U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number O-25030
PLAY CO. TOYS & ENTERTAINMENT CORP.
(Exact Name of Small Business Issuer as Specified in its Charter)
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<CAPTION>
<S> <C>
Delaware 95-3024222
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
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550 Rancheros Drive, San Marcos, California 92069
(Address of Principal Executive Offices)
(760) 471-4505
(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, $.01 par value:
5,548,857 shares outstanding as of November 19, 1999.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION Page Number
Item 1. FINANCIAL STATEMENTS
<S> <C> <C> <C>
Condensed consolidated balance sheets as of September 30, 1999 3
and March 31, 1999.
Condensed consolidated statements of operations and comprehensive
net loss for three months and six months ended September 30, 1999 and 1998. 4
Condensed consolidated statements of cash flows for the six months
ended September 30, 1999 and 1998. 5
Notes to condensed consolidated financial statements 6-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-17
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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<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
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<CAPTION>
September 30, 1999 March 31, 1999
(unaudited)
Current
<S> <C> <C>
Cash ................................................. $ 377,178 $ 125,967
Accounts receivable .................................. 172,442 98,276
Merchandise inventories .............................. 15,127,625 11,506,284
Stock subscription receivable ........................ 723,678 --
Other current assets ................................. 2,425,601 1,660,263
----------- -----------
Total current assets 18,826,524 13,390,790
Property and Equipment, Net of accumulated
depreciation and amortization of $4,511,565
and $4,058,603, respectively ......................... 7,245,790 5,348,175
Deposits and other assets ........................................ 3,412,965 2,411,427
----------- -----------
$29,485,279 $21,150,392
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
September 30, 1999 March 31, 1999
Current
<S> <C> <C>
Accounts payable .................................................... $ 9,705,643 $ 5,611,442
Accrued expenses and other liabilities .............................. 260,709 595,008
Current portion of notes payable and capital leases ................. 864,429 1,352,197
Borrowings under financing agreement ................................ 10,725,774 --
------------ ------------
Total current liabilities ................................... 21,556,555 7,558,647
Borrowings under financing agreement ........................................... -- 7,814,666
Notes payable and capital leases, net of current portion ....................... 1,000,637 585,681
Deferred rent liability ........................................................ 130,881 126,769
------------ ------------
Total liabilities ................................... 22,688,073 16,085,763
------------ ------------
Minority interest in subsidiary ................................................ 1,612,976 --
------------ ------------
Stockholders' equity:
Convertible series E preferred stock, $1 par, 25,000,000 shares
authorized: 5,858,903 shares outstanding .......................... 6,638,047 5,682,101
Convertible series F preferred stock, $0.01 par, 5,500,000 shares
authorized; 750,000 and 0
shares outstanding, respectively .................................. 428,571 --
Common stock, $.01 par value, 160,000,000 shares authorized;
5,548,852 and 5,503,519 shares outstanding, respectively .......... 55,488 55,035
Additional paid-in-capital .......................................... 17,960,428 15,335,172
Accumulated deficit ................................................. (19,898,304) (16,007,679)
------------ ------------
Total stockholders' equity ...... 5,184,230 5,064,629
------------ ------------
$ 29,415,279 $ 21,150,392
============ ============
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE NET LOSS
(Unaudited)
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<CAPTION>
Three Months Ended September 30, Six-months Ended September 30,
1999 1998 1999 1998
----
<S> <C> <C> <C> <C>
Net sales ............................................... $ 6,867,119 $ 6,098,315 $ 13,375,684 $ 12,455,710
Cost of Sales ........................................... 3,600,901 3,414,054 7,364,115 7,120,385
------------ ------------ ------------ ------------
Gross profit ........... 3,266,218 2,684,261 6,011,569 5,335,325
------------ ------------ ------------ ------------
Operating expenses:
Operating expenses ..................... 3,790,268 2,610,120 7,545,358 5,093,891
Depreciation and amortization .......... 228,514 193,794 452,982 382,211
------------ ------------ ------------ ------------
Total operating expenses 4,018,782 2,803,914 7,998,340 5,476,102
------------ ------------ ------------ ------------
Operating loss .......................................... (752,564) (119,653) (1,986,771) (140,777)
------------ ------------ ------------ ------------
Interest expense:
Interest and finance charges ........... 300,016 156,860 584,680 295,312
Amortization of debt issuance costs .... 47,424 27,202 78,154 54,402
------------ ------------ ------------ ------------
Total interest expense . 347,440 184,062 662,834 349,714
------------ ------------ ------------ ------------
Minority interest in loss of consolidated subsidiary .... 143,497 -- 143,497 --
------------ ------------ ------------ ------------
Net income (loss) ....................................... (956,507) (303,715) (2,506,108) (490,491)
Other comprehensive income (loss) ....................... -- -- -- --
------------ ------------ ------------ ------------
Comprehensive net income (loss) ......................... $ (956,507) $ (303,715) $ (2,506,108) $ (490,491)
============ ============ ============ ============
Calculation of basic and diluted income (loss) per share:
Net income (loss) ..................................... $ (956,507) $ (303,715) $ (2,506,108) $ (490,491)
Effects of non-cash dividends on convertible
preferred stock .................................... (799,402) (1,200,000) (1,384,517) (1,200,000)
------------ ------------ ------------ ------------
