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, 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)
Delaware 13-3626613
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
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 $0.001
per share: 4,550,236 shares outstanding as of February 25, 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
Number
Item 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets as of December 31, 1999 (unaudited) and March
31, 1999 3
Consolidated Statement of Operations (unaudited) for the three and nine
months ended December 31, 1999 and 1998 4
Consolidated Statement of Cash Flows (unaudited) for the nine months ended
December 31, 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
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
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and March 31, 1999
<TABLE>
<CAPTION>
Dec. 31, March 31,
1999 1999
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ............................................ $ 12,273,664 $ 126,625
Accounts receivables-net ............................................. 985,422 118,518
Inventories .......................................................... 14,175,841 11,506,284
Note receivable - affiliate .......................................... 650,000 --
Prepaid expenses and other current assets ............................ 652,395 1,315,851
Loans and advances-officer ........................................... (76,518) (37,061)
------------ ------------
Total current assets ......................................... 28,660,804 13,030,217
PROPERTY AND EQUIPMENT-NET ............................................. 7,312,257 5,348,175
OTHER ASSETS:
Deposits and other assets ............................................ 4,454,710 2,768,647
------------ ------------
Total other assets ........................................... 4,454,710 2,768,647
------------ ------------
Total assets ................................................. $ 40,427,771 $ 21,147,039
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 33,169,689 $ 14,498,578
Accrued expenses and other current liabilities ....................... 1,437,755 626,815
Due to affiliates .................................................... 795,403 831,897
Current portion of notes payable and capital lease obligation ........ 848,774 1,352,197
------------ ------------
Total current liabilities .................................... 36,251,621 17,309,487
LONG-TERM LIABILITIES:
Borrowings under financing agreement ................................. 54,170 7,814,666
Note payable and capital leases, net of current portion .............. 1,257,091 585,681
Deferred rent liability .............................................. 135,060 126,769
------------ ------------
Total long-term liabilities .................................. 1,446,321 8,527,116
------------ ------------
Total liabilities ............................................ 37,697,942 25,836,603
MINORITY INTEREST IN SUBSIDIARY ........................................ 9,585,439 (165,058)
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000,000 shares authorized, 4,550,236
Additional paid-in capital ........................................... 8,142,281 8,142,281
Retained earnings (deficit) .......................................... (15,002,441) (12,671,337)
------------ ------------
Total stockholders' equity ................................... (6,855,610) (4,524,506)
------------ ------------
Total liabilities and stockholders' equity ................... $ 40,427,771 $ 21,147,039
============ ============
</TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
Dec. 31, Dec 31, Dec. 31, Dec. 31,
1999 1998 1999 1998
Restated Restated
(Note 8) (Note 8)
<S> <C> <C> <C> <C>
Net sales ............................................ $ 17,316,024 $ 14,717,729 $ 30,692,008 $ 27,177,972
Cost of sales ........................................ 10,006,720 8,545,336 17,370,835 15,665,721
------------ ------------ ------------ ------------
Gross profit ......................................... 7,309,304 6,172,393 13,321,173 11,512,251
Operating expenses:
Operating expenses ................................. 6,044,595 4,100,202 13,810,986 9,368,107
Litigation settlement .............................. 183,464 -- 270,206 --
Depreciation and amortization ...................... 320,508 324,975 773,490 707,186
------------ ------------ ------------ ------------
Total operating expenses ................... 6,548,567 4,425,177 14,854,682 10,075,293
Operating income (loss) .............................. 760,737 1,747,216 (1,533,509) 1,436,958
Interest expense:
Interest and finance charges ....................... 307,870 221,860 823,453 517,172
Amortization of debt issuance costs ................ 58,097 174,889 127,434 73,032
------------ ------------ ------------ ------------
Total interest expense ..................... 365,967 294,892 998,342 644,606
------------ ------------ ------------ ------------
Interest Income ...................................... 2 -- 12 47,781
------------ ------------ ------------ ------------
(LOSS) BEFORE MINORITY INTEREST ...................... 394,772 1,452,324 (2,531,839) 840,133
Minority interest in net income (loss) of consolidated
