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 June 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, $0.01 par value:
51,412,624 shares outstanding as of August 15, 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PLAY CO. TOYS & ENTERTAINMENT CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page Number
Item 1. FINANCIAL STATEMENTS
Condensed consolidated balance sheets as of June 30, 2000 3
(unaudited) and March 31, 2000.
Condensed consolidated statements of operations and comprehensive net loss for three
months ended June 30, 2000 and 1999 (unaudited). 4
Condensed consolidated statements of cash flows for the three months ended June 30,
2000 and 1999 (unaudited). 5
Notes to condensed consolidated financial statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
11
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 18
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
Item 3. DEFAULTS UPON SENIOR SECURITIES 18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
Item 5. OTHER INFORMATION 18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 18
Signatures 19
Page 2
PLAY CO. TOYS & ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 2000 March 31, 2000
------------- --------------
(unaudited)
Current
Cash and cash equivalents ................................................................. $ 2,286,775 $ 6,050,007
Accounts receivable, net .................................................................. 330,623 676,456
Merchandise inventories, net .............................................................. 16,928,637 14,111,236
Other current assets ...................................................................... 20,000 149,000
------------ ------------
Total current assets ..................................... 19,566,035 20,986,699
Property and Equipment, Net of accumulated
depreciation and amortization of $4,749,604
and $5,162,813, respectively .............................................................. 7,775,783 7,398,621
Website development costs ............................................................................ 2,208,175 1,753,193
Deposits and other assets ............................................................................ 2,058,175 2,145,268
------------ ------------
$ 31,608,168 $ 32,283,781
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
June 30, 2000 March 31, 2000
------------ ------------
Current
Accounts payable ........................................................................... $ 8,482,651 $ 6,110,161
Accrued expenses and other liabilities ..................................................... 979,203 892,428
Current portion of capital lease obligations ............................................... 290,767 386,179
Borrowings under financing agreement ....................................................... 129,646 47,542
------------ ------------
Total current liabilities ............................................................ 9,882,267 7,436,310
Capital leases, net of current portion ............................................................... 994,797 988,767
Deferred rent ...................................................................................... 136,154 135,607
------------ ------------
liability
Total liabilities ............................................................ 11,013,218 8,560,684
------------ ------------
Minority interest in subsidiary ...................................................................... 8,844,650 9,943,407
------------ ------------
Stockholders' equity:
Convertible series E preferred stock, $1 par, 25,000,000 shares
authorized: 2,895,766 and 8,377,640 shares outstanding, respectively ..................... 2,291,845 7,349,154
Convertible series F preferred stock, $0.01 par,
5,500,000 shares authorized; 750,000 shares outstanding .................................. 750,000 750,000
Common stock, $.01 par value, 160,000,000 shares authorized;
49,177,408 and 11,227,568 shares outstanding, respectively ............................ 489,767 112,275
Additional paid-in-capital ................................................................. 38,819,995 33,053,724
Accumulated other comprehensive loss ....................................................... (185,013) (151,531)
------------ ------------
Accumulated deficit ........................................................................ (30,416,294) (27,333,932)
------------ ------------
Total stockholders' equity ................................ 11,750,300 13,779,690
------------ ------------
$ 31,608,168 $ 32,283,781
============ ============
See accompanying notes to condensed consolidated financial statements
Page 3
PLAY CO. TOYS & ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE NET LOSS
Three Months Ended June 30
--------------------------------------
