U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
(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, 2000
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)
Delaware 95-3024222
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
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:
84,928,054 shares outstanding as of November 16, 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page Number
Item 1. FINANCIAL STATEMENTS
<S> <C>
Condensed consolidated balance sheets as of September 30, 2000 (unaudited) and March 3
31, 2000.
Condensed consolidated statements of operations and comprehensive net loss for three
months and six months ended September 30, 2000 and 1999 (unaudited). 4
Condensed consolidated statements of cash flows for the six months ended September
30, 2000 and 1999 (unaudited). 6
Notes to condensed consolidated financial statements 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
14
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 21
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
Item 3. DEFAULTS UPON SENIOR SECURITIES 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
Item 5. OTHER INFORMATION 21
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 21
Signatures 22
</TABLE>
2
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
----------------------- -------------------
(Unaudited)
Current
<S> <C> <C>
Cash $ 30,450 $ 6,179,007
Accounts receivable 99,270 676,456
Merchandise inventories 18,523,931 14,111,236
Marketable securities 4,250,000 -
Other current assets 408,868 20,000
----------- -----------
Total current assets 23,312,519 20,986,699
Property and Equipment, Net of accumulated
depreciation and amortization of $5,987,224
and $4,058,603 respectively 8,742,215 7,398,621
Website development costs 3,081,149 1,753,193
Deposits and other assets 2,109,681 2,145,268
----------- -----------
$37,245,564 $ 32,283,781
=========== ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current
Accounts payable $ 11,205,368 $6,110,161
Accrued expenses and other liabilities 1,241,151 892,428
Current portion of notes payable and capital leases 187,696 386,179
Borrowings under financing agreement 3,144,873 47,542
----------- -----------
Total current liabilities 15,779,088 7,436,310
Notes payable and capital leases, net of current portion 994,797 988,767
Deferred rent liability 135,008 135,607
----------- -----------
Total liabilities 16,908,893 8,560,684
----------- -----------
Minority interest in subsidiary 7,513,308 9,943,407
----------- -----------
Stockholders' equity:
Convertible series E preferred stock, $1 par, 25,000,000 shares
authorized: 1,536,550 and 8,377,640 shares outstanding 1,216,098 7,349,154
Convertible series F preferred stock, $0.01 par,
5,500,000 shares authorized; 750,000
shares outstanding, respectively 750,000 750,000
Common stock, $.01 par value, 160,000,000 shares authorized;
83,718,097 and 11,227,568 shares outstanding, 837,181 112,275
respectively
Additional paid-in-capital 43,805,181 33,053,724
Accumulated deficit (33,785,097) (27,485,463)
----------- -----------
Total stockholders' equity 12,823,363 13,779,690
----------- -----------
$ 37,245,564 $32,283,781
============ ===========
</TABLE>
3
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE NET LOSS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
Restated (Note 5) Restated (Note 5)
2000 1999 2000 1999
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $9,027,051 $6,867,119 $16,045,144 $13,375,684
Cost of Sales 5,713,565 3,600,901 9,668,233 7,364,115
----------- --------- ----------- -----------
Gross profit 3,313,486 3,266,218 6,376,911 6,011,569
----------- --------- ----------- -----------
Operating expenses:
Operating expenses 6,972,704 3,788,706 12,514,011 7,542,234
Depreciation and amortization 611,423 228,514 1,163,547 452,982
----------- --------- ----------- -----------
Total operating expenses 7,584,127 4,017,220 13,677,558 7,995,216
----------- --------- ----------- -----------
Operating loss (4,270,641) (751,002) (7,300,647) (1,983,647)
----------- --------- ----------- -----------
Interest expense:
Interest and finance charges 146,300 300,016 797,413 584,680
Amortization of debt issuance costs - 47,424 - 78,154
Effective non-cash interest expense -
from beneficial conversion feature - - - 650,000
----------- --------- ----------- -----------
Total interest expense 146,300 347,440 797,413 1,312,834
----------- --------- ----------- -----------
Net loss before minority (4,416,941) (1,098,442) (8,098,060) (3,296,481)
interest, income taxes and
extraordinary item
Provision for income taxes 54,246 - 54,246 -
----------- --------- ----------- -----------
Net loss before minority interest and
extraordinary item (4,471,187) (1,098,442) (8,152,306) (3,296,481)
Minority interest in loss of consolidated subsidiary 1,331,341 143,497 2,430,098 143,497
----------- --------- ----------- -----------
Net loss before extraordinary gain (3,139,846) (954,945) (5,722,208) (3,152,984)
Extraordinary gain on modification of debt terms - - - 650,000
----------- --------- ----------- -----------
Net loss (3,139,846) (954,945) (5,722,208) (2,502,984)
Other comprehensive income (loss) (44,007) - (77,489) -
----------- --------- ----------- -----------
Comprehensive net loss $(3,183,853) $ (954,945) $(5,799,697) $ (2,502,984)
=========== ========= =========== ===========
</TABLE>
4
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE NET LOSS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Calculation of basic and diluted loss per share:
<S> <C> <C> <C> <C>
Net loss .................................................. $ (3,139,846) $ (954,945) $ (5,722,208) $ (2,502,984)
Effects of non-cash dividends on convertible
