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 December 31, 1998
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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<S> <C>
Delaware 13-3626613
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
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1410 Broadway, Suite 1602, 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 February 19, 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 December 31, 1998 (unaudited) 3
and March 31, 1998.
Consolidated Statements of Operations (unaudited) for the Three
Months and Nine Months Ended December 31, 1998 and 1997. 4
Consolidated Statements of Cash Flows (unaudited) for the Nine
Months Ended December 31, 1998 and 1997. 5
Notes to Consolidated Financial Statements (unaudited) 6-9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-15
PART II. OTHER INFORMATION 16
Item 1. LEGAL PROCEEDINGS
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
Item 3. DEFAULTS UPON SENIOR SECURITIES 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
Item 5. OTHER INFORMATION 16
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 16
Signatures 17
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UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and March 31, 1998
<TABLE>
<CAPTION>
Dec. 31, March 31,
1998 1998
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
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Cash and cash equivalents ........................................................ $ 1,219,624 $ 659,378
Accounts receivables-net ......................................................... 130,976 136,413
Inventories ...................................................................... 10,824,770 7,872,804
Prepaid expenses and other current assets ........................................ 1,742,357 189,516
Loans and advances-officer ....................................................... (37,061) 138,856
Total current assets ..................................................... 13,880,666 8,996,967
PROPERTY AND EQUIPMENT-NET ......................................................... 4,343,203 2,782,386
OTHER ASSETS
Deposits and other assets ........................................................ 2,392,247 2,580,409
Total other assets ....................................................... 2,392,247 2,580,409
Total assets ............................................................. $ 20,616,116 $ 14,359,762
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................. $ 11,938,359 $ 6,882,665
Accrued expenses and other current liabilities ................................... 822,417 817,788
Due to affiliates ................................................................ 806,158 719,174
Current portion of notes payable ................................................. 405,965 350,000
Total current liabilities ................................................ 13,972,899 8,769,627
LONG-TERM LIABILITIES:
Borrowings under financing agreement ............................................. 7,754,215 5,445,198
Note payable, net of current portion ............................................. 620,030 1,500,000
Deferred rent liability .......................................................... 124,005 110,351
Total long-term liabilities .............................................. 8,498,250 7,055,549
Total liabilities ........................................................ 22,471,149 15,825,176
MINORITY INTEREST IN SUBSIDIARY .................................................... 1,037,072 1,158,514
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) ...................................................... (11,038,936) (10,770,759)
Total stockholders' equity ............................................... (2,892,105) (2,623,928)
Total liabilities and stockholders' equity ............................... $ 20,616,116 $ 14,359,762
============ ============
</TABLE>
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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<CAPTION>
For the Three Months Ended For the Nine Months Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES, net sales ........................ $ 14,717,729 $ 10,473,363 $ 27,177,972 $ 18,189,858
COSTS AND EXPENSES:
Cost of sales ............................ 8,545,336 6,596,501 15,665,721 11,422,925
Operating expenses ....................... 4,425,177 2,948,174 10,075,293 7,501,813
Interest and other income ................ -- -- (47,781) --
Interest expense ......................... 294,892 254,586 644,606 685,205
Amortization of debt issuance costs ...... -- -- --
Effect on non-cash dividends paid by
subsidiary ............................ 477,973 -- 1,229,752 --
13,743,378 9,799,261 27,567,591 19,609,943
INCOME (LOSS) BEFORE MINORITY INTERESTS
974,351 674,102 (389,619) (1,420,085)
Minority interest in net income (loss) of
consolidated subsidiary (Note 3) ...... 465,344 343,851 (121,442) (338,878)
NET INCOME (LOSS) .......................... $ 509,007 $ 330,251 $ (268,177) $ (1,081,207)
============ ============ ============ ============
Basic earnings and diluted income (loss) per
common share before minority interest $ .214 $ .069 $ (.086) $ (.14)
Minority interest in net income (loss) of
consolidated subsidiary ................. .102 .035 (.027) (.03)
Basic and diluted earnings (loss) per common
share ................................... $ .112 $ .034 $ (.059) $ (.11)
============ ============ ============ ============
Weighted average number of common shares
outstanding ............................. 4,550,236 9,788,050 4,550,236 9,788,050
============ ============ ============ ============
</TABLE>
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
<TABLE>
<CAPTION>
Nine Months Ended
