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 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)
</TABLE>
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, $0.01 par value:
7,514,716 shares outstanding as of February 21, 2000.
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 December 31, 1999 3
Condensed consolidated statements of operations and comprehensive net loss
for three months and nine months ended December 31, 1999 and 1998 (unaudited). 4
Condensed consolidated statements of cash flows for the nine months ended
December 30, 1999 and 1998 (unaudited). 5
Notes to condensed consolidated financial statements 6-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
19
Item 1. LEGAL PROCEEDINGS
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
Item 3. DEFAULTS UPON SENIOR SECURITIES 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
Item 5. OTHER INFORMATION 19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 19
Signatures 20
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<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS
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<CAPTION>
ASSETS
December 31, 1999 March 31, 1999
----------------- --------------
(unaudited)
Current
<S> <C> <C>
Cash $ 12,295,195 $ 125,967
Accounts receivable 985,422 98,276
Notes receivable - affiliates 650,000 -
Merchandise inventories 14,175,841 11,506,284
Other current assets 646,706 1,660,263
----------- -----------
Total current assets 28,753,164 13,390,790
Property and Equipment, net of accumulated
depreciation and amortization of $4,832,093 7,312,257 5,348,175
and $4,058,603, respectively
Deposits and other assets 4,447,490 2,411,427
$ 40,512,911 $ 21,150,392
=============== ============
LIABILITIES & STOCKHOLDERS' EQUITY
December 31, 1999 March 31, 1999
----------------- --------------
Current
Accounts payable $ 7,902,620 $ 5,611,442
Accrued expenses and other liabilities 1,392,517 595,008
Current portion of notes payable and capital leases 848,774 1,352,197
Borrowings under financing agreement 54,170 -
----------- -----------
Total current liabilities 10,198,081 7,558,647
Borrowings under financing agreement - 7,814,666
Notes payable and capital leases, net of current portion 1,257,091 585,681
Deferred rent liability 135,060 126,769
----------- -----------
Total liabilities 11,590,232 16,085,763
----------- -----------
Minority interest in subsidiary 12,600,132 -
----------- -----------
Stockholders' equity:
Convertible series E preferred stock, $1 par, 25,000,000 shares
authorized: 5,858,903 shares outstanding 7,116,020 5,682,101
Convertible series F preferred stock, $0.01 par,
5,500,000 shares authorized; 750,000 and 0
shares outstanding, respectively 750,000 -
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 29,525,537 15,335,172
Accumulated deficit (21,124,498) (16,007,679)
----------- ------------
Total stockholders' equity 16,322,547 5,064,629
----------- ------------
$40,512,911 $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
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<CAPTION>
(Unaudited)
Three Months Ended December 31, Nine Months Ended December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $17,315,824 $ 14,715,952 $30,691,508 $ 27,171,662
Cost of Sales 10,006,720 8,545,336 17,370,835 15,665,721
---------- ------------ ---------- ----------
Gross profit 7,309,104 6,170,616 13,320,673 11,505,941
---------- ------------ ---------- ----------
Operating expenses:
Operating expenses 6,017,985 4,049,888 13,746,807 9,115,002
Litigation settlement expense 183,464 2,227 270,206 31,004
Depreciation and amortization 320,508 324,975 773,490 707,186
---------- ------------ ---------- ----------
Total operating expenses 6,521,957 4,377,090 14,790,503 9,853,192
---------- ------------ ---------- ----------
Operating profit (loss) 787,147 1,793,526 (1,469,830) 1,652,749
---------- ------------ ---------- ----------
Interest expense:
Interest and finance charges 307,870 221,860 823,200 517,172
Amortization of debt issuance costs 58,097 73,032 174,889 127,434
---------- ------------ ---------- ----------
Total interest expense 294,892 998,089 644,606
---------- ------------ ---------- ----------
365,967
Profit (loss) before minority interest in 421,180 1,498,634 (2,467,919) 1,008,143
consolidated subsidiary
Minority interest (income) in loss of consolidated
subsidiary (608,478) - (464,981) -
---------- ------------ ---------- ----------
Net income (loss) (187,298) 1,498,634 (2,932,900) 1,008,143
Other comprehensive income (loss)
- - - -
Comprehensive net income (loss) $ (187,298) $ 1,498,634 $(2,932,900) $ 1,008,143
=========== ============ ============ ===========
Calculation of basic and diluted loss per share:
