<PAGE>
UNITED STATES
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 June 30, 1996
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 0-25916
YES! ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
California 94-3165290
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3875 Hopyard Road, Suite 375, Pleasanton, CA 94588
--------------------------------------------------
(Address of principal executive offices and zip code)
(510) 847-9444
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the proceeding 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
--- ---
As of July 26, 1996 there were 13,999,789 shares of the registrant's common
stock outstanding.
This quarterly report on Form 10-Q contains ____ pages of which this is page
number 1.
<PAGE>
YES! ENTERTAINMENT CORPORATION
FORM 10-Q
JUNE 30, 1996
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations -
Three months and six months ended
June 30, 1996 and June 30, 1995 3
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1996
and June 30, 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
SIGNATURE PAGE 17
PART II. OTHER INFORMATION
Part 6. Exhibits and Reports on Form 8-K 18
<PAGE>
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
YES! ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $11,551 $ 4,694 $20,486 $10,361
Cost of sales 6,887 2,303 11,192 4,948
------- ------- ------- -------
Gross profit 4,664 2,391 9,294 5,413
------- ------- ------- -------
Operating expenses:
Marketing, advertising and promotion 1,473 1,313 2,167 1,892
Selling, distribution and administrative 4,696 3,433 9,569 7,116
------- ------- ------- -------
Total operating expenses 6,169 4,746 11,736 9,008
------- ------- ------- -------
Operating loss (1,505) (2,355) (2,442) (3,595)
Interest income 105 27 212 39
Interest expense (107) (149) (310) (362)
Other income (expense), net (11) (18) (92) 21
------- ------- ------- -------
Net loss before income tax benefit (1,518) (2,495) (2,632) (3,897)
Income tax benefit (304) - (527) -
------- ------- ------- -------
Net loss $(1,214) $(2,495) $(2,105) $(3,897)
======= ======= ======= =======
Net loss per share $ (0.09) $ (0.97) $ (0.15) $ (2.53)
======= ======= ======= =======
Shares used in computing net loss per share 13,995 2,578 13,761 1,540
======= ======= ======= =======
</TABLE>
See accompanying notes.
3
<PAGE>
YES! ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------- -------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 6,382 $ 2,987
Accounts receivable, net 12,705 26,260
Inventories 16,433 12,050
Prepaid expenses 6,048 3,974
Other current Assets 2,112 560
------- -------
Total current assets 43,680 45,831
Property and equipment, net 3,299 2,769
Intangibles, deposits, and other assets, net 549 270
------- -------
Total assets $47,528 $48,870
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Convertible notes payable $ 2,000 $ 2,000
Loans payable - 10,125
Accounts payable 4,356 5,484
Accrued royalties 282 1,267
Accrued liabilities 509 1,012
Capital lease obligations due within one year 52 87
Income taxes payable - 185
------- -------
Total current liabilities 7,199 20,160
Capital lease obligations 22 29
Other liabilities 59 97
Commitments and contingencies
Common stock 82,438 69,511
Accumulated deficit (42,190) (40,085)
Less amounts receivable from shareholders - (842)
------- -------
Total shareholders' equity 40,248 28,584
------- -------
Total liabilities and shareholders' equity $47,528 $48,870
======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
YES! ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ended
-------------------------
June 30, June 30,
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,105) $ (3,897)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 1,208 868
Changes in operating assets and liabilities:
Accounts receivable 13,554 4,637
Inventories (4,383) 1,196
Prepaid expenses and other current assets (3,626) (1,739)
Other assets (307) -
Accounts payable (1,128) (1,674)
Accrued liabilities (1,672) (1,160)
Other long-term liabilities (39) -
--------- ---------
Net cash provided by (used in) operating activities 1,502 (1,769)
INVESTING ACTIVITIES
Acquisition of property and equipment (1,709) (579)
Decrease (increase) in intangibles and deposits - (15)
--------- ---------
Net cash used in investing activities (1,709) (594)
FINANCING ACTIVITIES
Decrease (increase) in restricted cash - (1,086)
Increase (decrease) in loans payable (10,125) (6,759)
Principal payments on capital lease obligations (43) (37)
Proceeds from convertible notes payable - 1,400
Proceeds from issuance of common stock,
net of issuance costs 13,770 10,501
--------- ---------
Net cash provided by financing activities 3,602 4,019
--------- ---------
Net increase in cash and cash equivalents 3,395 1,656
Cash and cash equivalents at beginning of period 2,987 2,558
--------- ---------
Cash and cash equivalents at end of period $ 6,382 $ 4,214
========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
YES! ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
Interim Financial Statements
----------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q but do not
include all of the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements and
should, therefore, be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the fiscal year
ended December 31, 1995 included in the Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 29, 1996. In the
opinion of management, all adjustments (which consist only of normal
recurring accruals) have been made to present fairly the consolidated
operating results for the unaudited periods. The interim operating results
are not necessarily indicative of the results for fiscal 1996.
Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
2. BALANCE SHEET COMPONENTS (IN THOUSANDS)
JUNE 30, DECEMBER 31,
1996 1995
------- -------
Inventories
Raw Materials $ 2,966 $ 1,904
Work-in-process 453 575
Finished goods 13,014 9,571
------- -------
$16,433 $12,050
======= =======
6
<PAGE>
3. RECENT DEVELOPMENT
In June 1996, subject to approval by the Company's shareholders, the Board
of Directors authorized an amendment to the Company's 1995 Stock Option
Plan to increase by 1,500,000 shares the number of shares that may be
issued thereunder. The Board intends to submit this increase to the
Company's shareholders at a special meeting to be held in the fall of 1996.