Dec. 31, Dec. 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income (loss) ................................................................. $ (268,177) $(1,081,207)
Adjustments to reconcile net loss to cash (used) provided for operating activities:
Depreciation and amortization .................................................. 707,186 441,172
Deferred rent .................................................................. 13,654 29,073
Minority interest in net loss of subsidiary .................................... (121,442) (338,878)
Compensation options and stock issued by subsidiary ............................ -- --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ........................................ 5,437 (185,894)
(Increase) in merchandise inventories ............................................. (2,951,966) (279,083)
(Increase) decrease in prepaid expenses and other current assets .................. (1,552,841) 83,889
Decrease in deposits and other assets ............................................. 188,162 146,135
Increase (decrease) in accounts payable ........................................... 5,055,694 3,252,621
Increase (decrease) in accrued expenses and other liabilities ..................... 4,629 428,153
Total adjustments ....................................................... 1,348,513 3,577,188
Net cash provided (used) by operating activities ........................ 1,080,336 2,495,981
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................ (2,268,003) (853,072)
Advances from affiliates ....................................................... 86,984 894,935
Net cash from (used for) investing activities ........................... (2,181,019) 41,863
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit ............................................ 2,309,017 307,432
Loans and repayment - officer .................................................. 175,917 (47,198)
Repayment of notes payable ..................................................... (824,005) (116,666)
Net cash provided by (used for) investing activities .................... 1,660,929 143,568
NET INCREASE (DECREASE) IN CASH ................................................... 560,246 2,681,412
Cash, beginning of period ......................................................... 659,378 144,668
Cash, end of period ............................................................... 1,219,624 2,826,080
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid ..................................................................... $ 644,606 $ 685,205
Taxes paid ........................................................................ $ -- $ --
</TABLE>
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
December 31, 1998
(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
presentation of the Company's financial position and the results
of its operations for the nine months ended December 31, 1998 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, 1998, 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. The Company owns 2,489,910
shares or 45.2% of the common stock of Play Co. Toys &
Entertainment Corp. ("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 (54.8%) of Play Co.'s equity at December
31, 1998. 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.
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 Hollywood Productions, Inc.
("Hollywood"), a related party, BWI purchased 1.4 million
unregistered shares of Play Co.'s common stock in a private
transaction. The President of Hollywood is also the Chairman of
Play Co.'s Board of Directors. Hollywood is a publicly traded
company. The shares purchased by
NOTE 3 - MINORITY INTERESTS (continued):
BWI represent approximately 25.4% of the total common stock
issued and outstanding after the transaction.
6
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UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
The consideration for the stock was $505,000, which
represented an approximate price of $.36 per share. This price
was discounted 50% from the then current market price reflecting
a discount for the illiquidity of the shares, which do not carry
any registration rights. $301,973.50 of the consideration
remitted was in cash and the remaining $203,026.50 was provided
in BWI product, primarily girls' swimsuits. Play Co. had
previously carried swimsuits from BWI in its stores on a trial
basis.
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.
The Company's President is President and sole Director of
European Ventures Corp. ("EVC") which is the majority shareholder
of Hollywood. Accordingly, it is considered that the Company,
through commonality of control, still exercises a controlling
influence over Play Co.'s operations.
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 owns
78.5% of the outstanding shares of common stock of the Company,
effectively making the Company a subsidiary of Multimedia. As the
Company owns 45.2% of the outstanding shares of common stock of
Play Co., Multimedia and its management have obtained beneficial
vesting control of Play Co.
On January 20, 1998, U.S. Stores Corp. ("U.S. Stores")
acquired 1,465,000 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.
7
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UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
NOTE 5 - FINANCING AGREEMENTS:
In November 1998, Play Co. borrowed $250,000 from Amir
Overseas Capital Corporation under a Promissory Note. The Note
bore interest at 12% and was repaid in January 1999.
Also in November 1998, Play Co. entered into agreements with
ZD Group, L.L.C. ("ZD"), a related party, and Frampton
Industries, Ltd. ("Frampton"), an unaffiliated British Virgin
Islands company, to secure additional financing. ZD is a New York
limited liability company, the beneficiary of which is a member
of the family of Play Co.'s Chairman.
