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 June 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: 4,550,235 shares outstanding as of August 18, 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 June 30, 1999 (unaudited) 3
and March 31, 1999.
Consolidated Statement of Operations (unaudited) for the Three
Months Ended June 30, 1999 and 1998. 4
Consolidated Statement of Cash Flows (unaudited) for the Three
Months Ended June 30, 1999 and 1998. 5
Notes to Consolidated Financial Statements (unaudited) 6-11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
12-17
PART II. OTHER INFORMATION
18
Item 1. LEGAL PROCEEDINGS
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
Item 3. DEFAULTS UPON SENIOR SECURITIES 18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
Item 5. OTHER INFORMATION 18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 18
Signatures 19
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UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
CONSOLIDATED BALANCE SHEETS
As of June 30, 1999 and March 31, 1999
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<CAPTION>
June 30, March 31,
1999 1999
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
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Cash and cash equivalents ........................................................ $ 392,968 $ 126,625
Accounts receivables-net ......................................................... 152,078 118,518
Inventories ...................................................................... 12,247,019 11,506,284
Prepaid expenses and other current assets ........................................ 1,393,311 1,315,851
Loans and advances-officer ....................................................... (52,469) (37,061)
Total current assets ..................................................... 14,132,907 13,030,217
PROPERTY AND EQUIPMENT-NET ......................................................... 5,583,035 5,348,175
OTHER ASSETS
Deposits and other assets ........................................................ 2,930,058 2,768,647
Total other assets ....................................................... 2,930,058 2,768,647
Total assets ............................................................. $ 22,646,000 $ 21,147,039
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................. $ 18,060,045 $ 14,498,578
Accrued expenses and other current liabilities ................................... 368,084 626,815
Due to affiliates ................................................................ 844,258 831,897
Current portion of notes payable and capital lease obligation .................... 1,260,530 1,352,197
Total current liabilities ................................................ 20,532,917 17,309,487
LONG-TERM LIABILITIES:
Borrowings under financing agreement ............................................. 8,263,713 7,814,666
Note payable and capital leases, net of current portion .......................... 524,396 585,681
Deferred rent liability .......................................................... 129,533 126,769
Total long-term liabilities .............................................. 8,917,642 8,527,116
Total liabilities ........................................................ 29,450,559 25,836,603
MINORITY INTEREST IN SUBSIDIARY .................................................... (1,316,689) (165,058)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000,000 shares authorized, 4,550,234
shares issued and outstanding ................................................. 4,550 4,550
Additional paid-in capital ....................................................... 8,142,281 8,142,281
Retained earnings (deficit) ...................................................... (13,634,701) (12,671,337)
Total stockholders' equity ............................................... (5,487,870) (4,524,506)
Total liabilities and stockholders' equity ............................... $ 22,646,000 $ 21,147,039
============ ============
</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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For the Three Months Ended
June 30, June 30,
1999 1998
Restated
(Note 8)
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Net sales ...................................................... $ 6,508,565 $ 6,358,709
Cost of sales .................................................. 3,763,214 3,706,331
Gross profit ................................................... 2,745,351 2,652,378
Operating expenses:
Operating expenses ............................................. 3,780,011 2,596,461
Depreciation and amortization ................................ 224,468 188,417
Total operating expenses ........................ 4,004,479 2,784,878
Operating income (loss) ........................................ (1,259,128) (132,500)
Interest expense:
Interest and finance charges ................................. 284,664 138,452
Amortization of debt issuance costs .......................... 30,730 27,200
Total interest expense .......................... 315,394 165,652
(LOSS) BEFORE MINORITY INTERESTS ............................... (1,574,522) (298,152)
Effect of non-cash dividends on convertible preferred stock .... (540,473) (273,806)
(2,114,995) (571,958)
Minority interest in net income (loss) of consolidated
Subsidiary (Note 12) ......................................... 1,151,631 183,772
Net income (loss) .............................................. $ (963,364) $ (388,186)
========== ==========
(Loss) per basic and diluted common share and share equivalents:
Net loss before minority ..................................... $ (.47) $ (.13)
