UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20659
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly period ended September 30, 1996
Play Co. Toys & Entertainment Corp.
(Exact Name of Registrant as specified in its charter)
Delaware 94-3024222
(State or other jurisdiction of ( I.R.S. Employer ID No.)
incorporation or organization).
550 Racheros Drive, San Marcos, California 92069
(Address of principal executive offices) (Zip Code)
(619) 471-4505
(Registrant's telephone number, including area code)
(Former name, former address and formal fiscal year, if changed
since last report)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO [ ]
Common Stock, $.01 par value: 11,700,558 shares outstanding as
of September 30, 1996.
PLAY CO. TOYS & ENTERTAINMENT CORP.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. FINANCIAL STATEMENTS
Condensed balance sheet as of September 30, 1996. 3
Condensed statements of operations for the three
and six months ended September 30, 1996 and 1995. 4
Condensed statements of cash flows for
the six months ended September 30, 1996 and 1995. 5
Notes to condensed financial statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. 9
PART II. OTHER INFORMATION
Item 5. Other Information 13
Signatures 14
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAY CO. TOYS & ENTERTAINMENT CORP.
CONDENSED BALANCE SHEET
September 30, 1996
(Unaudited)
ASSETS:
Current Assets
Cash $ 80,610
Merchandise inventories 8,969,665
Accounts receivable 293,557
Total Current Assets 9,343,832
Property and equipment, net 1,898,857
Other assets 567,269
Total Assets $ 11,809,958
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,993,488
Line of credit 5,480,972
Accrued and other liabilities 8,809
Total Current Liabilities 10,483,269
Deferred rent 177,112
Stockholders' equity 1,149,577
-------------------
Total Liabilities & Stockholders' Equity $ 11,809,958
============
See accompanying notes to condensed financial statements.
PLAY CO. TOYS & ENTERTAINMENT CORP.
CONDENSED STATEMENT OF OPERATIONS
September 30, 1996
(Unaudited)
Three Months Ended September 30, Six Months Ended September 30,
1996 1995 1996 1995
Net sales $3,666,218 $3,967,276 $6,851,121 $8,105,590
Cost of sales 2,528,783 2,633,348 4,680,501 5,428,579
Operating expenses 1,921,500 2,062,297 3,758,872 4,492,008
Interest & financing expense 186,913 96,042 366,087 181,551
Total costs & expenses 4,637,196 4,791,687 8,805,460 10,102,138
Net loss $(970,798) $(824,411) $(1,954,339) $(1,996,548)
Net loss per common share $(0.20) $(0.21) $(0.45) $(0.52)
Weighed average number of
common shares and share
equivalents 4,814,786 3,863,530 4,339,158 3,863,530
See accompanying notes to condensed financial statements
PLAY CO. TOYS & ENTERTAINMENT CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,954,339) $(1,996,548)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 298,532 172,320
Preferred stock issued for financing charges 16,000 0
Change in assets and liabilities:
Merchandise inventories (2,710,581) (1,845,551)
Other current assets 193,165 26,569
Accounts payable 2,115,304 2,140,037
Accrued and other liabilities (274,802) (30,920)
Deferred rent liability (20,825) 192,578
Accounts receivable (258,284) 317,797
Net cash used for operating activities (2,595,830) (1,023,718)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (231,477) (67,067)
Amounts from stockholder 0 17,788
Net cash used for investing activities (231,477) (49,279)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on bank line of credit 2,077,947 1,092,361
Repayments of long-term debt and capital lease obligations 0 (41,179)
Proceeds from issuance of preferred stock 834,000 0
Payment of accrued dividends 0 (15,931)
Redemption of preferred stock (87,680) (122,368)
-------------- --------------
Net cash provided by financing activities 2,824,267 912,883
-------------- --------------
Net decrease in cash (3,040) (160,114)
Cash at beginning of period 83,650 249,925
------------- ---------------
Cash at end of period $80,610 $89,811
======= ========
See accompanying notes to condensed financial statements
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
NOTE 1.
The interim accompanying unaudited condensed financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and
the instructions to Form 10-QSB. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles 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, refer to the audited
financial statements for the year ended March 31, 1996. Operating
results for the three and six months ended September 30, 1996 are
not necessarily indicative of the results of operations that may be
expected for the year ended March 31, 1997.
