743 for the six months ended September 30, 1998 from its
original reported net loss.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
United Textiles & Toys Corp. (the "Company") is a Delaware corporation
which was organized in March 1991 and commenced operations in October 1991. In
April 1998, the Company ceased all operating activities and now operates solely
as a holding company for its ownership in Play Co. Toys & Entertainment Corp.
("Play Co.") Historically, the Company's results of operations have related
primarily to its majority ownership of Play Co., as its own operations were
substantially less than those of its subs idiary. Accordingly, the Company's
results of operations for the three month period ending September 30, 1999 are
primarily those of Play Co.
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 now projected.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Consolidated sales for the three months ended September 30, 1999 were
$6,867,119, as compared to $6,098,315 for the three months ended September 30,
1998. This increase of $768,804, or 12.6%, is directly attributable to increased
sales contributions from Play Co.'s new stores as same store sales declined by
24.8% for the period.
Consolidated cost of sales for the three months ended September 30, 1999
was $3,645,543, or 53.1% of sales, as compared to the three month period ended
September 30, 1998 in which cost of sales was $3,414,054, or 56% of sales. This
increase of $231,489, or 6.8%, is primarily due to costs associated with the
opening of new retail outlets.
Consolidated operating expenses (excluding depreciation and amortization
expenses) were $3,684,031, or 53.6% of sales for the three months ended
September 30, 1999, as compared to $2,620,444, or 43% of sales, for the three
months ended September 30, 1998. This increase of $1,063,587, or 40.6%, was due
to an increase in payroll and related expenses as well as an increase in rent
expense associated with the opening of new retail stores.
During the three months ended September 30, 1999, non-cash depreciation and
amortization amounted to $228,514, as compared to $193,794 in the three months
ended September 30, 1998. This increase of $34,720 is due primarily to
depreciation on new assets acquired by Play Co. in this quarter.
Consolidated interest expense was $347,693, or 5.1% of sales, in the three
months ended September 30, 1999, as compared to $184,062, or 3.0% of sales in
the three months ended September 30, 1998. The primary reason for the increased
level of interest expense was a higher level of borrowings by Play Co. in the
three month period ended September 30, 1999.
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For the three months ended September 30, 1999, the Company reported a
consolidated net loss of $827,954 (after reflecting the adjustment for the
minority interest in Play Co.), or basic earnings deficit per share of $.18, as
compared to a restated net loss of $480,118, or a basic earnings deficit per
share of $.11 (after reflecting the minority interest in Play Co.), for the
three months ended September 30, 1998. The weighted average number of common
shares used in the computation of basic earnings per share was 4,550,236 for the
three months ended September 30, 1999 and 1998.
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX MONTHS ENDED SEPTEMBER
30, 1998
Consolidated sales for the six months ended September 30, 1999 were
$13,375,684, as compared to $12,460,021 for the three months ended September 30,
1998. This increase of $915,663, or 7.34%, is directly attributable to increased
sales contributions from Play Co.'s new stores as same store sales declined by
26% for the period.
Consolidated cost of sales for the six months ended September 30, 1999 was
$7,364,115, or 55.1% of sales, as compared to the six month period ended
September 30, 1998 in which cost of sales was $7,120,385, or 57.2% of sales.
This increase of $243,730, or 3.4%, is primarily due to costs associated with
the opening of new retail outlets.
Consolidated operating expenses (excluding depreciation and amortization
expenses) were $7,464,041, or 55.8% of sales for the six months ended September
30, 1999, as compared to $5,219,903, or 41.9% of sales, for the six months ended
September 30, 1998. This increase of $2,241,138, or 43%, was due to an increase
in payroll and related expenses as well as an increase in rent expense
associated with the opening of new retail stores.
During the six months ended September 30, 1999, non-cash depreciation and
amortization amounted to $452,982, as compared to $382,211 in the six months
ended September 30, 1998. This increase of $70,771 is due primarily to
depreciation on new assets acquired by Play Co. in this period.