In addition, and also subject to the approval of the Company's
shareholders, the Board of Directors has authorized the Company to
reincorporate in Delaware. The Board also intends to submit the proposal to
reincorporate the Company in Delaware to the Company's shareholders at the
special meeting.
7
<PAGE>
YES! ENTERTAINMENT CORPORATION -- PART I, ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forward looking statements about the Company that
are based on current expectations. Actual results may differ materially as a
result of any one or more of the risks identified in this section, as well as is
the section captioned "Business Factors."
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
- ---------------------
<S> <C> <C> <C> <C>
(Dollars in thousands) Three months ended Six months ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
Net sales $11,551 $ 4,694 $20,486 $10,361
Cost of sales 6,887 2,303 11,192 4,948
------- ------- ------- -------
Gross profit 4,664 2,391 9,294 5,413
Gross profit % 40% 51% 45% 52%
Operating expenses 6,169 4,746 11,736 9,008
Operating expense % 53% 101% 57% 87%
Operating loss (1,505) (2,355) (2,442) (3,595)
Interest and other expense, net (13) (140) (190) (302)
------- ------- ------- -------
Net loss before income tax benefit (1,518) (2,495) (2,632) (3,897)
Income tax benefit (304) -- (527) --
------- ------- ------- -------
Net loss $(1,214) $(2,495) $(2,105) $(3,897)
</TABLE>
NET SALES:
The Company's net sales for the second quarter of 1996 increased $6.9 million or
approximately 146% to $11.6 million from $4.7 million in the second quarter of
1995. Net sales increased $10.1 million or approximately 98% to $20.5 million
for the first six months of 1996 from $10.4 million for the first six months of
1995. These increases were primarily the result of strong sales of the
Company's YES! Gear(TM) line of products which constituted 92% of the Company's
---------
sales in the second quarter of 1996. In addition, international sales in the
second quarter and the first six months of 1996 were higher than in the
comparable periods of 1995, primarily as the result of the Company's efforts
8
<PAGE>
to increase international sales. The Company expects international sales will
constitute a higher percentage of the Company's sales in 1996 than in 1995.
International shipments represented 26% of shipments in the second quarter of
1996 and 11% of shipments in the second quarter of 1995.
The Company recognizes revenue upon shipment of product and computes net sales
by concurrently deducting a provision for sales returns and allowances,
including allowances for defective returns, price protection, mark downs and
other returns. Sales allowances may vary as a percentage of gross sales due to
changes in the Company's product mix, defective product allowances or other
sales allowances.
Sales of toys traditionally have been highly seasonal, with a majority of retail
sales occurring during the December holiday season. Accordingly, the Company
expects that its operating results will vary significantly from quarter to
quarter, particularly in the quarters ending September 30 and December 31, when
the majority of the products are shipped.
The Company is dependent on a relatively small number of customers, in
particular Toys "R" Us, Inc. and Wal-Mart Stores, Inc., for a significant
percentage of its sales. Significant reductions in sales to any one or more of
the Company's largest customers would have a material adverse effect on the
Company's operating results. Because orders in the toy industry are generally
cancelable at any time without penalty, there can be no assurance that present
or future customers will not terminate their purchase agreements with the
Company or significantly change, reduce or delay the amount of products ordered
from the Company. Any such termination of a customer relationship or change,
reduction or delay in orders would have a material adverse effect on the
Company's operating results.
COST OF SALES:
Cost of sales were approximately 60% and 49% of net sales in the second quarters
of 1996 and 1995, respectively, and approximately 55% and 48% of net sales for
the first six months of 1996 and 1995, respectively. The increases in cost of
sales as a percentage of net sales in 1996 from the comparable periods in 1995
was primarily the result of the substantial increase in lower margin
international sales in the second quarter of 1996. In absolute dollars, cost of
sales increased $4.6 million or approximately 199% to $6.9 million in the second
quarter of 1996 from $2.3 million in the second quarter of 1995 and increased
$6.2 million or approximately 126% to $11.2 million for the first six months of
1996 from $4.9 million for the first six months of 1995, primarily as the
result of higher net sales.
9
<PAGE>
<TABLE>
<CAPTION>
OPERATING EXPENSES:
Three months ended Six months ended
(in thousands) June 30, June 30,
------------------- -----------------
1996 1995 1996 1995
------ ------ ------- ------
<S> <C> <C> <C> <C>
Marketing, advertising & promotion $1,473 $1,313 $ 2,167 $1,892
Selling, distribution & administrative 4,696 3,433 9,569 7,116
------ ------ ------- ------
Total operating expenses $6,169 $4,746 $11,736 $9,008
</TABLE>
Operating expenses increased $1.4 million or approximately 30% to $6.2 million
in the second quarter of 1996 from $4.7 million in the second quarter of 1995,
primarily as the result of higher variable expense associated with higher net
sales and higher fixed expenses required to support current and expected higher
sales volume, offset in part by the Company's ongoing strategy to maintain a low
break-even level. Operating expenses increased $2.7 million or approximately
30% to $11.7 million for the first six months of 1996 from $9.0 million for the
first six months of 1995 for substantially the same reasons.
