U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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:
85,690,234 shares outstanding as of February 16, 2001.
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
Accountants' Review Report
Condensed consolidated balance sheets as of December 31, 2000 3
(unaudited) and March 31, 2000.
Condensed consolidated statements of operations and comprehensive net loss for three
months and nine months ended December 31, 2000 and 1999 (unaudited). 4
Condensed consolidated statements of cash flows for the nine months ended December
31, 2000 and 1999 (unaudited). 5
Notes to condensed consolidated financial statements 6-11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
12-19
PART II. OTHER INFORMATION
20
Item 1. LEGAL PROCEEDINGS
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
Item 3. DEFAULTS UPON SENIOR SECURITIES 20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
Item 5. OTHER INFORMATION 20
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 20
Signatures 21
2
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 2000
(unaudited) March 31, 2000
------------ ------------
Current
Cash ......................................................... $ 1,682,697 $ 6,179,007
Accounts receivable .......................................... 570,439 676,456
Merchandise inventories ...................................... 14,052,585 14,111,236
Other current assets ......................................... 655,252 20,000
------------ ------------
Total current assets ......... 16,960,973 20,986,699
Property and Equipment, net of accumulated
depreciation and amortization of $6,474,595
and $5,162,813, respectively ................................. 10,211,016 7,398,621
Marketable securities ................................................... 4,073,872 --
Website development costs ............................................... 1,612,545 1,753,193
Deposits and other assets ............................................... 2,183,366 2,145,268
------------ ------------
$ 35,041,772 $ 32,283,781
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current
Accounts payable .............................................. $ 8,824,852 $ 6,110,161
Accrued expenses and other liabilities ........................ 2,612,580 892,428
Current portion of notes payable and capital leases ........... 187,504 386,179
Borrowings under financing agreement .......................... 5,169,514 47,542
------------ ------------
Total current liabilities ............................... 16,794,450 7,436,310
Notes payable and capital leases, net of current portion ................ 1,099,418 988,767
Deferred rent liability ................................................. 129,268 135,607
------------ ------------
Total liabilities ............................... 18,023,136 8,560,684
------------ ------------
Minority interest in subsidiary ......................................... 6,125,317 9,943,407
------------ ------------
Stockholders' equity:
Convertible series E preferred stock, $1 par, 25,000,000 shares
authorized: 1,233,769 and 8,377,640 shares outstanding, ..... 1,089,624 7,349,154
respectively
Convertible series F preferred stock, $0.01 par, 5,500,000
shares authorized; 750,000 shares
Outstanding ................................................. 726,153 750,000
Common stock, $.01 par value, 160,000,000 shares authorized;
85,534,783 and 11,227,568 shares outstanding, respectively .. 855,347 112,275
Additional paid-in-capital .................................... 43,933,559 33,053,724
Accumulated deficit and
comprehensive loss ............................................ (35,711,364 (27,485,463)
------------ ------------
Total stockholders' equity ... 10,893,319 13,779,690
------------ ------------
$ 35,041,772 $ 32,283,781
============ ============
See accompanying notes to condensed financial statements
3
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE NET LOSS
(Unaudited)
Three Months Ended December 31, Nine Months Ended December 31,
1999 1999
(Restated, (Restated,
2000 Note 8) 2000 Note 8)
---- ------- ---- -------
Net sales $19,257,452 $17,315,824 $35,302,596 $30,691,508
Cost of sales 11,668,839 10,006,720 21,337,072 17,370,835
----------- ------------- ----------- -------------
Gross profit 7,588,613 7,309,104 13,965,524 13,320,673
----------- ------------- ----------- -------------
Operating expenses:
Operating expenses 7,529,499 6,016,423 19,917,210 13,742,120
Litigation settlement expense -- 183,464 126,300 270,206
Depreciation and amortization 655,117 320,508 1,818,664
----------- ------------- ----------- -------------
773,490
Total operating expenses 8,184,616 6,520,395 21,862,174 14,785,816
