SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly quarter ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition quarter from __________ to __________
Commission File Number O-25030
PLAY CO. TOYS & ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
Delaware 95-3024222
(State or Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
550 Rancheros Drive, San Marcos, California 92069
(Address of Principal Executive Offices)
(760) 471-4505
(Registrant'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) has 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 quarter 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, $.01 par value:
4,103,525 outstanding as of June 30, 1998.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PLAY CO. TOYS & ENTERTAINMENT CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page Number
Item 1. FINANCIAL STATEMENTS
Condensed balance sheets as of June 30, 1998 and March 31, 1998. 3
Condensed statements of operations for the three months
ended June 30, 1997 and 1996.
4
Condensed statements of cash flows for the three months
ended June 30, 1997 and 1996.
5
Notes to condensed financial statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
8-12
PART II. OTHER INFORMATION 13
Item 1. LEGAL PROCEEDINGS 13
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 13
Item 3. DEFAULTS UPON SENIOR SECURITIES 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
Item 5. OTHER INFORMATION 13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
Signatures 14
2
Item 1. Financial Statements
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TOYS & TEXTILES CORP.)
CONDENSED BALANCE SHEETS
ASSETS
(unaudited)
June 30, 1998 March 31, 1998
------------- --------------
Current
Cash .............................................................................................$ 289,455 $ 648,986
Accounts receivable .............................................................................. 51,976 78,594
Merchandise inventories .......................................................................... 9,376,037 7,872,804
Other current assets ............................................................................. 561,156 433,928
------------ ------------
Total current assets .......................................... 10,278,624 9,034,312
Property and Equipment, Net of accumulated
depreciation and amortization of $3,596,257
and $3,414,235, respectively ......................................................... 3,062,109 2,782,386
Deposits and other assets ........................................................................ 2,409,866 2,323,189
------------ ------------
$ 15,750,599 $ 14,139,887
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
June 30, 1998 March 31, 1998
------------ ------------
Current
Accounts payable ................................................................................. 4,754,599 3,505,230
Accrued expenses and other liabilities ........................................................... 165,566 726,601
Current portion of notes payable and capital leases .............................................. 262,293 350,000
------------ ------------
Total current liabilities ..................................................... 5,182,458 4,581,831
Borrowings under financing agreement ............................................................. 6,521,695 5,445,198
Notes payable, and capital leases, net of ........................................................ 71,541 1,500,000
current portion (Note 2)
Deferred rent liability .......................................................................... 114,903 110,351
Stockholders' equity:
Series E preferred stock, $.01 par, 10,000,000 shares authorized;
5,746,403 and 4,200,570 shares outstanding (Note 2) ................................. 7,435,291 5,891,020
Common stock, $.01 par value, 40,000,000 shares
authorized; 4,103,525 and 4,103,519 shares outstanding .............................. 41,035 41,035
Additional paid-in-capital ............................................................ 6,675,398 6,675,398
Accumulated deficit ................................................................... (10,291,722) (10,104,946)
------------ ------------
Total stockholders' equity ........................ 3,860,002 2,502,507
------------ ------------
$ 15,750,599 $ 14,139,887
============ ============
See accompanying notes to condensed financial statements
3
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
1998 1997
----
Net sales ............................................... $ 6,357,395 $ 3,142,813
Cost of Sales ........................................... 3,706,331 1,973,365
----------- -----------
Gross profit ........... 2,651,064 1,169,448
Operating expenses:
Operating expenses ..................... 2,483,771 2,044,652
Depreciation and amortization .......... 188,417 139,027
----------- -----------
Total operating expenses 2,672,188 2,183,679
----------- -----------
Operating loss .......................................... (21,124) (1,014,231)
Interest expense:
Interest and finance charges ........... 138,452 118,619
Amortization of debt issuance costs .... 27,200 76,654
----------- -----------
Total interest expense . 165,652 195,273
----------- -----------
Net loss ................................................ $ (186,776) $(1,209,504)
===========
Basic and diluted loss per common share and
share equivalents ................................... $ (0.05) $ (0.30)
=========== ===========
Weighted average number of common shares
share equivalents outstanding ....................... 4,103,525 4,083,739
=========== ===========
See accompanying notes to condensed financial statements
4
PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
June 30,
1998 1997
-----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $ (186,776) $(1,209,504)
Adjustments used to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization ...................... 188,417 139,027
Amortization of common stock options ............... -- 53,685
Deferred rent ...................................... 4,552 8,746
Stock compensation ................................. 10,938 --
Increase (decrease) from changes in:
Accounts receivable ..................... 26,618 (14,776)
Merchandise inventories ................... (1,503,233) (457,854)
Other current assets ...................... (127,228) 101,504
Deposits and other assets ................. (93,072) 12,420
Accounts payable .......................... 1,249,369 602,459
Accrued expenses and other liabilities .. (527,702) (165,469)
----------- -----------
Net cash used for operating activities .. (958,117) (929,762)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ......................... (461,745) (64,518)
----------- -----------
Net cash used for investing activities .. (461,745) (64,518)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred and common stock ........ -- 700,501
Change in bank overdraft .................................... -- (41,443)
Net borrowings on financing agreement 1,076,497 387,188
Net repayments of notes payable and capital leases (16,166) --
----------- -----------
Net cash provided by financing activities 1,093,664 979,580
----------- -----------
Net decrease in cash ................................................. (359,531) (14,700)
Cash at beginning of quarter ......................................... 648,986 177,722
Cash at end of quarter ............................................... $ 289,455 $ 163,022
See accompanying notes to condensed financial statements
PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
Note 1. General
The interim accompanying unaudited condensed financial statements have
been prepared in accordance with generally accepted accounting principles
(AGAAP@) 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 three month quarter ended June 30, 1998 are not
necessarily indicative of the results of operations that may be expected for the
year ending March 31, 1999.