Net income (loss) applicable to common
shares ............................................ $ (1,755,909) $ (1,503,715) $ (3,890,625) $ (1,690,491)
============ ============ ============ ============
Basic and diluted loss per common share
and share equivalents .................. $ (0.32) $ (0.37) $ (0.70) $ (0.41)
============ ============ ============ ============
Weighted average number of common shares
and share equivalents outstanding ............. 5,548,852 4,103,525 5,537,457 4,103,525
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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<CAPTION>
Six-months Ended September 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ................................................... $ (2,506,108) $ (490,491)
Adjustments used to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ..................... 452,962 382,211
Minority interest in net loss of subsidiary ....... (143,497) --
Deferred rent ..................................... 4,112 9,102
Stock compensation ................................ -- 21,876
Increase (decrease) from changes in:
Accounts receivable .................... (74,166) 21,077
Merchandise inventories .................. (3,621,341) (4,312,326)
Other current assets ..................... (647,338) (500,243)
Deposits and other assets ................ (1,001,538) (163,756)
Accounts payable ......................... 4,094,201 2,144,710
Accrued expenses and other liabilities . (334,299) (528,880)
------------ ------------
Net cash used in operating activities .. (3,777,012) (3,416,720)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................ (1,919,427) (1,149,757)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred and common stock ....... 3,540,504 156,877
Borrowings under financing agreement ....................... 21,157,590 17,967,798
Repayments under financing agreement ....................... (18,246,482) (14,931,000)
Borrowings under notes payable ............................. -- 1,147,450
Repayments under notes payable and capital leases .......... (503,962) --
------------ ------------
Net cash provided by financing activities 5,947,650 4,341,125
------------ ------------
Net increase (decrease) in cash ..................................... 251,211 (225,352)
Cash at beginning of period ......................................... 125,967 648,986
Cash at end of period ............................................... $ 377,178 $ 423,634
============ ============
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
Note 1. General
The interim accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and with the instructions
to Form 10-QSB. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. For further information,
management suggests that the reader refer to the audited financial statements
for the year ended March 31, 1999 included in its Annual Report on Form 10-KSB.
Operating results for the six-month period ended September 30, 1999 are not
necessarily indicative of the results of operations that may be expected for the
year ending March 31, 2000.
Note 2. Leases
During the three-month period ended September 30, 1999, the Company entered
into several capital leases to help finance its new computer system and several
new stores. The leases are for an aggregate principal amount of $336,109 and
bear interest at rates varying between 9.2% and 17.5%.
Note 3. Sale of Shares in Subsidiary
On July 15, 1999, Tudor Technologies, Inc. ("Tudor"), a British Virgin
Islands corporation, an entity of which Mr. Moses Mika (a director of the
Company) is a shareholder - as an assignee of an option to acquire 25% of the
outstanding shares of the common stock of the Company's then wholly-owned
subsidiary, Toys International.COM ("Toys"), elected to exercise the option to
purchase the stock in the subsidiary. As of this date, Tudor received 2,335,000
or 25% of the outstanding shares of the subsidiary, for $723,678. The option
called for the purchase price to be 25% of the subsidiary's book value at June
30, 1999. The Company has recorded a stock subscription receivable as a current
asset to reflect this transaction as the funds were received in October 1999.
This option arose out of the June 30, 1998 conversion, by ABC Fund, Inc.
("ABC," an affiliate of the Company), of a $1.5 million debenture into Series E
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, the Company entered into an agreement to sell 660,000
shares of Toys common stock to CDMI Capital Corporation ("CDMI") and Concord
Effekten ("Concord") of Frankfurt, Germany. Mr. Mika is a shareholder of CDMI.
This investment represented a 6.6% ownership for these shareholders. The Company
received gross proceeds of $2,800,000 and recorded this as an equity
transaction.
<PAGE>
No gain or loss was recorded on the sales of Toys shares to Tudor, CDMI, or
Concord per Staff Accounting Bulletin No. 5 as such sales of shares were issued
as part of a broader corporate reorganization contemplated by the Company in the
form of a public offering of Toys shares as discussed below.
Toys has granted an aggregate 250,000 options to purchase common stock of
Toys to certain directors, officers, and advisors with an exercise price of
$4.24 per share. These options are for a period of three years and may not be
exercised until twelve months after the public offering on the Toys shares (see
below). As the Company and Toys utilize the provisions of APB 25 for stock
options granted to employees, no compensation expense was recorded for 224,000
of these options as the exercise price was estimated by management to be
approximately equal to the fair value given the sales of Toys shares which
immediately preceded these grants. However, 26,000 of the options were granted
to a legal advisor for services related to the proposed public offering. These
shares were valued by management at the estimated fair value of approximately
$118,000 and were recorded as deferred offering costs which is included in other
current assets at September 30, 1999, with an offsetting effect to additional
paid-in capital. Upon recording the effects of the completed offering, this
amount will be netted against the proceeds of the offering credited to
additional paid-in capital. As such, the compensation recorded for these shares
will have no net effect on the Company's consolidated equity or results of
operations.