----------- ------------- ----------- -------------
Impairment of website development costs 1,695,874 -- 1,695,874 --
----------- ------------- ----------- -------------
Operating profit (loss) (2,291,877) 788,709 (9,592,524) (1,465,143)
----------- ------------- ----------- -------------
Interest expense:
Interest and finance charges 780,011 307,870 1,025,424 823,200
Amortization of debt issuance costs 251,055 58,097 303,055
174,889
Effective non-cash interest expense
from beneficial conversion feature - - 500,000 650,000
----------- ------------- ----------- -------------
Total interest expense 1,031,066 365,967 1,828,479 1,648,089
----------- ------------- ----------- -------------
Profit (loss) before minority interest in consolidated
subsidiary and income taxes (3,322,943) 422,742 (11,421,003) (3,113,232)
Provision for income taxes 5,757 -- 60,003 --
----------- ------------- ----------- -------------
Minority interest in loss (income) of consolidated
subsidiary 1,387,992 (608,478) 3,818,090 (464,981)
----------- ------------- ----------- -------------
Net loss before extraordinary gain (1,940,708) (185,736) (7,662,916) (3,578,213)
Extraordinary gain on modification of debt terms - - - 650,000
----------- ------------- ----------- ------------
Net loss (1,940,708) (185,736) (7,662,916) (2,928,213)
Other comprehensive loss (136,660) - (214,149) -
----------- ------------- ----------- -------------
Comprehensive net loss $ (2,077,368) $ (185,736) $ (7,877,065) $(2,928,213)
============= ============= ============= =============
Calculation of basic and diluted loss per share:
Net loss $ 1,940,708) $ (185,736) $(7,662,916) $(2,928,213)
Effects of non-cash dividends on convertible
preferred stock - (799,402) (500,000) (2,183,919)
----------- ------------- ----------- -------------
Net loss applicable to common shares $(1,940,708) $ (985,138) $(8,162,916) $(5,112,132)
============= ============= ============= =============
Basic and diluted loss per common share and
share equivalents $ (0.02) $ (0.18) $ (0.14) $ (0.92)
============= ============= ============= =============
Weighted average number of common shares
and share equivalents outstanding 84,696,135 5,548,852 59,021,606 5,541,076
============= ============= ============= =============
See accompanying notes to condensed financial statements
4
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine-months Ended December 31,
2000 1999
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,662,916) $(2,928,213)
Adjustments used to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,818,664 773,490
Minority interest in net income (loss) of (3,818,090) 464,981
subsidiary
Deferred rent (6,339) 8,291
Other 89,530
Impairment of website development costs 1,695,874 -
Amortization of debt issuance costs 303,055 174,889
Extraordinary gain - (650,000)
Effective interest expense for
beneficial conversion 500,000 650,000
Increase (decrease) from changes in:
Accounts receivable 106,017 (887,146)
Merchandise inventories 58,651 (2,669,557)
Other current assets (635,252) 1,627,026
Deposits and other assets (341,153) (4,105,431)
Accounts payable 2,714,691 2,291,178
Accrued expenses and other liabilities 1,720,152 839,009
-------------- ---------------
Net cash used by operating activities (3,457,116) (4,411,483)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,214,332) (1,931,206)
Website development (1,971,953) -
-
Issuance of notes receivable to affiliates - (650,000)
-------------- ---------------
Net cash used by investing activities (6,186,285) (2,581,206)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred and common stock - 25,560,792
Borrowings under financing agreement 34,898,776 27,061,000
Repayments under financing agreement (29,776,804) (34,821,496)
Borrowings under notes payable -
Reclassification of restricted cash - 2,000,000
Repayments under notes payable and capital leases (88,024) (638,379)
-------------- ---------------
Net cash provided by financing activities 5,033,948 19,161,917
-------------- ---------------
Effect of exchange rate on cash 113,143 -
-------------- ---------------
Net increase(decrease) in cash (4,496,310) 12,169,228
Cash at beginning of period 6,179,007 125,967
-------------- ---------------
Cash at end of period $ 1,682,697 $ 12,295,195
=========== ============
See accompanying notes to condensed financial statements
5
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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,
as amended. Operating results for the nine month period ended December 31, 2000
are not necessarily indicative of the results of operations that may be expected
for the year ending March 31, 2001.