Minority interest in net loss ................................ .26 .04
Net income (loss) ............................................. $ (.21) $ (.09)
========== ==========
Weighted average number of common shares outstanding ........... 4,550,234 4,550,234
========== ==========
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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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Three Months Ended
June 30, June 30,
1999 1998
Restated
(Note 8)
CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income (loss) ................................................................. $ (963,364) $ (388,186)
Adjustments to reconcile net loss to cash (used) provided for operating activities:
Depreciation and amortization .................................................. 224,468 188,417
Deferred rent .................................................................. 2,764 4,552
Minority interest in net loss of subsidiary .................................... (1,151,631) (183,772)
Compensation options and stock issued by subsidiary ............................ -- 10,938
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ........................................ (33,560) 64,195
(Increase) in merchandise inventories ............................................. (740,735) (1,503,323)
(Increase) decrease in prepaid expenses and other current assets .................. (77,460) 22,772
Decrease in deposits and other assets ............................................. (161,411) 163,323
Increase (decrease) in accounts payable ........................................... 3,586,189 2,649,618
Increase (decrease) in accrued expenses and other liabilities ..................... (258,731) (554,329)
Total adjustments ....................................................... 1,389,893 862,391
Net cash provided (used) by operating activities ........................ 426,529 474,205
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................ (196,653) (461,745)
Advances from affiliates ....................................................... (12,361) (43,239)
Net cash from (used for) investing activities ........................... (209,014) (504,984)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit ............................................ 449,047 1,076,497
Loans and repayment - officer .................................................. 15,408 299,200
Repayment of notes payable ..................................................... (415,627) (1,516,166)
Net cash provided by (used for) investing activities .................... 48,828 (140,469)
NET INCREASE (DECREASE) IN CASH ................................................... 266,343 (171,248)
Cash, beginning of period ......................................................... 126,625 659,378
Cash, end of period ............................................................... $ 392,968 $ 488,130
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid ..................................................................... $ 315,394 $ 165,652
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
June 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 presentation of the Company's
financial position and the results of its operations for the
three months ended June 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. The Company owns 2,489,910
shares or 44.9% 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 (55.1%) of Play Co.'s equity at June 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.
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
<PAGE>
NOTE 3 - MINORITY INTERESTS (continued):
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 represent 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. This issuance diluted 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 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 44.9% 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.
<PAGE>
NOTE 5 - FINANCING AGREEMENTS:
On February 7, 1996, Play Co. borrowed, under an agreement
with Congress Financing Corporation (Western) (the "Congress
Financing"), approximately $2,243,000, the proceeds of which were
used to repay the then outstanding borrowings under a bank line
of credit agreement. The Congress Financing provided for maximum
borrowings up to $7,000,000 based upon a percentage of the cost
value of eligible inventory, as defined. Outstanding borrowings
bore interest at 1.5% above the prime rate, as defined.
In connection with the Congress Financing, and the previous
bank line of credit agreement, European American Capital Corp.
("EACC"), an affiliate, provided a $2,000,000 letter of credit
for collateral. As compensation to EACC, Play Co. granted EACC
options to acquire shares of Common Stock and Preferred Stock,
the aggregate value of which was $458,000. The aggregate $458,000
was initially included in other assets, as debt issuance costs,
and additional paid-in capital. The option values were amortized
into interest expense through the February 1, 1998 maturity of
the Congress Financing, resulting in aggregate interest charges
of $196,849 for the year ended March 31, 1998.
In March 1997, the Congress Financing was amended to provide
for, among other things, increased borrowing ratios and an
additional $1,000,000 letter of credit for collateral from EACC.
Thereafter, the Congress Financing was collateralized by an
aggregate $3,000,000 in letters of credit through its maturity on
February 1, 1998.
On February 3, 1998, Play Co. borrowed $4,886,324 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 through June 30, 1999,
provided 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.
See Note 6 for further amendments.