Concurrently, the Company granted an additional 450,000 incentive options
to acquire shares of Toys common stock which have an exercise period over nine
years at an exercise price of 3 Euro per share. As these options were granted
subject to Toys meeting future performance criteria, no compensation expense has
been recorded currently as the compensation has not yet been earned.
On November 19, 1999, Toys completed an initial public offering (the
"Offering") on the SMAX segment of the Frankfurt Stock Exchange in Germany. The
Offering was underwritten by Concord. Toys 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, which was approximately equal to
$13.52 per share. The Company retained majority ownership of Toys with a 58.4%
equity interest in the subsidiary and, as a result, will continue to consolidate
Toys' operations in its financial statements.
In addition to the 2 million shares sold by Toys in the offering, Concord
and CDMI each sold 200,000 shares in the offering in the form of a greenshoe
allotment. Both Concord and CDMI invested in Toys in a private placement in July
1999. The total offering size, including the greenshoe allotment, was 2.4
million shares.
The Company expects to complete the accounting for the net proceeds of the
Offering during the quarterly period ended December 31, 1999.
As a result of the transactions involving Toys stock, the Company has
recorded a minority interest in its consolidated financial statements to reflect
the ownership of the minority owners. This represents the minority shareholders'
basis in Toys, along with their respective portion of the net losses recorded
for Toys from the transaction date through September 30, 1999.
<PAGE>
Note 4. Basic and Diluted Loss per Share
The basic and diluted loss per common share for the three and six month
periods ending September 30, 1999 and 1998, are the same as the effects of
common stock equivalents are anti-dilutive given the net loss per common share
in each period. Potentially dilutive common shares aggregate approximately
68,383,000, which could result from the exercise of options, warrants, and the
conversion of debentures and/or the Series E and Series F Preferred Stock.
Exercise or conversion of certain of these instruments is restricted based on
defined holding periods or vesting schedules.
Note 5. Subsequent Events
In early October 1999, the Company loaned $200,000 to Shopnet.com, Inc. and
$50,000 to Breaking Waves, Inc., both of which entities are affiliated with the
Company. The loans carry interest at 9% and are due in March 2000.
On October 25, 1999, Tudor lent the Company $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
Toys.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
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 that could cause actual results to differ materially
from those projected.
The Company's operations are substantially controlled by United Textiles &
Toys Corp. ("UTTC"), the Company's parent, which currently owns approximately
43.9% of the issued and outstanding shares of the Company's Common Stock. UTTC
is a Delaware corporation and public company which was organized in March 1991
and commenced operations in October 1991 and now operates solely as a holding
company.
For the three months ended September 30, 1999 compared to the three months ended
September 30, 1998
The Company generated net sales of $6,867,119 in the three months ended
September 30, 1999. This represented an increase of $768,804, or 12.6%, from net
sales of $6,098,315 in the three months ended September 30, 1998. All of this
sales growth came from the Company's new stores as same store sales declined by
24.8% for the period.
The Company 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 three months ended September 30, 1999,
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 the Company has with some of its vendors. The
Company is working to increase its lines of credit with its vendors to more
adequately address not only the past growth but its expected future growth as
well. In addition, the Company held back a substantial amount of critical
inventory from its existing stores for the six new stores it opened in the
September through late October timeframe.
The Company posted a gross profit of $3,266,218 in the three months ended
September 30, 1999, an increase of $581,957, or 21.7%, from the gross profit of
$2,684,261 in the three months ended September 30, 1998. This gross profit
increase was due to the increase in sales noted above and an increase in the
Company's gross margin. The gross margin of 47.6% in the September 1999 period
was an increase of 3.6% over the Company's gross margin of 44.0% in the
September 1998 period.
Operating expenses (excluding depreciation and amortization expenses) in
the three months ended September 30, 1999 were $3,790,268. This represented a
$1,180,148, or 45.2%, increase over the Company's operating expenses of
$2,610,120 in the three months ended September 30, 1998. The primary reasons for
the operating expense increase were an increase in payroll and related expenses
of $525,871 and an increase in rent expense of $519,877. The payroll expense
increase was due to the addition of several middle managers and of employees at
new stores. The growth of rent expense was the result of adding additional
stores.
<PAGE>
During the three months ended September 30, 1999, the Company recorded
non-cash depreciation and amortization expenses of $228,514, a $34,720, or
17.9%, increase from $193,794 in the period ended September 30, 1998. Total
operating expenses (operating expenses combined with depreciation and
amortization) in the September 1999 period were $4,018,782, a $1,214,868, or
43.3%, increase from total operating expenses of $2,803,914 in the September
1998 period.