The interim accompanying unaudited condensed consolidated financial
statements include the operations of the Company and its majority owned
subsidiary, Toys International.COM, Inc. ("Toys"). At December 31, 2000, the
Company owned 58.4% of Toys.
Note 2. Liquidity and Capital Resources
The nine-month period covered in this report was an extremely difficult
period for the toy industry. The Company incurred a significantly increased loss
from operations due, in part, to a decline in same store sales. This operating
loss, coupled with investments in new store locations and Internet operations,
has reduced the Company's working capital and increased its reliance on trade
vendor support and bank financing (see Note 4). The Company's management is
actively working with its trade vendors and its secured lender to sustain
inventory shipments and continued financing.
Note 3. 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 December 31, 2000, and for the nine
months then ended. For the nine-months ended December 31, 1999, the Internet
segment was not considered to be an operating segment by management since the
websites were under development or revision and only operated for approximately
the last two months of that nine month period.
6
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Unaudited)
The following information reflects a $1,695,874 impairment charge the
Company recorded relating to its website development costs. This charge was
recorded pursuant to Statement of Financial Accounting Standards No. 121 ("FAS
121"), which addresses accounting for the impairment of long-lived assets. After
reviewing the carrying amount of the website development costs and the projected
cash flows from the Internet operations, the Company determined that the
$1,695,874 impairment charge was appropriate under FAS 121 at this point in
time.
As of December 31, 2000:
Assets
Retail $30,920,651
Internet 4,121,121
------------
$35,041,772
For the Nine-Months Ended December 31, 2000:
Capital Expenditures
Fixed Assets $ 4,214,332
Website Development costs 1,971,953
------------
Total $ 6,186,285
============
Sales
Retail $34,355,861
Internet 946,735
------------
Total $35,302,596
============
Gross Profit
Retail $13,757,047
Internet 208,477
------------
Total $13,965,524
============
Operating loss
Retail $(5,222,326)
Internet, including impairment charge (4,370,198)
-----------
Total $(9,592,524)
============
7
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Unaudited)
Note 4. Line of Credit
On November 20, 2000, Toys entered into a $12,000,000 revolving credit
facility (the "Credit Facility") with Paragon Capital LLC, now known as Wells
Fargo Retail Finance ("Wells Fargo"). The Company guarantied the Credit Facility
for its Toys subsidiary. The Credit Facility called for an initial 90-day period
(the "Evaluation Period") for Wells Fargo to determine the covenant requirements
to be maintained under the agreement, and to complete its due diligence
investigation. During the Evaluation Period, the Credit Facility is effectively
on a demand note basis. After conclusion of the Evaluation Period, the Credit
Facility provides for a three-year life. The Wells Fargo Credit Facility
replaced the Company's previous credit facility with FINOVA Capital Corporation.
The Company's performance during the holiday selling season fell below
plan due, among other factors, to the depressed retail climate and the soft toy
industry generally. This performance led Wells Fargo in late January to extend
the 90-day Evaluation Period for another month in order to continue its
evaluation process. There was approximately $6.6 million outstanding under the
Credit Facility on February 16, 2001.
Should Wells Fargo elect not to further extend the Credit Facility
beyond the additional month of the Evaluation Period, then the Company would be
forced to seek a replacement lender. There can be no assurance that the Company
would be able to find such a replacement lender on terms acceptable to the
Company or at all.
Note 5. Bridge Loan
In order to support its inventory needs for the 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 Credit Facility. In September
2000, in anticipation of receiving the Bridge Loan from DIG Financial Corp., a
material stockholder of the Company, the Company granted to DIG a security
interest in certain of its assets. 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.
8
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Unaudited)
Note 6. Basic and Diluted Loss per Share
The basic and diluted loss per common share for the three and nine
month periods ending December 31, 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 aggregate 20,932,614, which
could result from the exercise of options, warrants, and the conversion of
debentures and/or the Series E and Series F Preferred Stock. Exercise or
conversion of certain of these instruments is restricted based on defined
holding periods or vesting schedules.
Note 7. Launch of TX40 Project
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 nine months ended December 31, 2000, the Company invested $1,971,953
in this project. That investment is shown net of accumulated amortization and a
$1,695,874 impairment charge (see Note 3), on the December 31, 2000 balance
sheet as a balance of $1,612,545 under the description "web-site development
costs."