Net income (loss) $ (187,298) $1,498,634 $(2,932,900) $ 1,008,143
Effects of non-cash dividends on convertible
Preferred stock (799,402) (477,973) (2,183,919) (1,229,752)
---------- ------------ ---------- ----------
Net income (loss) applicable to common shares $ (986,700) $1,020,661 $(5,116,819) $ (221,609)
========== ========== ===========- ==========
Basic and diluted income (loss) per common share
and share equivalents $ (0.18) $ 0.22 $ (0.92) $ (0.05)
========= ======== ========= ==========
Weighted average number of common shares
And share equivalents outstanding 5,548,852 4,666,562 5,541,076 4,291,883
========== ========== ===========- ==========
</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>
Nine-months Ended December 31,
1999 1998
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $(2,932,900) $ 1,008,143
Adjustments used to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 773,490 707,186
Minority interest in net income (loss) of 464,981 -
subsidiary
Deferred rent 8,291 4,552
Stock compensation - 32,814
Amortization of debt issuance costs 105,521 127,434
Increase (decrease) from changes in:
Accounts receivable (887,146) (32,140)
Merchandise inventories (2,669,557) (2,951,966)
Other current assets 1,631,713 (1,302,841)
Deposits and other assets (4,036,063) (213,123)
Accounts payable 2,291,178 1,713,009
Accrued expenses and other liabilities 839,009 54,770
------------- -----------
Net cash used by operating activities (4,411,483) (852,162)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,931,206) (1,497,673)
Issuance of notes receivable to affiliates (650,000) -
------------- -----------
Net cash used by investing activities (2,581,206) (1,497,673)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred and common stock 25,560,792 706,148
Borrowings under financing agreement 27,061,000 33,321,000
Repayments under financing agreement (34,821,496) (31,012,017)
Borrowings under notes payable - 1,550,000
Reclassification of restricted cash 2,000,000 -
Repayments under notes payable and capital leases (638,379) (1,644,293)
------------- -----------
Net cash provided by financing activities 19,161,917 2,920,838
------------- -----------
Net increase in cash 12,169,228 571,003
Cash at beginning of period 125,967 648,986
------------- -----------
Cash at end of period $ 12,295,195 $ 1,219,989
============ ===========
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 nine month period ended December 31, 1999 are not
necessarily indicative of the results of operations that may be expected for the
year ending March 31, 2000.
The interim accompanying unaudited condensed consolidated financial
statements include the operations of the Company and its majority owned
subsidiary, Toys International.COM, Inc. ("Toys"). At December 31, 1999, the
Company owned 58.4% of Toys.
Note 2. Cash
At December 31, 1999, the Company had $12,295,195 in cash, $9,819,941
of which was attributable to Toys.
Note 3. Leases
During the nine month period ended December 31, 1999, the Company
entered into several capital leases to help finance several new stores. The
leases are for an aggregate principal amount of $806,366 and bear interest at
rates varying between 9.2% and 20.9%.
Note 4. Sale of Shares in Subsidiary
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 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. The Company 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.
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Unaudited)
Note 4. Sale of Shares in Subsidiary (continued)
Toys has granted options to purchase an aggregate 250,000 shares of
common stock to certain of its directors, officers, and advisors. The options
bear an exercise price of $4.24 per share and a term of three years. They are
not exercisable until November 19, 2000 (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 approximate the fair value given the
private sales of Toys shares immediately preceding such grants. However, 26,000
of the options were granted to a legal advisor for services related to the
proposed public offering and were valued by management at the estimated fair
value of approximately $118,000 which amount was netted against the proceeds of
the Offering credited to additional paid-in capital. As such, the compensation
recorded for such shares had no net effect on the Company's consolidated equity
or results of operations.
Concurrently, Toys granted an additional 450,000 incentive stock
options bearing a term of nine years and an exercise price of 3 Euros per share.
As these options are contingent upon Toys meeting certain specified performance
criteria, no compensation expense has been recorded as no compensation has yet
been earned.