Since the $581,957 increase in gross profit was less than the $1,214,868
increase in total operating expenses, the Company's operating loss increased by
$632,911 from $119,653 during the three months ended September 30, 1998 to
$752,564 during the three months ended September 30, 1999.
Interest expense totaled $347,440 for the three months ended September 30,
1999. This represented a $163,378 increase from interest expense of $184,062 in
the three months ended September 30, 1998. The primary reason for the increased
level of interest expense was a higher level of borrowings in the three months
ended September 30, 1999 than in the September 1998 period.
During the three months ended September 30, 1999, the Company recorded a
minority interest in the loss of consolidated subsidiary of $143,497. This
minority interest arose out of the sale of stock of the Company's Toys
International.COM, Inc. ("Toys") subsidiary in July 1999 to Tudor Technologies,
Inc. ("Tudor"), CDMI Capital Corporation ("CDMI"), and Concord Effekten
("Concord"), as described in Note 3 to the condensed consolidated financial
statements and below. Since Toys incurred a loss during the three months ended
September 30, 1999, this minority interest represented a reduction in the
Company's net loss.
As a result of the above-mentioned factors, the Company recorded a net loss
of $956,507 for the three months ended September 30, 1999. This represented a
$652,792 increase over the net loss of $303,715 recorded in the three months
ended September 30, 1998. For the three-month periods ended September 30, 1999
and 1998, the net losses of $956,507 and $303,715, respectively, were increased
by non-cash dividends of $799,402 and $1,200,000, respectively, in order to
determine the net loss applicable to common shares. The non-cash dividends
represent amortization of the discount recorded upon the issuance of Series E
Preferred Stock ("Series E Stock") with a beneficial conversion feature. No
dividends in the form of securities or other assets were actually paid out.
The basic and diluted net loss per common share for the September 1999
period was $0.32 compared to a basic and diluted net loss per common share in
the September 1998 period of $0.37.
For the six months ended September 30, 1999 compared to six months ended
September 30, 1998
<PAGE>
The Company generated net sales of $13,375,684 in the six-month period
ended September 30, 1999. This represented an increase of $919,974, or 7.4%,
from net sales of $12,455,710 in the six-month period ended September 30, 1998.
All of this sales growth came from the Company's new stores as same store sales
declined by 26% for the period.
The Company believes that its same store sales showed a decline after a
period of two years of continuous increases (in the fiscal years ended March 31,
1998 and March 31, 1999) because in the six-month period ended September 30,
1999, the flow of allocated 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 the Company has with some of its
vendors. The Company is working to increase its lines of credit with its vendors
to more adequately address not only the past growth but its expected future
growth as well. In addition, the Company held back a substantial amount of
critical inventory from its existing stores for the six new stores it opened in
the September through late October timeframe.
The Company posted a gross profit of $6,011,569 in the six-month period
ended September 30, 1999, an increase of $676,244, or 12.7%, from the gross
profit of $5,335,325 in the six-month period ended September 30, 1998. This
gross profit increase was due to the increase in sales noted above and in the
Company's gross margin. The gross margin of 44.9% for the six-month period ended
September 30, 1999 was an increase of 2.1% over the Company's gross margin of
42.8% in the six-month period ended September 30, 1998.
Operating expenses (excluding depreciation and amortization expenses) in
the six-month period ended September 30, 1999 were $7,545,358. This represented
a $2,451,467, or 48.1%, increase over the Company's operating expenses of
$5,093,891 in the six-month period ended September 30, 1998. The primary reasons
for the operating expense increase were an increase in payroll and related
expenses of $962,066 and an increase in rent expense of $1,067,934. The
increased expenses were due to the lease payments on the new stores opened and
the addition of several middle managers and of employees at the new stores.
During the six-month period ended September 30, 1999, the Company recorded
non-cash depreciation and amortization expenses of $452,982, a $70,771, or
18.5%, increase from $382,211 in the period ended September 30, 1998. This
increase was largely due to depreciation on the fixed assets purchased for the
newly opened stores. Total operating expenses (operating expenses combined with
depreciation and amortization) in the September 1999 period were $7,998,340, a
$2,522,238, or 46.1%, increase from total operating expenses of $5,476,102 in
the September 1998 period.
Since the $676,244 increase in gross profit was less than the $2,522,238
increase in total operating expenses, the Company's operating loss increased by
$1,845,994 from $140,777 during the six-month period ended September 30, 1998 to
$1,986,771 during the six-month period ended September 30, 1999.
Interest expense totaled $662,834 for the six-month period ended September
30, 1999. This represented a $313,120, or 89.5%, increase over the interest
expense of $349,714 in the six-month period ended September 30, 1998. The
primary reason for the increased level of interest expense was a higher level of
borrowings in the six-month period ended September 30, 1999 than in the
September 1998 period.