<PAGE>
NOTE 6 - SUBSEQUENT EVENTS:
On July 15, 1999, Tudor Technologies, Inc. ("Tudor"), the
assignee of an option to acquire 25% of the outstanding shares of
Play Co.'s subsidiary, Toys International.COM, Inc. ("Toys") at
Toys' book value, elected to exercise its right to purchase the
Toys common stock and requested that the exercise price be
amended to reflect the book value of Toys at the most recent
fiscal quarter, June 30, 1999. Play Co. agreed to Tudor's
request. As the book value of Toys as of June 30, 1999 is not yet
determined, Play Co. has not yet provided Tudor with the basis
for the option exercise and, as a result, Tudor has not yet
provided Play Co. with the appropriate consideration. Play Co.
anticipates that it will provide Tudor the June 30, 1999 book
value determination later in August 1999.
This option arose out of the June 30, 1998 conversion, by
ABC Fund, Inc. ("ABC," an affiliate of Play Co. and the Company),
of a $1.5 million debenture into Series E Preferred Stock
("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, Play Co. sold a 6.6% interest in its Toys
subsidiary to two investors for $2.8 million in gross proceeds in
a private transaction. The investors were an unaffiliated
investment banking firm and CDMI Capital Corporation ("CDMI"), a
British Virgin Islands corporation. Mr. Mika is a shareholder of
CDMI. Each party invested $1.4 million in the transaction.
On August 4, 1999, Play Co. entered into Amendment Number 6
to its Financing Agreement with FINOVA Capital Corporation
("FINOVA"). As a result of this amendment, Play Co.'s aggregate
credit facility with FINOVA increased from $8.3 million 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 Play Co. and by 60% of any annual profits
generated by Play Co.; (2) allows Play Co. 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.
<PAGE>
NOTE 7 - 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 ensure year 2000 capability would not have an adverse
effect on the Company and its subsidiary, Play Co.
NOTE 8 - RESTATEMENT OF FINANCIAL STATEMENTS - JUNE 30, 1998:
The consolidated financial statements for the three months
ended June 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 $166,425 in its original
reported net loss.
6
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 month period ending June 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 June 30, 1999 compared to the three months
ended June 30, 1998:
Consolidated sales for the three months ended June 30, 1999 were
$6,508,565, as compared to $6,358,709 for the three months ended June 30, 1998.
This increase of $149,856, or 2.4%, is directly attributable to increased sales
contributions from Play Co.'s new stores as same store sales declined by 27% for
the period.
Consolidated cost of sales for the three months ended June 30, 1999 was
$3,763,214, or 58% of sales, as compared to the three month period ended June
30, 1998 in which cost of sales was $3,706,331, or 58% of sales. This increase
of $56,883, or 1.5%, is primarily due to costs associated with the opening of
new retail outlets.
Consolidated operating expenses were $4,004,479, or 62% of sales for the
three months ended June 30, 1999, as compared to $2,784,878, or 44% of sales,
for the three months ended June 30, 1998. This increase of $1,219,601, or 44%,
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 June 30, 1999, non-cash depreciation and
amortization amounted to $224,468, as compared to $188,417 in the three months
ended June 30, 1998. This increase of $36,051 is due primarily to depreciation
on new assets acquired by Play Co. in this quarter.
Consolidated interest expense was $315,394, or 4.8% of sales, in the three
months ended June 30, 1999, as compared to $165,652, or 2.6% of sales, in the
three months ended June 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 June 30, 1999.
<PAGE>
For the three months ended June 30, 1999, the Company reported a
consolidated net loss of $963,364 (after reflecting the adjustment for the
minority interest in Play Co.), or basic earnings deficit per share of $.21, as
compared to a restated net loss of $388,186, or a basic earnings deficit per
share of $.09 (after reflecting the minority interest in Play Co.), for the
three months ended June 30, 1998. The weighted average number of common shares
used in the computation of basic earnings per share was 4,550,234 for the three
months ended June 30, 1999 and 1998.