Note 2. Debt Conversion
In June 1998, the Company and ABC Fund, Inc. ("ABC"), a Belize
corporation, the holder of a 5% Convertible Secured Subordinated Debenture Due
August 15, 2000 (the "Debenture") dated January 21, 1998 agreed to amend the
terms of the Debenture to enable the conversion of the principal amount and
accrued interest thereon, into shares of Playco's Series E Preferred Stock, at a
conversion price of $1.00 per share. Simultaneously, ABC elected to convert the
Debenture as of June 30, 1998, whereby, $1.5 million principal amount and
$33,333 in accrued interest were converted into 1,533,333 shares of Series E
Preferred Stock. ABC did not receive any registration rights regarding the
shares.
Simultaneous with the conversion of the Debenture, ABC terminated the
Subordinated Security Agreement between the parties and the Intercreditor and
Subordination Agreement by and between ABC and Finova Capital Corporation dated
January 21, 1998.
ABC, or its assigns, retained a right included in the Debenture, to
purchase up to an aggregate of 25% of the outstanding shares of common stock of
a subsidiary of the Company. The purchase price per share shall equal the net
book value per share of the subsidiary's common stock as of the date of exercise
using generally accepted accounting principals. The calculation of the number of
shares subject to this right and the purchase price per share shall be as of the
date that the Company receives notification that the right is being exercised.
This right shall extend until August 15, 2000, which shall automatically extend
until August 15, 2003 unless earlier terminated by ABC Fund, Inc., or its
assignee.
Note 3. Subsequent Events
On July 15, 1998, the Company borrowed $300,000 from Breaking Waves,
Inc., an affiliate, and issued an unsecured 9% promissory note (the ANote@). The
Note calls for five monthly installments of principal and interest commencing in
August 1998 and ending December 30, 1998.
On July 22, 1998, the Company entered into a Lead Generation/Corporate
Relations Agreement with Corporate Relations Group, Inc., a Florida corporation
(ACRG@), pursuant to which CRG shall provide investor and public relations
services to the Company for a period of five years. Under the terms of the
Agreement, the Company paid $100,000 to CRG upon execution of the agreement and
agreed to issue 50,000 shares of the Company's Series E Preferred Stock as a
reimbursement for expenses. In addition, the Company granted to CRG options to
purchase 350,000 shares of Common Stock at an exercise price of $0.78125 per
share and 400,000 shares of Series E Preferred Stock at an exercise price of
$2.25 per share. In a related agreement, the Company issued options to four
principals of CRG entitling each to purchase 25,000 shares of Common Stock at an
exercise price of $0.78125 and 75,000 shares of Series E Preferred Stock at an
exercise price of $2.25 per share.
On July 27, 1998, the Company sold 100,000 shares of Series E Preferred
Stock to United Toys & Textiles Corp., the Company's principal stockholder, for
$100,000.
Effective July 30, 1998, the Company and FINOVA Capital Corporation,
the Company=s working capital lender, amended the Company=s credit agreement to
increase the maximum level of borrowings under the agreement from $7.1 million
to $7.6 million.
5
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 is a subsidiary of United Textiles & Toys Corp. (AUTTC@), which
currently owns approximately 59.3% of the issued and outstanding shares of the
Company=s Common Stock.