preferred stock ........................................ -- (799,402) (500,000) (1,384,517)
------------- ------------- ------------- -------------
Net loss applicable to common shares .................... $ (3,139,846) $ (1,754,347) $ (6,222,208) $ (3,887,501)
============= ============= ============= =============
Basic and diluted loss per common share
and share equivalents .................................. $ (.05) $ (0.32) $ (.13) $ (0.70)
============= ============= ============= =============
Weighted average number of common shares .................. 63,089,166 5,548,852 46,544,721 5,537,457
and share equivalents outstanding ============= ============= ============= =============
</TABLE>
5
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six-months Ended September 30,
Restated (Note 5)
2000 1999
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ......................................................................... $ (5,722,208) $ (2,502,984)
Adjustments used to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............................................. 1,163,547 452,982
Minority interest in net loss of subsidiary ............................... (2,430,098) (143,497)
Deferred rent ............................................................. (599) 4,112
Extraordinary gain ........................................................ -- (650,000)
Effective interest for beneficial conversion feature ...................... 500,000 650,000
Other ..................................................................... 93,368
Increase (decrease) from changes in:
Accounts receivable ....................................................... 577,186 (74,166)
Merchandise inventories ................................................... (4,412,695) (3,621,341)
Other current assets ...................................................... (388,868) (650,462)
Deposits and other assets ................................................. 35,587 (299,250)
Accounts payable .......................................................... 5,095,207 4,094,181
Accrued expenses and other liabilities .................................... 348,723 (334,299)
------------ ------------
Net cash used in operating activities .................. (5,140,850) (3,074,724)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .............................................. (2,229,323) (1,919,427)
Web Site Development ............................................................. (1,605,774) (702,288)
------------ ------------
Net cash used in investing activities ................... (3,835,097) (2,621,715)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred and common stock ............................. 3,540,504
Borrowings under financing agreement ............................................. 12,000,000 21,157,590
Repayments under financing agreement ............................................. (8,902,669) (18,246,482)
Repayments under notes payable and capital leases ................................ (192,453) (503,962)
------------ ------------
Net cash provided by financing activities .............. 2,904,878 5,947,650
------------ ------------
Effect of exchange rate on cash .......................................................... (77,488)
------------ ------------
Net increase (decrease) in cash .......................................................... (6,148,557) 251,211
Cash at beginning of period .............................................................. 6,179,007 125,967
------------ ------------
Cash at end of period .................................................................... $ 30,450 $ 377,178
============ ============
</TABLE>
6
See accompanying notes to condensed financial statements
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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, 2000 included in its Annual Report on Form 10-KSB.
Operating results for the six-month period ended September 30, 2000 are not
necessarily indicative of the results of operations that may be expected for the
year ending March 31, 2001.
Note 2. Segment Information
The Company's reportable segments are its retail store operations and its
Internet operations. The retail store operations are entirely based in the
United States, and its Internet operations occur both in the United States and
in Germany. The Internet operations consist of both business-to-consumer and
business-to-business (or wholesale) sales.
Information on segments which is based on information utilized by the Company's
chief operating decision maker, and a reconciliation to income (loss) before
income taxes, are as follows at September 30, 2000, and for the six months then
ended. For the six-months ended September 30, 1999, the Internet segment was not
considered to be an operating segment by management since the websites were
under development or revision.
<TABLE>
<CAPTION>
Assets
<S> <C>
Retail ............................... $32,593,975
Internet ............................. 4,651,589
-----------
$37,245,564
For the Six-Months Ended September 30, 2000
Capital Expenditures
Fixed Assets ......................... $ 2,229,323
Website Development costs ............ 1,605,774
-----------
$ 3,835,097
Sales
Retail ............................... $15,764,210
Internet ............................. 280,934
-----------
$16,045,144
===========
</TABLE>
7
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 2. Segment Information (continued)
Gross Profit(loss)
Retail ........... $ 6,400,544
Internet ......... (23,633)
-----------
$ 6,376,911
Operating Income (loss)
Retail ........... $(5,654,365)
Internet ......... (1,646,282)
-----------
$(7,300,647)
Note 3 American Telecom PLC Stock Exchange with DIG Financial Corp.