2000 1999
(unaudited) Restated
(Note 5)
---------------- ----------------
Net sales $ 7,018,093 $ 6,508,565
Cost of sales 3,954,668
3,763,214
---------------- ----------------
Gross profit
3,063,425 2,745,351
---------------- ----------------
Operating expenses:
Operating expenses 5,541,313
3,753,528
Depreciation and amortization
552,118 224,468
---------------- ----------------
Total operating expenses 6,093,431 3,977,996
---------------- ----------------
Operating loss (3,030,006) (1,232,645)
------------------ ------------------
Interest expense:
Cash interest expense 99,113 284,664
Non-cash interest expense 552,000 680,730
---------------- ----------------
651,113 965,394
---------------- ----------------
Loss before minority interest in consolidated subsidiary (3,681,119) (2,198,039)
Minority interest in loss of consolidated subsidiary 1,098,757
-
---------------- ----------------
Net loss before extraordinary gain (2,582,362) (2,198,039)
Extraordinary gain on modification of debt terms - 650,000
---------------- ----------------
Net loss (2,582,362) (1,548,039)
Other comprehensive loss (33,482) -
---------------- ----------------
Comprehensive net loss $(2,615,844) $(1,548,039)
================== ==================
Calculation of Basic and Diluted Loss Per Share:
Net loss $(2,582,362) $(1,548,039)
Effect of non-cash dividends on preferred (500,000) (585,116)
stock
------------------ ------------------
Net loss applicable to common shares (3,082,362) (2,133,155)
================== ==================
Basic and diluted loss per common share and share equivalents $ (0.10) $ (0.39)
================== ==================
Weighted average number of common shares
and share equivalents outstanding 30,237,290 5,525,936
================== ==================
See accompanying notes to condensed consolidated financial statements
Page 4
PLAY CO. TOYS & ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three-months Ended June 30,
2000 1999
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,582,362) $ (1,548,039)
Adjustments used to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 552,118 224,468
Minority interest in net loss of subsidiary (1,098,757) -
Deferred rent 547 2,764
Stock compensation - 56,100
Extraordinary gain - (650,000)
Effective interest for beneficial conversion - 650,000
Effective interest for financing agreement 500,000 -
Other 86,454 -
Increase (decrease) from changes in:
Accounts receivable 45,833 (33,560)
Merchandise inventories (2,817,401) (740,735)
Other current assets - 271,079
Deposits and other assets 87,093 (484,002)
Accounts payable 2,372,490 2,319,827
Accrued expenses and other liabilities 86,775 (267,983)
----------- ---------
Net cash used by operating activities (2,767,210) (200,081)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments received on note receivable 300,000 -
Release of restricted cash 129,000 -
Purchases of property and equipment (790,371) (196,653)
Capital expenditures on website development costs (593,891) (27,408)
----------- ---------
Net cash used by investing activities (955,262) (224,061)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock - 657,500
Borrowings under financing agreement 82,104 8,561,047
Repayments under financing agreement - (8,112,000)
Borrowings under notes payable - 200,000
Repayments under notes payable and capital leases (89,382) (615,627)
----------- ---------
Net cash provided by financing activities (7,278) 690,920
----------- ---------
Effect of exchange rate changes on cash (33,482) -
----------- ---------
Net (decrease) increase in cash (3,763,232) 266,778
Cash at beginning of period 6,050,007 125,967
----------- ---------
Cash at end of period $ 2,286,775 $392,745
=========== =========
See accompanying notes to condensed consolidated financial statements
Page 5
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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-Q. 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 three-month period ended June 30, 2000 are not
necessarily indicative of the results of operations that may be expected for the
year ending March 31, 2001.
Certain reclassifications have been made in the June 30, 1999 financial
statements to conform to the June 30, 2000 presentation.
Note 2. Conversion of Series E Preferred Stock to Common Stock
During the quarter ended June 30, 2000, certain shareholders of 6,333,574 shares
of Series E Preferred Stock ("Series E Stock") elected to convert their shares
into Common Stock shares at the stated conversion rate of six-to-one. This
resulted in the issuance of 38,019,044 shares of Common Stock.
During the period July 1, 2000 through August 15, 2000, a further 372,536 shares
of Series E Stock was converted into Common Stock. This resulted in the issuance
of 2,235,216 shares of Common Stock.