subsidiary (Note 3) .................................. (54,939) (468,406) 2,384,654 27,260
------------ ------------ ------------ ------------
Net income (loss) .................................... 339,833 983,918 (147,185) 867,393
Effect of non-cash dividends on convertible preferred
stock ................................................ 799,402 477,973 2,183,919 1,229,752
------------ ------------ ------------ ------------
(Loss) applicable to common shares ................... $ (459,569) $ 505,945 $ (2,331,104) $ (362,359)
============ ============ ============ ============
Basic and diluted loss per common share and share
equivalent ........................................... $ (.10) $ .11 $ (.51) $ (.08)
============ ============ ============ ============
Weighted average number of common shares outstanding
4,550,236 4,550,236 4,550,236 4,550,236
============ ============ ============ ============
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------
Dec. 31, Dec. 31,
1999 1998
------------------ -------------------
Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ................................................................. $ (2,331,104) $ (362,359)
Adjustments to reconcile net loss to cash (used) provided for operating activities:
Amortization of issuance costs ................................................. 174,889 --
Depreciation and amortization .................................................. 773,490 707,891
Deferred rent .................................................................. 8,291 13,654
Minority interest in net loss of subsidiary .................................... (2,384,654) (27,260)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ........................................ (886,904) 119,159
(Increase) in merchandise inventories ............................................. (2,669,557) (2,984,709)
(Increase) decrease in prepaid expenses and other current assets .................. 663,456 (1,552,841)
(Increase) decrease in deposits and other assets .................................. (1,686,063) 173,429
Increase (decrease) in accounts payable ........................................... 5,132,991 4,582,433
Increase (decrease) in accrued expenses and other liabilities ..................... 810,950 822,417
------------ ------------
Total adjustments ....................................................... (63,111) 1,854,173
------------ ------------
Net cash provided (used) by operating activities ........................ (2,394,215) 1,491,814
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................ (2,737,572) (2,300,169)
Advances to affiliates ......................................................... (650,000) --
------------ ------------
Net cash from (used for) investing activities ........................... (3,387,572) (2,300,169)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock of subsidiary ........................ 25,560,792 --
Net borrowings under line of credit ............................................ (7,760,496) 2,309,017
Loans and repayment - officer .................................................. (39,457) (94,797)
Repayment of notes payable ..................................................... 167,987 (824,005)
------------ ------------
Net cash provided by (used for) investing activities .................... 17,928,826 1,390,215
NET INCREASE (DECREASE) IN CASH ................................................... 12,147,039 581,860
Cash, beginning of period ......................................................... 126,625 1,635,058
------------ ------------
Cash, end of period ............................................................... $ 12,273,664 $ 2,216,918
============ ============
Supplemental disclosure of cash flow information:
Interest paid ..................................................................... $ 823,453 $ 644,806
Taxes paid ........................................................................ $ -- $ --
</TABLE>
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of Multimedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 and nine months ended December 31, 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 December 31,
1999 the Company owned 2,434,910 shares of the common stock of Play Co. Although
the percentage of ownership at December 31, 1999 was 43.9%, the Company still
exercises prerogative of control over Play Co., which is still consolidated into
the Company. (See Note 3). Currently, UTTC owns 32.4% of the common stock of
Play Co. and given its relationships with other Play Co. affiliates,
significantly influences Play Co.'s operations
NOTE 3 - MINORITY INTERESTS:
The minority interest in Play Co. represents the minority shareholders'
interest (56.1%) of Play Co.'s equity at December 31, 1999 and 41.6% of Toys
International.COM, Inc. 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.
<PAGE>
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 BWI 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 $0.475 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%.
<PAGE>
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 $0.28 per share ($0.01 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 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.