NOTE 2.
On June 20, 1996, the Company's majority stockholder, American
Toys, Inc. ("American Toys"), which name was changed to U.S.
Wireless Corporation as of October 12, 1996, which owned
2,548,930 or approximately 66.0% of the 3,863,530 issued and
outstanding shares of the Company's common stock, par value $.01
per share the ("Common Stock") outstanding as of such date,
executed a written consent authorizing the Company to amend its
Certificate of incorporation such that (i) the Company's Series D
Preferred Stock shall be convertible into 1,157,028 shares of the
Company's Common Stock based on the average closing bid price
for the ninety (90) day period from March 31, 1996 to May 30,
1996 and (ii) the Company's Series E Preferred Stock shall be
separated into two classes, 1,900,000 shares of which shall be
designated the Class I Series E Preferred Stock, which shares shall
be convertible at any time into twenty shares of the Company's
Common Stock, par value $.01 per share and the remaining
100,000 shares of which shall be designated the Class II Series E
Preferred Stock, which shares will be convertible two (2) years
from issuance into twenty shares of the Company's Common Stock.
Under Section 228 of the General Corporation Law of the State of
Delaware, any action requiring the consent of the stockholders at
an annual or special meeting of the stockholders of the Company,
may be taken without a meeting, without prior notice and without
a vote, if a consent or consents in writing, setting forth the action
so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted and shall be
delivered to the Company.
On May 3, 1996, the Corporation held an annual meeting of its
stockholders, at which time it proposed to its stockholders (i) the
election of three persons nominated by the Board of Directors as
Directors, (ii) the authorization of an amendment to the
Corporation's Certificate of Incorporation to effect a change of the
name of the Corporation from Play Co. Toys to Play Co. Toys &
Entertainment Corp., (iii) the authorization of an amendment to the
Corporation's Certificate of Incorporation to authorize one share of
Preferred Stock, par value $.01 per share, as the "Series D
Preferred Stock" and (iv) the authorization to increase the number
of authorized shares of Common Stock to 410,000,000 shares and
to authorize 20,000,000 shares of Preferred Stock, par value $.01
per share, as the "Series E Preferred Stock". All proposals were
adopted by the stockholders and an amendment to the Corporation's
Certificate of Incorporation filed with the State of Delaware. The
Certificate of amendment as filed, amended the name of the
Corporation, authorized a share of Series D Preferred Stock,
authorized 1,000,000 shares of the Series E Preferred Stock and
increased the authorized shares of Common Stock to 30,000,000.
As shares of the Series E Preferred Stock are issued, the Company
shall amend its certificate of incorporation to increase the
authorized number of shares of the Series E Preferred Stock and
shares of Common Stock underlying same.
On June 30, 1996, Europe American Capital Corp. ("EACC")
exercised its option to purchase 334,000 shares of the Series E
Preferred Stock for $334,000. These shares of Series E Preferred
Stock were designated Class I Series E Preferred Stock. EACC is
a company in which Yair Arbel, Ilan Arbel's brother was the sole
officer and director. In August, 1996, EACC transferred all 334,000
shares to Ilan Arbel, its newly elected President and Director.
Simultaneously, Mr. Arbel transferred such shares to Mister Jay
Fashions International, ("Mr. Jay"), a company in which he is the
president, a director and principal stockholder. On September 12,
1996, the 334,000 shares of Series E Preferred Stock was converted
into 6,680,000 shares of Common Stock, whereby Mr Jay became
the majority stockholder of the Company.
In April 1996, the Company converted $528,070 of debt consisting
of a $500,000 note payable and accrued expenses to the EACC into
528,000 shares of Series E Preferred Stock. The Series E Preferred
Stock is non voting, provides for accumulated annual dividends at
$1.00 per share, and is convertible into 20 shares of Common
Stock for each share of Series E Preferred Stock, at the holder's
option at any time during the three year period commencing two
years after the issuance of Series E Preferred Stock, all of which
shares were converted into Class I Series E Preferred Stock.
On October 10, 1996, EACC exercised its option to purchase an
aggregate of 500,000 shares of the Series E Class I Preferred Stock.