Consolidated interest expense was $663,087, or 5.0% of sales, in the six
months ended September 30, 1999, as compared to $349,714, or 2.8% of sales, in
the six months ended September 30, 1998. The primary reason for the increased
level of interest expense was a higher level of borrowings by Play Co. in the
six month period ended September 30, 1999.
For the six months ended September 30, 1999, the Company reported a
consolidated net loss of $1,791,318 (after reflecting the adjustment for the
minority interest in Play Co.), or basic earnings deficit per share of $.39, as
compared to a restated net loss of $868,305, or a basic earnings deficit per
share of $.19 (after reflecting the minority interest in Play Co.), for the six
months ended September 30, 1998. The weighted average number of common shares
used in the computation of basic earnings per share was 4,550,236 for the six
months ended September 30, 1999 and 1998.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company reported cash and cash equivalents of
$363,202, working capital deficit of $7,493,857, and stockholders' equity of
$(6,315,824), reflecting the net loss of $1,791,318 for the six months ended
September 30, 1999.
At March 31, 1999, the Company reported cash and cash equivalents of
$126,625, working capital deficit of $4,279,270, and stockholders' equity of
$(4,524,506).
During the six month period ending September 30, 1999, the Company provided
$445,787 in cash from its operating activities, as compared to $2,299,364 used
by operating activities in the six month period ended September 30, 1998.
The Company used $2,365,339 of cash in investing activities during the six
months ended September 30, 1999, compared to an outflow of cash of $1,096,273 in
the six months ended September 30, 1998. The primary investing activities was
the purchase of equipment and fixtures by Play Co. for its new stores.
The Company generated $2,156,129 from its financing activities in the six
month period ended September 30, 1999, as compared to providing $3,164,184 in
the six months ended September 30, 1998. The primary contributors to the
Company's financing activities were borrowings by Play Co. under a financing
agreement. These proceeds were used to finance Play Co.'s capital requirements,
capital expenditures, and operating losses during the six months ended September
30, 1999.
As a result of the above factors, the Company has a net increase in cash of
$236,577 in the six months ended September 30, 1999, compared to a net decrease
in cash of $231,453 in the six months ended September 30, 1998.
At September 30, 1999, Play Co. had a working capital deficit of $2,730,031
compared to a working capital position of $5,832,143 at March 31, 1999. The
primary factors in the $8.56 million decrease in working capital was a
reclassification of Play Co.'s credit line with FINOVA Capital Corporation
("FINOVA") from a long term liability to a short term liability. This
reclassification was due to the expiration date of the credit facility of August
3, 2000 falling within one year of the September 30 , 1999 balance sheet date.
Prior to its most recent fiscal year ended March 31, 1999, Play Co.
generated operating losses in the past several years as well as in the six-month
period ended September 30, 1999. Play Co. has historically financed those losses
and its working capital requirements through loans and sales of Play Co.'s
equity securities, primarily through the sale of Play Co.'s Series E preferred
stock. There can be no assurances that Play Co. will be able to generate
sufficient revenues or have sufficient cont rols over expenses and other charges
to achieve profitability.
During the three-month period ended September 30, 1999, Play Co. opened one
new store. This store was located in Pier 39 in San Francisco, California. Pier
39 is a tourist-oriented destination that has a history of heavy foot traffic.
The capital investment for building this store was approximately $425,000, net
of landlord contributions.
<PAGE>
In October 1999, Play Co. opened five new stores located in Concord, North
Carolina (two stores), near Houston, Texas (two stores) and in Mission Viejo,
California. These stores are located in high traffic shopping malls. These five
stores represented an aggregate capital investment of approximately $1.3
million, net of landlord contributions. Play Co. postponed the construction of
its planned new store in Schaumburg, Illinois until the spring of 2000. Play Co.
now has 32 stores located in sev en states.
Play Co. had planned to finance the above store opening costs through a
combination of capital lease financing, use of Play Co.'s working capital, and
the sale of additional equity. Play Co. has obtained approximately $431,500 in
capital lease financing this fiscal year.