<PAGE>
NOTE 5 - SALE OF SHARES BY PLAY CO.'S SUBSIDIARY - TOYS INTERNATIONAL.COM, INC.
On November 19, 1999, Toys International.COM, Inc. ("Toys"), a subsidiary
of Play Co., completed an initial public offering (the "Offering") on the SMAX
segment of the Frankfurt Stock Exchange in Germany. The Offering was
underwritten by Concord Effekten AG ("Concord") of Frankfurt, Germany. Toys sold
2 million shares, or a 16.7% interest, in the Offering for net proceeds of
approximately $23.3 million. The Offering was priced at 13 Euros per share, or
approximately US $13.52 per share. Play Co. retained majority ownership of Toys
(58.4%) and, as a result, will continue to consolidate Toys' operations in its
financial statements. No gain or loss was recorded on the sales of Toys' shares
in the public offering or in earlier private placements per Staff Accounting
Bulletin No. 84.
NOTE 6 - CREDIT FACILITY:
On December 31, 1999, Play Co. had $54,170 outstanding under its revolving
credit facility with FINOVA Capital Corporation ("FINOVA") and $6,990,395
available under the credit facility. During December, at Play Co.'s request,
FINOVA agreed to reduce the maximum borrowing level of the credit facility from
$11.3 million to $9.3 million and to terminate a $2 million standby letter of
credit ("L/C") that previously helped support the credit facility. The
termination of the L/C allowed the Play Co. access to a $2 million certificate
of deposit which previously was restricted and was used as collateral for the
L/C by the issuing bank. The amount outstanding at December 31, 1999 represented
the interest accrued during the month of December 1999 as the principal balance
was paid down to zero during the December quarter.
As of December 31, 1999, the FINOVA credit line is presented as a short
term liability since the credit facility expires August 3, 2000, or within less
than one year of the December 31, 1999 balance sheet date.
NOTE 7 - YEAR 2000 UPDATE:
Subject to continued monitoring of Play Co.'s third party suppliers, the
Company's year 2000 program ("Program") is complete; no material problems have
arisen since the end of calendar year 1999. The Program addressed the issue of
computer programs and embedded computer chips being unable to distinguish
between the year 1900 and the year 2000. All of the Company's business computer
systems are year 2000 ready.
<PAGE>
NOTE 8 - RESTATEMENT OF FINANCIAL STATEMENTS - DECEMBER 31, 1998
The consolidated financial statements for the three and nine months ended
December 31, 1998 have been restated to reflect a restatement by Play Co. of its
dividend attributable to the beneficial conversion feature of its Series E
preferred stock. This restatement resulted in a decrease of $34,790 in the
profits for the three months ended December 31, 1998 and an increase in the loss
for the nine months ended December 31, 1998 of $94,182 from its original
reported net loss.
<PAGE>
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 subsidiary. Accordingly, the Company's
results of operations for the three-month period ending December 31, 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 December 31, 1999 compared to three months ended
December 31, 1998
Consolidated sales for the three months ended December 31, 1999 were
$17,316,024, as compared to $14,717,729 for the three months ended December 31,
1998. This increase of $2,598,295, or 17.7%, is directly attributable to
increased sales contributions from Play Co.'s new stores and Play Co.'s Internet
operations in the United States and Germany, as same store sales declined by
17.6% for the period.
Consolidated cost of sales for the three months ended December 31, 1999 was
$10,006,720, or 57.8% of sales, as compared to the three month period ended
December 31, 1998 in which cost of sales was $8,545,336, or 58% of sales. This
increase of $1,461,384, or 17.1%, is primarily due to costs associated with the
opening of new retail outlets.
Consolidated operating expenses (excluding litigation settlement expenses
and depreciation and amortization expenses) were $6,044,595, or 34.9% of sales
for the three months ended December 31, 1999, as compared to $4,100,202, or 28%
of sales, for the three months ended December 31, 1998. This increase of
$1,944,393, or 47.4%, 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, 1999, Play Co. settled its final
store closing related litigation. Under this settlement, Play Co. agreed to make
a cash payment of $35,000, to issue 100,000 shares of its common stock, and to
pay an aggregate of $186,138 over a 36-month period. Play Co. accrued $183,464
during the three months ended December 31, 1999 to cover the estimated value of
the settlement.