The Company entered into a Stock Purchase Agreement dated September 1, 2000 (the
"Agreement"), with DIG Financial Corp., a British Virgin Island corporation
("DIG"). The Agreement provides for the sale of an aggregate of 26,315,789
shares of the Company's authorized, but unissued, shares of Common Stock ("Play
Co. Stock") to DIG in exchange for 1,086,957 Ordinary 1 pence par value shares
("Ordinary Shares") of American Telecom, PLC ("American Telecom'), owned by DIG.
American Telecom is a corporation formed under the laws of the United Kingdom.
American Telecom Ordinary Shares are traded on OFEX, an off-exchange share
matching and trading facility enabling London Stock Exchange member firms to
deal in securities of unlisted and unquoted companies. American Telecom is an
affiliated entity. European American Capital Foundation ("EACF") owns 80% of the
outstanding shares of American Telecom. EACF also owns approximately 30% of the
outstanding common shares of Play Co.
On the date of the Agreement, the Play Co. Stock and the 1,086,957 Ordinary
Shares of American Telecomm ("American Telecom Stock") each had an aggregate
fair value of approximately U.S. $5 million, calculated based on an approximate
30-day trading average of each security prior to such date, as reported by the
Over the Counter Bulletin Board and OFEX, respectively. The determination of the
share price being based on the 30-day average was stipulated in the Agreement.
The sale of the Play Co. Stock was made in reliance upon the exemption from
registration provisions of the Securities Act of 1933, as amended, afforded by
Section 4(2) thereof, and as such, are "restricted securities." The American
Telecom Stock is freely tradable on OFEX.
Based on the contractual value of $5 million for the stock exchange, this was
determined to be the nominal value of the Play Co. shares issued. However, due
the Play Co. shares being unregistered, and the fact that the shares are lightly
traded and not readily marketable for such a large trading block, the Company
recognized a 15% valuation discount to determine the fair value of the shares
issued. Therefore, the Company valued the stock exchange transaction at
$4,250,000.
8
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 3. American Telecom PLC Stock Exchange with DIG Financial Corp.
(continued)
The shares of American Telecom have been classified as available for sale
marketable securities. Management intends to sell these shares in the future to
raise cash. The shares of American Telecom are also thinly traded, and the
market price has not changed as of September 30, 2000. There is no unrealized
gain or loss for these marketable securities as of September 30, 2000.
As of the date of the Agreement, the Company had 56,217,377 issued and
outstanding shares of Common Stock, $.01 par value. After giving effect to the
issuance of the Play Co. Stock, DIG owns approximately 32% of the aggregate of
82,533,166 issued and outstanding shares of the Company's Common Stock as of the
date of the Agreement.
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, 2000 and 1999, 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 as of September 30, 2000 aggregate
22,749,300 that 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. Restatement of Amounts Previously Reported
The September 30, 1999 financial statements contain certain restatements of
amounts previously reported. The restatements were the result of inquiries made
by the SEC regarding the accounting treatment for transactions revolving around
the Company's debt and equity securities, including grants of options/stock,
convertible debentures, and convertible preferred stock. As a result, the
Company has restated several amounts, which are described below. The tables
below identify significant changes to balances in the financial statements.
The revision for the grant of options relates to the Company recognizing a
prepaid expense for the fair value of options at the time it entered into two
agreements to issue options, the related services for which were never
performed. Therefore, the Company reversed the accounting for these
transactions. See Items 1 and 6 below for the impact on the balance sheet and
Item 1 below for the impact on the statement of operations and comprehensive net
income (loss). This reduction of other current assets is less than the amount of
the adjustment to additional paid-in capital in Item 4 because of the reversal
of the amortization of the prepaid expense recorded during the year ended March
31, 1999.
9
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 5. Restatement of Amounts Previously Reported (continued)
The revision for the Series E Preferred Stock was to record the issuance of
shares to officers for which the Company did not previously recognize
compensation expense during the year ending March 31, 1999.
The revision in Item 3,4, and 5 below is to reflect accounting necessary for a
beneficial conversion feature included in $650,000 of debentures convertible
into shares of Series E Preferred Stock at a discount from the trading price of
the Series E Preferred Stock.
The following is a summary of the impact of the restatements on the September
30, 1999 consolidated financial statements which include the cumulative effects
of the restatements made to the March 31, 1999 financial statements.