Note 3. Issuance of Series E Preferred Stock
In May 2000, the Company entered into a termination and release agreement with
ZD Group LLC ("ZD") for a financing arrangement previously provided by ZD. See
the Company's March 31, 2000 10-KSB for a complete description of this financing
agreement. The agreement made the Company no longer liable to ZD for a
percentage of the profits of three retail stores, in exchange for $500,000 in
cash. Subsequently, ZD agreed to receive 854,700 shares of Series E Stock in
lieu of $500,000 cash. The Series E Stock was thereby valued at $0.59 per share,
which represented a 60 percent discount of the market value as of the date of
the transaction. To obtain a fair value for the Series E Stock, the Company
engaged an independent appraiser to determine the value of the Series E Stock
near the transaction date. ZD assigned its rights under this the above mentioned
financing agreement to European American Capital Foundation and, accordingly,
the Company issued the 854,700 shares of Series E Stock to EACF.
The Company recorded non-cash interest expense of $500,000 for the issuance of
stock related to the settlement, with the offsetting amount being recorded in
Series E Stock and additional paid-in capital.
Page 6
As part of this issuance, the Company recognized the beneficial conversion
feature in the convertible securities. The benefit amount was limited to the
amount of "proceeds" or consideration obtained, which was $500,000. As the
market value of the Company's common stock exceeded the consideration, the
Company recognized a non-cash dividend of $500,000 related to this beneficial
conversion feature in the quarter ended June 30, 2000.
Note 4. Segment Reporting
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," in the fiscal year ended March 31, 2000.
This accounting standard changes the way the Company reports information about
its operating segments.
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. Internet sales for the period ended June 30, 1999 were generated
only in the United States. The Internet operations consist of both
business-to-consumer and business-to-business (or wholesale) sales. Since the
Internet activities effectively began in April 1999, no restatements of
prior-year presentations are necessary to comply with SFAS 131.
Information on segments which is based on information utilized by the
Company's chief operating decision maker is as follows:
Three Months Ended June 30:
2000 1999
---- ----
Assets:
Retail stores $ 28,211,094 $ 22,529,834
Internet 3,397,074 68,189
------------ -------------
$ 31,608,186 $ 22,598,023
============ =============
Capital Expenditures for Fixed Assets and
Website Development Cost:
Retail stores $ 790,371 $ 27,408
Internet 593,891 196,653
------------ -------------
$ 1,384,262 $ 224,061
============ =============
Sales:
Retail stores $ 6,862,429 $ 6,393,797
Internet 155,664 114,768
------------ -------------
Sales $ 7,018,093 $ 6,508,565
============ =============
Gross profit:
Retail stores $ 3,072,152 $ 2,676,956
Internet (8,727) 68,395
------------ -------------
Gross profit $ 3,063,425 $ 2,745,351
============= =============
Operating income (loss):
Retail stores $ (2,601,746) $ (1,294,904)
Internet (428,260) 62,259
------------ -------------
Operating (loss) $ (3,030,006) $ (1,232,645)
============= ==============
Page 7
Note 5. Restatement of Amounts Previously Reported
The June 30, 1999 financial statements contain certain restatements of amounts
previously reported. These restatements were previously reported in an amendment
to the June 1999 quarterly report. 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
table below identifies significant changes to balances in the financial
statements.
The following is a summary of the impact of the restatements on the June 30,
1999 consolidated financial statements which include the cumulative effects of
the restatements made to the March 31, 1999 financial statements.
