U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A-1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number O-25030
PLAY CO. TOYS & ENTERTAINMENT CORP.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 95-3024222
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
550 Rancheros Drive, San Marcos, California 92069
(Address of Principal Executive Offices)
(760) 471-4505
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares of each of the issuer's classes of common equity
outstanding as of the latest practicable date: Common Stock, $.01 par value:
4,109,198 shares outstanding as of November 12, 1998.
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 balance sheets as of September 30, 1998 3
and March 31, 1998.
Condensed statements of operations and comprehensive net loss for the
three months and six months ended September 30, 1998 and 1997. 4
Condensed statements of cash flows for the six months ended September 30, 1998 and 1997.
5
Notes to condensed financial statements 6-7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
8-14
PART II. OTHER INFORMATION
15
Item 1. LEGAL PROCEEDINGS
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
Item 3. DEFAULTS UPON SENIOR SECURITIES 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
Item 5. OTHER INFORMATION 15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 15
Signatures 16
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED BALANCE SHEETS
ASSETS
September 30, 1998 March 31, 1998
(unaudited) (Restated)
Current
Cash ................................................. $ 423,634 $ 648,986
Accounts receivable .................................. 57,517 78,594
Merchandise inventories .............................. 12,185,130 7,872,804
Other current assets ................................. 934,171 433,928
----------- -----------
Total current assets 13,600,452 9,034,312
Property and Equipment, Net of accumulated
Depreciation and amortization of $3,788,081
and $3,414,235, respectively ........................ 3,558,297 2,782,386
Deposits and other assets ........................................ 2,490,037 2,323,189
----------- -----------
$19,648,786 $14,139,887
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
September 30, 1998 March 31, 1998
Current
Accounts payable .............................................. 5,649,940 3,505,230
Accrued expenses and other liabilities ........................ 197,721 726,601
Current portion of notes payable and capital leases ........... 1,340,250 350,000
----------- -----------
Total current liabilities ............................. 7,187,911 4,581,831
Borrowings under financing agreement ..................................... 8,481,996 5,445,198
Notes payable and capital leases, net of current portion ................. 157,200 1,500,000
Deferred rent liability .................................................. 119,453 110,351
Stockholders' equity:
Convertible series E preferred stock, $1 par, 10,000,000 shares
authorized: 5,858,903 and 4,200,570 shares outstanding ...... 4,748,031 3,974,376
Common stock, $.01 par value, 40,000,000 shares
authorized; 4,109,198 and 4,083,519 shares outstanding ...... 41,035 41,035
Additional paid-in-capital .................................... 14,596,252 12,927,718
Accumulated deficit ........................................... (15,683,092) (14,440,822)
----------- -----------
Total stockholders' equity . 3,702,226 2,502,507
----------- -----------
$19,648,786 $14,139,887
=========== ===========
See accompanying notes to condensed financial statements
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE NET LOSS
(Unaudited)
(Restated)
Three Months Ended September 30, Six-months Ended September 30,
1998 1997 1998 1997
----
Net sales ................................................... $ 6,098,315 $ 4,228,780 $ 12,455,710 $ 7,371,593
Cost of Sales ............................................... 3,414,054 2,384,717 7,120,385 4,358,082
Gross profit ............... 2,684,261 1,844,063 5,335,325 3,013,511
------------ ------------ ------------ ------------
Operating expenses:
Operating expenses ......................... 2,610,120 2,028,571 5,093,891 4,056,974
Depreciation and amortization .............. 193,794 139,026 382,211 278,053
------------ ------------ ------------ -----------
Total operating expenses ... 2,803,914 2,167,597 5,476,102 4,334,027
------------ ------------ ------------ -----------
Operating loss .............................................. (119,653) (323,534) (140,777) (1,321,516)
------------ ------------ ------------ -----------
Interest expense:
Interest and finance charges ...... 156,860 127,767 295,312 249,512
Amortization of debt issuance costs 27,202 89,778 54,402 179,555
------------ ------------ ------------ ------------