<TABLE>
<CAPTION>
Balance Sheet
<S> <C>
1. Reduction of other current assets for options not ultimately issued, net of previously recorded amortization $(65,510)
2. Increase in Series E Preferred Stock for issuance of shares 79,000
3. Increase in additional paid-in capital for beneficial conversion feature of convertible debentures 650,000
4. Reduction in additional paid-in capital for extraordinary gain from modification of debt terms, which
was considered a debt extinguishment from significant modification in terms under EITF 96-19 (650,000)
5. Increase in additional paid-in capital for beneficial conversion feature of revised convertible
debentures treated as new debt instruments 650,000
6. Reduction in additional paid-in capital for cancellation of options (79,000)
7. Additional net loss in accumulated deficit. The increase in accumulated deficit is attributable to a
cumulative increase of $718,634 for the year ended March 31, 1999, less $3,124 in operating
expenses attributed to the reversal of amortization expense of prepaid stock options that were
not issued. 715,510
8. Net reduction in stockholders' equity (65,510)
</TABLE>
10
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 5. Restatement of Amounts Previously Reported (continued)
Statement of Operations and Comprehensive Net Income (Loss)
For the three months ended September 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
1. Decrease in operating expenses from reversal of amortization of stock
options not issued $ (1,562)
For the six months ended September 30, 1999:
1. Decrease in operating expenses from reversal of amortization of stock
options not issued $ (3,124)
2. Additional effective non-cash interest expense attributable to the
beneficial conversion feature of revised convertible debentures
treated as new debt instruments 650,000
3. Extraordinary gain from modification of debt terms, since such
modifications were significant to be considered as a debt
extinguishment under EITF 96-19 $ (650,000)
-----------------
Decrease in net loss for the six-months ended September 30, 1999 $ (3,124)
=================
</TABLE>
The effects on the Company's previously submitted September 30, 1999 financial
statements are summarized as follows.
<TABLE>
<CAPTION>
Previously Increase
Reported (Decrease) Restated
--------------- ---------------- ---------------
Consolidated balance sheet:
<S> <C> <C> <C>
Other current assets $ 2,425,601 $ (65,510) $ 2,360,091
Total assets $ 29,485,279 $ (65,510) $ 29,419,769
=============== ================ ===============
Series E convertible preferred stock $ 6,638,047 $ 79,000 $ 6,717,047
Additional paid-in capital 17,960,428 571,000 18,531,428
Accumulated deficit 19,898,304 715,510 20,613,814
Total liabilities and stockholders' equity $ 29,485,279 $ (65,510) $ 29,419,769
=============== ================ ===============
</TABLE>
11
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 5. Restatement of Amounts Previously Reported (continued)
Consolidated statement of operations and comprehensive loss:
For the six months ended September 30,1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Operating expenses $ 7,545,358 $ (3,124) $ 7,542,234
Effective interest for beneficial
conversion feature - 650,000 650,000
Extraordinary gain on extinguishment
of debt - 650,000 650,000
Comprehensive net income (loss) $ (2,506,108) $ 3,124 $ (2,502,984)
=============== ================ ===============
Net income (loss) applicable to
common shares $ (3,890,625) $ 3,124 $ (3,887,501)
=============== ================ ===============
Basic and diluted income (loss) per
common share and share equivalents $ (.70) $ - $ (.70)
============== ================ ==============
For the three months ended September 30,1999:
Operating expenses $ 3,790,268 $ (1,562) $ 3,788,706
Comprehensive net income (loss) $ (956,507) $ 1,562 $ (954,945)
=============== ================ ===============
Net income (loss) applicable to
common shares $ (1,755,909) $ 1,562 $ (1,754,347)
=============== ================ ===============
</TABLE>
12
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 6. Subsequent Events
On November 20, 2000, Toys entered into a $12,000,000, three-year
revolving credit facility (the "Paragon Facility") with Paragon Capital LLC; an
asset based lending institution affiliated with Foothill Capital, a subsidiary
of Wells Fargo Bank. While the Paragon Facility carries several possible advance
rates against Toys' inventory, the pricing on the primary lending facility is at
the prime rate plus 1 1/2%. The Company guaranteed the Paragon Facility. The
agreement calls for a 90-day period for Paragon to determine the covenant
requirements to be maintained under the agreement. The Paragon Facility also
called for the issuance of a warrant by Toys for 400,000 shares at a strike
price of $1.50 per share, which is higher than the current trading price for
Toys' common stock. The warrant will be valued at fair value and recorded as
debt issuance cost.
The Paragon Facility replaces the Company's previous credit facility
with FINOVA Capital Corporation.