During the three months ended December 31, 1999, non-cash depreciation and
amortization amounted to $320,508, as compared to $324,975 in the three months
ended December 31, 1998. This amount was lower in the December 1999 period than
in the December 1998 period because in the 1998 period, Play Co. amortized a
portion of its store opening expenses. All such expenses were considered
operating expenses in 1999.
<PAGE>
Consolidated interest expense was $365,967, or 2.1% of sales, in the three
months ended December 31, 1999, as compared to $294,892, or 2.0% of sales, in
the three months ended December 31, 1998. The primary reason for the increased
level of interest expense was a higher average level of borrowings by Play Co.
in the three-month period ended December 31, 1999.
For the three months ended December 31, 1999, the Company reported a
consolidated net loss of $459,569 (after reflecting the adjustment for the
minority interest in Play Co.), or basic earnings deficit per share of $0.10, as
compared to a restated net income of $505,945, or a basic earnings deficit per
share of $0.11 (after reflecting the minority interest in Play Co.), for the
three months ended December 31, 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 December 31, 1999 and 1998.
Nine months ended December 31, 1999 compared to nine months ended December
31, 1998
Consolidated sales for the nine months ended December 31, 1999 were
$30,692,008, as compared to $27,177,972 for the nine months ended December 31,
1998. This increase of $3,514,036, or 12.9%, is directly attributable to
increased sales contributions from Play Co.'s new stores and Play Co.'s Internet
operations in the United States and Germany, as same store sales declined by
22.5% for the period.
Consolidated cost of sales for the nine months ended December 31, 1999 was
$17,370,835, or 56.6% of sales, as compared to the nine month period ended
December 31, 1998 in which cost of sales was $15,665,721, or 57.6% of sales.
This increase of $1,705,114, or 10.9%, is primarily due to costs associated with
the opening of new retail outlets.
Consolidated operating expenses (excluding litigation settlement expenses,
depreciation and amortization expenses) were $13,810,986, or 45.0% of sales for
the nine months ended December 31, 1999, as compared to $9,368,107, or 34.5% of
sales, for the nine months ended December 31, 1998. This increase of $4,442,879,
or 47.4%, 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 nine months ended December 31, 1999, Play Co. settled its final
store closing related litigation. Play Co. estimated the total net present value
of the settlement to be $233,905, consequently, Play Co accrued $270,206 in the
nine months ended December 31, 1999 to cover the estimated value of the
settlement and other litigation related expenses.
During the nine months ended December 31, 1999, non-cash depreciation and
amortization amounted to $773,490, as compared to $707,186 in the nine months
ended December 31, 1998. This increase of $66,304 is due primarily to
depreciation on new assets acquired by Play Co. in this period.
<PAGE>
Consolidated interest expense was $998,342, or 3.3% of sales, in the nine
months ended December 31, 1999, as compared to $644,606, or 2.4% of sales, in
the nine months ended December 31, 1998. The primary reason for the increased
level of interest expense was a higher level of borrowings by Play Co. in the
nine-month period ended December 31, 1999.
For the nine months ended December 31, 1999, the Company reported a
consolidated net loss of $2,331,104 (after reflecting the adjustment for the
minority interest in Play Co.), or basic earnings deficit per share of $0.51, as
compared to a restated net loss of $362,359, or a basic earnings deficit per
share of $0.08 (after reflecting the minority interest in Play Co.), for the
nine months ended December 31, 1998. The weighted average number of common
shares used in the computation of basic earnings per share was 4,550,236 for the
nine months ended December 31, 1999 and 1998.