Total interest expense ..... 184,062 217,545 349,714 429,067
------------ ------------ ------------ ------------
Net income (loss) ........................................... $ (303,715) $ (541,079) $ (490,491) $ (1,750,583)
Other comprehensive income (loss) ........................... 0 0 0 0
------------ ------------ ------------ -----------
Comprehensive net income (loss) ............................. $ (303,715) $ (541,079) $ (490,491) $ (1,750,583)
============ ============ ============ ============
Calculation of basic and diluted income (loss) per share:
Net income (loss) ......................................... $ (303,715) $ (541,079) $ (490,491) $ (1,750,583)
Effects of non-cash dividends on convertible
preferred stock ........................................ (477,973) (1,200,000) (751.779) (1,200,000)
Net income (loss) applicable to common
shares ................................................ $ (781,688) $ (1,741,079) $ (1,242,270) $ (2,950,583)
Basic and diluted loss per common share
and share equivalents ...................... $ (0.19) $ (0.42) $ (0.30) $ (0.72)
============ ============ ============ ============
Weighted average number of common shares
and share equivalents outstanding ................. 4,103,525 4,103,519 4,103,525 4,093,683
============ ============ ============ ============
See accompanying notes to condensed financial statements
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six-months Ended September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $ (490,491) $(1,750,583)
Adjustments used to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization ...................... 382,211 278,053
Amortization of common stock options ............... -- 107,372
Deferred rent ...................................... 9,102 8,746
Stock compensation ................................. 21,876 --
Increase (decrease) from changes in:
Accounts receivable ..................... 21,077 (338,764)
Merchandise inventories ................... (4,312,326) (1,263,705)
Other current assets ...................... (500,243) 13,418
Deposits and other assets ................. (163,756) (214,050)
Accounts payable .......................... 2,144,710 1,441,513
Accrued expenses and other liabilities .. (528,880) (262,085)
----------- -----------
Net cash used for operating activities .. (3,416,720) (1,907,085)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ......................... (1,149,757) (366,258)
----------- -----------
Net cash used for investing activities .. (1,149,757) (366,258)
----------- -----------
ASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred and common stock ........ 156,877 1,250,501
Net borrowings on line of credit ............................ 3,036,798 1,195,359
Borrowings under notes payable and capital leases, net ...... 1,147,450 (91,666)
----------- -----------
Net cash provided by financing activities 4,341,125 2,354,194
----------- -----------
Net (decrease) increase in cash ...................................... (225,352) 7,851
Cash at beginning of period .......................................... 648,986 177,722
Cash at end of period ................................................ $ 423,634 $ 185,573
See accompanying notes to condensed financial statements
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
Note 1. General
The interim accompanying unaudited condensed 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, 1998 included in its Annual Report on Form 10-KSB. Operating
results for the six-month period ended September 30, 1998 are not necessarily
indicative of the results of operations that may be expected for the year ending
March 31, 1999.
Note 2. Amendment of Loan and Security Agreement
Effective September 24, 1998, the Company and FINOVA Capital Corporation
("FINOVA"), the Company's working capital lender (which is not affiliated with
the Company), amended the Company's Loan and Security Agreement to increase the
maximum level of borrowings under the Agreement from $7.6 million to $8.6
million through December 31, 1998. Beginning on January 1, 1999, the maximum
level of borrowings under the Agreement will return to the $7.6 million level.
Note 3. Leases
During the three-month period ended September 30, 1998, the Company entered
into several capital leases to help finance its new computer system and several
new stores. The leases are for an aggregate principal amount of $280,719 and
bear interest at rates varying between 10.8% and 18%.
Note 4. Secured Subordinated Promissory Note
On September 18, 1998, the Company borrowed $1,000,000 from Amir Overseas
Capital Corp. ("Amir"), a company not affiliated with the Company, under a
Secured Subordinated Promissory Note. The Note bears interest at 12% and calls
for three installment payments ending December 23, 1998.