Pursuant to the ZD agreement, ZD issued a $700,000
irrevocable standby letter of credit ("L/C") in favor of FINOVA
Capital Corp. ("FINOVA"), Play Co.'s working capital lender.
FINOVA then lent a matching $700,000 to Play Co. in the form of a
term loan, pursuant to a Third Amendment to Loan and Security
Agreement executed on February 11, 1999 by and between Play Co.
and FINOVA. The term loan from FINOVA 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 profit percentage
after application of corporate overhead from three of Play Co.'s
stores.
Under the Frampton agreement, Frampton will loan $500,000 in
the form of a convertible, subordinated debenture due December
31, 1999. The debenture will bear a 5% interest rate and will be
convertible into Play Co.'s Series E preferred stock at a price
of $.10 per share at Frampton's option. This price represents a
50% discount from the then current (November 13, 1998) market
price reflecting a discount for the illiquidity of the shares,
which do not carry any registration rights. Play Co. expects to
receive the proceeds of this loan in the near future.
NOTE 6 - SUBSEQUENT EVENTS:
In January 1999, Play Co. and Frampton executed a letter
agreement pursuant to which Frampton has agreed to act as the
exclusive placement agent and financial advisor for Play Co. in
connection with a contemplated proposed offering of convertible
debentures. The agreement is for a term of six months (with a
potential two month extension at Frampton's option) and provides
that Frampton shall be provided an investment banking fee of 8%
of the face amount of each debenture funded.
8
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UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
NOTE 6 - SUBSEQUENT EVENTS (continued):
In February 1999, Play Co. borrowed $100,000 from BWI and
issued an unsecured 9% promissory note which calls for repayment
of the note in four equal monthly installments, comprising
principal and interest, commencing March 15, 1999 and ending June
15, 1999.
Results of Operations
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. Historically, the Company's results of operations have
related primarily to the Company's majority ownership of Play Co., as its
operations were substantially less than those of its subsidiary. Accordingly,
the Company's results of operations for the three and nine month periods ending
December 31, 1998 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.
For the three months ended December 31, 1998 compared to the three months ended
December 31, 1997:
Consolidated sales for the three months ended December 31, 1998 were
$14,717,729, as compared to $10,473,363 for the three months ended December 31,
1997. This increase of $4,244,366, or 40.5%, is directly attributable to
increased sales contributions from Play Co.'s same store retail sales as well as
approximately $3.4 million coming from sales at Play Co.'s new retail stores.
Consolidated cost of sales for the three months ended December 31, 1998 was
$8,545,336, or 58% of sales, as compared to the three month period ended
December 31, 1997 in which cost of sales was $6,596,501, or 63% of sales. This
increase of $1,948,835, or 29.5%, is primarily due to costs associated with the
opening of new retail outlets.
Consolidated operating expenses were $4,425,177, or 30% of sales, as
compared to $2,948,174, or 28% of sales, for the three months ended December 31,
1997. This increase of $1,477,003, or 50%, 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 December 31, 1998, non-cash depreciation and
amortization amounted to $324,975, as compared to $162,482 in the three months
ended December 31,1997. This increase of $162,493 is due primarily to
depreciation on new assets acquired by Play Co. in this quarter.
Consolidated interest expense was $294,892, or 2.0% of sales, in the three
months ended December 31, 1998, as compared to $254,586, or 2.4% of sales, in
the three months ended December 31, 1997. 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 December 31, 1998.
9
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UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
For the three months ended December 31, 1998, the Company reported a
consolidated net income of $509,007 (after reflecting the adjustment for the
minority interest in Play Co.), or basic earnings per share of $.112, as
compared to a net income of $330,251, or a basic earnings per share of $.034
(after reflecting the minority interest in Play Co.), for the three months ended
December 31, 1997. 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
December 31, 1998 and 9,788,050 for the three months ended December 31, 1997.
For the nine months ended December 31, 1998 compared to the nine months ended
December 31, 1997:
Consolidated sales were $27,177,972 for the nine months ended December 31,
1998, as compared to $18,189,858 for the nine months ended December 31, 1997.