For the three months ended June 30, 1998 compared to the three months ended
June 30, 1997
The Company generated net sales of $6,357,395 for the three months ended
June 30, 1998. This represented an increase of $3,214,582, or 102%, from net
sales of $3,142,813 in the three months ended June 30, 1997. Approximately
$1,900,000 of this sales growth came from increases in same store sales. The
remaining increase in sales of approximately $1,300,000 is attributable to sales
from the Company=s new stores. The Company=s same store sales increased by
approximately 69% for the three months ended June 30, 1998 over the three months
ended June 30, 1997. Specialty toys represented the primary contributor to the
sales growth from a sales mix standpoint.
The Company posted a gross profit of $2,651,064 for the three months ended
June 30, 1998, representing an increase of $1,481,616, or 127%, from the gross
profit of $1,169,448 for the three months ended June 30, 1997. This represented
an increase in the Company=s gross margin from 37.2% for the June 1997 quarter
to 41.7% for the June 1998 quarter. This 4.5% gross margin improvement was
largely due to the ongoing implementation of the Company=s business plan to sell
educational, new electronic interactive, and specialty and collectible toys and
items in high traffic malls from its prior plan of selling traditional toys in
stores located in strip shopping centers. The mix of specialty and educational
toys, generally produce better margins than traditional toys.
Operating expenses for the three months ended June 30, 1998 were
$2,483,771. This represented a $439,119, or 21.5%, increase in the Company=s
operating expenses from a level of $2,044,652 for the three months ended June
30, 1997. The operating expense increase was primarily due to a $280,034 growth
in payroll and payroll-related expense largely related to the opening of new
locations.
During the three months ended June 30, 1998, the Company recorded non-cash
depreciation and amortization expenses of $188,417, representing a $49,390
increase from $139,027 recorded for the quarter ended June 30, 1996. Total
operating expenses (operating expenses combined with depreciation and
amortization) for the June 1998 quarter were $2,672,188, representing a
$488,509, or 22.4%, increase from total operating expenses of $2,183,679
recorded for the June 1997 quarter.
As a result of the $1,481,616 increase in gross profit partially offset by
the $488,509 increase in total operating expenses, the Company=s operating loss
decreased by $993,107 from an operating loss of $1,014,231 during the three
months ended June 30, 1997 to an operating loss of $21,124 during the three
months ended June 30, 1998.
Interest expense totaled $165,652 for the three months ended June 30, 1997.
This represented a $29,621, or 15.2%, decrease from interest expense of $195,273
for the three months ended June 30, 1997. The primary reason for the decrease
was the completion of the amortization of debt issuance costs related to the
Company=s previous financing arrangement in the fiscal year ended March 31, 1998
in connection with the Company's prior credit financing company. Those charges
were recorded as interest expense. The Company had amortization expense of
$27,200 in the June 1998 quarter related to the FINOVA financing agreement.
As a result of the above mentioned factors, the Company recorded a net loss
of $(186,776) for the three months ended June 30, 1997. This represented a
$1,022,728 improvement over the net loss of $(1,209,504) recorded in the three
months ended June 30, 1997.
The basic and diluted loss per share for the three months ended June 1998
was $(0.05) compared to a basic and diluted net loss per share in the comparable
June 1997 quarter of $(0.30). The weighted average number of common shares
outstanding increased from 4,083,739 in the June 1997 quarter to 4,103,525 in
the June 1998 quarter.
Liquidity and Capital Resources
At June 30, 1998, the Company had working capital of $5,096,166 compared to
a working capital position of $4,452,481 at March 31, 1998. 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 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 month quarter ended June 30, 1998, the Company used
$958,117 of cash in its operations compared to $929,762 used in operations for
the three month quarter ended June 30, 1997. The Company=s net loss was
approximately $187,000 and $1,209,000, respectively, in those quarters.
The Company used $461,745 of cash in its investing activities during the
three month quarter ended June 30, 1998 compared to $64,518 for the three month
quarter ended June 30, 1996. All of the Company=s investing activities related
to purchases of property and equipment, primarily related to openings of new
stores.
The Company generated $1,060,331 from its financing activities in the
three month quarter ended June 30, 1998 compared to the generation of $979,580
from financing activities for the three month quarter ended June 30, 1996. The
primary cash contribution to the Company=s financing activities in the June 1998
quarter was net borrowing of $1,076,497 under its financing agreement. In the
June 1997 quarter, the primary contribution to the Company=s financing
activities was from $700,000 in proceeds from the issuance of preferred stock.
In both quarters, the proceeds of financing activities were used to finance the
Company=s working capital and capital expenditure requirements and operating
losses.