Note 5. Subsequent Events
On November 9, 1998, the Company borrowed $250,000 from Amir under a
Promissory Note. The Note bears interest at 12% and calls for repayment on
January 29, 1999.
Note 6. Restatement of Financial Statements
The Company has restated its financial statements for the year ended March
31, 1998 from those originally presented, to conform with Topic No. D-60 of the
Emerging Issues Task Force. Topic D-60 communicated the views of the staff of
the Securities and Exchange Commission that the portion of the proceeds upon
issuance of convertible preferred stock allocable to the beneficial conversion
feature should be recorded as additional paid-in capital and recognized as a
dividend over the minimum period in which the preferred shareholders can realize
the conversion.
The Company's Series E Preferred Stock ("Series E Stock"), which stock was
issued in varying amounts on various dates, includes a beneficial conversion
feature whereby each share is convertible into six shares of the Company's
Common Stock, at the option of the holder, at no additional conversion price.
The beneficial conversion feature is measured at the date of issuance of
the Company's Series E Stock as the difference between the conversion price,
which is $0, and the market value of the Common Stock into which the Series E
Stock is convertible, limited to the proceeds received from the issuance of the
Series E Stock. Based on the calculations prescribed by Topic No. D-60, all
proceeds initially received by the Company from the issuances of the Series E
Stock should initially be recorded as additional paid-in capital, as 100% of the
proceeds are allocable to the beneficial conversion feature. Over the required
holding period, a non-cash dividend is recorded reducing the retained earnings
(or increasing the accumulated deficit) and increasing the balance recorded as
Series E Stock in the balance sheet. Thus, there is no net effect on the total
shareholders' equity of the Company.
However, the Company has also restated its net loss per common share as
presented in the statement of operations for the year ended March 31, 1998, as
the dividend attributable to the beneficial conversion feature of the Series E
Stock reduces the amount of net income (or increases the amount of net loss)
applicable to the common shares.
In applying the provisions of Topic D-60, the Company has recorded
dividends of $477,973 and $1,200,000 for the three month periods ended September
30, 1998 and 1997, respectively, and $751,779 and $1,200,000 for the six month
periods ended September 30, 1998 and 1997, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Statements contained in this report which are not historical facts may be
considered forward looking information with respect to plans, projections, or
future performance of the Company as defined under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected.
The Company's operations are substantially controlled by United Textiles &
Toys Corp. ("UTTC"), the Company's parent, which currently owns approximately
60.1% of the issued and outstanding shares of the Company's Common Stock. UTTC
is a Delaware corporation and public company which was organized in March 1991
and commenced operations in October 1991. It formerly designed, manufactured,
and marketed a variety of lower priced women's dresses, gowns, and separates
(blouses, camisoles, jackets, skirts, and pants) for special occasions and
formal events. In April 1998, UTTC ceased all operating activities; it now
operates solely as a holding company.
For the three months ended September 30, 1998 compared to the three months ended
September 30, 1997
The Company generated net sales of $6,098,315 in the three months ended
September 30, 1998. This represented an increase of $1,869,535, or 44.2%, from
net sales of $4,228,780 in the three months ended September 30, 1997.
Approximately $780,000 of this sales growth came from a 22.5% increase in same
store sales during the three months and the remaining sales increase of
approximately $1.1 million came from sales at the Company's new stores.
The Company posted a gross profit of $2,684,261 in the three months ended
September 30, 1998; an increase of $840,198, or 45.6%, from the gross profit of
$1,844,063 in the three months ended September 30, 1997, due basically to the
increase in sales. The gross margin of 44% in the September 1998 period was
comparable to the Company's gross margin of 43.6% in the September 1997 period.
Operating expenses (excluding depreciation and amortization expenses) in
the three months ended September 30, 1998 were $2,610,120. This represented a
$581,549, or 28.7%, increase over the Company's operating expenses of $2,028,571
in the three months ended September 30, 1997. The primary reasons for the
operating expense increase were an increase in payroll and related expenses of
$253,014 and an increase in rent expense of $189,418. The payroll expense
increase was due to the addition of several middle managers and of employees at
new stores. The growth of rent expense was the result of adding additional
stores.