This increase of $8,988,114, or 49.4%, was due to increased sales contributions
from Play Co.'s same store sales as well as approximately $2.4 million from Play
Co.'s new retail stores.
Consolidated cost of sales were $15,665,721, or 57.6% of sales, for the
nine months ended December 31, 1998, as compared to $11,422,925, or 62.8% of
sales, for the nine months ended December 31, 1997. This increase of $4,242,796,
or 37.1%, was due to increased costs associated with new store openings.
Consolidated operating expenses were $10,075,293, or 37.1% of sales, for
the nine months ended December 31, 1998, as compared to $7,501,813, or 41.2% of
sales, for the nine months ended December 31, 1997. This increase of $2,573,480,
or 34.3%, was due primarily to increases in payroll and related expenses as well
as an increase in rent expense associated with new store openings.
For the nine months ended December 31, 1998, non-cash depreciation and
amortization amounted to $707,186, as compared to $441,172 for the nine months
ended December 31, 1997. The increase of $266,014 was due to depreciation on new
assets acquired by Play Co. in the nine months ended December 31, 1998.
Consolidated interest expense was $644,606, or 2.4% of sales, for the nine
months ended December 31, 1998, as compared to $685,205, or 3.8% of sales, for
the nine months ended December 31, 1997. This decrease of $40,599, or 5.9%, was
due to a higher level of amortization of debt issuance costs by Play Co. in the
nine month period ended December 31, 1997 than in the December 1998 period.
For the nine months ended December 31, 1998, the Company reported a
consolidated net loss of $268,177 (after reflecting the adjustment for the
minority interest in Play Co.), or basic loss per share of $.059, as compared to
a net loss of $1,081,207, or basic loss per share of $.11, (after reflecting the
minority interest in Play Co.) for the nine months ended December 31, 1997. The
weighted average number of common shares used in the computation of basic
earnings (loss) per share was 4,550,236 for the nine months ended December 31,
1998 and 9,788,050 for the nine months ended December 31, 1997.
Liquidity and Capital Resources
At December 31, 1998, the Company reported cash and cash equivalents of
$1,219,624, working capital of $(92,233), and stockholders' equity of
$(2,892,105), reflecting the net loss of $268,177 for the nine months ended
December 31, 1998.
At March 31, 1998, the Company reported cash and cash equivalents of
$659,378, working capital of $227,340, and stockholders' equity of $(2,623,928).
10
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UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
During the nine month period ending December 31, 1998, the Company provided
$1,080,336 in cash from its operating activities, as compared to $2,495,981
provided by operating activities in the nine month period ended December 31,
1997. The consolidated net loss was $268,177 and $1,081,207, respectively, in
those periods. The primary reason the cash provided by operating activities was
so much larger in the nine month period ended December 31, 1998 was a growth in
net investment in inventories (increase in merchandise inventories less increase
in accounts payable) of $2,103,728.
The Company used $2,181,019 of cash in investing activities during the nine
months ended December 31, 1998, compared to an inflow of cash of $41,863 in the
nine months ended December 31, 1997. The primary investing activities was the
purchase of equipment and fixtures by Play Co. for its new stores.
The Company generated $1,660,929 from its financing activities in the nine
month period ended December 31, 1998, as compared to the generation of $143,568
in the nine months ended December 31, 1997. The primary contributors to the
Company's financing activities were borrowings on Play Co.'s line of credit and
under notes payable. These proceeds were used to finance Play Co.'s capital
requirements, capital expenditures, and operating losses during the nine months
ended December 31, 1998.
As a result of the above factors, the Company has a net increase in
cash of $560,246 in the nine months ended December 31,1998, compared to a net
increase in cash of $2,681,412 in the nine months ended December 31, 1997.
During the three-month period ended December 31, 1998, Play Co. opened four
new stores. Those stores were all located in high traffic shopping malls. The
stores were located in Thousand Oaks and Orange (both located in California),
Auburn Hills, Michigan, and in Gurnee, Illinois. These four stores represented
an aggregate capital investment of approximately $1.1 million, net of landlord
tenant improvement ("Landlord TI") contributions.
The Landlord TI contributions related to those four stores equal $587,440.
Play Co. has not yet received those contributions. Play Co. expects to receive
those contributions before the end of its fiscal year.