As a result of the transactions involving Toys common 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 profits recorded for Toys through December 31, 1999.
Note 5. Basic and Diluted Loss per Share
The basic and diluted loss per common share for the three and nine
month periods ending December 31, 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
68,383,418, 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 6. Credit Facility
On December 31, 1999, the Company 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 the
Company'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 Company 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.
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Unaudited)
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. Transactions with Affiliates
In early October 1999, the Company loaned $50,000 to Shopnet.com, Inc.
("Shopnet") and $200,000 to Breaking Waves, Inc. ("Breaking Waves"), 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 Technologies, Inc. ("Tudor") lent the
Company $127,922 under a Demand Promissory Note ("Demand Note") bearing 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 and has been paid in full.
On November 29, 1999, the Company 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.
In December 1999, one of the two holders of the Company's convertible
subordinated debentures, Frampton Industries, Ltd. ("Frampton"), assigned its
debenture to the remaining holder, Europe American Capital Foundation ("EACF").
Pursuant to the debenture agreement, EACF informed the Company of its intention
to convert the aggregate $650,000 of subordinated debt into Series E Preferred
Stock. The Company expects this conversion to occur prior to its March 31, 2000
fiscal year end.
<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.
At December 31, 1999, the Company's operations were substantially
controlled by United Textiles & Toys Corp. ("UTTC") and Breaking Waves, Inc.
("Breaking Waves") which owned 43.9% and 22.9%, respectively, of the then issued
and outstanding shares of the Company's Common Stock (then totaling 5,548,857).
By virtue of Breaking Wave's status as a wholly-owned subsidiary of Shopnet.com,
Inc. ("Shopnet"), a Delaware public company, Shopnet may be deemed the
beneficial owner of the shares of Common Stock owned by Breaking Waves.
UTTC is a Delaware corporation and public company which was organized
in March 1991 and operates solely as a holding company. Breaking Waves is a New
York corporation and private company which manufactures swimwear.
UTTC and Breaking Waves currently own 32.4% and 16.9%, respectively, of
the Company's issued and outstanding shares of Common Stock (now totaling
7,514,716 shares given the recent conversions of Series E Preferred Stock
("Series E Stock") into Common Stock). The president of UTTC is also (a) the
president of Multimedia Concepts International, Inc. ("MMCI"), the parent of
UTTC and (b) the son-in-law of Harold Rashbaum who is the chairman of the board
of the Company and the president of both Shopnet and Breaking Waves. By virtue
of UTTC's and Breaking Waves' ownership of the Company's Common Stock and the
companies' significant affiliate relationships, these companies can be deemed to
hold de facto voting control of the Company.
For the three months ended December 31, 1999 compared to
the three months ended December 31, 1998
The Company generated net sales of $17,315,824 in the three months
ended December 31, 1999. This represented an increase of $2,599,872, or 17.7%,
from net sales of $14,715,952 in the three months ended December 31, 1998. Of
this sales growth, $840,224 is attributable to the Company's Internet operations
in the United States and Germany; the remainder is attributable to the Company's
new stores' sales as same store sales declined by 17.6% 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 December 31, 1999,
the flow of allocated or "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 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 June
through late October 1999 timeframe.
<PAGE>
The Company posted a gross profit of $7,309,104 in the three months
ended December 31, 1999, representing an increase of $1,138,488, or 18.5%, from
the gross profit of $6,170,616 in the three months ended December 31, 1998. This
gross profit increase is due to the above noted increase and an increase in the
Company's gross margin. The gross margin of 42.2% in the December 1999 period
represented an increase of 0.3% over the Company's gross margin of 41.9% in the
December 1998 period.
Operating expenses (excluding litigation settlement expenses and
depreciation and amortization expenses) in the three months ended December 31,
1999 were $6,017,985. This represented a $1,968,097, or 48.6%, increase over the
Company's operating expenses of $4,049,888 in the three months ended December
31, 1998. The primary reasons for the operating expense increase were an
increase in payroll and related expenses of $469,200, an increase in rent
expense of $476,543, and operating expenses related to the Company's new
Internet activities of $685,352. The payroll expense increase was due to the
hiring of several middle managers and employees at new stores. The growth in
rent expense was caused by the additional stores.