EACC transferred 200,000 shares to Multimedia Concepts
International, Inc. and 300,000 shares to VermongenStreuhand
G.M.B.H an Austrian Corporation.
NOTE 3.
On February 1, 1996, the Company entered into a "Loan and
Security Agreement" (the "Loan Agreement") with Congress
Financial Corporation ("Congress"). Funds drawn on February 7,
on the loan agreement of $2,000,000 were used to repay the
amounts due under a previous line of credit arrangement with
Imperial Bank, effectively terminating that borrowing arrangement.
The Loan Agreement provides for maximum borrowings of
$7,000,000 based on the "Cost Value of Eligible Inventory" as
defined in the Loan Agreement. The only material financial
covenant in the Loan Agreement is the requirement that the
Company maintain at all times an adjusted net worth of not less
than $500,000. The Loan Agreement requires the payment of a
quarterly service fee of $8,750, is secured by substantially all assets
of the Company and is further collateralized by a $2,000,000 letter
of credit provided by EACC. As payment for the issuance of the
letter of credit the Company granted EACC an option to purchase
up to 20,000,000 shares of its Series E Preferred stock. Interest on
outstanding balances is charged at prime plus 1.5%. The Loan
Agreement matures February 1, 1998. Congress can extend the
Loan Agreement for an additional year at its option.
NOTE 4.
In June 1996, American Toys, pursuant to the consent of its
majority stockholder, Mister Jay Fashions International, Inc.,
authorized the conversion of its one share of Series D Preferred
Stock into 1,157,028 shares of the Company's Common Stock
based upon the average closing bid price ($1.21) of the Company's
shares for the period from March 1, 1996 to May 31, 1996 in
accordance with the provisions of the Company's Certificate of
Incorporation as amended by the consent of American Toys on
June 20, 1996 (See Note 2). The conversion resulted in American
Toys owning 3,741,958 shares of the total 5,020,558 shares issued
and outstanding after the conversion, or approximately 74%. In
addition, American Toys authorized the spin-off of its total
investment in the Company's Common Stock by distributing the
shares to its stockholders of record on August 15, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS.
For the three months ended September 30, 1996 compared to the
three months ended September 30, 1995.
Sales for the three months ended September 30, 1996 decreased to
$3,666,218 from $3,967,276. This represents a decrease of
$301,058 or approximately 7.6%. Retail store sales for the three
months ended September 30, 1996 decreased by approximately
9.1% from the sales level achieved for the three months ended
September 30, 1995. The Company operated 17 retail locations
during each of the three month periods ended September 30, 1996
and 1995. Wholesale sales increased 17.4% to $262,542 for the
three month period ended September 30, 1996 from $223,541 for
the three month period ended September 30, 1995.
Gross profit decreased slightly to 31.02% for the three months
ended September 30,
1996 from 33.62% for the three months ended September 30, 1995.
Operating expenses decreased to $1,921,500 (or 52.41% of net
sales) from $2,062,297 (or 51.98% of net sales). Such decrease of
approximately $140,797 or 6.82% is primarily attributable to
decreased payroll expense. While operating expenses decreased, the
overall percentage of operating expenses to net sales increased due
to the larger percentage decrease in net sales for the period.
Additionally, the increase in operating expenses as a percentage of
net sales results from the relative level of fixed costs, such as rent
and minimum payroll requirements which are not subject to
changes relative to fluctuations in sales volume.
Interest and financing expense for the three months period ended
September 30, 1996 increased to $186,913 from $96,042 for the
three month period ended September 30, 1995. The interest for the
three month period ending September 30, 1996 was incurred from
borrowings on the Company's line of credit and amortization of
loan costs totaling $53,686.
For the six months ended September 30, 1996 compared to the six
months ended September 30, 1995.
Sales for the six months ended September 30, 1996 decreased to
$6,851,121 from $8,105,590. This represents a decrease of
$1,254,469 or approximately 15.5%. Approximately $474,000 of
the decrease in sales is directly attributable to the decreased sales
of Milk Cap game products and the reduction of one retail location.
Additionally, retail store sales for the six months ended September
30, 1996 decreased by approximately 11.8% from the sales level
achieved for the six months ended September 30, 1995. The
Company operated 17 and 18 retail locations during the six month
periods ended September 30, 1996 and 1995. Wholesale sales of
non-milk cap game products increased 21.6% to $419,709 for the
six month period ended September 30, 1996 from $345,048 for the
six month period ended September 30, 1995.
