<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 September 30, 1996
OR
[ ] Transition Report pursuant to Section 13 of 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 October 18, 1996 there were 14,013,670 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
SEPTEMBER 30, 1996
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations - Three months
and nine months ended September 30, 1996 and
September 30, 1995 3
Consolidated Balance Sheets - September 30, 1996 and
December 31, 1995 4
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1996 and September 30, 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securing Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE PAGE 18
2
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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 Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 29,636 $ 18,610 $ 50,122 $ 28,971
Cost of sales 16,475 8,775 27,668 13,724
------------- ------------- ------------- -------------
Gross profit 13,161 9,835 22,454 15,247
------------- ------------- ------------- -------------
Operating expenses:
Marketing, advertising and promotion 1,241 1,960 3,408 3,851
Selling, distribution and administrative 7,526 4,378 17,094 11,495
------------- ------------- ------------- -------------
Total operating expenses 8,767 6,338 20,502 15,346
------------- ------------- ------------- -------------
Operating income (loss) 4,394 3,497 1,952 (99)
Interest income 33 24 245 64
Interest expense (206) (378) (516) (740)
Other income (expense), net (22) (63) (114) (42)
------------- ------------- ------------- -------------
Net income (loss) before provision for income taxes 4,199 3,080 1,567 (817)
Provision for income taxes 808 - 282 -
------------- ------------- ------------- -------------
Net income (loss) $ 3,391 $ 3,080 $ 1,285 $ (817)
============= ============= ============= =============
Net income (loss) per share $ 0.23 $ 0.29 $ 0.09 $ (0.20)
============= ============= ============= =============
Shares used in computing net income (loss) per share 14,913 10,750 14,638 4,021
============= ============= ============= =============
</TABLE>
See accompanying notes.
3
<PAGE>
YES! ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995*
------------- ------------
(Unaudited)
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,595 $ 2,987
Accounts receivable, net 26,845 26,260
Inventories 20,380 12,050
Prepaid expenses 5,870 3,974
Other current Assets 3,012 560
------------- ------------
Total current assets 60,702 45,831
Property and equipment, net 3,569 2,769
Intangibles, deposits, and other assets, net 1,842 270
------------- ------------
Total assets $ 66,113 $ 48,870
============= ============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Convertible notes payable $ 2,000 $ 2,000
Loans payable 9,359 10,125
Accounts payable 8,933 5,484
Accrued royalties 766 1,267
Accrued liabilities 682 1,012
Capital lease obligations due within one year 21 87
Income taxes payable 464 185
------------- ------------
Total current liabilities 22,225 20,160
Capital lease obligations 18 29
Other liabilities 58 97
Commitments and contingencies
Common stock 82,612 69,511
Accumulated deficit (38,800) (40,085)
Less amounts receivable from shareholders - (842)
------------- ------------
Total shareholders' equity 43,812 28,584
------------- ------------
Total liabilities and shareholders' equity $ 66,113 $ 48,870
============= ============
</TABLE>
*Derived from audited financial statements
See accompanying notes.
4
<PAGE>
YES! ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
-------------------------------------
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,285 $ (817)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 1,809 1,549
Changes in operating assets and liabilities:
Accounts receivable (585) (9,425)
Inventories (8,330) (947)
Prepaid expenses and other current assets (4,347) (3,235)
Other assets (1,579) -
Accounts payable 3,449 (1,014)
Accrued liabilities (831) (111)
Income taxes payable 280 -
Other long-term liabilities (40) -
------------- -------------
Net cash used in operating activities (8,889) (14,000)
INVESTING ACTIVITIES
Acquisition of property and equipment (2,566) (1,051)
Increase in intangibles and deposits (36) (15)
------------- -------------
Net cash used in investing activities (2,602) (1,066)
FINANCING ACTIVITIES
Decrease in restricted cash - 789
Increase (decrease) in loans payable (767) 287
Principal payments on capital lease obligations (77) (56)
Proceeds from convertible notes payable - 1,400
Proceeds from issuance of common stock, net of issuance costs 13,943 10,993
------------- -------------
Net cash provided by financing activities 13,099 13,413
------------- -------------
Net increase (decrease) in cash and cash equivalents 1,608 (1,653)
Cash and cash equivalents at beginning of period 2,987 2,558
------------- -------------
Cash and equivalents at end of period $ 4,595 $ 905
============= =============
</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.
Use of Estimates
----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. BALANCE SHEET COMPONENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
----------------------------
<S> <C> <C>
Inventories
Raw Materials $ 2,750 $ 1,904
Work-in-process 594 575
Finished goods 17,036 9,571
------- -------
$20,380 $12,050
======= =======
</TABLE>
6
<PAGE>
3. RECENT DEVELOPMENT
In July and September 1996, the Company's board of directors and
shareholders, respectively, approved (i) the Company's reincorporation in
Delaware and (ii) 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 reincorporation into Delaware was effected on October 25,
1996.