Note 8. Restatement of Amounts Previously Reported
The December 31, 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 table below
identifies significant changes to balances in the financial statements. The
following is a summary of the impact of the restatements on the December 31,
1999 consolidated financial statements.
9
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Unaudited)
Note 8. Restatement of Amounts Previously Reported (continued)
Balance Sheet
1. Reduction of other current assets for options not ultimately issued, net
of previously recorded amortization $ (63,947)
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 the
accumulated deficit is attributable to a cumulative increase of $718,634
for the year ended March 31, 1999 (see previous table outlining changes
to the March 31, 1999 balance sheet), less $4,686 in operating expenses
attributed to the reversal of amortization expense of prepaid stock options
that were not issued 713,947
8. Net reduction in stockholders' equity (63,947)
Statement of Operations and Comprehensive Net Income (Loss)
For the three months ended December 31, 1999:
1. Decrease in operating expenses from reversal of amortization of stock
options not issued $ 1,562
For the nine months ended December 31, 1999:
1. Decrease in operating expenses from reversal of amortization of stock
options not issued $ (4,686)
2. Additional effective non-cash interest expense attributable to the
beneficial conversion feature 650,000
3. Extraordinary gain from modification of debt terms (650,000)
-------------------
Decrease in net loss $ (4,686)
10
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Unaudited)
Note 8. Restatement of Amounts Previously Reported (continued)
The effects on the Company's previously submitted December 31, 1999 financial
statements are summarized as follows.
Previously Increase
Reported (Decrease) Restated
--------------- ---------------- ---------------
Consolidated balance sheet:
Total current assets $ 28,753,164 $ (63,947) $ 28,689,217
Total assets $ 40,512,911 $ (63,947) $ 40,448,964
=============== ================ ===============
Series E convertible preferred stock $ 7,116,020 $ 79,000 $ 7,195,020
Additional paid-in capital 29,525,537 571,000 30,096,537
Total liabilities and stockholders' equity $ 40,512,911 $ (63,947) $ 40,448,964
=============== ================ ===============
Previously Increase
Reported (Decrease) Restated
--------------- ---------------- ---------------
Consolidated statement of operations and comprehensive loss:
For the nine months ended December 31,1999:
Operating expenses $ 13,746,807 $ (4,687) $ 13,742,120
Effective interest for beneficial
conversion feature - 650,000 650,000
Extraordinary gain on extinguishment
of debt - 650,000 650,000
Comprehensive net income (loss) $ (2,932,900) $ 4,687 $ (2,928,213)
=============== ================ ===============
Net income (loss) applicable to
common shares $ (5,116,819) $ 4,687 $ (5,112,132)
=============== ================ ===============
Basic and diluted income (loss) per
common share and share equivalents $ (.92) $ - $ (.92)
============== ================ ==============
For the three months ended December 31, 1999:
Operating expenses $ 6,017,985 $ (1,562) $ 6,016,423
Comprehensive net income (loss) $ (187,298) $ 1,562 $ (185,736)
=============== ================ ===============
Net income (loss) applicable to
common shares $ (986,700) $ 1,562 $ (985,138)
=============== ================ ===============
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OFOPERATIONS
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-seven of the Company's stores, of which Canyon holds the lease for one of
Toys' retail locations.
For the three months ended December 31, 2000 compared to
the three months ended December 31, 1999
The Company generated net sales of $19,257,452 in the three months ended
December 31, 2000. This represented an increase of $1,941,628, or 11.2%, from
net sales of $17,315,824 in the three months ended December 31, 1999. All of
this sales growth is attributable to the Company's new stores as same store
sales declined by 7.7% for the period and since the Company's Internet
operations in the United States and Germany generated approximately $174,000
less in sales during the 2000 period than the Internet operations did in the
1999 period.
The Company ended December 2000 with 38 retail locations in eleven states,
compared to 31 retail locations in seven states at the end of fiscal year 2000.
During the quarter, the Company opened four new stores, which were located in
Colorado, Illinois, Maryland and Minnesota.