Play Co. had planned to finance the costs of opening those new stores
through a combination of capital lease financing, use of Play Co.'s working
capital and the sale of additional equity. Play Co. received approximately
$420,000 in lease financing on December 30, 1998 and recently received another
$150,000 in commitments for lease financing. Play Co. continues to seek
additional capital lease financing.
On November 24, 1998, BWI, a subsidiary of Hollywood, a related party,
purchased 1.4 million unregistered shares of Play Co.'s common stock in a
private transaction. The President of Hollywood is also the Chairman of the
Board of Play Co. Hollywood is a publicly traded company. The shares purchased
by BWI represent approximately 25.4% of the total common stock issued and
outstanding after the transaction.
The consideration for the stock was $505,000, which represented a price of
$.36 per share. This price was a 50% discount from the then current market price
reflecting a discount for the illiquidity of the shares, which do not carry any
registration rights. $301,973.50 of the consideration was in cash and the
remaining $203,026.50 was in product from BWI, primarily girl's swimsuits. Play
Co. had previously carried swimsuits from BWI in its stores on a trial basis.
In November 1998, Play Co. entered into agreements with ZD, a related
party, and Frampton, respectively , to secure additional financing. ZD is a New
York trust, the beneficiary of which is a member of the family of Play Co.'s
Chairman of the Board.
11
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
Pursuant to the ZD agreement, ZD issued a $700,000 irrevocable standby L/C
in favor of FINOVA, Play Co.'s working capital lender. FINOVA then lent a
matching $700,000 to Play Co. in the form of a term loan. The term loan expires
on August 3, 2000 and bears interest at prime plus one percent. As its
consideration of issuing the L/C, ZD will receive a profit percentage after
application of corporate overhead from Play Co.'s stores.
Under the Frampton agreement, Frampton will loan $500,000 in the form of a
convertible, subordinated debenture due December 31, 1999. The debenture will
bear a 5% interest rate and will be convertible into Play Co.'s Series E
preferred stock at a price of $.10 per share at Frampton's option. This price
was discounted 50% from the then current (November 13, 1998) market price
reflecting a discount for the illiquidity of the shares, which do not carry any
registration rights.
Play Co. has entered into leases to open eight new stores in calendar year
1999. Play Co. anticipates that the cost of opening those new stores will be
approximately $3,000,000, net of Landlord TI contributions. Play Co. plans to
finance the costs of opening those new stores through a combination of capital
lease financing, use of Play Co.'s working capital, and the sale of additional
equity. In January 1999, Play Co. and Frampton executed a letter agreement
pursuant to which Frampton has agreed to act as the exclusive placement agent
and financial advisor for Play Co. in connection with a proposed offering of $5
million in convertible subordinated debentures on terms similar to the debenture
discussed above. The agreement is for a term of six months (with a potential two
month extension at Frampton's option) and provides that Frampton shall be
provided an investment banking fee of 8% of the face amount of each debenture
funded. There can be no assurance that Play Co. will be able to obtain
sufficient financing to successfully open the planned new stores.
Year 2000
In 1998, Play Co. developed a plan to upgrade its existing management
information system ("MIS") and computer hardware and to become year 2000
compliant. Play Co. has now purchased the necessary hardware and software and is
in the process of installing the software. Play Co. has completed the hardware
upgrade and has installed a year 2000 compliant upgrade to its accounting
software. Play Co. expects to finish the year 2000 compliance work in the first
half of 1999.
To finance the cost of new hardware in the computer upgrade project, Play
Co. entered into a lease in the amount of $82,472 bearing interest at a rate of
10.8%. The total cost of the hardware and software purchased for the project was
approximately $100,000.
Beyond the above noted internal year 2000 system issue, Play Co. has no
current knowledge of any outside third party year 2000 issues that would result
in a material negative impact on its operations. Management has reviewed its
significant vendors' (i.e., Mattel, Inc. and Hasbro, Inc.) and financing arm's
(FINOVA) recent SEC filings vis-a-vis year 2000 risks and uncertainties and, on
the basis thereof, is confident that the steps Play Co. has taken to become year
2000 compliant are sufficient. In continuation of this review, Play Co. shall
continue to monitor or otherwise obtain confirmation from the aforesaid entities
- - and such other entities as management deems appropriate - as to their
respective degrees of preparedness. To date, nothing has come to the attention
of Play Co. that would lead it to believe that its significant customers,
vendors, and/or service providers will not be year 2000 ready.