Gross profit decreased slightly to 31.68% for the six months ended
September 30, 1996 from 33.03% for the six months ended
September 30, 1995.
Operating expenses decreased to $3,758,872 (or 54.86% of net
sales) from $4,492,008 (or 55.42% of net sales). Such decrease of
approximately $733,136 or 16.32%, are primarily attributable to
decreased payroll expense due to the re-organizing of personnel and
decreased supplies and expenses required for the milk-cap game
program. While operating expenses decreased, the overall
percentage of operating expenses to net sales increased due to the
larger percentage decrease in net sales for the period. Additionally,
the increase in operating expenses as a percentage of net sales
results from the relative level of fixed costs, such as rent and
minimum payroll requirements which are not subject to changes
relative to fluctuations in sales volume.
Interest and financing expense for the six months period ended
September 30, 1996 increased to $366,087 from $181,551 for the
six month period ended September 30, 1995. The interest for the
six month period ending September 30, 1996 was incurred from
borrowings on the Company's bank financing agreement and
amortization of loan costs totaling $107,372.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had a working capital deficit
of $1,139,437.
On February 1, 1996, the Company entered into a "Loan and
Security Agreement" (the "Loan Agreement") with Congress
Financial Corporation ("Congress"). Funds drawn on February 7,
on the loan agreement of $2,000,000 were used to repay the
amounts due under a previous line of credit arrangement with
Imperial Bank, effectively terminating that borrowing arrangement.
The Loan Agreement provides for maximum borrowings of
$7,000,000 based on the "Cost Value of Eligible Inventory" as
defined in the Loan Agreement. The only material financial
covenant in the Loan Agreement is the requirement that the
Company maintain at all times an adjusted net worth of not less
than $500,000. The Loan Agreement requires the payment of a
quarterly service fee of $8,750, is secured by substantially all assets
of the Company and is further collateralized by the $2,000,000
letter of credit originally provided for the benefit of Imperial Bank.
Interest on outstanding balances is charged at prime plus 1.5%.
The Loan Agreement matures February 1, 1998. Congress can
extend the Loan Agreement for an additional year at its option. The
balance outstanding under the Loan Agreement totaled $5,480,972
as of September 30, 1996.
Sources of funds to repay obligations as described above, are
typically generated from sales during the peak selling season from
October to December of each year.
Approximately 45 to 49% of the Company's annual sales are
generated during the months of October through December due to
the significant seasonality of the toy industry. Vendors generally
extend terms during the balance of the year. Vendors are generally
repaid in December and January of each year, at a time when
inventory levels are significantly reduced.
The Company believes that its cash on hand, together with its
credit facility, will be sufficient to meet its working capital needs
during fiscal year ending March 31, 1997.
Trends Affecting Liquidity, Capital Resources and Operations.
The Company's sales efforts are aimed primarily at a defined
geographic segment, consisting of individuals in the southern
California area. The Company's future financial performance will
depend upon continued demand for toys and hobby items by
individuals within southern California. Such demand is dependent
to a great degree upon general economic conditions within this
geographic market area, the Company's ability to lease favorable
locations for new stores, to purchase product at favorable prices on
favorable terms, changes in consumer preferences and its ability
to compete in the industry.
Commencing August 1996, the Company has decided to re-focus
its strategy and remodel its existing stores to incorporate integrated
educational interactive games and other educational toys with its
traditional promotional items.
The toy and hobby retail industry faces a number of potentially
adverse business conditions including price and gross margin
pressure and market consolidation and domination. The domination
of the toy industry by Toys R Us has resulted in increased price
competition among various toy retailers and declining gross
0margins for such retailers. Moreover, the domination of Toys R
Us has resulted in liquidation or bankruptcy of many toy retailers
throughout the United States including the southern California
market.
During August and September 1996, the Company remodeled three
of its existing stores to include an educational toy department at a
cost of $123,370. The cost of which was included in operating
expenses for the three months ended September 30, 1996. Adding
this new department allows the Company to compete with other
educational toy stores, plus the mixture of educational toys and
promotional toys gives the customer a broader selection of
merchandise. The Company knows of no other retailer who has
successfully incorporated the two concepts in a retail operation.