12
The Company posted a gross profit of $7,588,613 in the three months ended
December 31, 2000, representing an increase of $279,509, or 3.8%, from the gross
profit of $7,309,104 in the three months ended December 31, 1999. This gross
profit increase is due to the above noted sales increase, which was largely
offset by a decrease in the Company's gross margin. The gross margin of 39.4% in
the December 2000 period represented a decrease of 2.8% from the Company's gross
margin of 42.2% in the December 1999 period. The gross margin decrease was
largely due to a significant level of sales price discounting by the Company
during the holiday season in order to generate sales.
Operating expenses (excluding litigation settlement expenses and
depreciation and amortization expenses) in the three months ended December 31,
2000 were $7,529,499. This represented a $1,513,076, or 25.1%, increase over the
Company's operating expenses of $6,016,423 in the three months ended December
31, 1999. The primary reasons for the operating expense increase were an
increase in payroll and related expenses of $418,347 and an increase in rent
expense of $299,636. The payroll expense increase was due to the hiring of
several middle managers and employees at new stores. The growth in rent expense
was caused by the additional stores.
During the three months ended December 31, 1999, the Company settled its
remaining store closing related litigation. Under this settlement the Company
agreed to make a cash payment of $35,000, to issue 100,000 shares of its common
stock, and to pay an aggregate $186,138 over a 36-month period. The Company has
estimated the total net present value of the settlement to be $233,905 and
accrued an additional amount of $183,464 in the three months ended December 1999
to cover the estimated value of the settlement, $113,905 and other litigation
related expenses, incurred of $69,559. The value of the settlement includes the
initial $35,000 cash payment and $42,500 attributable to the 100,000 shares of
common stock. The value assigned to the common stock component was based on the
then market price of $.50 per share and a 15% discount given the unregistered
nature of the shares as well as the thinly-traded and highly volatile nature of
the market for the Company's securities. The remaining balance of $156,405
represent the net present value of the thirty-six monthly payments aggregating
$186,138 using a discount factor of 10%.
During the three months ended December 31, 2000, the Company recorded
non-cash depreciation and amortization expenses of $655,117, representing a
$334,609, or 104.4%, increase over $320,508 in the period ended December 31,
1998. This amount was higher in the December 2000 period than in the December
1999 period primarily due to the additional depreciation associated with the new
stores opened by the Company. Total operating expenses (operating expenses
combined with litigation settlement expenses and depreciation and amortization)
in the December 2000 period were $8,184,616, representing a $1,664,221, or
25.5%, increase from total operating expenses of $6,520,395 in the December 1999
period.
During the three months ended December 2000, the Company recorded a
$1,695,874 impairment charge relating to its website development costs. This
charge was recorded pursuant to Statement of Financial Accounting Standards No.
121 ("FAS 121"), which addresses accounting for the impairment of long-lived
assets. After reviewing the carrying amount of the website development costs and
the projected cash flows from the Internet operations, the Company determined
that the $1,695,874 impairment charge was appropriate under FAS 121 at this
point in time.
13
Due to the combination of the above mentioned impairment charge of
$1,695,874 and the increase in total operating expenses of $1,664,221, which
were only partially offset by the $279,509 increase in gross profit, the Company
generated an operating loss of $2,291,877 for the three months ended December
2000. This was a $3,080,586 decrease from the Company's operating profit of
$788,709 in the three months ended December 1999.
Interest expense totaled $1,031,066 for the three months ended December 31,
2000. This represented a $665,099 increase from interest expense of $365,967 in
the three months ended December 31, 1999. The primary reason for the increased
level of interest expense was the expensing of various fees and interest charges
relating to the bridge loan from the Company's prior lender.
As a result of the above-mentioned factors, the Company recorded a loss
before minority interest in its consolidated subsidiary and before income taxes
of $3,322,943 in the December 2000 period compared to a profit of $422,742 in
the December 1999 period, a decrease of $3,745,685.
During the three months ended December 31, 2000, the Company recorded a
minority interest arising out of the loss in consolidated subsidiary of
$1,387,992, compared to a minority interest arising out of the profit of
consolidated subsidiary of $608,478 in the December 1999 period. This minority
interest arose out of various sales of stock of the Company's Toys
International.COM, Inc. ("Toys") subsidiary. This minority interest represented
a reduction in the Company's loss in the December 2000 period and a reduction in
the Company's profit in the December 1999 period.