During the three months ended December 31, 1999, the Company settled
its final store closing related litigation. Under this settlement the Company
agreed to make a cash payment of $35,000, to issue 100,000 shares of its common
stock, and to pay an aggregate $186,138 over a 36-month period. The Company has
estimated the total net present value of the settlement to be $233,905 and
accrued an additional amount of $183,464 in the three months ended December 1999
to cover the estimated value of the settlement and other litigation related
expenses.
During the three months ended December 31, 1999, the Company recorded
non-cash depreciation and amortization expenses of $320,508, representing a
$4,467, or 1.4%, decrease from $324,975 in the period ended December 31, 1998.
This amount was lower in the December 1999 period than in the December 1998
period because in the 1998 period the Company amortized a portion of its store
opening expenses. All such expenses were considered operating expenses in 1999.
Total operating expenses (operating expenses combined with litigation settlement
expenses and depreciation and amortization) in the December 1999 period were
$6,521,957, representing a $2,144,867, or 49%, increase from total operating
expenses of $4,377,090 in the December 1998 period.
<PAGE>
Since the $1,138,488 increase in gross profit was less than the
$2,144,867 increase in total operating expenses, the Company's operating income
decreased by $1,006,379 from $1,793,526 during the three months ended December
31, 1998 to $787,147 during the three months ended December 31, 1999.
Interest expense totaled $365,967 for the three months ended December
31, 1999. This represented a $71,075 increase from interest expense of $294,892
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 in
the three months ended December 31, 1999 than in the December 1998 period.
As a result of the above-mentioned factors, the Company recorded a
profit before the minority interest in its consolidated subsidiary of $421,180
compared to $1,498,634, a decrease of $1,077,454. Profit before minority
interest may be a more relevant position on the statements of operations to
compare the two periods than the net income (loss) position, given there was no
minority interest in 1998.
During the three months ended December 31, 1999, the Company recorded a
minority interest in the profit of consolidated subsidiary of $608,478. This
minority interest arose out of various sales of stock of the Company's Toys
International.COM, Inc. ("Toys") subsidiary, as described in Note 4 to the
condensed consolidated financial statements and below. Since Toys posted a
profit of $1,267,310 during the three months ended December 31, 1999, this
minority interest represented a reduction in the Company's profits.
As a result of the above-mentioned factors, the Company recorded a net
loss of $187,298 for the three months ended December 31, 1999. This represented
a $1,685,932 decrease from the net profit of $1,498,634 recorded in the three
months ended December 31, 1998. For the three-month periods ended December 31,
1999 and 1998, the net loss and net income of $(187,298) and $1,498,634,
respectively, were increased by non-cash dividends of $799,402 and $477,973,
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 and Series F Preferred Stock ("Series F Stock"), both
having a beneficial conversion feature. The Series F Stock non-cash dividend was
applicable only to 1999. 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 December 1999
period was $(0.18), compared to a basic and diluted net income per common share
in the December 1998 period of $0.22.
For the nine months ended December 31, 1999 compared to
the nine months ended December 31, 1998
The Company generated net sales of $30,691,508 in the nine-month period
ended December 31, 1999. This represented an increase of $3,519,846, or 13.0%,
from net sales of $27,171,662 in the nine-month period ended December 31, 1998.
Of this sales growth, $1,063,666 can be attributed to the Company's Internet
operations in the United States and Germany; the remainder of the sales growth
can be attributed to the Company's new stores as same store sales declined by
22.5% for the period.
<PAGE>
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 nine month period ended December 31,
1999, the flow of allocated or "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 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 1999 timeframe.
The Company posted a gross profit of $13,320,673 in the nine-month
period ended December 31, 1999, representing an increase of $1,814,732, or
15.8%, from the gross profit of $11,505,941 in the nine month period ended
December 31, 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 43.4% for the
nine-month period ended December 31, 1999 represented an increase of 1.1% over
the Company's gross margin of 42.3% in the nine-month period ended December 31,
1998.