Liquidity and Capital Resources
At December 31, 1999, the Company reported cash and cash equivalents of
$12,273,664, working capital deficit of $7,590,817, and stockholders' equity of
$(6,855,610), reflecting the net loss of $2,331,104 for the nine months ended
December 31, 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 nine-month period ending December 31, 1999, the Company used
$2,394,215 in cash from its operating activities, as compared to $1,491,814
provided by operating activities in the nine month period ended December 31,
1998.
The Company used $3,387,572 of cash in investing activities during the nine
months ended December 31, 1999, compared to an outflow of cash of $2,300,169 in
the nine months ended December 31, 1998. The primary investing activities was
the purchase of equipment and fixtures by Play Co. for its new stores.
The Company generated $17,928,826 from its financing activities in the
nine-month period ended December 31, 1999, as compared to providing $1,390,215
in the nine months ended December 31, 1998. The primary contributors to the
Company's financing activities were borrowings by Play Co. under a financing
agreement and the sale of Play Co.'s Series F preferred stock and the sale of
common stock of Play Co.'s subsidiary, Toys. These proceeds were used to finance
Play Co.'s capital requirements, capital expenditures, and operating losses
during the nine months ended December 31, 1999.
As a result of the above factors, the Company has a net increase in cash of
$12,147,039 in the nine months ended December 31, 1999, compared to a net
increase in cash of $581,860 in the nine months ended December 31, 1998.
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
nine-month period ended December 31, 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 controls over expenses and other
charges to achieve profitability.
<PAGE>
During the three month period ended December 31, 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 seven 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 $806,000 in
capital lease financing this fiscal year.
In May 1999, pursuant to ss.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. Play Co.
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 registration statement declared effective by the Securities
and Exchange Commission. Such registration statement has not yet been declared
effective.
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 amount 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.
("Shopnet") and $50,000 to Breaking Waves, Inc. ("BWI"), 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.
On November 29, 1999, Play Co. loaned Shopnet $400,000 under a Demand
Promissory Note ("Demand Note") bearing an interest rate of nine percent per
annum. The Demand Note required a principal repayment of $100,000 plus accrued
interest on January 30, 2000 and requires that the balance be paid on April 30,
2000. The January 30, 2000 payment was remitted as agreed.
<PAGE>
The holders of Play Co.'s convertible subordinated debentures have informed
Play Co. that they plan to convert $650,000 of the subordinated debt into Play
Co.'s Series E Preferred Stock. Play Co. expects this conversion to occur prior
to its March 31, 2000 fiscal year end.
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.
Year 2000 Update
Subject to continued monitoring of third party suppliers, the Company's
year 2000 program ("Program") is complete; no material problems have arisen
since the end of calendar year 1999. The Program addressed the issue of computer
programs and embedded computer chips being unable to distinguish between the
year 190 and the year 2000. All of the Company's business computer systems are
year 200 ready.
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 nine month period ended December 31, 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 $25 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. It 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 its 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 its third quarter 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
December 31, 1999:
27.1 Financial Data Schedule
(b) During the quarter ended December 31, 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 28th day of February 2000.
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> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 12,273,664
<SECURITIES> 0
<RECEIVABLES> 985,422
<ALLOWANCES> 0
<INVENTORY> 14,175,841
<CURRENT-ASSETS> 28,660,804
<PP&E> 12,182,502
<DEPRECIATION> (4,870,245)
<TOTAL-ASSETS> 40,427,771
<CURRENT-LIABILITIES> 36,251,621
<BONDS> 0
0
0
<COMMON> 4,550
<OTHER-SE> (6,860,160)
<TOTAL-LIABILITY-AND-EQUITY> 40,427,771
<SALES> 30,692,000
<TOTAL-REVENUES> 30,692,000
<CGS> 17,370,835
<TOTAL-COSTS> 17,370,835
<OTHER-EXPENSES> 14,854,682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 998,342
<INCOME-PRETAX> (2,331,104)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,331,104)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,331,104)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