In order to support its inventory needs for the upcoming holiday
season, in October 2000, the Company borrowed an aggregate of $750,000 ("Bridge
Loan") from ZD Group LLC ("Bridge Lender") - a related New York limited
liability company, the beneficiary of which is a member of the family of the
Company's chairman. The Company paid $48,000 in consulting fees to CDMI Capital
Corp. ("CDMI," a British Virgin Islands corporation of which Moses Mika, then a
director of the Company, was a shareholder) for assisting the Company in
arranging the Bridge Loan.
The Bridge Loan and accrued interest of $20,000 was repaid on November
24, 2000 following the initial funding of the Paragon Facility. In September
2000, in anticipation of receiving the Bridge Loan from DIG Financial Corp.
("DIG"), rather than ZD Group LLC, the Company granted to DIG a security
interest in certain of its assets. Since the Bridge Lender ultimately was ZD
Group LLC and not DIG, upon receipt of the loan from the Bridge Lender, the
Security Agreement was assigned by DIG to the Bridge Lender. The security
interest was terminated upon repayment of the Bridge Loan.
In October 2000, the Company debuted its new concept in electronic
commerce with the launch of www.tx40.net and www.toys.tx40.de. Tx40 is the
Company's new concept of using an evolving storyline to bring viewers to its
websites. Toys.tx40.de is the company's related e-commerce website in Germany.
In November 2000, the Company launched www.toys.tx40.com as its related
e-commerce website in the United States. In addition to prior amounts expended,
through the six months ended September 30 2000, the Company invested $1,605,774
in this project. That investment of $2,181,539 is shown net of accumulated
amortization on the September 30, 2000 balance sheet, included under the
description "web-site development costs."
13
<PAGE>
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
This Report on Form 10-QB and the following "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. All statements other than statements of
historical fact are "forward-looking statements" for purposes of these
provisions, including any projections of earnings, revenues or other financial
items, any statements of the plans and objectives of management for future
operations, any statements concerning proposed new products or services, any
statements regarding future economic conditions or performance, and any
statements of assumptions underlying any of the foregoing in some cases,
forward-looking statements can be identified by the use of terminology such as
"may", "will", "expects", "plans", "anticipates", "estimates", "potential", or
"continue" or the negative thereof or other comparable terminology. Although we
believe that the expectations reflected in the forward-looking statements
contained herein are reasonable, there can be no assurance that such
expectations or any of the forward-looking statements will prove to be correct,
and actual results could differ materially from those projected or assumed in
the forward-looking statements. Our future financial condition and results of
operations, as well as any forward-looking statements are subject to inherent
risks and uncertainties. All forward-looking statements and reasons why results
may differ included in this report are made as of the date hereof, and we assume
no obligation to update any such forward-looking statement or reason why actual
results might differ.
The Company has two subsidiaries, Toys International.COM, Inc. ("Toys") and
Play Co. Toys Canyon Country, Inc. ("Canyon"). Toys currently operates all
thirty-eight of the Company's stores, of which Canyon holds the lease for one of
Toys' retail locations.
For the three months ended September 30, 2000 compared to the three months ended
September 30, 1999
The Company generated net sales of $9,027,051 in the three months ended
September 30, 2000. This represented an increase of $2,159,932, or 31%, from net
sales of $6,867,119 in the three months ended September 30, 1999. All of this
sales growth can be attributed to the Company's new stores as the Company's
Internet operations in the United States and Germany ("Internet Operations")
contributed approximately $52,000 less in sales than in the September 1999
period and since the Company's same store sales declined by approximately 2% for
the period.
The Company ended September 2000 with 34 retail locations in nine states,
compared to 31 retail locations in seven states at the end of fiscal year 2000.
During the quarter, the Company opened one new store in Las Vegas, Nevada.
The Company posted a gross profit of $3,313,486 in the three months ended
September 30, 2000, reflecting an increase of $47,268, or 1.4%, from the gross
profit of $3,266,218 in the three months ended September 30, 1999. This increase
was due to the above noted growth in sales.
14
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PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
The Company's gross margin of 36.7% in the September 2000 period was 10.9% below
the gross margin of 47.6% achieved in the September 1999 period. The primary
reasons for the gross margin decline were a negative 11.9% gross margin from the
Internet Operations in the September 2000 period compared to a 58.3%
contribution in the September 1999 period and to a decline in the margin of
products sold in the stores during the quarter. The Internet Operations
generated the 58.3% gross margin in the September 1999 period largely through
several highly margined sales on a business to business basis. There were no
such highly margined sales in the September 2000 period.