Operating expenses (excluding litigation settlement expenses and
depreciation and amortization expenses) in the nine month period ended December
31, 1999 were $13,746,807. This represented a $4,631,805, or 50.8%, increase
over the Company's operating expenses of $9,115,002 in the nine-month period
ended December 31, 1998. The primary reasons for the operating expense increase
were an increase in payroll and related expenses of $1,431,265, an increase in
rent expense of $1,517,642 and operating expenses relating to the Company's new
Internet activities of $921,231. The payroll expense increase was due to the
hiring of several middle managers and employees at new stores. The growth in
rent expense was caused by the additional stores.
During the nine months ended December 31, 1999, the Company settled its
final store closing related litigation. Under this settlement the Company agreed
to an upfront cash payment of $35,000, to issue 100,000 shares of its common
stock, and to pay an aggregate $186,138 over a 36-month period. The Company has
estimated the total net present value of the settlement to be $233,905 and
accrued an additional amount of $270,206 in the nine months ended December 1999
to cover the estimated value of the settlement and other litigation related
expenses.
During the nine-month period ended December 31, 1999, the Company
recorded non-cash depreciation and amortization expenses of $773,490, a $66,304,
or 9.4%, increase from $707,186 in the period ended December 31, 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
litigation settlement expense and depreciation and amortization) in the December
1999 period were $14,790,503, representing a $4,937,311, or 50.1%, increase from
total operating expenses of $9,853,192 in the December 1998 period.
<PAGE>
Since the $1,814,732 increase in gross profit was less than the
$4,937,311 increase in total operating expenses, the Company's operating loss
increased by $3,122,579 from an operating profit of $1,652,749 during the
nine-month period ended December 31, 1998 to an operating loss of $1,469,830
during the nine-month period ended December 31, 1999.
Interest expense totaled $998,089 for the nine-month period ended
December 31, 1999. This represented a $353,483, or 54.8%, increase over the
interest expense of $644,606 in the nine-month period ended December 31, 1998.
The primary reason for the increased level of interest expense was a higher
level of borrowings in the nine-month period ended December 31, 1999 than in the
December 1998 period.
As a result of the above-mentioned factors, the Company recorded a loss
before the minority interest in its consolidated subsidiary of $(2,467,919)
compared to a profit of $1,008,143, representing a decrease of $3,476,062. Since
there was no minority interest in the 1998 period, profit before minority
interest may be a more relevant position on the statements of operations to
compare the two periods than the net income (loss) position.
During the nine months ended December 31, 1999, the Company recorded a
minority interest in the profit of consolidated subsidiary of $464,981. This
minority interest arose out of various sales of stock of the Company's Toys
subsidiary, as described in Note 4 to the condensed consolidated financial
statements and below. Since Toys posted a profit during the nine months ended
December 31, 1999 of $455,387, this minority interest represented a reduction in
the Company's profits.
As a result of the above-mentioned factors, the Company recorded a net
loss of $(2,932,882) for the nine-month period ended December 31, 1999. This
represented a $3,941,025 decrease from the net profit of $1,008,143 recorded in
the nine-month period ended December 31, 1998. For the nine month periods ended
December 31, 1999 and 1998, the net loss of $(2,932,882) and net profit of
$1,008,143, respectively, were increased by non-cash dividends of $2,183,919 and
$1,229,752, 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 December 1999
period was $(0.92) compared to a basic and diluted net loss per common share in
the December 1998 period of $(0.05).
<PAGE>
Liquidity and Capital Resources
At December 31, 1999, the Company had working capital of $18,555,083
compared to working capital of $5,832,143 at March 31, 1999. The primary factor
in the $12,722,940 increase in working capital was the completion of an initial
public offering of a minority interest in the Company's Toys subsidiary on the
Frankfurt Stock Exchange on November 19, 1999.
The Company has historically financed operations and working capital
requirements through financing agreements 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 nine month period ended December 31, 1999, the Company used
$4,411,483 of cash in its operations compared to $852,162 used in operations in
the nine-month period ended December 31, 1998. The primary reason for the
significant difference between the amount of cash used in operations in the two
periods was the net loss of $2,932,900 in the 1999 period compared to the net
income of $1,008,143 in the 1998 period.
The Company used $2,581,206 of cash in its investing activities during
the nine-month period ended December 31, 1999 compared to $1,497,673 in the
nine-month period ended December 31, 1998. In both periods, the primary
investing activity was the purchase of equipment and fixtures for new stores.