In May 1999, pursuant to s 506 of regulation D, Play Co. sold 750,000
shares of series F preferred 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
Preferred Stock is convertible, at the holder's option, into two fully paid and
non-assessable shares of common stock, at any time commencing on the date the
registration statement registering the common stock underlying same is declared
effective by the securities and exchange commission. Each share of series F
preferred 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 least $5.00 for a consecutive 30-day period.
Due to the beneficial conversion feature of the Series F preferred stock,
the proceeds have initially been recorded as additional paid-in capital, which
is being authorized over an 8-month period in the form of a non-cash dividend.
Management has used an 8-month period to correspond to the estimated time
necessary to have a registrations statement declared effective by the Securities
and Exchange Commission.
In connection with the private placement of the Series F preferred stock,
Play Co. 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. Play Co. 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 Play Co.'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, an entity of which a director of Play Co. is a
shareholder, exercised its right to purchase a 25% ownership interest in a
consolidated subsidiary of Play Co. This entity was the assignee of an option to
acquire 25% of the outstanding shares of the subsidiary at book value as of June
30, 1999. The book value was determined to be $2,894,711 and 25% was determined
to be $723,678. This amount was recorded on the accompanying balance sheet as
Stock Subscription Receivable. The amo unt was paid to Play Co. in October 1999.
<PAGE>
This option arose out of the June 30, 1998 conversion, by ABC Fund, Inc.
("ABC", an affiliate of Play Co.), of a $1.5 million debenture into Series E
preferred 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 the
entity.
On July 20, 1999, Play Co. sold a 6.6% interest in this subsidiary to two
investors for $2.8 million in gross proceeds in a private transaction. The
investors were an unaffiliated investment-banking firm, Concord of Frankfurt,
Germany and CDMI, a British Virgin Islands corporation. One of Play Co.'s
directors is a shareholder of CDMI. Each party invested $1.4 million in the
transaction.
In early October 1999, Play Co. loaned $200,000 to Shopnet.com, Inc. and
$50,000 to Breaking Waves, Inc., both of which entities are affiliated with Play
Co. The loans carry interest at 9% and are due in March 2000.
On October 25, 1999, an entity of which a director of Play Co. is a
shareholder, lent Play Co. $127,922 under a Demand Promissory Note ("Demand
Note"). The Demand Note carries 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 the subsidiary.
On November 19, 1999, Play Co.'s subsidiary completed an initial public
offering (the "Offering") on the SMAX segment of the Frankfurt Stock Exchange in
Germany. The Offering was underwritten by Concord.
This subsidiary sold 2 million shares, or a 16.7% interest, in the Offering
for gross proceeds of approximately $27 million. The Offering was priced at 13
Euro per share, or approximately $13.52 per share. Play Co. retained majority
ownership of the subsidiary holding a 58.4% equity interest in same and, as a
result, will continue to consolidate the subsidiary's operations into its
financial statements.
In addition to the 2 million shares sold by the subsidiary in the Offering,
Concord and CDMI each sold 200,000 shares in the form of a greenshoe allotment.
Both Concord and CDMI invested in the subsidiary in a private placement in July
1999. The total Offering size, including the greenshoe allotment, was 2.4
million shares.
Play Co. expects to complete the accounting for the net proceeds of the
Offering during the quarterly period ending December 31, 1999.
Play Co. anticipates, based on currently proposed plans and assumptions
relating to its operations, that the proceeds of the Offering will be sufficient
to satisfy its contemplated cash requirements for at least 12 months.
<PAGE>
YEAR 2000
The Company does not believe that the year 2000 computer issue will have a
significant impact on its operations and financial position. Furthermore, the
Company does not believe that it will have to significantly modify its internal
computer systems. However, if internal systems do not correctly date information
when the year changes to 2000, there could be an adverse impact on the Company's
operations. Furthermore, there can no assurance that another entity's failure to
ensure year 2000 capabi lity would not have an adverse effect on the Company and
its subsidiary, Play Co.