<PAGE>
During the six months ended September 30, 1999, the Company recorded a
minority interest in the loss of consolidated subsidiary of $143,497. This
minority interest arose out of the sale of stock of the Company's Toys
subsidiary in July 1999 to Tudor, CDMI, and Concord, as described in Note 3 to
the condensed consolidated financial statements and above. Since Toys incurred a
loss during the three months ended September 30, 1999, this minority interest
represented a reduction in the Company's net loss.
As a result of the above-mentioned factors, the Company recorded a net loss
of $2,506,108 for the six-month period ended September 30, 1999. This
represented a $2,015,617 increase over the net loss of $490,491 recorded in the
six-month period ended September 30, 1998. For the six-month periods ended
September 30, 1999 and 1998, the net losses of $2,506,108 and $490,491,
respectively, were increased by non-cash dividends of $1,384,517 and $1,200,000,
respectively, in order to determine the net loss applicable to common shares.
The non-cash dividends represent amortization of the discount recorded upon the
issuance of Series E Stock with a beneficial conversion feature. No dividends in
the form of securities or other assets were actually paid out.
The basic and diluted net loss per common share for the September 1999
period was $0.70 compared to a basic and diluted net loss per common share in
the September 1998 period of $0.41.
Liquidity and Capital Resources
At September 30, 1999, the Company had a working capital deficit of
$2,730,031 compared to a working capital position of $5,832,143 at March 31,
1999. The primary factors in the $8.56 million decrease in working capital was a
reclassification of the Company's credit line with FINOVA Capital Corporation
("FINOVA") from a long term liability to a short term liability. This
reclassification was due to the expiration date of the credit facility of August
3, 2000 falling within one year of the September 30, 1999 balance sheet date.
Prior to its most recent fiscal year ended March 31, 1999, the Company
generated operating losses in the past several years as well as in the six-month
period ended September 30, 1999. The Company has historically financed those
losses and its working capital requirements through loans and sales of the
Company's equity securities, primarily through the sale of the Company's Series
E Stock. There can be no assurance that the Company will be able to generate
sufficient revenues or have sufficient controls over expenses and other charges
to achieve profitability.
During the six-month period ended September 30, 1999, the Company used
$3,777,012 of cash in its operations compared to $3,416,720 used in operations
in the six-month period ended September 30, 1998. The Company's net loss was
approximately $2,506,000 and $490,000, respectively, in those periods. The
primary reason the cash used for operating activities was larger than the net
loss in the six-month period ended September 30, 1999 was due to increases in
deposits and other current assets related to the opening and planned openings of
additional stores and deferred expenses related to the public offering of Toys'
common stock.
<PAGE>
The Company used $1,919,427 of cash in its investing activities during the
six-month period ended September 30, 1999 compared to $1,149,757 in the
six-month period ended September 30, 1998. The primary investing activity was
the purchase of equipment and fixtures for new stores.
The Company generated $5,947,650 from its financing activities in the
six-month period ended September 30, 1999 compared to the generation of
$4,341,125 from financing activities in the six-month period ended September 30,
1998. The primary contributors to the Company's financing activities were
borrowings on the Company's line of credit and proceeds from the sale of the
Company's Series F Preferred Stock and the sale of common stock of the Toys
subsidiary, as discussed below. Those proceeds were used to finance the
Company's working capital requirements, capital expenditures and operating
losses during the six-month period ended September 30, 1999.
As a result of the above factors, the Company had a net increase in cash of
$251,211 in the six-month period ended September 30, 1999 compared to a net
decrease in cash of $225,352 in the six-month period ended September 30, 1998.
During the three-month period ended September 30, 1999, the Company opened
one new store. This store was located in Pier 39 in San Francisco, California.
Pier 39 is a tourist-oriented destination that has a history of heavy foot
traffic. The capital investment for building this store was approximately
$425,000, net of landlord contributions.
In October 1999, the Company 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. The Company postponed the
construction of its planned new store in Schaumburg, Illinois until the spring
of 2000. The Company now has 32 stores located in seven states.
The Company had planned to finance the above store opening costs through a
combination of capital lease financing, use of the Company's working capital,
and the sale of additional equity. The Company has obtained approximately
$431,500 in capital lease financing this fiscal year.
In May 1999, pursuant to ss.506 of Regulation D, the Company sold 750,000
shares of Series F Preferred Stock ("Series F Stock"), at a purchase price of
$1.00 per share, through Robb Peck McCooey Clearing Corporation as placement
agent. The Company received $657,500 in net proceeds from the sale. Each share
of Series F Stock is convertible, at the holder's option, into two full paid and
non-assessable shares of Common Stock, at any time commencing on the date the
registration statement registering the Common Stock underlying same is declared
effective by the Securities and Exchange Commission. Each share of Series F
Stock shall convert automatically on the occurrence of the earlier of either of
the following events, without action on the part of the holder thereof: (i) two
years from issuance or (ii) in the event the closing price per share of Common
Stock has been at lease $5.00 for a consecutive 30-day period.