Additionally, in 1999, the Company loaned $650,000 to affiliated entities.
The Company generated $19,161,917 from its financing activities in the
nine-month period ended December 31, 1999 compared to the generation of
$2,920,838 from financing activities in the nine-month period ended December 31,
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 Stock and the sale of common stock of the Toys subsidiary, as
discussed herein. Those proceeds were used to finance the Company's working
capital requirements, capital expenditures and operating losses during the
nine-month period ended December 31, 1999.
As a result of the above factors, the Company had a net increase in
cash of $12,169,228 in the nine-month period ended December 31, 1999 compared to
a net increase in cash of $571,003 in the nine month period ended December 31,
1998.
During the three-month period ended December 31, 1999, the Company
opened five new stores. 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.
<PAGE>
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 $806,000 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 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.
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 a 7-month period in the form of a non-cash dividend.
Management has used a 7-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 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 Technologies, Inc. ("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 1999, Tudor
paid the Company $723,678 (25% of the book value as of June 30, 1999).
<PAGE>
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
Effekten AG ("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 $50,000 to Shopnet.com, Inc. and
$200,000 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") bearing 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 and has been
paid in full.
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 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. 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. 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.
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 profits recorded
for Toys through December 31, 1999.
On November 29, 1999, the Company 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.
The holders of the Company's convertible subordinated debentures have
informed the Company that they plan to convert the $650,000 of subordinated debt
into the Company's Series E Preferred Stock. The Company expects this conversion
to occur prior to its March 31, 2000 fiscal year end.
<PAGE>
The Company anticipates, based on currently proposed plans and
assumptions relating to its operations, that the proceeds of the Offering will
suffice to satisfy its contemplated cash requirements for at least 12 months.
Year 2000
The Company believes that its computer systems completed the transition
to the year 2000 without any discernible issues. The Company is not aware that
any of its key vendors realized any year 2000 related computer problems.
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 nine month period ended December 31,
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 $25 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.
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.
<PAGE>
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
During the nine months ended December 31, 1999, the Company settled its
lawsuit with Foothill Marketplace which had alleged breach of contract
pertaining to the Company's closing of its Rialto store. Pursuant to the
settlement, the Company made a cash payment of $35,000 and agreed to pay an
aggregate $186,138 to Foothill Marketplace over a 36-month period. In addition,
the Company agreed to issue 100,000 shares of Common Stock to same. The Company
has estimated the total net present value of the settlement to be $233,905.
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: On February 4,
2000, the Company held a special meeting of its Common and Series E Preferred
Stock shareholders at its San Marcos office. Shareholders were asked to vote on
the proposal to amend the Company's Certificate of Incorporation to modify the
conversion terms of the Series E Preferred Stock to render all shares of same
eligible for conversion as of February 4, 2000. The proposal was adopted by a
majority of both the Common and Series E Preferred shareholders as follows:
<TABLE>
<CAPTION>
Votes Cast For Votes Cast Against Abstentions
<S> <C> <C> <C>
Common Stock 3,709,300 3,202 687
Series E Preferred Stock 3,845,880 0 0
</TABLE>
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
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
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 February 2000.
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
<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> 9-mos
<FISCAL-YEAR-END> mar-31-2000
<PERIOD-END> dec-31-1999
<CASH> 12,295,195
<SECURITIES> 0
<RECEIVABLES> 985,422
<ALLOWANCES> 0
<INVENTORY> 14,175,841
<CURRENT-ASSETS> 28,753,164
<PP&E> 12,144,350
<DEPRECIATION> 4,832,093
<TOTAL-ASSETS> 40,512,911
<CURRENT-LIABILITIES> 10,198,081
<BONDS> 0
0
7,866,020
<COMMON> 0
<OTHER-SE> 8,456,527
<TOTAL-LIABILITY-AND-EQUITY> 16,322,547
<SALES> 30,691,508
<TOTAL-REVENUES> 30,691,508
<CGS> 17,370,835
<TOTAL-COSTS> 14,790,503
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 998,089
<INCOME-PRETAX> (2,932,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,932,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,932,900)
<EPS-BASIC> (0.92)
<EPS-DILUTED> (0.92)
</TABLE>