Balance Sheet
1. Reduction of other current assets for options not ultimately issued, net of previously recorded
amortization $(67,072)
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 the 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 (Note 4) 650,000
6. Reduction in additional paid-in capital for cancellation of options (79,000)
7. Increase in Series F Preferred Stock to reflect change in amortization period for beneficial conversion
feature. The amortization for the dividend associated with the beneficial conversion feature of the
securities was initially to be recognized over the two-year hold period. The amortization period was
changed to seven months to correspond to the expected timeframe to bring the Series F Stock registration
statement effective, since this is the first instance when the Series F Stock is able to be converted. 44,643
8. Additional net loss and non-cash dividend in accumulated deficit. The increase in the accumulated deficit
is attributable to a cumulative increase of $718,634 for the year ended March 31, 1999 (see previous table
outlining changes in the March 31, 1999 balance sheet), less $1,562 in operating expenses attributed to the
reversal of amortization expense of prepaid stock options that were not issued, plus an additional non-cash
dividend of $44,643 related to the change in the amortization period of the beneficial conversion feature,
as noted in 7. above. 761,715
Page 8
9. Net reduction in stockholders' equity (67,072)
Statement of Operations and Comprehensive Net Income (Loss)
1. Net decrease in operating expenses from reversal of amortization of stock options not issued $ (1,562)
2. Additional effective non-cash interest expense attributable to the beneficial conversion feature of
revised convertible debentures treated as new debt instruments (Note 4) 650,000
3. Extraordinary gain from modification of debt terms, since such modifications were significant to be
considered a debt extinguishment under EITF 96-19 650,000
Decrease in net loss for the three months ending June 30, 1999
$ (1,562)
=========
The effects on the Company's previously submitted June 30, 1999 financial
statements are summarized as follows.
Previously Increase
Reported (Decrease) Restated
--------------- ---------------- ---------------
Consolidated balance sheet:
Other current assets $ 1,387,622 $ (67,072) $ 1,320,550
Total assets $ 22,665,095 $ (67,072) $ 22,598,023
=============== ================ ===============
Series E convertible preferred stock $ 6,160,074 $ 79,000 $ 6,239,074
Additional paid-in capital 16,048,319 571,000 16,619,319
Series F convertible preferred stock 62,500 44,643 107,143
Accumulated deficit 18,097,752 761,715 18,859,467
Total liabilities and stockholders' equity $ 22,665,095 $ (67,072) $ 22,598,023
=============== ================ ===============
Page 9
Consolidated statement of operations and comprehensive loss:
Operating expenses $ 3,755,090 $ (1,562) $ 3,753,528
Effective interest for beneficial
conversion feature - 650,000 650,000
Extraordinary gain on extinguishment
of debt - 650,000 650,000
Net income(loss) $ (1,549,601) $ 1,562 $ (1,548,039)
=============== ================ ===============
Non-cash dividends on preferred stock (540,473) 44,643 (585,116)
Net income(loss) applicable to
common shares $ (2,090,074) $ 43,081 $ (2,133,155)
=============== ================ ===============
Basic and diluted income(loss) per
common share and share equivalents $ (.39) $ - $ (.39)
============== ================ ===============
Note 6. Subsequent Event
On August 15, 2000, the Company entered into the 7th Amendment to the Loan and
Security Agreement with FINOVA. The original Agreement expired on August 3,
2000, however, the amendment provides for a bridge loan commencing on the
expiration date through the bridge loan termination date, November 14, 2000. The
amount of the bridge line of credit is $3,200,000. The interest rate was not
changed under the amendment and remained at prime plus 1.5%
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
This Report on Form 10-Q 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
twenty-nine of the Company's aggregate thirty-three stores, of which Canyon
holds the lease for one of Toys' retail locations. Toys also operates the
Company's Internet activities (the "Internet Operations").
For the three months ended June 30, 2000 compared to the three months ended June
30, 1999
The Company generated net sales of $7,018,093 in the three months ended
June 30, 2000. This represented an increase of $509,528, or 7.8%, from net sales
of $6,508,565 in the three months ended June 30, 1999. Of this sales growth,
approximately $41,000 can be attributed to the Internet Operations in the United
States and Germany ("Internet Operations"); the remainder of the sales growth
can be attributed to the Company's new stores as same store sales declined by
21.5% for the period.
Page 11
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) due to a significant reduction in the sales of certain
collectible items, in particular, Beanie Babies. The Company attributes a great
deal of this decline both to a reduction in demand for Beanie Babies and related
items and a general lack of availability of those items from the manufacturer.