During the three months ended September 30, 1998, the Company recorded
non-cash depreciation and amortization expenses of $193,794, a $54,768 increase
from $139,026 in the period ended September 30, 1997. Total operating expenses
(operating expenses combined with depreciation and amortization) in the
September 1998 period were $2,803,914, a $636,317, or 29.4%, increase from total
operating expenses of $2,167,597 in the September 1997 period.
As a result of the $840,198 increase in gross profit less the $636,317
increase in total operating expenses, the Company's operating loss decreased by
$203,881 from $323,534 during the three months ended September 30, 1997 to
$119,653 during the three months ended September 30, 1998, representing a 63%
reduction in the Company's operating loss.
Interest expense totaled $184,062 for the three months ended September 30,
1998. This represented a $33,483 decrease from interest expense of $217,545 in
the three months ended September 30, 1997. The primary reason for the decreased
level of interest expense was a higher level of amortization of debt issuance
costs in the three months ended September 30, 1997 than in the September 1998
period.
As a result of the above-mentioned factors, the Company recorded a net loss
of $303,715 for the three months ended September 30, 1998. This represented a
$237,364 reduction from the net loss of $541,079 recorded in the three months
ended September 30, 1997. For the three month periods ended September 30, 1998
and 1997, the net loss of $303,715 and $541,079, respectively, was increased by
non-cash dividends of $477,973 and $1,200,000, respectively, in order to
determine the net loss applicable to common shares. The non-cash dividends
represent amortization of the discount recorded upon the issuance of Series E
Stock with a beneficial conversion feature. No dividends in the form of
securities or other assets were actually paid out.
The basic and diluted net loss per common share for the September 1998
period was $0.19 compared to a basic and diluted net loss per common share in
the September 1997 period of $0.42, an improvement of $0.23 per share.
For the six months ended September 30, 1998 compared to six months ended
September 30, 1997
The Company generated net sales of $12,455,710 in the six-month period
ended September 30, 1998. This represented an increase of $5,084,117, or 69.0%,
from net sales of $7,371,593 in the six-month period ended September 30, 1997.
Approximately $2,680,000 of this sales growth came from a 42.8% increase in same
store sales during the six-month period, with the remaining increase of
approximately $2.4 million from the Company's new stores.
The Company posted a gross profit of $5,335,325 in the six-month period
ended September 30, 1998; an increase of $2,321,814, or 77.0%, from the gross
profit of $3,013,511 in the six-month period ended September 30, 1997, due to an
increase in the Company's gross margin from 40.9% for the six-months ended
September 30, 1997 to 42.8% for the same period ended September 1998. This 1.9%
gross margin improvement was largely due to the ongoing implementation of the
Company's plan to sell educational, new electronic interactive, and specialty
and collectible toys and items in high traffic malls. Prior to the fiscal year
beginning April 1, 1996, the Company sold traditional toys in stores located in
strip shopping centers. The mix of specialty and a mix of educational toys
generally produce better margins than traditional toys.
Operating expenses (excluding depreciation and amortization expenses) in
the six-month period ended September 30, 1998 were $5,093,891. This represented
a $1,036,917, or 25.6%, increase over the Company's operating expenses of
$4,056,974 in the six-month period ended September 30, 1997. The primary reasons
for the operating expense increase were an increase in payroll and related
expenses of $533,048 and an increase in rent expense of $128,141. The increased
expenses were due to the lease payments on the new stores opened and the
addition of several middle managers and of employees at the new stores.
During the six-month period ended September 30, 1998, the Company recorded
non-cash depreciation and amortization expenses of $382,211, a $104,158 increase
from $278,053 in the period ended September 30, 1997. This increase was largely
due to depreciation on the fixed assets purchased for the newly opened stores.