Operating expenses (excluding depreciation and amortization expenses) for
the three months ended September 30, 2000 were $6,972,704. This represented a
$3,183,998 or 84.0%, increase over the Company's operating expenses of
$3,788,706 in the three months ended September 30, 1999. The primary reasons for
the operating expense increase were operating expenses relating to the Internet
segment of approximately $773,000, an increase in payroll and related expenses
of $1,982,000. The payroll expense increase was due to the addition of a new
President of Toys, a new Director of MIS, as well as several middle managers and
employees at the Company's new stores.
During the three months ended September 30, 2000, the Company recorded
non-cash depreciation and amortization expense of $611,423, a $382,909 increase
from depreciation and amortization expense of $228,514 in the period ended
September 30, 1999. The primary reason for the depreciation and amortization
expense increase was the depreciation related to the fixed assets purchased for
the seven new stores that opened during fiscal year 2000 and three new stores
opened in the first half of the current fiscal year. Additionally, the Company
capitalized development costs for its websites, and began amortizing these costs
in December 1999.
Total operating expenses (operating expenses combined with depreciation and
amortization) in the September 2000 period were $7,584,127, representing a
$3,566,907, or 88.8%, increase from total operating expenses of $4,017,220 in
the September 1999 period.
As a result of the $47,268 increase in gross profit less the $3,566,907
increase in total operating expenses, the Company's operating loss increased by
$3,519,639 from $751,002 during the three months ended September 30, 1999 to
$4,270,641 during the three months ended September 30, 2000.
Interest expense totaled $146,300 for the three months ended September 30,
2000. This represented a $201,140 decrease from interest expense of $347,440 for
the three months ended September 30, 1999. The primary reason for the decreased
level of interest expense was a lower level of borrowings in the three months
ended September 30, 2000 than in the September 1999 period.
As a result of the above-mentioned factors, the Company recorded a loss
before minority interest in consolidated subsidiary of $4,416,941 for the three
months ended September 30, 2000. This represented a $3,318,499 increase over the
net loss before minority interest of $1,098,442 recorded in the three months
ended September 30, 1999.
15
<PAGE>
During the three months ended September 30, 2000, the Company recorded a
minority interest in the loss of the consolidated Toys subsidiary of $1,331,341.
This minority interest arose out of various sales of stock in the Company's Toys
subsidiary. The minority interest of $1,331,341 was a $1,187,844 increase over
the minority interest of $143,497 in the three months ended September 30, 1999.
This minority interest represented a reduction in the Company's net loss in both
periods.
As a result of the above factors, the Company recorded a net loss of
$3,139,846 in the three months ended September 30, 2000. This represented a
$2,184,901 increase over the net loss of $954,945 posted in the three months
ended September 30, 1999.
In the three months ended September 30, 2000, the Company recorded other
items of comprehensive loss of $44,007 that related to foreign currency
translation adjustments arising from Toys Internet operations in Germany. There
were no foreign currency translation adjustments in the September 1999 period.
For the three months ended September 30, 2000, the net loss of $3,183,853
was not impacted by non-cash dividends in order to determine the net loss
applicable to common shares, as there were no issuances of convertible preferred
stock. This compares with $799,402 of non-cash dividends recorded in the
three-month period ended September 30, 1999. The non-cash dividends represented
amortization of the discount recorded upon issuance of Series E and Series F
preferred stock with a beneficial conversion feature.
The basic and diluted loss per share for the three months ended September
30, 2000 was $(0.05) compared to basic and diluted loss per share of $(0.32) for
the three months ended September 30, 1999. The weighted average number of common
shares outstanding increased from 5,548,852 in the September 1999 period to
63,089,166 in the September 2000 period due to the continuing conversion of
Series E Stock into common shares and the September 1, 2000 issuance of
26,315,789 common shares as discussed in Note 3 to the condensed consolidated
financial statements.
For the six months ended September 30, 2000 compared to the six months ended
September 30, 1999
The Company generated net sales of $16,045,144 in the six months ended
September 30, 2000. This represented an increase of $2,669,460, or 19.9%, from
net sales of $13,375,684 in the three months ended September 30, 1999. All of
this sales growth can be attributed to the Company's new stores as the Internet
Operations contributed approximately $11,000 less than in the September 1999
period and since same store sales declined by approximately 11% for the period.
The Company ended September 2000 with 34 retail locations in nine states,
compared to 31 retail locations in seven states at the end of fiscal year 2000.
During the six-month period, the Company opened three new stores in Nashville,
TN, Orlando, FL and in Las Vegas, NV.