The Company expects this trend to continue only through the second quarter of
current fiscal year 2001.
The Company ended June 2000 with 33 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 two new stores.
The Company posted a gross profit of $3,063,425 in the three months ended
June 30, 2000, reflecting an increase of $318,074, or 11.6%, from the gross
profit of $2,745,351 in the three months ended June 30, 1999. This increase was
due to the above noted growth in sales. The Company's gross margin of 43.7% in
the June 2000 period was 1.6% greater than the gross margin of 42.1% achieved in
the June 1999 period.
Operating expenses (excluding depreciation and amortization expenses) for
the three months ended June 30, 2000 were $5,541,313. This represented a
$1,787,785, or 47.6%, increase over the Company's operating expenses of
$3,753,528 in the three months ended June 30, 1999. The primary reasons for the
operating expense increase were operating expenses relating to the Internet
Operations of approximately $427,000, an increase in payroll and related
expenses of $812,000 and an increase in rent expense of approximately $770,000.
The payroll expense increase was due to the addition of a new President, 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 three months ended June 30, 2000, the Company recorded non-cash
depreciation and amortization expense of $552,118, a $327,650 increase from
depreciation and amortization expense of $224,468 in the period ended June 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.
Total operating expenses (operating expenses combined with depreciation and
amortization) in the June 2000 period were $6,093,431, representing a
$2,118,435, or 53.2%, increase from total operating expenses of $3,977,996 in
the June 1999 period.
As a result of the $318,074 increase in gross profit less the $2,118,435
increase in total operating expenses, the Company's operating loss increased by
$1,797,361 from $1,232,645 during the three months ended June 30, 1999 to
$3,030,006 during the three months ended June 30, 2000. The Internet Operations
represented approximately $428,000 of the operating loss.
Page 12
Interest expense totaled $651,113 for the three months ended June 30, 2000.
This represented a $314,281 decrease from interest expense of $965,394 for the
three months ended June 30, 1999. The June 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. The consideration for this charge was an
issuance of Series E Preferred Stock to ZD (see Note 3). For the three months
ended June 30, 1999, the Company recognized non-cash interest expense of
$650,000 attributable to the beneficial conversion feature of its convertible
debentures.
As a result of the above-mentioned factors, the Company recorded a loss
before minority interest of $3,681,119 for the three months ended June 30, 2000.
This represented a $1,483,080 increase over the loss before minority interest of
$2,198,039 recorded in the three months ended June 30, 1999.
In the three months ended June 30, 2000, the Company recorded a minority
interest in the loss of the consolidated Toys subsidiary of $1,098,757. This
minority interest arose out of various sales of stock in the Company's Toys
subsidiary. This minority interest represented a reduction in the Company's net
loss for the June 2000 period. Since Toys operated as a wholly owned division of
the Company during the June 1999 period, no minority interest was recorded in
that period.
As a result of the above factors, the Company recorded a net loss before
extraordinary gain of $2,582,362 in the three months ended June 30, 2000. This
represented a $384,323 increase over the net loss of $2,198,039 posted in the
three months ended June 30, 1999.
In the three months ended June 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 June 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.
The net loss for the three months ended June 30, 2000 was $2,582,362. This
represented a $1,034,323 increase over the net loss of $1,548,039 recorded in
the three months ended June 30, 1999.
In the three months ended June 30, 2000, the Company recorded other
comprehensive loss of $33,482 that related to foreign currency translation
adjustments arising from Toys' Internet operations in Germany. There were no
foreign currency translation adjustments in the June 1999 period.
For the three months ended June 30, 2000, the net loss of $2,582,362 was
increased by non-cash dividends of $500,000 in order to determine the net loss
applicable to common shares.
Likewise, during the three months ended June 30, 1999, the net loss of
$1,548,039 was increased by non-cash dividends of $585,116 in order to determine
the net loss applicable to common shares. 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.