Total operating expenses (operating expenses combined with depreciation and
amortization) in the September 1998 period were $5,476,102, a $1,142,075, or
26.4%, increase from total operating expenses of $4,334,027 in the September
1997 period.
As a result of the $2,321,814 increase in gross profit and the $1,142,075
increase in total operating expenses, the Company's operating loss decreased by
$1,180,739 from $1,321,516 during the six-month period ended September 30, 1997
to $140,777 during the six-month period ended September 30, 1998. This
represented an 89.3% reduction in the Company's operating loss.
Interest expense totaled $349,714 for the six-month period ended September
30, 1998. This represented a $79,353, or 18.5%, decrease from the interest
expense of $429,067 in the six-month period ended September 30, 1997. The
primary reason for the decreased level of interest expense was a higher level of
amortization of debt issuance costs in the six-month period ended September 30,
1997 than in the September 1998 period.
As a result of the above-mentioned factors, the Company recorded a net loss
of $490,491 for the six-month period ended September 30, 1998. This represented
a $1,260,092 reduction from the net loss of $1,750,583 recorded in the six-month
period ended September 30, 1997. For the six month periods ended September 30,
1998 and 1997, the net loss of $490,491 and $1,750,583, respectively, was
increased by non-cash dividends of $751,779 and $1,200,000, respectively, in
order to determine the net loss applicable to common shares. The non-cash
dividends represent amortization of the discount recorded upon the issuance of
Series E Stock with a beneficial conversion feature. No dividends in the form of
securities or other assets were actually paid out. The basic and diluted net
loss per common share for the September 1998 period was $0.30 compared to a
basic and diluted net loss per common share in the September 1997 period of
$0.72, an improvement of $0.42 per share.
Liquidity and Capital Resources
At September 30, 1998, the Company had a working capital position of
$6,412,541 compared to a working capital position of $4,452,481 at March 31,
1998. The primary factors in the $1,960,060 increase in working capital were a
$2,167,616 growth in the Company's net investment in inventories (increase in
inventories less increase in accounts payable) which was financed through a
$3,036,798 increase under the Company's financing agreement, a long term
liability.
The Company has generated operating losses for the past several years and
has historically financed those losses and its working capital requirements
through loans and sales of the Company's equity securities, primarily through
the sale of the Company's Series E Stock. There can be no assurance that the
Company will be able to generate sufficient revenues or have sufficient controls
over expenses and other charges to achieve profitability.
During the six-month period ended September 30, 1998, the Company used
$3,416,720 of cash in its operations compared to $1,907,085 used in operations
in the six-month period ended September 30, 1997. The Company's net loss was
approximately $490,000 and $1,750,000, respectively, in those periods. The
primary reason the cash used for operating activities was so much larger than
the net loss in the six-month period ended September 30, 1998 was net investment
(increase in inventories less increase in accounts payable) in inventories of
$2,167,616.
The Company used $1,149,757 of cash in its investing activities during the
six-month period ended September 30, 1998 compared to $366,258 in the six-month
period ended September 30, 1997. The primary investing activity was the purchase
of equipment and fixtures for new stores.
The Company generated $4,341,125 from its financing activities in the
six-month period ended September 30, 1998 compared to the generation of
$2,354,194 from financing activities in the six-month period ended September 30,
1997. The primary contributors to the Company's financing activities were
borrowings on the Company's line of credit and under notes payable. Those
proceeds were used to finance the Company's working capital requirements,
capital expenditures and operating losses during the six-month period ended
September 30, 1998.
As a result of the above factors, the Company had a net decrease in cash of
$225,352 in the six-month period ended September 30, 1998 compared to a net
increase in cash of $7,851 in the six-month period ended September 30, 1997.
During the three-month period ended September 30, 1998, the Company opened
two new stores. These stores, and all stores the Company intends to open in the
future, are considered by management to be high-end retail toy and educational,
electronic interactive stores, in presentation, which offer items comparable in
quality and choice to those offered by FAO Schwarz and Warner Brothers and
Disney Stores and which attract clientele similar to those attracted by such
stores. The first store opened in the three-month period ended September 30,
1998 is located in Primm, Nevada near Las Vegas and opened in July 1998. The
second store opened in September in Grapevine, Texas near Dallas. Both stores
are located in high traffic shopping malls. The capital investment for building
each of those stores was approximately $300,000.