Liquidity and Capital Resources:
At June 30, 1999, the Company reported cash and cash equivalents of
$392,968, working capital deficit of $6,400,010, and stockholders' equity of
$(5,487,870), reflecting the net loss of $963,364 for the three months ended
June 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 three month period ending June 30, 1999, the Company provided
$426,529 in cash from its operating activities, as compared to $474,205 provided
by operating activities in the three month period ended June 30, 1998. The
consolidated net loss was $963,346 and $388,186, respectively, in those periods.
The Company used $209,014 of cash in investing activities during the three
months ended June 30, 1999, compared to an outflow of cash of $504,984 in the
three months ended June 30, 1998. The primary investing activities was the
purchase of equipment and fixtures by Play Co. for its new stores.
The Company generated $48,828 from its financing activities in the three
month period ended June 30, 1999, as compared to the use of $140,469 in the
three months ended June 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 three months ended June 30, 1999.
As a result of the above factors, the Company has a net increase in cash of
$266,343 in the three months ended June 30, 1999, compared to a net decrease in
cash of $171,248 in the three months ended June 30, 1998.
In November 1998, Play Co. entered into an agreement with ZD Group, L.L.C.
("ZD"), a related party, 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.
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 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 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 Play Co.'s stores (Woodfield Mall in Schaumburg,
Illinois now scheduled to open in fall 1999; Auburn Hills, Michigan; and Gurnee,
Illinois). As those stores did not generate a profit after application of
corporate overhead in the three-month period ended June 30, 1999, no payments
accrued or were made to ZD during the June period.
<PAGE>
Planned new store openings remain a significant capital commitment of Play
Co. Play Co. has entered into leases to open eight new stores by the end of
calendar year 1999. Play Co. expects that the costs of building those new
stores, net of landlord tenant improvement contributions and of inventory
requirements, will be approximately $2.8 million.
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.
The first of those stores opened in June in the Venetian Resort and Casino
in Las Vegas, Nevada. The costs of opening that store (excluding inventory) were
approximately $825,000. This store was projected to be the most capital
intensive of all the stores scheduled to be opened this fiscal year.
The following transactions entered into after April 1, 1999 were equity and
debt transactions structured to help Play Co. with the cost of the capital
expenditures associated with opening the total of eight new stores in 1999.
Play Co. received approximately $240,000 in lease financing in the three
month period ended June 30, 1999 and continues to seek additional capital lease
financing.
In May 1999, pursuant to ss.506 of Regulation D, Play Co. 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. Play Co. received $657,000
in net proceeds from the sale. 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 of 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 event,
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 lest
$5.00 for a consecutive 30 day period. Play Co. received net proceeds of
$657,500 after deduction of all investment banking and legal and administrative
fees.
Due to the beneficial conversion feature of the Series F Stock, the
proceeds have initially have been recorded as additional paid in capital which
will amortize over a 12-month period in the form of a non-cash dividend.
On July 15, 1999, Tudor Technologies, Inc. ("Tudor") - an entity of which
Mr. Moses Mika (a director of the Company and Play Co.) is a shareholder - as
the assignee of an option to acquire 25% of the outstanding shares of the common
stock of the Play Co. subsidiary, Toys International.COM, Inc. ("Toys"), which
shares were then owned by Play Co. and which option price was set at Toys' book
value on the date of election to exercise the option, elected to exercise its
right to purchase the stock and requested that the exercise price be amended to
reflect the book value of Toys at the most recent fiscal quarter, June 30, 1999.
Play Co. agreed to Tudor's request. As the book value of Toys as of June 30,
1999 is not yet determined, Play Co. has not yet provided Tudor with the basis
for the option exercise and, as a result, Tudor has not yet provided Play Co.
with the appropriate consideration. Play Co. anticipates that it will provide
Tudor the June 30, 1999 book value determination by the end of August 1999.
<PAGE>
This option arose out of the June 30, 1998 conversion, by ABC Fund, Inc.
("ABC", an affiliate of Play Co. and the Company), of a $1.5 million debenture
into Series E Preferred Stock ("Series E Stock") as of June 30, 1998. Pursuant
to the terms of the debenture, in September 1998, ABC assigned its rights to
purchase the Toys common stock to Tudor.