As a result of the above-mentioned factors, the Company recorded a net loss
of $1,940,708 for the three months ended December 31, 2000. This represented a
$1,754,972 increase from the net loss of $185,736 for the three months ended
December 31, 1999. For the three-month period ended December 31, 1999, the net
loss of $187,298 was increased by a non-cash dividends of $799,402 in order to
determine the net loss applicable to common shares. The non-cash dividend
represented amortization of the discount recorded upon the issuance of Series E
Stock and Series F Preferred Stock ("Series F Stock"), both having a beneficial
conversion feature. The Series F Stock non-cash dividend was applicable only to
1999. No dividends in the form of securities or other assets were actually paid
out.
The basic and diluted net loss per common share for the December 2000
period was $(0.02), compared to a basic and diluted net income per common share
in the December 1999 period of $$(0.18). The decrease in the loss per share was
due to the increase in the weighted average number of shares outstanding from
5,548,852 in the December 1999 period to 84,696,135 in the December 2000 period.
14
For the nine months ended December 31, 2000 compared to
the nine months ended December 31, 1999
The Company generated net sales of $35,302,596 in the nine-month period
ended December 31, 2000. This represented an increase of $4,611,088, or 15.0%,
from net sales of $30,691,508 in the nine-month period ended December 31, 1999.
All of this sales growth is attributable to the Company's new stores as same
store sales declined by 12.8% for the period and since the Company's Internet
operations in the United States and Germany generated approximately $117,000
less in sales during the 2000 period than the Internet operations did in the
1999 period.
The Company posted a gross profit of $13,965,524 in the nine-month period
ended December 31, 2000, representing an increase of $644,851, or 4.8%, from the
gross profit of $13,320,673 in the nine month period ended December 31, 1998.
This gross profit increase is due to the above noted sales increase, which was
largely offset by a decrease in the Company's gross margin. The gross margin of
39.6% in the December 2000 period represented a decrease of 3.8% from the
Company's gross margin of 43.4% in the December 1999 period. The gross margin
decrease was due to a significant level of sales price discounting by the
Company during the holiday season in order to generate sales.
Operating expenses (excluding litigation settlement expenses and
depreciation and amortization expenses) in the nine month period ended December
31, 2000 were $19,917,210. This represented a $6,175,090, or 44.9%, increase
over the Company's operating expenses of $13,742,120 in the nine-month period
ended December 31, 1999. The most significant contributors to the operating
expense increase were an increase in payroll and related expenses of $1,232,969
and an increase in rent expense of $1,347,995. The payroll expense increase was
due to the hiring of several middle managers and employees at new stores. The
growth in rent expense was caused by the additional stores.
During the nine months ended December 31, 1999, the Company settled its
final store closing related litigation. Under this settlement the Company agreed
to an upfront cash payment of $35,000, to issue 100,000 shares of its common
stock, and to pay an aggregate $186,138 over a 36-month period. The Company has
estimated the total net present value of the settlement to be $233,905 and
accrued an additional amount of $270,206 in the nine months ended December 1999
to cover the estimated value of the settlement and other litigation related
expenses.
During the nine-month period ended December 31, 2000, the Company recorded
non-cash depreciation and amortization expenses of $1,818,664, a $1,045,174, or
135.1%, increase from $773,490 in the period ended December 31, 1999. This
increase was largely due to depreciation on the fixed assets purchased for the
newly opened stores. Total operating expenses (operating expenses combined with
litigation settlement expense and depreciation and amortization) in the December
2000 period were $21,862,174, representing a $7,076,358, or 47.9%, increase from
total operating expenses of $14,785,816 in the December 1999 period.
15
During the three months ended December 2000, the Company recorded a
$1,695,874 impairment charge the Company recorded relating to its website
development costs. This charge was recorded pursuant to Statement of Financial
Accounting Standards No. 121 ("FAS 121"), which addresses accounting for the
impairment of long-lived assets. After reviewing the carrying amount of the
website development costs and the projected cash flows from the Internet
operations, the Company determined that the $1,695,874 impairment charge was
appropriate under FAS 121 at this point in time.