In early November 1998, the Company opened new stores in Thousand Oaks,
California near Los Angeles and in Auburn Hills, Michigan near Detroit. These
stores are also located in high traffic shopping malls. These two stores
represented an aggregate capital investment of approximately $613,000, net of
landlord tenant improvement ("Landlord TI") contributions.
The Company expects to open two additional stores in mid-to-late November
1998. Those stores represent the final two of the six stores the Company planned
to build during calendar year 1998. Those final two stores are located in
Orange, California near Los Angeles and in Gurnee, Illinois near Chicago. These
two stores represented an aggregate capital investment of approximately
$500,000, net of Landlord TI contributions. Upon the opening of the final two
stores in November, the Company will have 25 stores located in six states.
The Company had planned to finance the costs, now estimated to be $1.7
million, net of Landlord TI contributions, of building the new stores described
above through a combination of capital lease financing, use of the Company's
working capital, and the sale of additional equity. The Company has obtained
approximately $260,000 in lease financing on the equipment and fixtures of the
Nevada and Century City stores. The Company is also in the documentation phase
of a five-year term loan in the principal amount of approximately $500,000 with
a new lender. That term loan will be secured by the equipment and fixed assets
of the new Texas store and three existing stores.
The Company continues to seek additional lease financing based on the
equipment and fixtures of its new (or soon to be opened) stores in California
(two), Michigan, and in Illinois. There can be no assurance that the Company
will be able to obtain sufficient financing to offset the new store opening
costs that have been incurred.
On September 18, 1998, the Company borrowed $1,000,000 from Amir under a
Secured Subordinated Promissory Note. The Note bears interest at 12% and calls
for three installment payments ending December 23, 1998. On November 9, 1998,
the Company borrowed an additional $250,000 from Amir under a Promissory Note.
The Note bears interest at 12% and calls for repayment on January 29, 1998.
In September 1998, the Company and FINOVA Capital Corporation, the
Company's working capital lender, amended the Company's Loan and Security
Agreement to increase the maximum level of borrowings under the Agreement from
$7.6 million to $8.6 million through December 31, 1998. Beginning on January 1,
1999, the maximum level of borrowings under the Agreement will return to the
$7.6 million level. The Company expects to utilize this additional amount on its
credit line to partially finance either its working capital, particularly
inventory purchases, or the capital expenditures noted above.
Year 2000
Earlier in 1998 the Company developed a plan to upgrade its existing
management information system ("MIS") and computer hardware and to become year
2000 compliant. The Company has now purchased the necessary hardware and
software and is in the process of installing the software. The Company expects
to complete the MIS upgrade by late November 1998 and to finish the year 2000
compliance work in the first half of 1999.
To finance the cost of the new hardware in the computer upgrade project,
the Company entered into a lease in the amount of $82,472 bearing an interest
rate of 10.8%. The total cost of the hardware and software purchased for the
project was approximately $100,000.
Beyond the above noted internal year 2000 system issue, the Company has no
current knowledge of any outside third party year 2000 issues that would result
in a material negative impact on its operations. Management has reviewed its
material vendors' (i.e., Mattel, Inc. and Hasbro, Inc.) and financing arm's
(FINOVA) recent SEC filings vis a vis year 2000 risks and uncertainties and, on
the basis thereof, is confident that the steps the Company has taken to become
year 2000 compliant are sufficient. In continuation of this review, the Company
shall continue to monitor or otherwise obtain confirmation from the aforesaid
entities - and such other entities as management deems appropriate - as to their
respective degrees of preparedness. To date, nothing has come to the attention
of the Company that would lead it to believe that its material customers,
vendors, and/or service providers will not be year 2000 ready. Year 2000
readiness is a priority of the Company, and the Company believes that it is
taking such reasonable and prudent steps as are necessary to mitigate the risks
associated with potential year 2000 difficulties; however, the effect, if any,
of year 2000 problems on the Company's results of operations if the Company's or
its customers, vendors, or service providers are not fully compliant cannot be
estimated with any degree of certainty. Nonetheless, the most likely impact on
the Company would be a reduced level of activity in the fourth quarter of the
fiscal year ended March 31, 2000, a time at which, as a result of the
seasonality of the Company's business, its activities in sales, manufacturing,
and sourcing are at their low.