On July 20, 1999, Play Co. sold a 6.6% interest in its Toys subsidiary to
two investors for $2.8 million in consideration in a private transaction. The
investors were an unaffiliated investment banking firm and CDMI Capital
Corporation ("CDMI"), a British Virgin Islands corporation. Mr. Moses Mika, a
director of Play Co. and the Company, is a shareholder of CDMI. Each party
invested $1.4 million in the transaction.
On August 4, 1999, Play Co. entered into Amendment Number 6 to its
Financing Agreement with FINOVA Capital Corporation ("FINOVA"). As a result of
this amendment, Play Co.'s aggregate credit facility with FINOVA increased from
$8.3 million 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 Play Co.
and by 60% of any annual profits generated by Play Co.; (2) allows Play Co. 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.
Electronic commerce represents another area that may result in significant
capital expenditures for Play Co. in fiscal 2000. It is also a major focus for
management. In April 1999, Play Co. debuted the first of three dedicated
electronic commerce web sites. This site, www.ToysWhyPayRetail.com, represents a
new trade name for Play Co. and allows consumers to purchase, at near wholesale
prices, overstocks, special buys, and overruns on mostly name-brand toys
purchased by Play Co. out of season. Play Co. plans to offer approximately 1000
items for sale on the web site.
The second and third electronic commerce web sites are currently being
developed to a state-of-the-art standard in conjunction with two Internet
consulting firms. These sites will offer collectible and imported specialty
merchandise such as die-cast cars, dolls, plush toys, trains, and collectible
action figures and are expected to open in the late fall of 1999. In conjunction
with the web site launch, the Company plans to place computer kiosks in several
of its retail locations in order to permit customers to place orders on the web
site for goods otherwise not sold in such store.
Play Co. has entered into a letter of intent with an investment banking
firm to raise additional equity in the approximate amount of $20-25 million
through the public sale of a minority interest in Play Co.'s Toys subsidiary.
This public offering currently is expected to close in 1999. This investment
banking firm also participated in the $2.8 million private placement in July
1999.
<PAGE>
Play Co. is pursuing this opportunity and is continuing to seek additional
lease financing. There can be no assurance that Play Co. will be able to obtain
sufficient financing to successfully open the planned new stores. Additionally,
Play Co. has incurred significant capital expenditures over the past twelve
months. To date, Play Co. has deployed its working capital to cover a
significant portion of these capital expenditures. As a result, Play Co. is also
seeking additional working capital from the above mentioned equity offerings.
Should Play Co. be unable to raise sufficient working capital, it may be unable
to purchase product directly from factories at advantageous pricing, thereby
resulting in a negative impact on gross margins and results of operations.
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 can could be an
adverse impact on the Company's operations. Furthermore, there can no more
assurances that another entities failure to ensure year 2000 capability 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 because the flow of allocated or "hot"
selling merchandise is being 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 notes above, Play Co. has
significantly strengthened its balance sheet by raising approximately $3.5
million in additional equity over the past three months, 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 Play Co.'s ability to choose locations for new stores, Play Co.'s
ability to purchase product as 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 the Company's business strategy
will enable it to compete effectively in the toy industry.
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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings: None
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
June 30, 1999:
27.1 Financial Data Schedule
(b) During the quarter ended June 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 20th day of August 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 27.1
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> 3-mos
<FISCAL-YEAR-END> mar-31-2000
<PERIOD-END> jun-30-1999
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<SECURITIES> 0
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<ALLOWANCES> 0
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<CURRENT-ASSETS> 14,132,907
<PP&E> 9,904,258
<DEPRECIATION> (4,321,223)
<TOTAL-ASSETS> 22,646,000
<CURRENT-LIABILITIES> 20,532,917
<BONDS> 0
0
0
<COMMON> 4,550
<OTHER-SE> (5,492,420)
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<NET-INCOME> (963,364)
<EPS-BASIC> (0.21)
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</TABLE>