The Company expects to generate increased revenues and higher
gross margins, however, there is no assurance that such will be
realized.
The Company's inclusion of educational sections is expected to
have a material impact on the Company's operations and liquidity
during the next two years. As noted above, the Company expects
revenues to increase from the implementation of this concept,
however, additional funds other than generated from operations
may be necessary to remodel additional locations. No other source
of funds has been identified at this time.
The Company's operating history has been characterized by narrow
profit margins and, accordingly, the Company's earnings will
depend significantly on its ability to purchase its product on
favorable terms, to obtain store locations on favorable terms, to
retail a large volume and variety of products efficiently and to
provide quality support services. The Company's prices are, in
part, based on market surveys of its competitors prices, primarily
those of Toys R Us. As a result, aggressive pricing policies, such
as those used by Toys R Us, have resulted in the Company
reducing its retail prices on many items, thereby reducing the
available profit margin. Moreover, increases in expenses or other
charges to income may have a material adverse effect on the
Company's results of operations. 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 increase
profitability.
During August and September 1996, the Company remodeled three
of its existing locations to include an educational toy section.
Computer terminals allow customers to try out new computer
educational programs, and a theater featuring movies available for
sale in the location is operational throughout the day. Allowing the
customer and child to have a "hands on" experience before
purchasing the merchandise, plus the higher gross margins on
educational toys is expected to increase revenues and improve
overall gross margins. Remodeling the locations cost approximately
$40,000 per store and the Company expects to convert most of its
remaining stores to this format during 1997. The Company opened
a new store using this new format on November 1, 1996. Financing
for the remaining conversions may come in the form of capital
leases.
Immediately after the Christmas season, the Company begins
purchasing inventory which has been depleted as a result of
seasonal sales patterns. Thus, although significant reductions in
accounts payable are made in January, accounts payable levels are
expected to immediately increase as a result of new inventory
purchases.
As of March 31, 1996, the Company has net operating loss
("NOL") carryforwards of approximately $5,000,000 and
$3,000,000 for federal and California income tax purposes. The
federal NOL's are available to offset future taxable income through
March 31, 2011 while the California NOLs are available through
March 31, 2001. Such NOLs could have a positive effect on the
Company's cash flow in future profitable years resulting from
reduced income tax liabilities. Losses from operations for the three
months ended June 30, 1996 increase the Federal and California
NOLs available to offset future income. However, the utilization
of such NOLs may be subject to limitation under the Tax Reform
Act of 1986 should ownership changes, such as those resulting
from the exercise of stock purchase options to acquire common
stock as well as the issuance of Series D and Series E Preferred
Stock, into shares of Common Stock, result in a cumulative greater
than 50% ownership change during the three year testing period.
Inflation and Seasonality.
During the past few years, inflation in the United States has been
relatively stable. In management's opinion, this is expected to
continue for the foreseeable future. However, should the American
economy again experience double digit inflation rates, as has been
the case in the past, the impact on prices could adversely affect the
Company's operations.
The Company's business is highly seasonable with a large portion
of its revenues being derived during the months of October through
December. Accordingly, the Company is required to obtain
substantial short-term borrowing during the first three quarters of
the calendar year in order to purchase inventory for capital and for
operational expenditures. The Company's past history of negative
cash flows during the fiscal year are partially the result of its
seasonal business nature. The Company's cash flows are negative
for most months prior to the Christmas season. Thus the
Company's negative cash flow for all months except October
through December are being serviced via the Company's line of
credit and special credit terms with vendors. Historically, the
Creditors extending special credit terms have been repaid in
December and in the fourth fiscal quarter.
PART II OTHER INFORMATION
Item 1 Legal Proceedings:
N O N E
Item 2 Changes in Securities:
N O N E
Item 3 Defaults Upon Senior Securities:
N O N E
Item 4 Submission of Matters to a Vote of Security Holders:
N O N E
Item 5 Other Information:
N O N E
Item 6. Exhibits and Reports on Form 8K.
N O N E
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 12th day of November
1996.
PLAY CO. TOYS & ENTERTAINMENT CORP.
BY: _________________________
Richard L. Brady
President
By: _________________________
Angela R Burnett
Chief Financial Officer