Marketing, Advertising and Promotion. Marketing, advertising and promotion
- ------------------------------------
expenses increased $160,000 or approximately 12% to $1.5 million in the second
quarter of 1996 from $1.3 million in the second quarter of 1995. Marketing,
advertising and promotion expenses increased $275,000 or approximately 15% to
$2.2 million for the first six months of 1996 from $1.9 million for the first
six months of 1995. These increases resulted primarily from an increase in
advertising expense to support increased sales. The Company expects advertising
expense in the last six months of the year to exceed advertising expense in the
first six months of the year to support anticipated seasonal increases in net
sales and the introduction of the Company's 1996 product line, including in
particular V-Link(TM). The Company expects that it will devote a significant
----------
portion of its marketing budget to the expected introduction of V-Link. In the
------
event the Company is unable to effectively market V-Link, or if V-Link is not
------ ------
well received by the teen consumer, or if V-Link does not ship as scheduled, the
------
Company would be unable to recover its significant investment in V-Link which
------
would have a material adverse effect on the Company's financial results.
Selling, Distribution and Administrative. Selling, distribution and
- ----------------------------------------
administrative expenses increased $1.3 million or approximately 37% to $4.7
million in the second quarter of 1996 from $3.4 million in the second quarter of
1995. Selling, distribution and administrative expenses increased $2.5 million
or approximately 34% to $9.6 million for the first six months of 1996 from $7.1
million for the first six months of 1995. The increase in expenses resulted
from higher variable expenses associated with higher sales volume, higher
depreciation and amortization expense, higher royalty expenses associated with
the increase in revenue, and higher costs in operations support, product
development, and general and administrative expenses required to support current
and expected higher sales volumes.
10
<PAGE>
INTEREST EXPENSE:
The following table shows interest expense and interest income for the
applicable periods:
<TABLE>
<CAPTION>
(in thousands) Three months ended Six months ended
June 30, June 30,
----------------- ----------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Interest income $ 105 $ 27 $ 212 $ 39
Interest expense (107) (149) (310) (362)
</TABLE>
OTHER EXPENSE, NET:
The following table shows other expense, net, for the applicable periods:
(in thousands) Three months ended Six months ended
June 30, June 30,
----------------- ---------------
1996 1995 1996 1995
----- ----- ----- -----
Other income (expense), net $ (11) $ (18) $ (92) $ 21
The decrease in interest expense and increase in interest income in the quarter
and six months ended June 30, 1996 as compared to the comparable periods in
1995 is the result of the higher cash balances maintained by the Company during
those periods which resulted in decreased reliance on bank borrowings and
increased interest income.
INCOME TAX BENEFIT:
The following table shows the income tax benefit for the applicable periods:
<TABLE>
<CAPTION>
(in thousands)
Three months ended Six months ended
June 30, June 30,
------------------- ----------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income tax benefit $(304) $ -- $(527) $ --
</TABLE>
The income tax benefit for the quarter and six months ended June 30, 1996 is
computed based on the projected annualized effective tax rate of 20% applied to
the pre-tax book loss for the period. The projected effective tax rate for the
current year is less than the federal statutory rate (34%) due to the projected
benefit of the utilization of net operating loss carryovers. The Company
anticipates that its effective tax rate will be higher in 1996 than in 1995 due,
in part, to anticipated increases in taxable income and potential restrictions
on the utilization of net operating loss carryovers.
11
<PAGE>
At December 31, 1995, the Company had net operating loss carryforwards for
federal and California tax purposes of approximately $26 million and
$12 million, respectively. The federal losses will expire in the years 2007
through 2010 and the state losses will expire in the years 1997 through 2000 if
not utilized. Utilization of the net operating loss carryovers may be subject to
a substantial annual limitation if it should be determined that there has been a
change in the ownership of more than 50 percent of the value of the Company's
stock, pursuant to Section 382 of the Internal Revenue Code of 1986 and similar
state provisions. The annual limitation may result in the expiration of net
operating loss carryovers before utilization.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1996, the Company had cash, cash equivalents and short-term
investments of approximately $6.4 million, a $3.4 million increase from
approximately $3.0 million at December 31, 1995. This increase is attributed
primarily to the exercise in January 1996 of the remaining outstanding common
stock purchase warrants issued in connection with the Company's initial public
offering in June 1995 (the "IPO Warrants"), which generated net cash to the
Company of $13.8 million, plus net cash provided by operating activities of
approximately $1.5 million, offset by net cash used in investing activities of
$1.7 million and the repayment of bank loans of $10.1 million.
The positive cash flow in the first six months of 1996 was largely the result of
the exercise of the IPO Warrants and a decrease in accounts receivable of
approximately $13.6 million, partially offset by the Company's net loss, an
increase in inventory of approximately $4.4 million, an increase in prepaid
expenses and other current assets of approximately $3.6 million (primarily from
increases in advances against product royalties), a decrease in accounts payable
of $1.1 million, a decrease in accrued liabilities of approximately $1.7
million, an increase in property and equipment of approximately $1.7 million,
and a decrease in loans payable of approximately $10.1 million.