<PAGE>
Due to the beneficial conversion feature of the Series F Stock, the
proceeds have initially been recorded as additional paid-in capital, which is
being amortized over 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.
In connection with the private placement of the Series F Stock, the Company
granted options to the placement agent to purchase 350,000 shares of Common
Stock at an exercise price of $3.00 per share for a period of four years from
the date of closing of the private placement. The Company has valued these
options at approximately $507,000 using the Black-Scholes option valuation
model. As the options were granted in connection with the private placement, the
compensation effect of these was effectively offset against the proceeds into
additional paid-in capital with no net effect on the Company's stockholders'
equity or result of operations. The placement agent also received a 10%
commission, or $75,000, and a 1% allowance, or $7,500, to cover administrative
expenses. The private placement closed on May 27, 1999.
On July 15, 1999, Tudor - an entity of which Mr. Moses Mika (a director of
the Company) is a shareholder - elected to exercise its right to purchase a 25%
ownership interest in the Company's Toys subsidiary. Tudor was the assignee of
an option to acquire 25% of the outstanding shares of the common stock of Toys
at book value. The book value of Toys as of June 30, 1999 was determined to be
$2,894,711. In October, Tudor paid the Company $723,678 (25% of the book value
as of June 30, 1999).
This option arose out of the June 30, 1998 conversion, by ABC Fund, Inc.
("ABC," an affiliate of the Company), of a $1.5 million debenture into Series E
Stock as of June 30, 1998. Pursuant to the terms of the debenture, in September
1998, ABC assigned its right to purchase the Toys common stock to Tudor.
On July 20, 1999, the Company 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, Concord of
Frankfurt, Germany and CDMI, a British Virgin Islands corporation. Mr. Mika is a
shareholder of CDMI. Each party invested $1.4 million in the transaction.
In early October 1999, the Company loaned $200,000 to Shopnet.com, Inc. and
$50,000 to Breaking Waves, Inc., both of which entities are affiliated with the
Company. The loans carry interest at 9% and are due in March 2000.
On October 25, 1999, Tudor lent the Company $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
Toys.
<PAGE>
On November 19, 1999, the Company's Toys 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.
Toys 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, which was approximately equal to $13.52 per share. The Company retained
majority ownership of Toys with a 58.4% equity interest in the subsidiary and,
as a result, will continue to consolidate Toys' operations in its financial
statements.
In addition to the 2 million shares sold by Toys in the offering, Concord
and CDMI each sold 200,000 shares in the offering in the form of a greenshoe
allotment. Both Concord and CDMI invested in Toys in a private placement in July
1999. The total offering size, including the greenshoe allotment, was 2.4
million shares.
The Company expects to complete the accounting for the net proceeds of the
Offering during the quarterly period ending December 31, 1999.
The Company 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
Many installed computer systems and software products are currently
programmed to accept two-digit entries in the date field. Beginning in the year
2000 ("Y2K"), however, the programmed fields will have to accept four-digit
entries, so as to be able to distinguish dates from the 21st century from those
of the 20th century. However, even four-digit date entries do not necessarily
guarantee a smooth transition to the year 2000. Data lost during the archiving
process or the overwriting of old information with new information may initially
remain undiscovered and cause problems. As a result, computer systems and/or
software utilized by many companies must still be upgraded before the end of
this year to become year 2000 compatible.
The Company believes that all of its systems are year 2000 compatible and
that the Company does not face any Y2K problems in the U.S. The services offered
by the Company are not affected by the year 2000 compatibility of its systems.
According to the wholesalers, their systems will be year 2000 compatible as
well.
The Company has no current knowledge of any outside third party year 2000
issues that would result in a material negative impact on its operations.
Management has reviewed its significant vendors' (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 the
Company has taken to become year 2000 compliant are sufficient. In continuation
of this review, the Company shall continue to monitor or otherwise obtain
confirmation from the aforesaid entities - and such other entities, as
management deems appropriate - as to their respective degrees of preparedness.
To date, nothing has come to the attention of the Company that would lead it to
believe that its significant vendors and/or service providers will not be year
2000 ready.
<PAGE>
Year 2000 readiness is a priority of the Company, and the Company believes
that it is taking such reasonable and prudent steps as are necessary to mitigate
the risks associated with potential year 2000 difficulties. The effect, if any,
of year 2000 problems on the Company's results of operations if the Company's or
its customers, vendors, or service providers are not fully compliant cannot be
estimated with any degree of certainty. It is nonetheless possible that year
2000 problems could have a material adverse effect in that holiday 1999
purchases may be stunted due to consumer uncertainty and that the overall
business environment may be disrupted in the Company's fourth fiscal quarter.
The budget for the Company's Y2K issue was approximately $100,000 to
$120,000 (including upgraded hardware), and the Company spent all of it. The
Company used an external consultant, Data Pro Consulting, which has done the
vast majority of the Company's Y2K compliance work.