Due to the combination of the above mentioned impairment charge of
$1,695,874 and the increase in total operating expenses of $7,076,358, which
were only partially offset by the $644,851 increase in gross profit, the Company
generated an operating loss of $9,592,524 for the nine months ended December
2000. This was a $8,127,381 increase over the Company's operating loss of
$1,465,143 in the nine months ended December 1999.
Interest expense totaled $1,828,479 for the nine-month period ended
December 31, 2000. This represented a $180,390, or 10.9%, increase over the
interest expense of $1,648,089 in the nine-month period ended December 31, 1999.
The primary reason for the increased level of interest expense was a $500,000
non-cash interest charge related to the settlement of the ZD Financing
Agreement, as discussed in the prior quarter, and expensing of various fees and
interest charges relating to the bridge loan from the Company's prior lender.
The December 1999 period included the recognition of $650,000 in non-cash
effective interest expense, which was allocable to the proceeds of the
beneficial conversion feature of the amended Frampton and EACF convertible
debentures during the nine-month period ended December 31, 1999. That effective
interest expense represented a non-cash item that was effectively offset dollar
for dollar in stockholders' equity by an increase in additional paid-in capital.
The Company also recorded an extraordinary gain of $650,000 in the nine
month ended December 31, 1999 as a result of the modification of terms for the
Frampton and EACF convertible debentures.
As a result of the above-mentioned factors, the Company recorded a loss
before the minority interest in its consolidated subsidiary and before taxes of
$11,421,003 in the December 2000 period compared to a loss of $3,113,232 in the
December 1999 period, representing a increase of $8,307,771.
During the nine months ended December 31, 2000, the Company recorded a
minority interest arising out of the loss in consolidated subsidiary of
$3,818,090, compared to a minority interest arising out of the profit of
consolidated subsidiary of $464,981 in the December 1999 period. This minority
interest arose out of various sales of stock of the Company's Toys
International.COM, Inc. ("Toys") subsidiary. This minority interest represented
a reduction in the Company's loss in the December 2000 period and a reduction in
the Company's profit in the December 1999 period.
As a result of the above-mentioned factors, the Company recorded a net loss
of $7,662,916 for the nine-month period ended December 31, 2000. This
represented a $4,734,703 decrease from the net loss of $2,928,213 recorded in
16
the nine-month period ended December 31, 1998. For the nine-month periods ended
December 31, 2000 and 1999, the net losses of $7,662,916 and $2,928,213 were
increased by non-cash dividends of $500,000 and $2,183,919, respectively, in
order to determine the net loss applicable to common shares. The non-cash
dividend represented amortization of the discount recorded upon the issuance of
Series E Stock and Series F Preferred Stock ("Series F Stock"), both having a
beneficial conversion feature. No dividends in the form of securities or other
assets were actually paid out.
The basic and diluted net loss per common share for the December 2000
period was $(0.14) compared to a basic and diluted net loss per common share in
the December 1999 period of $(0.92). The decrease in the loss per share was due
to the increase in the weighted average number of shares outstanding from
5,541,076 in the December 1999 period to 59,021,606 in the December 2000 period.
Liquidity and Capital Resources
At December 31, 2000, the Company had working capital of $166,523 compared
to working capital of $13,550,389 at March 31, 2000. The primary factor in the
$13,383,866 decrease in working capital was the Company's operating loss in the
nine months ended December 2000 coupled with its investments in fixed assets and
in its websites, which are classified as noncurrent assets.
The Company has historically financed operations and working capital
requirements through financing agreements and sales of the Company's equity
securities, primarily through the sale of the Company's Series E Stock. There
can be no assurance that the Company will be able to generate sufficient
revenues or have sufficient controls over expenses and other charges to achieve
profitability.
During the nine month period ended December 31, 2000, the Company used
$3,457,116 of cash in its operations compared to $4,411,483 used in operations
in the nine-month period ended December 31, 1999. The primary reason for the
significant difference between the amount of cash used in operations in the two
periods was the net loss of $7,662,916 in the 2000 period compared to the net
loss of $2,928,213 in the 1999 period coupled with a rise in inventories of
approximately $2.7 million in the 1999 period while inventories remained fairly
constant in the 2000 period.