To meet seasonal working capital requirements during the balance of 1996, the
Company anticipates borrowing substantial amounts under an Accounts Receivable
Management and Security Agreement entered into with BNY Financial Corporation in
July 1995. The terms of the Agreement, as amended, provide that BNY Financial
Corporation may advance YES! up to $30 million on the basis of the Company's
accounts receivable, inventory and product being imported on a letter of credit
basis. Loans to the Company are fully secured by all of the Company's assets,
including intellectual property, and BNY acquired ownership of all of the
Company's trade receivables. The Company is required to remain in compliance
with certain financial and other covenants under the Accounts Receivable
Management and Security Agreement with BNY Financial Corporation. The Accounts
Receivable Management and Security Agreement also restricts the ability of the
Company to obtain working capital in the form of indebtedness, other than
indebtedness incurred in the ordinary course of the Company's business, to grant
security interests in the assets of the Company or to pay dividends on the
Company's securities.
12
<PAGE>
The Company's actual working capital needs will depend upon numerous factors,
including the extent and timing of acceptance of the Company's products in the
market, the Company's operating results, the cost of increasing the Company's
sales and marketing activities and the status of competitive products, none of
which can be predicted with certainty. The Company has experienced severe
working capital shortfalls in the past, which have restricted the Company's
ability to conduct its business as anticipated. The Company anticipates that it
will experience periods of significant negative cash flow in 1996 as a result of
seasonality in the toy industry, the timing of new product introductions and the
Company's planned growth in inventory and accounts receivable. There can be no
assurance that any additional financing will be available to the Company on
acceptable terms, if at all, when required by the Company. The inability to
obtain such financing would have a material adverse effect on the Company's
operating results.
RECENT DEVELOPMENTS
- -------------------
In June 1996, subject to approval by the Company's shareholders, the Board of
Directors authorized an amendment to the Company's 1995 Stock Option Plan to
increase by 1,500,000 shares the number of shares that may be issued thereunder.
The Board intends to submit this increase to the Company's shareholders at a
special meeting expected to be held in the fall of 1996. In addition, and also
subject to the approval of the Company's shareholders, the Board of Directors
has authorized the Company to reincorporate in Delaware. The Board also intends
to submit the proposal to reincorporate the Company in Delaware to the Company's
shareholders at the special meeting.
In June 1996, the Company appointed Sharon Duncan as Executive Vice President,
International.
Effective July 1, 1996, Esmond Goei, a member of the Company's Board of
Directors, was appointed to a one year term as Vice-Chairman of the Board. In
that capacity, the Company will pay Mr. Goei a fee of $5,000 per month.
BUSINESS FACTORS
Because of the variety and uncertainty of the factors affecting the Company's
operating results, past financial performance and historic trends may not be a
reliable indicator of future performance. These factors, as well as other
factors affecting the Company's operating performance, and the fact that the
Company participates in a highly dynamic industry, may result in significant
volatility in the Company's common stock price. The Company's business is
subject to a number of risks and the Company's forward looking statements should
be considered in light of the business factors set forth below.
Limited Operating History; History of Losses; Accumulated Deficit. The Company
- -----------------------------------------------------------------
has a short operating history, having commenced operation in November 1992 and
shipped
13
<PAGE>
its first product in July 1993. Although the Company has achieved
approximately $138 million in cumulative net sales through June 30, 1996, the
Company incurred substantial operating losses in 1993 and 1994 and at June 30,
1996 had an accumulated deficit of approximately $42 million. While the Company
achieved an operating profit in 1995, future profitability is dependent upon the
Company's ability to successfully and timely introduce, finance and manufacture
its new products, successfully market its existing products and collect trade
receivables in a timely manner.
Dependence on 1996 Products. In 1996, the Company has introduced and expects to
- ---------------------------
commence sales of a number of new product lines, such as the V-Link and the
------
Mrs. Fields(R) Baking Factory. In addition, the Company also expects to expand
- -----------------------------
its existing product lines in 1996, particularly its YES! Gear line of products.
--------
The final development and tooling of many of these new product lines and
products has not been completed and manufacturing in commercial quantities has
not commenced. The Company expects that completing the development and
commencing the manufacture of its 1996 product lines will place great demands on
management and other Company resources. In particular, V-Link is a complicated
------
consumer electronics product, and the Company expects it will incur substantial
expense in completing the development and tooling for its manufacture. If the
Company is not able to complete the development, tooling, manufacture and
successful marketing of its 1996 product lines, the Company's operating results
and financial condition would be materially adversely affected.
Dependence on YES! Gear. In 1995, 47% of the Company's sales were derived from
- -----------------------
the Company's various Yak Bak(TM) products, and 58% were derived from the
----------
Company's YES! Gear product line (which also includes the Mega Mouth(TM) and
--------- -------------
Power Penz(TM) products, as well as the Yak Bak products). The Company expects
- ------------- -------
the Yak Bak products specifically and the YES! Gear product line generally to
------- ----------
continue to account for a substantial percentage of the Company's business. In
addition, the Company is aware that a number of toy manufacturers are attempting
to duplicate the Company's success in this area of product by introducing
similar lines of products in 1996. While the Company believes it will compete
favorably with these new products on the basis of styling, quality, product
depth and promotional support, there can be no assurance that the sale of these
competitive products will not impact the sale of the YES! Gear product line,
---------
particularly on the basis of price.