Despite the measures that have been taken by the Company, there is no
guarantee that the transition to the year 2000 will be without problems.
Correction of these problems may be associated with additional financial
burdens. Moreover, it cannot be ruled out that wholesalers will encounter
problems beyond the control of the Company. The complexity of today's networked
systems, internally as well as externally, poses a general risk. The Company
strives to keep this risk to a minimum.
Trends Affecting Liquidity, Capital Resources and Operations
The Company believes that its same store sales showed a decline after a
period of two years of continuous increases (in the fiscal years ended March 31,
1998 and March 31, 1999) because in the six-month period ended September 30,
1999, the flow of allocated 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 the Company has with some of its
vendors. The Company is working to increase its lines of credit with its vendors
to more adequately address not only the past growth but its expected future
growth as well. As noted above, the Company has recently significantly
strengthened its balance sheet by raising approximately $30 million in
additional equity, which should result in expanded lines of credit with its
trade vendors.
The Company believes that its growth and the availability of "hot" or
allocated merchandise within certain sectors of its core business - such as
action figures, video games, and collector plush - could have an impact on
continuing store sales in the future. The Company is working diligently to
address this issue.
The Company's future financial performance will depend upon continued
demand for toys and the Company's ability to choose locations for new stores,
the Company's ability to purchase product at favorable prices and on favorable
terms, and the effects of increased competition and changes in consumer
preferences.
<PAGE>
The toy and hobby retail industry faces a number of potentially adverse
business conditions including price and gross margin pressures and market
consolidation. The Company competes with a variety of mass merchandisers,
superstores, and other toy retailers, including Toys R Us and Kay Bee Toy
Stores. Competitors that emphasize specialty and educational toys include Disney
Stores, Warner Bros. Stores, Learning Smith, Lake Shore, Zainy Brainy, and
Noodle Kidoodle. The Company also competes both through its electronic commerce
operations and through its stores against Internet oriented toy retailers such
as eToys, Inc. There can be no assurance that the Company's business strategy
will enable it to compete effectively in the toy industry.
Seasonality
The Company's operations are highly seasonal with approximately 30-40% of
its net sales falling within the Company's third quarter, which coincides with
the Christmas selling season. Also, the Company opened five new stores in
October, which will make the Company's third quarter sales an even greater
percentage of the total year's sales.
Impact of Inflation
The impact of inflation on the Company's results of operations has not been
significant. The Company attempts to pass on increased costs by increasing
product prices over time.
<PAGE>
PART II
Item 1. Legal Proceedings
In October 1997, in the Superior Court of the State of California, County
of San Bernardino, Foothill Marketplace commenced suit against the Company for
breach of contract pertaining to premises leased by the Company in Rialto,
California. The lease for the premises has a term from February 1987 through
November 2003. The Company vacated the premises in August 1997. Under California
State law and the provisions of the lease, plaintiff has a duty to mitigate its
damages. Plaintiff seeks damages, of a continuing nature, for unpaid rent,
proximate damages, costs, and attorneys' fees, in the approximate amount of
$300,000. This action has been taken off the trial calendar with a settlement
review hearing scheduled to occur in late December 1999 or early January 2000.
Management believes that this case will reach a settlement by that date.
No Director, Officer, or affiliate of the Company, nor any associate of
same, is a party to, or has a material interest in, any 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 herewith:
10.137 Amendment to Lease Agreement - Concord Mills (Toy Co.)
27.1 Financial Data Schedule
(b) During the quarter ended September 30, 1999, no reports on Form 8-K
were filed with the Securities and Exchange Commission.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, this 22nd day of November 1999.
PLAY CO. TOYS & ENTERTAINMENT CORP.
By: /s/ Richard L. Brady
Richard L. Brady
President and Chief Executive Officer
By: /s/ James B. Frakes
James B. Frakes
Chief Financial Officer
EXHIBIT 10.137
FIRST MODIFICATION OF LEASE AGREEMENT
LANDLORD NAME
AND ADDRESS: CONCORD MILLS LIMITED PARTNERSHIP,
a Delaware limited partnership
1300 Wilson Boulevard, Suite 400
Arlington, Virginia 22209
TENANT NAME
AND ADDRESS: TOYS INTERNATIONAL, INC.,
a California corporation
550 Rancheros Drive
San Marcos, California 92069
DATE OF LEASE: August 10, 1998
LEASED PREMISES: Store #522 (approximately 8,135 sf)
SHOPPING CENTER: Concord Mills,
Concord, North Carolina
R E C I T A L
WHEREAS, Landlord and Tenant have entered into a Lease dated August 10,
1998 ("Lease"), whereby Landlord has leased to Tenant the Leased Premises for a
term of approximately ten (10) years.
WHEREAS, Landlord and Tenant have agreed to modify the Lease to increase
Tenant's square footage of the Leased Premises and adjust the Minimum Rent and
Percentage Rent accordingly, all as provided for herein.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
it is hereby agreed as follows:
1. DESCRIPTION OF LEASED PREMISES:
Store Number: 518, consisting of approximately 10,402 square feet of floor
area as shown on Exhibit "A".