16
<PAGE>
The Company posted a gross profit of $6,376,911 in the six months ended
September 30, 2000, reflecting an increase of $365,342, or 6.1%, from the gross
profit of $6,011,569 in the six months ended September 30, 1999. This increase
was due to the above noted growth in sales. The Company's gross margin of 39.7%
in the September 2000 period was 5.2% below the gross margin of 44.9% achieved
in the September 1999 period. The primary reasons for the gross margin decline
were a negative 8.4% gross margin contribution from the Internet Operations in
the September 2000 period compared to a 59% contribution in the September 1999
period and to a decline in the margin of products sold in the stores during the
period. The Internet Operations generated the 59% gross margin in the September
1999 period largely through several highly margined sales on a business to
business basis. There were no such highly margined sales in the September 2000
period. Operating expenses (excluding depreciation and amortization expenses)
for the six months ended September 30, 2000 were $12,514,011. This represented a
$4,971,777, or 65.9%, increase over the Company's operating expenses of
$7,542,234 in the six months ended September 30, 1999. The primary reasons for
the operating expense increase were operating expenses relating to the Internet
segment of approximately $1,580,000, an increase in payroll and related expenses
of $859,000 and an increase in rent expense of $1,098,000. The payroll expense
increase was due to the addition of a new President for Toys, a new Director of
MIS, as well as several middle managers and employees at the Company's new
stores. The growth of rent expense was the result of adding additional stores.
During the six months ended September 30, 2000, the Company recorded
non-cash depreciation and amortization expense of $1,163,547, a $710,565
increase from depreciation and amortization expense of $452,982 in the period
ended September 30, 1999. The primary reason for the depreciation and
amortization expense increase was the depreciation related to the fixed assets
purchased for the seven new stores that opened during fiscal year 2000 and three
new stores opened in the first half of the current fiscal year.
Total operating expenses (operating expenses combined with depreciation and
amortization) in the September 2000 period were $13,677,558, representing a
$5,682,342, or 71.1%, increase from total operating expenses of $7,995,216 in
the September 1999 period.
As a result of the $365,342 increase in gross profit less the $4,971,777
increase in total operating expenses, the Company's operating loss increased by
$5,317,000 from $1,983,647 during the six months ended September 30, 1999 to
$7,300,647 during the six months ended September 30, 2000.
Interest expense totaled $797,413 for the six months ended September 30,
2000. This represented a $515,421 decrease from interest expense of $1,312,834
for the six months ended September 30, 1999. The primary reason for the
decreased level of interest expense was a lower level of borrowings in the six
months ended September 30, 2000 than in the September 1999 period. The September
2000 interest expense included a $500,000 non-cash charge related to the winding
up of a financing agreement with ZD Group LLC ("ZD"), a related party. For the
September 1999 period, the Company recognized non-cash interest expense of
$650,000 attributable to the beneficial conversion feature of its then
outstanding convertible debentures.
17
<PAGE>
As a result of the above-mentioned factors, the Company recorded a loss
before minority interest in consolidated subsidiary of $8,152,306 for the six
months ended September 30, 2000. This represented a $4,855,825 increase over the
net loss before minority interest of $3,296,481 recorded in the six months ended
September 30, 1999.
During the six months ended September 30, 2000, the Company recorded a
minority interest in the loss of the consolidated Toys subsidiary of $2,430,098.
This minority interest arose out of various sales of stock in the Company's Toys
subsidiary. The minority interest of $2,430,098 was a $2,286,601 increase over
the minority interest of $143,497 in the six months ended September 30, 1999.
This minority interest represented a reduction in the Company's net loss in
both periods. As a result of the above factors, the Company recorded a net loss
before extraordinary gain of $5,722,208 in the six months ended September 30,
2000. This represented a $2,569,224 increase over the net loss of $3,152,984
posted in the six months ended September 30, 1999.
In the six months ended September 30, 1999, the Company recorded an
extraordinary gain of $650,000. This gain arose out of the modification of the
terms of certain convertible debentures in the September 1999 period. The
modification was of such significance that the amended debenture agreements were
deemed to be substantially different by management. The original debentures were
therefore accounted for as an extinguishment of debt.
In the six months ended September 30, 2000, the Company recorded other
comprehensive loss of $77,489 that related to foreign currency translation
adjustments arising from Toys Internet operations in Germany. There were no
foreign currency translation adjustments in the September 1999 period.
For the six months ended September 30, 2000, the net loss of $5,722,208 was
increased by non-cash dividends of $500,000 in order to determine the net loss
applicable to common share of $6,222,208. This compares with $1,384,517 of
non-cash dividends recorded in the six-month period ended September 30, 1999.
The non-cash dividends represent amortization of the discount recorded upon
issuance of Series E and Series F preferred stock with a beneficial conversion
feature.