Dependence on Manufacturing Facilities Based in People's Republic of China. The
- --------------------------------------------------------------------------
Company contracts for the manufacture of substantially all of its products with
entities based in Hong Kong whose manufacturing facilities are located in the
People's Republic of China. In 1997, Hong Kong will become a sovereign territory
of the People's Republic of China. While the People's Republic of China has
provided assurances that Hong Kong will be allowed to maintain critical economic
and tax policies, there can be no assurance that political or social tensions
will not develop in Hong Kong that would disrupt this process. In addition,
recent tensions in the Taiwan Straits between the Peoples Republic of China and
the Republic of China (Taiwan), and the United States' involvement therein,
could result either in a disruption in manufacturing in the China mainland or in
the imposition of tariffs or duties on Chinese manufactured goods. Either event
would have an adverse impact on the Company's ability to obtain its products or
on the cost of these products, respectively, such that its operating results and
financial condition would be materially adversely affected.
14
<PAGE>
Sales Concentration Risk. The Company's ten largest customers accounted for
- ------------------------
approximately 87%, 68% and 76% of net sales for the years ending December 31,
1995, 1994 and 1993, respectively. For the year ended December 31, 1995, the
Company's two largest customers, Wal-Mart Stores, Inc. and Toys "R" Us, Inc.,
each accounted for approximately 27% of net sales. For the year ended December
31, 1994, the same two customers accounted for approximately 21% and 14% of net
sales, respectively. Toys "R" Us, Inc. accounted for approximately 41% of net
sales in the year ended December 31, 1993. While the Company intends to expand
distribution to new accounts, the Company expects to continue to depend on a
relatively small number of customers for a significant percentage of its sales.
Significant reductions in sales to any one or more of the Company's largest
customers would have a material adverse effect on the Company's operating
results. Because orders in the toy industry are generally cancelable at any time
without penalty, there can be no assurance that present or future customers will
not terminate their purchase arrangements with the Company or significantly
change, reduce or delay the amount of products ordered from the Company. Any
such termination of a significant customer relationship or change, reduction or
delay in significant orders could have a material adverse effect on the
Company's operating results.
Price Protection; Stock Balancing; Reliance of Timely Payment. In connection
- -------------------------------------------------------------
with the introduction of new products, many companies in the toy industry
discount prices of existing products, provide for certain advertising allowances
and credits or give other sales incentives to their customers, particularly
their most significant customers. In addition, in order to address working
capital requirements, sales of inventory, changes in marketing trends and other
issues, many companies in the toy industry allow retailers to return slow-moving
products for credit, or if the manufacturer lowers the prices of its products,
to provide price adjustments for inventories on hand at the time the price
change occurs. The Company has made such accommodations in the past, and there
can be no assurance that the Company will not make accommodations such as stock
balancing, returns, other allowances or price protection adjustments to a
significant degree in the future. Any such accommodations by the Company in the
future could have a material adverse effect on the Company's operating results.
In addition, in the past certain of the Company's retail customers have delayed
payment beyond the date such payment is due. Delays in payments from retail
customers in the future could materially impact the Company's anticipated cash
flow to the detriment of the Company's business.
Short Product Cycles. Consumer preferences in the toy industry are continuously
- --------------------
changing and are difficult to predict. Few products achieve market acceptance,
and even when they do achieve commercial success, products typically have short
life cycles. There can be no assurance that (i) new products introduced by the
Company will achieve any significant degree of market acceptance, (ii)
acceptance, if achieved, will be
15
<PAGE>
sustained for any significant amount of time, or (iii) such products' life
cycles will be sufficient to permit the Company to recover development,
manufacturing, marketing and other costs associated therewith. In addition,
sales of the Company's existing product lines are expected to decline over time,
and may decline faster than expected unless existing products are enhanced or
new product lines are introduced. Failure of new product lines to achieve or
sustain market acceptance would have a material adverse effect on the Company's
operating results and financial condition.
International Business Risk. The Company relies exclusively either on foreign
- ---------------------------
distributors or foreign sales agents to market and sell the Company's products
outside the United States. Although the Company's international sales personnel
work closely with its foreign distributors and foreign sales agents, the Company
cannot directly control such entities' sales and marketing activities and,
accordingly, cannot directly manage the Company's product sales in foreign
markets. With respect to sales made through a foreign sales agent, the Company
also must incur significant marketing expense and, for non-F.O.B. sales,
significant warehousing and inventory expense. A significant portion of these
expenses must be incurred prior to determining whether the Company's products
will be well received in that market and may not be recouped in the event the
sales in the market fall below the Company's expectations. In addition, the
Company's international sales may be disrupted by currency fluctuations
or other events beyond the Company's control, including political or regulatory
changes.
Dependence on Restrictive Facility. The Company has entered into an Accounts
- ----------------------------------
Receivable Management and Security Agreement (the "ARM Agreement"), with BNY
Financial Corporation. The Company is dependent on the ARM Agreement to meet
its financial needs during 1996, due in large part to the seasonality of the
Company's business whereby the Company is required to finance the manufacture of
a substantial portion of its products in the summer and autumn but does not
collect on the sale of these products until the fourth quarter of that year and
the first quarter of the following year. Under the terms of the ARM Agreement,
BNY Financial Corporation has taken a first priority security interest in
substantially all of the Company' assets, including its intellectual property.