Page 13
As a result of all of the above-mentioned factors, the Company recorded a
net loss applicable to common shares of $3,082,362, or a basic and diluted loss
per share of $0.10, in the three months ended June 30, 2000. This compares to a
net loss applicable to common shares of $2,133,155, or a basic and diluted loss
per share of $0.39, in the three months ended June 30, 1999. The weighted
average number of common shares outstanding increased from 5,525,936 in the June
1999 period to 30,237,290 in the June 2000 period as a result of the conversion
of Series E Shares into common shares during the quarter as discussed in Note 2
to the condensed consolidated financial statements..
Liquidity and Capital Resources
At June 30, 2000, the Company had a working capital position of $9,683,768
compared to a working capital position of $13,550,389 at March 31, 2000. The
primary factor in the $3,866,621 decrease in working capital was cash used to
fund the net loss incurred in the quarter ended June 30, 2000.
While the Company generated an operating profit during fiscal year ended
March 31, 1999, the Company generated an operating loss in fiscal 2000 and in
the three months ended June 30, 2000. The Company has historically financed
those operating losses and its working capital requirements through debt and
sales of the Company's equity securities. 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 consistent profitability.
During the three-month period ended June 30, 2000, the Company used
$2,767,210 of cash in its operations compared to $200,081 used in operations in
the three-month period ended June 30, 1999. The Company's net loss was
$2,582,362 and $1,548,039, respectively, in those periods. The largest factors
that led to the consumption of cash in operating activities for the June 2000
period exceeding the amount of the net loss was a $2,817,401 growth in
merchandise inventories and the $1,098,757 that funded the minority interest in
net loss of subsidiary.
The Company used $955,262 of cash in its investing activities during the
three-month period ended June 30, 2000 compared to $224,061 in the three-month
period ended June 30, 1999. Investing activity for the June 2000 period
consisted of the purchase of equipment and fixtures for new stores of
approximately $790,000, which was partially offset by the collection of a
$300,000 receivable from a related party and the release of restrictions on
certificates of deposit. Additionally, the Company continued to invest heavily
in the software development of its websites related to e-commerce activities.
Such expenditures approximated $590,000 for the three months ended June 30,
2000.
The Company used $7,278 of cash in its financing activities in the
three-month period ended June 30, 2000 compared to the generation of $690,920
from financing activities in the three-month period ended June 30, 1999. The
primary contributors to the Company's financing activities in the 1999 period
were the issuance of preferred stock and net borrowings under its credit line.
Page 14
As a result of the above factors, the Company had a net decrease in cash of
$3,763,232 in the three-month period ended June 30, 2000 compared to a net
decrease in cash of $266,778 in the three-month period ended June 30, 1999.
Planned new store openings remain a significant capital commitment of the
Company. The Company has entered into leases to open seven new stores by the end
of calendar year 2000. The Company expects that the costs of building those new
stores net of landlord tenant improvement contributions and of inventory
requirements will be approximately $3.6 million. The Company plans to finance
the costs of opening those new stores through a combination of capital lease
financing and the use of the Company's working capital.
Three of those new stores were opened in the May through August period. The
first of those stores opened in May in Nashville, Tennessee. The second opened
in June in Orlando, Florida. The third opened in the Aladdin hotel in Las Vegas,
Nevada in August. The net costs of constructing those three stores (excluding
inventory and the costs of opening the store including personnel acquisition and
training) were approximately $1.5 million. The costs of opening the stores is
included in operating expenses.
The remaining four stores are scheduled to open in the September through
November timeframe. Those new stores will be located in Colorado, Illinois,
Maryland and Minnesota. It is expected that the net costs of constructing those
stores (excluding inventory and the costs of opening the store including
personnel acquisition and training) will be approximately $2.1 million.
