UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20659
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly period ended June 30, 1997
Commission File Number 0-25030
PLAY CO TOYS & ENTERTAINMENT CORP.
(Exact Name of Registrant as specified in its charter)
Delaware 95-3024222
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization) .
550 Rancheros Drive, San Marcos, California 92069
(Address of principle executive offices) (Zip Code)
(760) 471-4505
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
Common Stock, $.01 par value: 4,103,519 shares outstanding as of June 30, 1997.
PLAY CO. TOYS & ENTERTAINMENT CORP.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. FINANCIAL STATEMENTS
Condensed balance sheets as of June 30, 1997 3
and March 31, 1997.
Condensed statements of operations for the
three months ended June 30, 1997 and 1996. 4
Condensed statements of cash flows for
the three months ended June 30, 1997 and 1996. 5
Notes to condensed financial statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. 7
PART II. OTHER INFORMATION
Item 5. Other Information and Signatures 12
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TOYS & TEXTILES CORP.)
CONDENSED BALANCE SHEETS
ASSETS
(unaudited)
June 30, 1997 March 31, 1997
------------- --------------
Current
Cash ................................................................................$ 163,022 $ 177,722
Subscription receivable (Note 2) .................................................... 550,000 --
Accounts receivable ................................................................. 45,430 60,206
Merchandise inventories ............................................................. 6,550,784 6,092,930
Other current assets ................................................................ 173,463 247,313
------------ ------------
Total current assets ...............................7,482,699 6,578,171
Property and Equipment, net of accumulated
depreciation and amortization of $2,967,938
and $2,828,913, respectively ..................................................................... 2,401,143 2,475,650
Deposits and other assets .............................................................................. 260,564 324,797
---------- ------------
$ 10,144,406 $ 9,378,618
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
June 30, 1997 March 31, 1997
------------ ------------
Current
Bank overdraft ...........................................................................$ 93,882 $ 135,325
Borrowings under financing agreement ..................................................... 4,826,063 4,438,875
Accounts payable ......................................................................... 3,726,313 3,123,851
Accrued expenses and other liabilities ..................................................... 143,444 308,940
Current portion of notes payable ..............................................................100,000 141,666
------------ ------------
Total current liabilities ........................................................ 8,889,702 8,148,657
Notes payable, net of current portion .................................................................. 75,000 226,925
Deferred rent liability ................................................................................ 135,672 --
Stockholders' equity:
Series E preferred stock, $1 par, 4,000,000 shares authorized; 250,000
subscribed; 3,200,570 and 2,500,570 shares outstanding (Note 2) ...........................3,700,570 2,500,570
Common stock, $.01 par value, 40,000,000 shares
authorized; 4,103,519 and 4,083,519 shares outstanding ..................................... 41,035 40,835
Additional paid-in-capital (Note 2) .........................................................6,562,407 6,512,107
Accumulated deficit .......................................................................(9,259,980) (8,050,476)
----------- ------------
Total stockholders' equity ......................................... 1,044,032 1,003,036
$ 10,144,406 $ 9,378,618
============ ============
See accompanying notes to condensed financial statements
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30,
1997 1996
Net sales .............................................. $ 3,142,813 $ 3,184,903
Cost of Sales .......................................... 1,973,365 2,151,718
----------- -----------
Gross profit ........... 1,169,448 1,033,185
Operating expenses:
Operating expenses .................... 2,028,403 1,741,792
Depreciation and amortization ......... 139,027 95,580
----------- -----------
Total operating expenses 2,167,430 1,837,372
----------- -----------
Operating loss ......................................... (997,982) (804,187)
Interest expense ....................................... 211,522 179,174
----------- -----------
Net loss ............................................... $(1,209,504) $ (983,361)
=========== ===========
Net loss applicable to common shares ................... $(1,209,504) $ (983,361)
=========== ===========
Net loss per common share .............................. $ (0.30) $ (0.76)
=========== ===========
Weighted average number of common shares and
share equivalents outstanding ................ 4,083,739 1,287,843
=========== ===========
See accompanying notes to condensed financial statements
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $(1,209,506) $ (983,361)
Adjustments used to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization ...................... 139,027 95,580
Preferred stock issued for financing charges ....... -- 16,000
Change in assets and liabilities:
Merchandise inventories ................. (457,854) (1,259,686)
Other assets .............................. 152,837 145,011
Accounts payable .......................... 602,457 1,320,106
Accrued and other liabilities ........... (165,469) (177,415)
Deferred rent liability ................. 8,746 (20,825)
Net cash used for operating activities .. (929,762) 864,590)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ......................... (64,518) (86,905)
----------- -----------
Net cash used for investing activities .. (64,518) (86,905)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred and common stock ........ 700,501 334,000
Change in bank overdraft .................................... (41,443) --
Borrowings on line of credit ................................ 387,188 853,768
Repayments of long-term debt ................................ (66,666) --
Redemption of preferred stock ............................... -- (87,680)
----------- -----------
Net cash provided by financing activities 979,580 1,100,088
----------- -----------
Net increase in cash ................................................. (14,700) 148,593
Cash at beginning of period .......................................... 177,722 83,650
Cash at end of period ................................................ $ 163,022 $ 232,243
See accompanying notes to condensed financial statements
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
Note 1.