12
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
Year 2000 readiness is a priority of Play Co. Play Co. 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 Play Co.'s results of operations if Play Co. or its
customers, vendors, or service providers are not fully compliant cannot be
estimated with any degree of certainty. Nonetheless, the most likely impact on
Play Co. would be a reduced level of activity in the fourth quarter of the
fiscal year ended March 31, 2000, a time at which, as a result of the
seasonality of Play Co.'s business, its activities in sales and sourcing of
products, are at their low.
Trends Affecting Liquidity, Capital Resources and Operations
As a result of its current merchandise mix emphasizes specialty and
educational toys, Play Co. enjoyed significant sales and gross profits in the
nine months ended December 31, 1998. The mix of specialty and educational toys
includes collectible die cast cars, specialty yo-yo's, Rokenbok and Learning
Curve toys, and Beanie Babies(R)and other plush and many educational toys. There
can be no assurance that these particular specialty toys will continue to
contribute strongly to Play Co.'s sales and gross profits. The history of the
toy industry, however, indicates that there is generally at least one or more
highly popular toy every year.
Play Co.'s sales efforts are focused primarily on a defined geographic
segment consisting of the Southern California area and the Southwestern and
Midwestern United States. Play Co.'s future financial performance will depend
upon (i) continued demand for high-end specialty, educational, and traditional
toys and management's ability to adapt to continuously changing consumer
preferences and the market for such items, (ii) general economic conditions
within Play Co.'s geographic market area, as same may be expanded, (iii) Play
Co.'s ability to chose locations for new stores, (iv) Play Co.'s ability to
purchase products at favorable prices and on favorable terms, and (v) the
effects of increased competition.
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, Kay Bee Toy Stores,
Wal-Mart, and K Mart. Competitors that emphasize specialty and educational toys
include Disney Stores, Warner Brothers Stores, Learning Smith, Lake Shore, Zany
Brainy, and Noodle Kidoodle. There can be no assurance that Play Co.'s business
strategy will enable it to compete effectively in the retail toy industry or
that Play Co. will be able to generate sufficient revenues or have sufficient
control over expenses and other charges to increase profitability.
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 quarter sales an even greater percentage of the
total year's sales.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders:
On November 10, 1998, the Company held an annual meeting of its
stockholders, at which the Company's stockholders voted to elect four Directors
to the Company's Board of Directors. The results of the election were disclosed
in the Company's Form 10-QSB for the quarter ended September 30, 1998.
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 December 31, 1998 except those designated by an asterisk (*) which shall
be filed by amendment hereto:
27.01 Financial Data Schedule
(b) During the quarter ended December 31, 1998, no reports on Form 8-K were
filed with the Securities and Exchange Commission.
14
<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 2nd day of March 1999.
UNITED TEXTILES & TOYS CORP.
By: /s/ Ilan Arbel
Ilan Arbel
President
By: /s/ Allean Goode
Allean Goode
Treasurer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.01
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> 9-mos
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> dec-31-1998
<CASH> 1,219,624
<SECURITIES> 0
<RECEIVABLES> 130,976
<ALLOWANCES> 0
<INVENTORY> 10,824,770
<CURRENT-ASSETS> 13,880,666
<PP&E> 8,502,768
<DEPRECIATION> (4,159,565)
<TOTAL-ASSETS> 20,616,116
<CURRENT-LIABILITIES> 13,972,899
<BONDS> 0
0
0
<COMMON> 4,550
<OTHER-SE> (2,896,655)
<TOTAL-LIABILITY-AND-EQUITY> 20,616,116
<SALES> 27,177,972
<TOTAL-REVENUES> 27,225,753
<CGS> 15,665,721
<TOTAL-COSTS> 15,665,721
<OTHER-EXPENSES> 11,305,045
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 644,606
<INCOME-PRETAX> (268,177)
<INCOME-TAX> 0
<INCOME-CONTINUING> (268,177)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (268,177)
<EPS-PRIMARY> (0.059)
<EPS-DILUTED> (0.059)
</TABLE>