The Company used $6,186,285 of cash in its investing activities during the
nine-month period ended December 31, 2000 compared to $2,581,206 in the
nine-month period ended December 31, 1999. In both periods, the primary
investing activity was the purchase of equipment and fixtures for new stores.
Additionally, in 2000, the Company also invested approximately $2 million in
website development. In 1999, the Company loaned $650,000 to affiliated
entities.
The Company generated $5,033,948 from its financing activities in the
nine-month period ended December 31, 2000 compared to the generation of
$19,161,917 from financing activities in the nine-month period ended December
31, 1999. The primary contributors to the Company's financing activities in 2000
were borrowings on the Company's line of credit. The primary contributors to the
1999 financing activities were proceeds from the sale of the Company's Series F
Stock and the sale of common stock of the Toys subsidiary as well as borrowings
on the Company's line of credit.
17
As a result of the above factors, the Company had a net decrease in cash of
$4,496,310 in the nine-month period ended December 31, 2000 compared to a net
increase in cash of $12,169,228 in the nine month period ended December 31,
1999.
During the three-month period ended December 31, 2000, the Company opened
four new stores, which were located in Colorado, Illinois, Maryland and
Minnesota. These four stores represented an aggregate capital investment of
approximately $2.0 million, net of landlord contributions. The Company ended
December 2000 with 38 retail locations in eleven states, compared to 31 retail
locations in seven states at the end of fiscal year 2000. Subsequent to December
31, 2000, one store closed upon expiration of its lease, and three additional
stores will be closed upon expiration of their leases in the months of March and
April 2001.
The Company is currently evaluating a number of non-performing stores for
closure and has retained two lease consultants to assist with related rent
reductions and/or exit strategies.
On November 20, 2000, Toys entered into a $12,000,000 revolving credit
facility (the "Credit Facility") with Paragon Capital LLC, now known as Wells
Fargo Retail Finance ("Wells Fargo"). The Company guarantied the Credit
Facility. The Credit Facility called for an initial 90-day period (the
"Evaluation Period") for Wells Fargo to determine the covenant requirements to
be maintained under the agreement and to complete its due diligence
investigation. During the Evaluation Period, the Credit Facility is effectively
on a demand note basis. After conclusion of the Evaluation Period, the Credit
Facility provides for a three-year life. The Wells Fargo Credit Facility
replaced the Company's previous credit facility with FINOVA Capital Corporation.
The Company's performance during the holiday selling season fell below plan
due, among other factors, to the depressed retail climate and the soft toy
industry generally. This performance led Wells Fargo in late January to extend
the 90-day Evaluation Period for another month in order to continue its
evaluation process. There was approximately $6.6 million outstanding under the
Credit Facility on February 16, 2001.
The Company believes that it requires access to and the ability to borrow
against a line of credit to continue financing its operations. It also requires
the ongoing support of its trade vendors in the form of ongoing inventory
shipments and financing in order to maintain its business operations. The
Company is currently actively working with its vendors to try to sustain
shipments. Should Wells Fargo elect not to further extend the Credit Facility
beyond the additional month of the Evaluation Period, then the Company would be
forced to seek a replacement lender. There can be no assurance that the Company
would be able to find such a replacement lender on terms acceptable to the
Company or at all. There also can be no assurance that the Company's trade
vendors will continue to ship products to the Company on acceptable terms.
18
Given ongoing support from Wells Fargo and from its trade vendors, based on
currently proposed plans and assumptions relating to its operations, the
Company's operations and working capital should suffice to satisfy its
contemplated cash requirements for the next 12 months.
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. To highlight the challenges in the toy industry, several
competitors recently filed for bankruptcy and/or ceased operations, including
E-Toys, ToyTime, RedRocket, World of Science/Natural Wonders. Given the soft toy
market, manufacturers are also incurring substantial losses. 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, Lake Shore and Zainy Brainy. The Company also competes both through its
electronic commerce operations and through its stores against Internet oriented
toy retailers ToysRUs.com. 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.
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.
19
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, and the discovery process has begun.
Item 2. Changes in Securities and Use 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
None
20
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 20th day of February 2001.
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
21