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, 1997 included in its Annual Report on Form 10-KSB. Operating
results for the three month period ended June 30, 1997 are not necessarily
indicative of the results of operations that may be expected for the year ending
March 31, 1998.
Note 2.
In an agreement dated June 30, 1997, the Company agreed to issue 250,000 shares
of series E preferred stock for $500,000 and for an additional $50,000 to issue
500,000 warrants to purchase series E preferred stock in a private sale. As a
result of that agreement, the Company booked a subscription receivable for
$550,000 and recorded increases to series E preferred stock and additional
paid-in-capital of $500,000 and $50,000, respectively. The Company had received
all of the $550,000 of proceeds from the private sale by August 12, 1997.
Over the course of the quarter ended June 30, 1997, the Company received
advances against equity aggregating $700,000. Europe American Capital Corp.
exercised its option whereby the $700,000 was converted into 700,000 shares of
series E preferred stock in June 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSES 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. UTTC currently owns
approximately 59.3% of the issued and outstanding shares of the Company's Common
Stock.
For the three months ended June 30, 1997 compared to three months ended June 30,
1996
The Company generated net sales of $3,142,813 in the three months ended
June 30, 1997. This represented a decrease of $42,090, or 1.3%, from net sales
of $3,184,903 in the three months ended June 30, 1996. The decline in sales is
directly attributable to decreased wholesale sales, primarily to military bases,
of $72,101 and to an absence of video rental income compared to $27,173 of such
income in the prior period. Prior to the beginning of the period ended June 30,
1997, management had determined that the video rental market had become
unprofitable and, accordingly, exited that market. Excluding the video rental
and wholesale related sales, the Company's sales from its stores actually
increased by $57,184, or 1.9%, from $2,996,759 to $3,053,943.
The Company posted a gross profit of $1,169,448 in the three months
ended June 30, 1997, an increase of $136,263, or 13.2%, from the gross profit of
$1,033,185 in the three months ended June 30, 1996. This represented an
improvement in the Company's gross margin from 32.4% in the June 1996 period to
37.2% in the June 1997 period. This 4.8% gross margin improvement was largely
due to the ongoing implementation of the Company's ongoing plan to augment its
traditional product base of lower margin promotional toys with a mix of
educational toys, which generally produce better margins than promotional toys.
Operating expenses in the three months ended June 30, 1997 were
$2,028,403. This represented a $286,611, or 16.5%, increase over the Company's
operating expenses of $1,741,792 in the three months ended June 30, 1996. The
primary reasons for the operating expense increase were an increase in rent
expense of $226,338 and an increase in payroll and related expenses of $103,896
Those increases were partially offset by a reduction in advertising expense of
$137,565. The operating expenses in the June 1996 period also had the benefit of
$67,229 more of other income, primarily related to income received from the
filming of a movie at one of the Company's stores in the earlier period.
During the three months ended June 30, 1997, the Company recorded
non-cash depreciation and amortization expenses of $139,027, a $43,447 increase
from $95,580 in the period ended June 30, 1996. This increase was largely due to
depreciation on the Toys International assets acquired in January 1997. Total
operating expenses (operating expenses combined with depreciation and
amortization) in the June 1997 period were $2,167,430, a $330,058, or 18.0%,
increase from total operating expenses of $1,837,372 in the June 1996 period.