The ARM Agreement also contains a number of restrictive covenants, including
covenants concerning the requirement that Donald Kingsborough and Sol Kershner,
the Company's Chief Executive Officer and Chief Financial Officer, respectively,
remain active in the management of the Company. In the event the Company falls
out of compliance with the ARM Agreement, and BNY Financial Corporation does not
provide financing as contemplated, the Company may not be able to finance its
operations, and its operating results and financial condition would be
materially adversely affected.
16
<PAGE>
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.55 Third Amendment to Lease Agreement between Registrant and
Lincoln Hayward VI dated May 17, 1996 for the facility
located at 1006 Whipple Road, Hayward, California.
10.56 Third Amendment to Lease Agreement between Registrant and
Chawin Property, Inc. dated May 1, 1996 for the facility
located at 3875 Hopyard Road, Pleasanton, California.
11.1 Statement Regarding Computation of Net Loss Per Share
27.1 Financial Data Schedule for the quarter ended June 30,
1996.
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1996.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
YES! Entertainment Corporation
------------------------------
Registrant
Date August 2, 1996 /s/ DONALD D. KINGSBOROUGH
-------------- ------------------------------
Donald D. Kingsborough
Chief Executive Officer
(Principal Executive Officer)
Date August 2, 1996 /s/ SOL KERSHNER
-------------- ------------------------------
Sol Kershner
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
10.55 Third Amendment to Lease Agreement between
Registrant and Lincoln Hayward VI dated
May 17, 1996 for the facility located at
1006 Whipple Road, Hayward, California.
10.56 Third Amendment to Lease Agreement between
Registrant and Chawin Property, Inc. dated
May 1, 1996 for the facility located at
3875 Hopyard Road, Pleasanton, California.
11.1 Statement Regarding Computation of
Net Loss Per Share
27.1 Financial Data Schedule for the
quarter ended June 30, 1996
19
<PAGE>
EXHIBIT 10.55
THIRD AMENDMENT
to
LEASE AGREEMENT
Dated May , 1996
by and between
LINCOLN HAYWARD VI,
a California limited partnership
as Lessor,
and
YES! ENTERTAINMENT CORPORATION,
a California corporation,
as Lessee
THIS THIRD AMENDMENT TO LEASE dated May 17th, 1996, by and between
LINCOLN HAYWARD VI, a California limited partnership as Lessor, and YES!
ENTERTAINMENT CORPORATION, a California corporation, as Lessee.
WITNESSETH
WHEREAS, pursuant to that certain lease dated May 17, 1993, Lessee occupies the
premises known as 1039-1055 Whipple Road, Units A, B, C, D, E, F, and G,
Hayward, California.
WHEREAS, Lessee desires to extend the term of the lease for and additional
three (3) years, from December 31, 1996 to December 31, 1999.
WHEREAS, the parties desire to amend the Lease.
NOW, THEREFORE, the parties agree as follows:
1. Effective Date: The effective date of the expansion shall be June 1,
1996.
2. Expansion Premises: Approximately 24,000 square feet - Suite 1006 Whipple
Road, which space is identified on the floor plan
attached hereto as Exhibit A.
3. Term: The term for the 84,000 square feet shall be extended
thirty six (36) months from the termination date.
Therefore, the expiration date for this lease shall
be December 31, 1999. The expansion space, 24,000
square feet shall run conterminous and expire in
December 31, 1999.
4. Monthly Base Rent:
For 24,000 rentable square foot
From 6/1/96 to 12/30/96 $0.32 per sq.ft. or $7,680
For 108,000 rentable square foot
From 1/1/97 to 6/30/98 $0.32 per sq.ft. or $34,560
From 7/1/98 to 12/31/99 $0.34 per sq.ft. or $36,720
5. Operating Expenses: Lessee's pro rata share of operating expenses, tax
expense, and security and protection expenses for the
park shall be a total of 24.30%
6. Security Deposit: $8,160 due upon signing this Amendment.
<PAGE>
Third Amendment
Yes! Entertainment
Page 2
7. Relocation Option:
If Lessee is not in default in the performance of any of its obligations
under the Lease and if during the term of the expansion space lease, the
space known as 1063 Whipple Road, Building B, consisting of 36,000 square
feet becomes available, Lessor shall notify Lessee in writing of this
availability. Following notification by Lessor, Lessee shall have three (3)
business days to respond to Lessor, in writing, of its intention to lease
said space, or Lessee shall have no further rights to such space.
Lessor will agree to cancel the current 24,000 square feet (1066 Whipple
Road) expansion space lease and a new amendment for the total of the 36,000
square feet (1063 Whipple Road) shall be executed by Lessor and Lessee for
such space within five (5) business days.
The monthly base rent for the new amendment shall be set at then prevailing
fair market rental rate (to be mutually negotiated between Lessor and
Lessee) and in no event shall be less than the highest rent charged during
the expansion space lease.
8. Continued The parties acknowledge and agree that the Lease
Enforceability: remains in full force and effect, unchanged except
as expressly provided for in this Amendment. This
Amendment and the Lease shall read together as one
document. In the event of any conflict between the
terms of this Amendment and the Terms of the Lease,
the terms of this Amendment shall govern.
9. Further This Amendment may only be modified pursuant to a
Modifications: written agreement by all of the parties hereto.