The Internet Operations represent another area that will require a
significant level of capital expenditures. The Company has developed a new
strategy for its Internet Operations that it believes may differentiate its
websites from its competitors' websites. The Company has invested approximately
$2 million in this new concept. The new concept requires the participation of
media and/or financing partners. The new concept is based on the use of a
continuing story line to draw repeat viewers/potential customers to its websites
rather than spending significant amounts of capital on advertising expense. The
Company believes that it may draw a more loyal customer base in this new
approach. If the Company does secure the participation of media partners, than
it will also need to raise additional financing to fund the somewhat open-ended
nature of capital expenditures associated with this new project. The Company is
currently seeking additional financing for this purpose. There can be no
assurance that such financing will be available on terms acceptable to the
Company or at all. During the June 2000 period, the Company invested
approximately $1.1 million in the Internet Operations. This $1.1 million amount
includes the operating loss in the Internet Operations, the costs of acquiring
additional inventory in Germany and the costs of creating new software for the
Internet Operations.
The Company's previous financing agreement with FINOVA Capital Corporation
was scheduled to expire on August 3, 2000. On August 15, 2000, the Company
entered into an amendment to the FINOVA Agreement. That amendment called for an
extension of the credit line through November 14, 2000 with a borrowing limit of
$3.2 million.
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The Company continues to seek an alternative financing agreement. The
Company has received a letter of intent for a multiyear, $15 million line of
credit from a major finance company, which is completing its due diligence.
However, there can be no assurance that any such finance agreement will be
consummated on terms acceptable to the Company, or if at all.
We believe that current cash and cash equivalents and cash that may be
generated from operations will be sufficient to meet our anticipated cash needs
through March 31, 2001. However, any projections of future cash needs and cash
flows are subject to substantial uncertainty. If current cash, cash equivalents
and cash that may be generated from operations are insufficient to satisfy our
liquidity requirements, we will likely seek to sell additional equity or debt
securities or to obtain a line of credit. The sale of additional equity or
equity-related securities would result in additional dilution to our
stockholders. In addition, we will, from time to time, consider the acquisition
of or investment in complementary businesses, products, services and
technologies, which might impact our liquidity requirements or cause us to issue
additional equity or debt securities. There can be no assurance that financing
will be available in amounts or on terms acceptable to us, if at all.
Trends Affecting Liquidity, Capital Resources and Operations
The Company believes that the period covered by both its fiscal year 2000
and the three months ended June 30, 2000 were slow periods for the worldwide toy
industry. With the exception of the Pokemon phenomenon, there were very few hot
toys. Movie related toy products (such as Star Wars) did not sell well in that
period and as discussed above, sales of Beanie babies slowed dramatically.
The Company is trying to mitigate this slowness in the toy industry by
locating its new stores in sites that have a large amount of customer foot
traffic such as tourist areas. These high-traffic areas should enable the
Company to provide better access to its educational, specialty, and collectible
toy merchandise. Additionally, the history of the toy industry indicates that
there is generally at least one highly popular toy every year. The Company
believes that its new locations will help position the Company to take advantage
of those future positive trends.
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 and Zany Brainy. The
Company also competes both through its electronic commerce operations and
through its stores against Internet oriented toy retailers such as eToys, Inc,
Amazon.com and Toys R Us.com. There can be no assurance that the Company's
business strategy will enable it to compete effectively in the toy industry.
Page 16
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.
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 17
PART II
Item 1. .........Legal Proceedings
No Director, Officer, or affiliate of the Company, nor any associate of
same, is a party to, or has a material interest in, any proceeding adverse to
the Company.
Item 2. .........Changes in Securities and Use of Proceeds: None
Item 3. .........Defaults Upon Senior Securities: None
Item 4. .........Submission of Matters to a Vote of Security Holders: None
Item 5. .........Other Information: None
Item 6. .........Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
None.
(b) During the quarter ended June 30, 2000, no reports on Form 8-K were
filed with the Securities and Exchange Commission.
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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 21st day of August 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
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