As a result of the $330,058 increase in total operating expenses more
than offsetting the $136,263 improvement in gross profit, the Company's
operating loss increased by $193,797 from $804,187 during the three months ended
June 30, 1996 to $997,984 during the three months ended June 30, 1997.
Interest expense totaled $211,522 for the three months ended June 30,
1997. This represented a $32,348, or 18.1%, increase over interest expense of
$179,174 in the three months ended June 30, 1996. The primary reason for the
increased level of interest expense was a higher level of borrowings in the June
1997 period than in the June 1996 period.
As a result of the above mentioned factors, the Company recorded a net
loss of $1,209,506 for the three months ended June 30, 1997. This represented a
$226,145 increase to the net loss of $983,361 recorded in the three months ended
June 30, 1996. The net loss per common share for the June 1997 period was
$(0.30) compared to a net loss per common share in the June 1996 period of
$(0.76). The loss per common share decreased in the June 1997 period compared to
the corresponding prior period due to an increase in the weighted average number
of shares outstanding from 1,287,843 in the June 1996 period to 4,083,739 in the
June 1997 period.
Liquidity and Capital Resources
At June 30, 1997, the Company had a working capital deficit of
$(1,406,998) compared to a working capital deficit of $(1,570,486) at March 31,
1997. The Company has generated operating losses for the past several years and
has historically financed those losses and its working capital requirements
through sales of preferred stock. There can be no assurance that the Company
will be able to generate sufficient revenues or have sufficient controls over
expenses and other charges to achieve profitability.
During the three months ended June 30, 1997, the Company used $929,762
of cash in its operations compared to $864,590 used in operations in the three
months ended June 30, 1996. The Company's net loss was approximately $1.2
million and $1.0 million, respectively, in those periods.
The Company used $64,518 of cash in its investing activities during the
three months ended June 30, 1997 compared to $86,905 in the three months ended
June 30, 1996.
The Company generated $979,580 from its financing activities in the
three months ended June 30, 1997 compared to the generation of $1,100,088 from
financing activities in the three months ended June 30, 1996. The largest
contribution to the Company's financing activities in the 1997 fiscal year was
the receipt of $700,000 from the sale of preferred stock. Those proceeds were
used to finance the Company's operating losses during the three months ended
June 30, 1997.
As a result of the above factors, the Company had a net decrease in
cash of $14,700 in the three months ended June 30, 1997 compared to a net
increase in cash of $148,593 in the three months ended June 30, 1996.
At June 30, 1997, the Company had an inventory financing line of credit
with Congress Financial Corporation ("Congress") in connection with a Loan and
Security Agreement ("Loan Agreement") that was executed on February 1, 1996. The
Loan Agreement provides for maximum borrowings of $7,000,000 based on the "Cost
Value of Eligible Inventory," as defined in the Loan Agreement. The Loan
Agreement also requires the Company to maintain, at all times, a net worth of
$500,000. The Loan Agreement requires the payment of a quarterly service fee of
$10,000, The line of credit is secured by substantially all assets of the
Company, is guaranteed by United, and is further collateralized by $3,000,000 in
letters of credit provided by Europe American Capital Corp. ("EACC"). Interest
on outstanding balances is charged at prime plus 1.5%. The Loan Agreement
matures February 1, 1998.
As compensation for the issuance of the letter of credit, the Company
granted to EACC options (i) to purchase up to an aggregate of 1,250,000 shares
of the Company's Common Stock at a purchase price of 25% of the closing bid
price for the Common Stock on the last business day prior to exercise, for a
period of six months from the date of issuance and (ii) to purchase up to an
aggregate of 20,000,000 shares of the Company's newly authorized Series E
Preferred Stock.
The Company purchases approximately 95% of its products directly form
manufacturers. Approximately 30% of the Company's inventory purchases are made
directly from five (5) manufacturers. The Company typically purchases products
from its suppliers on credit arrangements provided by the manufacturers. The
five major manufacturers mentioned above generally provide credit terms of 180+
days while other vendors offer credit terms of 30 to 120 days.
The toy industry is seasonal with approximately 45% to 49% of the
Company's annual sales occurring during the months of October through December.
As a result, sources of funds to repay amounts due under inventory finance
arrangements with financial institutions and manufacturers are typically
generated from sales during the peak selling season.