LESSEE: LESSOR:
BY: YES! ENTERTAINMENT CORP. BY: LINCOLN HAYWARD VI,
a California Corporation a California limited partnership
by: W. Gardner Combs, as Receiver for
Lincoln Hayward VI
by: /s/ Sol Kershner by: /s/ W. Gardner Combs
------------------------- ---------------------------------
Its: CFO Its: Receiver
------------------------- ---------------------------------
<PAGE>
EXHIBIT "A"
[DIAGRAM OF WHIPPLE AVENUE FACILITY]
BUILDING A
Building size: 120,000 square feet
Divisible to: 12,000 square feet (200' x 60')
Column spacing: 24' x 60'
Interior clear height: 24'
Power availability: 2,000 amps
277/480 volts
3-phase
Dock high and grade level loading V Dock high truck do
Fully sprinklered o Grade level truck do
Improvements to suit Scale: 1/8 inch equals
<PAGE>
EXHIBIT 10.56
THIRD AMENDMENT TO LEASE
------------------------
THIS THIRD AMENDMENT TO LEASE (this "Amendment") is entered into as of May 1,
1996 by and between Chawin Property, Inc. a California corporation ("Landlord"),
and YES! Entertainment, Inc., a California corporation ("Tenant").
RECITALS
A. Chawin Property, Inc. a California corporation, and Tenant entered
into that certain Lease dated March 1, 1993, and that certain First Amendment to
Lease dated October 1, 1993 and that certain Second Amendment to Lease dated May
1, 1995 whereby Tenant leased from Landlord that certain space commonly referred
to as Suite 375 and Suite 201, 3875 Hopyard Road, Hacienda West, located at the
Hacienda Business Park in the City of Pleasanton, California the "Original
Premises"). The Second Amendment to Lease terminated Suite 201.
B. Landlord and Tenant now desire to amend certain of the terms and
conditions set forth in the Original Lease and First and Second Amendments to
Lease. The Original Lease (and the amendments made herein) shall be hereinafter
referred to collectively as the "Lease". All initially capitalized terms not
otherwise defined herein shall have the meanings given to them in the Lease.
<PAGE>
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises contained
herein, the parties hereby agree as follows:
1. EFFECTIVE DATE. The effective
date ("Effective Date") of this amendment shall be July 1, 1996.
2. PREMISES. Commencing on the Effective Date, the square footage
of the existing Premises, consisting of Suite 375 in the North Building located
at 3875 Hopyard Road, Pleasanton, California 94588 the ("Existing Premises"),
shall be expanded to include the additional space shown on Exhibit A hereto (the
---------
"Expansion Space") consisting of Four Thousand Seven Hundred and Ten rentable
square feet (4,710 rsf). Exhibit A to the Lease describing the Premises is
---------
amended, as of the Effective Date, by adding to it the Expansion Space shown on
Exhibit A hereto.
- ---------
3. TERM. The Term of this Third Amendment to Lease shall be
coterminous with the Original Lease which will expire November 18, 1998.
4. BASE RENT. Effective July 1, 1996, the monthly base rent, shall
be amended as set forth below:
<PAGE>
<TABLE>
<CAPTION>
Mo. Rate Monthly
Period Suite per RSF Base Rent Mo.
------ ----- ------- -------------
<S> <C> <C> <C>
July 1, 1996 -- 375 $1.25 $21,668.75
March 18, 1997 345 $1.70 $ 8,007.00
----------
$29,675.75
March 19, 1997 -- 375 $1.40 $24,269.00
March 18, 1998 345 $1.70 $ 8,007.00
----------
$32,276.00
March 19, 1998 -- 375 $1.35 $23,402.25
November 18, 1998 345 $1.70 $ 8,007.00
----------
$31,409.25
</TABLE>
5. OPERATING EXPENSE
Effective July 1, 1996 Paragraph 15 is hereby amended by
increasing the Tenant's percentage share of operating expense from 8.39% to
10.66%, an increase of 2.27%.
6. BASIC LEASE INFORMATION. The Basic Lease Information, as
amended, is attached hereto as Exhibit B.
7. TENANT IMPROVEMENTS. Landlord shall furnish and install within
the Premises building standard carpet and paint only. Except for said carpet and
paint, Premises shall be leased by Tenant in its "As is" condition.
<PAGE>
8. TERMINATION. So long as Tenant is not in default under this
Lease, if Tenant desires to lease additional space in the Project, the size of
which is at least 10,000 rentable square fee, and Landlord has such space
available, and Landlord and Tenant mutually agree to certain terms and
conditions for said additional space, then Tenant shall have the right to
terminate this Third Amendment to Lease and enter into a new amendment for
additional available space in the Project.
Tenant shall have no right to terminate this Third Amendment unless and until a
new amendment is executed by Landlord and Tenant.
Tenant's rights under this Paragraph 8 are personal to Tenant and shall not be
assigned, transferred or conveyed to any other person (voluntarily,
involuntarily, by operation of law or otherwise,) including any assignee or
sublessee permitted under Paragraph 27 of the Lease. If Tenant assigns,
subleases, or otherwise transfers all or any portion of the Premises or this
Lease, all of Tenant's rights under this Paragraph 8 shall immediately
terminate. All of Tenant's rights under this Paragraph shall also terminate upon
the expiration or sooner termination of this Lease.
<PAGE>
9. LIMITATION ON AMENDMENT. Except as modified by this
Amendment, all of the terms and provisions of the Lease shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have entered into this
Amendment, in one or more counterparts, effective as of the Effective Date.