As a result of the above factors, the Company had a net decrease in
cash of $359,531 for the three month quarter ended June 30, 1998 compared to a
net decrease in cash of $14,700 for the three month quarter ended June 30, 1997.
During the three months ended June 30, 1998, the Company relocated its
Toys International store within the Century City Shopping Center in west Los
Angeles. During the same quarter, the Company also began construction on a new
store in a mall near Las Vegas, located in Primm, Nevada, which store opened in
July 1998. Both of these locations are high traffic shopping malls. Those two
stores represented an aggregate capital investment of approximately $550,000.
The Company has signed leases to open five additional stores in high
traffic malls in 1998, including locations in Texas, Illinois, Michigan and
southern California. The cost involved in opening these five new locations will
require a estimated capital expenditure of approximately $1.3 million to $1.6
million. The Company plans to finance the capital expenditure through a
combination of working capital, landlord tenant improvement contributions,
capital leases, drawing down on its credit line and through additional equity
investments, though the Company does not presently have any agreements to obtain
said equity investments and can not give any assurances that it will have the
funds when needed to meet the capital requirements to open these locations. In
May 1998, the Company commenced an offering of Units, each Unit comprising one
share of the Company=s Series F Preferred Stock and one Series F Preferred Stock
Purchase Warrant at a purchase price of $3.00 per Unit, through Morgan Grant
Capital Group, Inc., as placement agent. This offering has been terminated,
whereby, no funds were raised. In June 1998, the Company entered into a five-
year capital lease for approximately $84,000 to partially finance the cost of
its relocated Century City store. The Company is in the documentation process
for an additional capital lease to partially finance the cost of its Nevada
store.
In July 1998, the Company and FINOVA Capital Corporation, its working
capital lender, amended the Company=s credit agreement to increase the maximum
level of borrowings under the agreement from $7.1 million to $7.6 million. 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 expenditure requirements noted above.
In July 1998, the Company borrowed $300,000 from Breaking Waves, an
affiliate, under an unsecured 9% promissory note (the ANote@). The Note calls
for monthly principal and interest payments through December 30, 1998, when the
Note is scheduled for repayment in full.
Year 2000
An additional area that represents a near term commitment of capital
resources is the Company=s management information system. The Company has
investigated its existing management information system and has determined that
it does not provide sufficient scope to support the planned level of expanded
operations and, furthermore, is not year 2000 compliant. The Company has
explored the cost of upgrading its current system or purchasing a new system to
meet the projected demands of the business and to become year 2000 compliant.
In order to minimize the disruption to its operations, the Company has
decided to upgrade its existing system to increase the scope of the system and
to become year 2000 compliant. The Company estimates that the cost of upgrading
its current system will be 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. Should the Company become aware of any such situation,
contingency plans will be developed.
Trends Affecting Liquidity, Capital Resources and Operations
As a result of its planned merchandise mix change to emphasize
specialty and educational toys, the Company enjoyed significant sales and gross
profits in the three months ended June 30, 1998. Which specialty and educational
mix includes; collectible die cast cars, specialty yo-yo=s, Rokenbok and
Learning Curve toys, and Beanie Babies7 and other plush and 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 United States. The Company=s future financial performance will
depend upon (i) continued demand for toys and hobby items and management's
ability to adapt to continuously changing consumer preferences and the market
for such items, (ii) on 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, Zainy
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.
6
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. 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
Exhibit 10.94 - Lease Agreement for Store-Concord Mills (Play Co. Toys)
Exhibit 10.95 - Lease Agreement for Store-Katy Mills (Play Co. Toys)
Exhibit 10.96 - Lease Agreement for Store-Concord Mills (Toy Co.)
Exhibit 10.97 - Lease Agreement for Store-Katy Mills (Toy Co.)
Exhibit 10.98 - Lease Agreement for Store-Ontario Mills (Toy Co.)
Exhibit 10.99 - Amendment No. 1 to Finova Loan Agreement
Exhibit 10.100 - Amendment to Lease Agreement for Store-Rancho Cucamonga (Play Co. Toys)
(filed concurrently with Form 10-QSB via Form SE)
Exhibit 10.101 - Company & Corporate Relations Group, Inc. Lead Generation/Corporate Relations
Agreement, dated July 22, 1998
Exhibit 27 - Financial Data Schedule
7
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, this 12th day of August 1998.
PLAY CO. TOYS & ENTERTAINMENT CORP.
By: \s\ Richard Brady
Richard L. Brady
President and Chief Executive Officer
By: \s\ James B. Frakes
James B. Frakes
Chief Financial Officer
8