The basic and diluted loss per share for the six months ended September 30,
2000 was $(0.13) compared to basic and diluted loss per share of $(0.70) for the
six months ended September 30, 1999. The weighted average number of common
shares outstanding increased from 5,537,457 in the September 1999 period to
46,544,721 in the September 2000 period due to the continuing conversion of
Series E Stock into common shares and the September 1, 2000 issuance of
26,315,789 common shares as discussed in Note 3 to the condensed consolidated
financial statements.
18
<PAGE>
Liquidity and Capital Resources
At September 30, 2000, the Company had a working capital position of
$7,533,431 compared to a working capital position of $13,550,389 at March 31,
2000. The primary factor in the $6,016,958 decrease in working capital was the
Company's use of cash for operating activities of approximately $5.1 million.
The Company has generated operating losses for the past several years and
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 convertible preferred 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, 2000, the Company used
$5,140,850 of cash in its operations compared to $3,074,724 used in operations
in the six-month period ended September 30, 1999. The Company's net loss was
$5,722,208 and $2,502,984, respectively, in those periods.
The Company used $3,835,097 of cash in its investing activities during the
six-month period ended September 30, 2000 compared to $2,621,715 in the
six-month period ended September 30, 1999. Investing activity consisted of the
purchase of equipment and fixtures for new stores, totaling to $2,229,323, and
investing software development for the Company's website totaling to $1,605,774.
The Company generated $2,904,878 of cash from its financing activities in
the six-month period ended September 30, 2000 compared to the generation of
$5,947,650 from financing activities in the six-month period ended June 30,
1999. The primary contributors to the Company's financing activities in the 2000
period were $3,097,331 in net borrowings on the Company's line of credit. Those
proceeds were used to finance the Company's working capital requirements and
capital expenditures during the six-month period ended September 30, 2000. The
primary factor in the prior period was $2,911,108 in net borrowings on the
Company's line of credit.
As a result of the above factors, the Company had a net decrease in cash of
$6,148,557 in the six-month period ended September 30, 2000 compared to a net
increase in cash of $251,211 in the six-month period ended September 30, 1999.
19
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Electronic commerce represents another area that will result in significant
capital expenditures for the company in fiscal 2001. In October 2000, the
Company debuted its new concept in electronic commerce with the launch of
www.tx40.net and www.toys.tx40.de. TX40 is the Company's new concept of using an
evolving storyline to bring viewers to its websites. Toys.tx40.de is the
Company's related e-commerce website in Germany. In November 2000, the Company
launched www.toys.tx40.com as its related e-commerce website in the United
States. Through the six months ended September 2000, the Company had invested
$2,181,539 in this project.
On November 20, 2000, Toys entered into a $12,000,000, three-year revolving
credit facility (the "Paragon Facility") with Paragon Capital LLC; an asset
based lending institution affiliated with Foothill Capital, a subsidiary of
Wells Fargo Bank. While the Paragon Facility carries several possible advance
rates against Toys' inventory, the pricing on the primary lending facility is at
the prime rate plus 1 1/2%. The Company guarantied the Paragon Facility. The
Paragon Facility also called for the issuance of a warrant by Toys for 400,000
shares at a strike price of $1.50 per share, which is higher than the current
trading price for Toys' common stock. The warrant will be valued at fair value
and recovered as debt issuance cost.
The Paragon Facility replaces the Company's previous credit facility with
FINOVA Capital Corporation.
Trends Affecting Liquidity, Capital Resources and Operations
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.
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. The Company intends to open new stores throughout
the year, but generally before the Christmas selling season, which will make the
Company's third quarter sales an even greater percentage of the total year's
sales.
20
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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.
PART II
Item 1. Legal Proceedings
On or about November 16, 2000 a complaint was filed against the Company by
certain purported holders of the Company's Series F Preferred Stock and Options
to purchase shares of Series F Preferred Stock ("Securityholders") in the
Supreme Court of the State of New York, County of New York. The Securityholders
allege, among other things, breaches of contract relating to certain
registration rights that they allege are contained in the stock purchase
agreement governing the purchase of such securities. The complaint seeks, among
other things, an award of damages in the aggregate of $159,500, $11,000 per
month, commencing October 25, 2000, for each month that a registration statement
is not declared effective, interest, unspecified damages and reimbursement of
the costs and expenses of such legal action. The Company is in the process of
evaluating the claims.
Item 2. Changes in Securities and st of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on From 8-K
a) Exhibit 27.1 - Financial Data Schedule
b) The Company filed one report on From 8-K during the quarter
ended September 30, 2000. Such report was filed on September
18, 2000.
21
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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 29th day of December 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
22