2. MINIMUM RENT:
Original Term:
From the Commencement Date and continuing through the fifth (5th) year of
the Original Term, the sum of $228,844.00 ($22.00 psf) annually, payable in
equal consecutive monthly installments of $19,070.33 each;
<PAGE>
Beginning with the sixth (6th) year and continuing through the expiration
of the Original Term, the sum of $249,648.00 ($24.00 psf) annually, payable in
equal consecutive monthly installments of $20,804.00 each.
3. PERCENTAGE RENT:
Percentage Factor: 6%
Sales Break Point for the Original Term:
From the Commencement Date through the fifth (5th) year of the Original
Term: $3,269,200.00;
Beginning with the sixth (6th) year and continuing through the expiration
of the Original Term: $3,566,400.00.
4. Exhibit "A" is replaced with the attached Exhibit "A" dated August 5,
1998.
5. Exhibit "D", page 14, line 41 is replaced with 10,402 square feet.
6. Except as expressly modified in this First Modification of Lease
Agreement, all the terms, covenants and conditions of said Lease shall remain
the same and in full force and effect, shall be binding on the parties hereto,
and are hereby ratified and affirmed. Unless specifically defined herein, the
capitalized terms used in this First Modification of Lease Agreement shall have
the meanings defined in the Lease.
IN WITNESS WHEREOF, the parties hereto have set their hand and seal as
of the ___ day of __________, 19__ and declare this First Modification of Lease
Agreement to be binding on them, their respective successors and permitted
assigns.
<TABLE>
<CAPTION>
<S> <C>
WITNESS: LANDLORD:
CONCORD MILLS LIMITED PARTNERSHIP, a Delaware limited partnership
By: Concord Mills, L.L.C., a Delaware limited liability company
Its: General Partner
By: The Mills Limited Partnership, a Delaware limited partnership
Its: Manager
By: The Mills Corporation, a Delaware corporation
Its: General Partner
By: ________________________
Judith Berson
Executive Vice President
<PAGE>
WITNESS/ATTEST: TENANT:
TOYS INTERNATIONAL, INC.,
a California corporation
__________________________ By: ___________________________
__________________________ Its: ___________________________
__________________________ By: ___________________________
__________________________ Its: ___________________________
Corporate Seal:
</TABLE>
<PAGE>
ACKNOWLEDGEMENT OF LANDLORD
COMMONWEALTH OF VIRGINIA )
)ss.
COUNTY OF ARLINGTON )
On this ______ day of ________________, 19___, before me personally
appeared Judith Berson to me known to be the person who executed the foregoing
First Modification of Lease Agreement and acknowledged before me that she was
duly authorized and did execute same on behalf of CONCORD MILLS LIMITED
PARTNERSHIP, a Delaware limited partnership.
-----------------------------------------
Notary Public, Commonwealth of Virginia
My Commission expires:_________________
ACKNOWLEDGMENT OF CORPORATE TENANT
STATE OF )
)ss.
COUNTY OF )
On this ______ day of ________________, 19___, before me personally
appeared ____________________________ and __________________, to me personally
known, who, being by me duly sworn, did for themselves say that they are the
___________________ and ______________________ of TOYS INTERNATIONAL, INC., a
California corporation, the corporation named in and which executed the within
instrument, and that the seal affixed to said instrument is the corporate seal
of said corporation, and that said instrument was signed and sealed in behalf of
said corporation by authority of its board of directors and acknowledged before
me said instrument to be the free act and deed of said corporation.
-----------------------------------
Notary Public
My Commission expires:_____________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.1
PLAY CO. TOYS & ENTERTAINMENT CORP.
FINANCIAL DATA SCHEDULE
This schedule contains summary information extracted from the condensed
consolidated balance sheet, statements of operations and cash flows and notes
thereto incorporated in Part 1, Item 1, of this Form 10-QSB and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> mar-31-2000
<PERIOD-END> sep-30-1998
<CASH> 377,178
<SECURITIES> 0
<RECEIVABLES> 172,442
<ALLOWANCES> 0
<INVENTORY> 15,127,625
<CURRENT-ASSETS> 18,826,524
<PP&E> 11,757,355
<DEPRECIATION> (4,511,565)
<TOTAL-ASSETS> 29,485,279
<CURRENT-LIABILITIES> 21,556,555
<BONDS> 0
0
7,066,618
<COMMON> 1,612,976
<OTHER-SE> (1,882,388)
<TOTAL-LIABILITY-AND-EQUITY> 29,415,279
<SALES> 13,375,684
<TOTAL-REVENUES> 0
<CGS> 7,364,115
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,998,340
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 662,834
<INCOME-PRETAX> (2,506,108)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,506,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,506,108)
<EPS-BASIC> (.70)
<EPS-DILUTED> (.70)
</TABLE>