The Company has prepared cash flow forecasts for the fiscal year ending March
31, 1998. Management acknowledges that the Company will require additional
financing in addition to its support from its line of credit with Congress and
from vendor credit lines in order to meet its capital requirements for the
fiscal year ending March 31, 1998. In addition, the Company may require
additional capital to redesign current and future retail locations to
incorporate its plans to focus on the educational and specialty toy market. The
Company has filed a registration statement with the Securities and Exchange
Commission for an initial public offering for the Company's Series E preferred
shares to meet those impending capital requirements. That offering is being led
by West America Securities Corp. on a best efforts basis with an objective of
raising net proceeds to the Company of approximately $2.5 million. However,
there can be no assurance that this offering will be consummated. In addition,
Mr. Ilan Arbel, an affiliate of EACC, in a letter dated June 10, 1997,
represented his willingness to provide additional working capital to the
Company, should such be necessary, through September 30, 1998.
Trends Affecting Liquidity, Capital Resources and Operations
The Company's sales efforts are focused primarily on a defined
geographic segment, consisting of individuals in the southern California area.
The Company's future financial performance will depend upon continued demand for
toys and hobby items by individuals in southern California, general economic
conditions within such geographic market area, the Company's ability to choose
locations for new stores, the Company's ability to purchase product at favorable
prices on favorable terms as well as 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 domination of the toy industry by Toys R Us has resulted in
increased price competition among various toy retailers and declining gross
margins for such retailers. Moreover, the domination of Toys R Us has resulted
in the liquidation or bankruptcy of many toy retailers throughout the United
States, including in the southern California market. There can be no assurance
that the Company's business strategy will enable it to compete effectively in
the toy industry.
Management currently knows of no trends reasonably expected to have a
material impact upon the Company's operations or liquidity in the foreseeable
future. The Company's operating history has been characterized by narrow profit
margins and, accordingly, the Company's earnings will depend significantly on
its ability to purchase its product on favorable terms, to obtain store
locations on favorable terms, retail a large volume and variety of products
efficiently and to provide quality support services. The Company's prices are,
in part, based on market surveys of its competitors' prices, primarily those of
Toys R Us. As a result, aggressive pricing policies, such as those used by Toys
R Us, have resulted in the Company reducing its retail prices on many items,
thereby reducing the available profit margin. Moreover, increases in expenses or
other charges to income may have a material adverse effect on the Company's
results of operations. There can be no assurance that the Company will be able
to generate sufficient revenues or have sufficient controls over expenses and
other charges to increase profitability.
The Company's common stock is currently traded on the NASDAQ SmallCap
Market System which requires the Company to maintain total assets of at least
$2,000,000, stockholders' equity of $1,000,000, and a minimum bid price of
$1.00. If the Company's result of operations from future periods cause the
Company to be in a position where it is unable to satisfy these criteria, its
securities will be subject to being delisted and trading, if any, would
thereafter be conducted in the over-the-counter market and quoted on the OTC
Bulletin Board. Consequently, an investor may find it more difficult to dispose
of or obtain accurate quotations as to the price of the Company's securities.
Such an event of delisting may also have a negative impact on the Company's
ability to raise additional equity or debt financing.
Inflation and Seasonality
During the past few years, inflation in the United States has been
relatively stable. In management's opinion, this is expected to continue for the
foreseeable future. However, should the American economy again experience double
digit inflation rates, as was the case in the past, the impact on prices could
adversely affect the Company's operations.
The Company's business is highly seasonal with a large portion of its
revenues and profits being derived during the months of November and December.
Accordingly, the Company is required to obtain substantial short-term borrowing
during the first three quarters of the calendar year in order to purchase
inventory and to finance capital and operational expenditures. The Company's
past history of negative cash flows during the fiscal year are partially a
result of its seasonal business nature. The Company's cash flows are negative
for most months prior to the Christmas season. The Company's negative cash flow
for all months except November and December historically have been serviced via
the Company's line of credit, special credit terms with vendors and from the
sale of equity instruments, principally preferred stock.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings: None
Item 2. - Changes In Securities: 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: None
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 14th day of August 1997.
PLAY CO. TOYS & ENTERTAINMENT CORP.
By: \s\ Richard Brady
Richard L Brady
President
By: \s\ James B. Frakes
James B. Frakes
Chief Financial Officer