"LANDLORD"
CHAWIN PROPERTY, INC.
a California corporation
BY: /s/ ^^^^
--------------------------------
ITS: Vice President
-------------------------------
DATE: 6/18/96
------------------------------
BY: /s/ ^^^^
--------------------------------
ITS: Treasurer
-------------------------------
DATE: 6/25/96
------------------------------
"TENANT"
YES! ENTERTAINMENT, INC.
a California Corporation
BY: /s/ Sol Kershner
--------------------------------
ITS: Chief Financial Officer
-------------------------------
DATE: 6/13/96
------------------------------
<PAGE>
EXHIBIT A
HACIENDA WEST
- -------------
THIRD FLOOR
[DIAGRAM OF BUILDING B-1 AND BUILDING B-2 OF HOPYARD ROAD FACILITY]
<PAGE>
EXHIBIT B
Page 1 of 3
SECOND AMENDMENT TO LEASE
BASIC LEASE INFORMATION
A. PARTIES
-------
1. Landlord CHAWIN PROPERTY, INC.,
a California corporation
2. Tenant YES! ENTERTAINMENT, INC.,
a California corporation
B. EFFECTIVE DATE July 1, 1996
--------------
C. BASIC LEASE PROVISIONS
----------------------
1. Premises: Hacienda West
a. Building: North
b. Address: 3875 Hopyard Road
Pleasanton, California 94588
c. Suite: 375 and Expansion Space 345
d. Floor: Third
e. Total Building
rentable area: One Hundred Eight Thousand
Three Hundred Eighty-One
(108,381) rentable square feet
f. Total Adjacent
Building
rentable area: Ninety-Eight Thousand Seven
Hundred Sixty-Five (98,765)
rentable square feet
g. Total Project
rentable area: Two Hundred Seven Thousand One
Hundred Forty-Six (207,146)
rentable square feet
<PAGE>
EXHIBIT B
Page 2 of 3
2. Rentable Area:
Suite 375: Seventeen Thousand Three Hundred
Thirty-Five (17,335) rentable
square feet
Suite 345 Four Thousand Seven Hundred Ten
(4,710) rentable square feet
3. Expiration of Term: November 18, 1998
4. Estimated
Commencement Date: July 1, 1996
5. Tenant's Property
Percentage:
Suite 375: Eight and Thirty Nine Hundredths
Percent (8.39%)
Suite 345: Two and Twenty Seven Hundredths
Percent (2.27%)
6. Base Rent
for Entire Premises:
Monthly
Period Suite Base Rent Mo.
------ ----- -------------
July 1, 1996 -- 375 $21,668.75
March 18, 1997 345 $ 8,007.00
----------
$29,675.75
March 19, 1997 -- 375 $24,269.00
March 18, 1998 345 $ 8,007.00
----------
$32,276.00
March 19, 1998 -- 375 $23,402.25
November 18, 1998 345 $ 8,007.00
----------
$31,409.25
<PAGE>
EXHIBIT B
Page 3 of 3
7. Security Deposit: $21,301.20 Rolled over from
Original Lease
8. Operating Expense
Base Year: 1993 Original Space (Suite 375)
1996 Expansion Space (Suite 345)
9. Broker(s): Colliers Parrish International
10. Address for Notices:
Landlord: Chawin Property, Inc.
c/o C.M. Capital Corporation
525 University Ave., Suite 1500
Palo Alto, California 94301
with a copy to:
Property Manager Office
3875 Hopyard Road, Suite 175
Pleasanton, California 94588
Tenant: YES! Entertainment, Inc.
3875 Hopyard Road, Suite 375
Pleasanton, CA 94588
<PAGE>
EXHIBIT 11.1
YES! ENTERTAINMENT CORPORATION
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
------------------ -----------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss $(1,214) $(2,495) $(2,106) $(3,897)
Computation of weighted average common
and common equivalent shares outstanding:
Weighted average common share outstanding 13,995 2,503 13,761 1,452
Weighted average options outstanding
Weighted average warrants outstanding
Common equivalent shares from stock options
granted or issued during the twelve-month
period prior to the Company's proposed
initial public offering 75 88
------- ------- ------- -------
Shares used in computing net loss per share 13,995 2,578 13,761 1,540
======= ====== ======= =======
Net loss per share $ (0.09) $(0.97) $ (0.15) $ (2.53)
======= ====== ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FINANCIAL STATEMENTS CONTAINED
THEREIN.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 6,382
<SECURITIES> 0
<RECEIVABLES> 13,153
<ALLOWANCES> 448
<INVENTORY> 16,443
<CURRENT-ASSETS> 43,680
<PP&E> 9,510
<DEPRECIATION> 6,211
<TOTAL-ASSETS> 47,528
<CURRENT-LIABILITIES> 7,199
<BONDS> 22
0
0
<COMMON> 82,438
<OTHER-SE> (42,190)
<TOTAL-LIABILITY-AND-EQUITY> 47,528
<SALES> 11,551
<TOTAL-REVENUES> 11,551
<CGS> 6,887
<TOTAL-COSTS> 6,887
<OTHER-EXPENSES> 6,169
<LOSS-PROVISION> 35
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> (1,518)
<INCOME-TAX> (304)
<INCOME-CONTINUING> (1,214)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,214)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