TRENDS AFFECTING LIQUIDITY, CAPITAL RESOURCES AND OPERATIONS:
Play Co. believes that its same store sales showed a decline after a period
of two years of continuous increases (in the fiscal years ended March 31, 1998
and March 31, 1999) because in the six-month period ended September 30, 1999,
the flow of allocated "hot" selling merchandise was spread over 25% more stores.
This shortfall in allocated or "hot" selling inventory is a result of the
current credit lines that Play Co. has with some of its vendors. Play Co. 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. As
noted above, Play Co. has recently significantly strengthened its balance sheet
by raising approximately $30 million in additional equity, which should result
in expanded lines of credit with its trade vendors.
Play Co. 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. Play Co. is working diligently to address
this issue.
Play Co.'s future financial performance will depend upon continued demand
for toys and its ability to choose locations for new stores and purchase
products 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. Play Co. competes with a variety of mass merchandisers,
superstores, and other toy retailers, including Toys R Us and Kay Bee Toy
Stores. Competitors that emphasize specialty and educational toys include Disney
Stores, Warner Bros. Stores, Learning Smith, Lake Shore, Zainy Brainy, and
Noodle Kidoodle. Play Co. also competes both through its electronic commerce
operations and through its stores against Internet oriented toy retailers such
as eToys, Inc. There can be no assurance that Play Co.'s business strategy will
enable it to compete effectively in the toy industry.
<PAGE>
INFLATION AND SEASONALITY:
The impact of inflation on Play Co.'s results of operations has not been
significant. Play Co. attempts to pass on increased costs by increasing product
prices over time. Play Co.'s operations are highly seasonal with approximately
30-40% of its net sales historically falling within Play Co.'s third quarter,
which coincides with the Christmas selling season. Play Co. intends to open
stores throughout the year, but generally before the Christmas selling season,
which will make Play Co.'s third q uarter sales an even greater percentage of
the total year's sales.
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS:
The Company is not a party to any material litigation and is not aware of
any threatened litigation that would have a material adverse effect on its
business. Neither the Company's officers, directors, affiliates, nor owners of
record or beneficially of more than five percent of any class of the Company's
Common Stock is a party to any material proceeding adverse to the Company or has
a material interest in any such proceeding adverse to the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS: None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES: None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None
ITEM 5. OTHER INFORMATION: None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this Form 10-QSB for the quarter
ended September 30, 1999:
27.1 Financial Data Schedule
During the quarter ended September 30, 1999, no reports on Form 8-K were
filed with the Securities and Exchange Commission.
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED, ON THIS 9TH day of December 1999.
UNITED TEXTILES & TOYS CORP.
BY: /S/ ILAN ARBEL
Ilan Arbel
President
BY: /S/ ALLEAN GOODE
Allean Goode
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
ARTICLE 5 OF REGULATION S-X
This schedule contains summary financial information extracted from Balance
Sheet, Statement of Operations, Statement of Cash Flows and Notes thereto
incorporated in Part 1, Item 1, of this Form 10-QSB and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> mar-31-2000
<PERIOD-END> sep-30-1999
<CASH> 363,202
<SECURITIES> 0
<RECEIVABLES> 172,442
<ALLOWANCES> 0
<INVENTORY> 15,127,625
<CURRENT-ASSETS> 18,739,665
<PP&E> 11,795,507
<DEPRECIATION> (4,549,717)
<TOTAL-ASSETS> 29,488,192
<CURRENT-LIABILITIES> 26,233,522
<BONDS> 0
0
0
<COMMON> 4,550
<OTHER-SE> (6,338,379)
<TOTAL-LIABILITY-AND-EQUITY> 29,448,192
<SALES> 13,375,684
<TOTAL-REVENUES> 13,375,684
<CGS> 8,364,115
<TOTAL-COSTS> 7,364,115
<OTHER-EXPENSES> 7,917,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 663,087
<INCOME-PRETAX> (1,791,318)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,791,318)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,791,318)
<EPS-BASIC> (.39)
<EPS-DILUTED> (.39)
</TABLE>