Trends Affecting Liquidity, Capital Resources and Operations
As a result of its current merchandise mix which emphasizes specialty and
educational toys, the Company enjoyed significant sales and gross profits in the
six months ended September 30, 1998. This mix of specialty and educational toys
includes collectible die cast cars, specialty yo-yo's, Rokenbok and Learning
Curve toys, and Beanie Babies(R) and other plush and many educational toys.
While the Company believes these particular toys will remain popular with its
customer base for the remainder of calendar year 1998, there can be no assurance
that these particular specialty toys will continue to contribute strongly to the
Company's sales and gross profits. The history of the toy industry, however,
indicates that there is generally at least one highly popular toy every year.
The Company's current sales efforts focus primarily on a defined geographic
segment consisting of the southern California area and the southwestern and
midwestern United States. The Company's future financial performance will depend
upon (i) continued demand for high-end specialty, educational, and traditional
toys and management's ability to adapt to continuously changing consumer
preferences and the market for such items, (ii) general economic conditions
within the Company's geographic market area, as same may be expanded, (iii) the
Company's ability to choose locations for new stores, (iv) the Company's ability
to purchase products at favorable prices and on favorable terms, and (v) the
effects of increased competition.
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, Kay Bee Toy Stores,
Walmart and Kmart. Competitors that emphasize specialty and educational toys
include Disney Stores, Warner Bros. Stores, Learning Smith, Lake Shore, Zany
Brainy, and Noodle Kidoodle. There can be no assurance that the Company's
business strategy will enable it to compete effectively in the toy industry or
that the Company will be able to generate sufficient revenues or have sufficient
control over expenses and other charges to increase profitability.
Inflation and Seasonality
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.
The Company's operations are highly seasonal with approximately 30-40% of
its net sales historically falling within the Company's third quarter, which
coincides with the Christmas selling season. The Company intends to open 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.
PART II
Item 1. Legal Proceedings
In October 1997, in the Superior Court of the State of California, County
of San Bernardino, Foothill Marketplace commenced suit against the Company and
its former guarantor for breach of contract pertaining to premises leased by the
Company in Rialto, California. The lease for the premises has a term from
February 1987 through November 2003. The Company vacated the premises in August
1997. Under California State law and the provisions of the lease, plaintiff has
a duty to mitigate its damages. Plaintiff seeks damages, of a continuing nature,
for unpaid rent, proximate damages, costs, and attorneys' fees, in the
approximate amount of $300,000. This action is in the discovery phase.
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, except those designated with an (*), which are
filed herewith, were previously filed with the Company's Form 10-QSB for the
quarter ended September 30, 1998:
10.103 Promissory Note with Amir Overseas Capital Corp. (dated September 18, 1998)
10.104 Promissory Note with Amir Overseas Capital Corp. (dated November 9, 1998)
10.105* Lease Agreement for Store - Dallas (Grapevine Mills)
10.106* Lease Agreement for Store - Thousand Oaks
10.107* Lease Agreement for Store - Detroit (Great Lakes Crossing)
10.108* Lease Agreement for Store - Chicago (Gurnee Mills)
10.109* Phoenix Leasing Incorporated Loan and Security Agreement and Ancillary Documents (October 1998)
27.01* Financial Data Schedule
(b) During the quarter ended September 30, 1998, no reports on Form 8-K
were filed with the Securities and Exchange Commission.
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 31st day of March 1999.
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