7
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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
- ---------------------
(Dollars in thousands) Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $29,636 $18,610 $50,122 $28,971
Cost of sales 16,475 8,775 27,668 13,724
------- ------- ------- -------
Gross profit 13,161 9,835 22,454 15,247
Gross profit % 44% 53% 45% 53%
Operating expenses 8,767 6,338 20,502 15,346
------- ------- ------- -------
Operating expense % 30% 34% 41% 53%
Operating income (loss) 4,394 3,497 1,952 (99)
Interest and other expense, net (195) (417) (385) (718)
------- ------- ------- -------
Net income (loss) before
income tax benefit 4,199 3,080 1,567 (817)
Provision for income taxes 808 - 282 -
------- ------- ------- -------
Net income (loss) $ 3,391 $ 3,080 $ 1,285 $ (817)
======= ======= ======= =======
</TABLE>
NET SALES:
The Company's net sales for the third quarter of 1996 increased $11.0 million or
approximately 59% to $29.6 million from $18.6 million in the third quarter of
1995. Net sales increased $21.2 million or approximately 73% to $50.1 million
for the first nine months of 1996 from $29.0 million for the first nine months
of 1995. These increases were primarily the result of continued strong sales of
the Company's YES! Gear (TM) products, including the new Yak Bakwards(TM) and
--------- ------------
Mega Mike(TM) products and several new models of Power Penz(TM). Within YES!
- --------- ---------- ----
Gear, the Company's Yak Bak and Power Penz lines of products accounted for 62%
- ---- ------- ----------
and 15% of the Company's third quarter sales; the
8
<PAGE>
remaining YES! Gear line of products constituted 19% of the Company's sales in
---------
the third quarter of 1996. In addition, initial sales of the Mrs. Fields Baking
------------------
Factory constituted 3% of the Company's sales in the third quarter of 1996.
- -------
International sales in the third quarter and the first nine months of 1996 were
significantly higher than in the comparable periods of 1995, primarily as the
result of the Company's efforts to increase international sales, particularly in
Pacific Rim countries. The Company expects international sales will constitute a
higher percentage of the Company's sales in 1996 than in 1995. International
shipments represented 20% of sales in each of the third quarter and nine months
ended September 30, 1996 and 3% and 9% of sales in the third quarter and nine
months ended September 30, 1995, respectively.
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. 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 56% and 47% of net sales in the third quarters
of 1996 and 1995, respectively, and approximately 55% and 47% of net sales for
the first nine 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 first three quarters of 1996 and to a certain extent
lower pricing of certain of the older items within the Company's YES! Gear line
---------
of products. In absolute dollars, cost of sales increased $7.7 million or
approximately 88% to $16.5 million in the third quarter of 1996 from $8.8
million in the third quarter of 1995 and increased $13.9 million or
approximately 102% to $27.7 million for the first nine months of 1996 from
$13.7 million for the first nine months of 1995, primarily as the result of
higher net sales.
9
<PAGE>
<TABLE>
<CAPTION>
OPERATING EXPENSES:
(in thousands) Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Marketing, advertising & promotion $1,241 $1,960 $ 3,408 $ 3,851
Selling, distribution & administrative 7,526 4,378 17,094 11,495
------ ------ ------- -------
Total operating expenses $8,767 $6,338 $20,502 $15,346
</TABLE>
Operating expenses increased $2.5 million or approximately 38% to $8.8 million
in the third quarter of 1996 from $6.3 million in the third quarter of 1995,
primarily as the result of higher variable expenses 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 $5.2 million or approximately
34% to $20.5 million for the first nine months of 1996 from $15.3 million for
the first nine months of 1995 for substantially the same reasons.
Marketing, Advertising and Promotion. Marketing, advertising and promotion
- ------------------------------------
expenses decreased $719,000 or approximately 37% to $1.2 million in the third
quarter of 1996 from $2.0 million in the third quarter of 1995. Marketing,
advertising and promotion expenses decreased $443,000 or approximately 12% to
$3.4 million for the first nine months of 1996 from $3.9 million for the first
nine months of 1995. The decrease in the third quarter of 1996 compared to the
third quarter of 1995 was primarily due to the Company's decision to utilize the
majority of its advertising expense in the fourth quarter to promote anticipated
stronger seasonal retail sales. The decrease in the first nine months of 1996
compared to the first nine months of 1995 was primarily due to the third quarter
decrease in sales, offset in part by an increase in advertising expense to
support increased sales. The Company expects advertising expense in the last
three months of the year to significantly exceed advertising expense in the
first nine months of the year to support anticipated seasonal increases in sales
and the introduction of the Company's 1996 product line, including in particular
V-Link(TM). The Company expects advertising expense in 1996 to exceed
- ------
advertising expense in 1995.
Selling, Distribution and Administrative. Selling, distribution and
- ----------------------------------------
administrative expenses increased $3.1 million or approximately 72% to $7.5
million in the third quarter of 1996 from $4.4 million in the third quarter of
1995. Selling, distribution and administrative expenses increased $5.6 million
or approximately 49% to $17.1 million for the first nine months of 1996 from
$11.5 million for the first nine months of 1995. The increase in expenses
resulted from higher variable expenses associated with higher sales volume,
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 Nine months ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Interest income & 33 $ 24 $ 245 $ 64
Interest expense (206) (378) (516) (740)
</TABLE>
The decrease in interest expense and increase in interest income in the quarter
and nine months ended September 30, 1996 as compared to the comparable periods
in 1995 are 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.
PROVISION FOR INCOME TAXES:
The following table shows the provision for income taxes for the applicable
periods:
<TABLE>
<CAPTION>
(in thousands) Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Provision for income taxes $808 $ -- $282 $ --
</TABLE>
The provision for income taxes for the quarter and nine months ended September
30, 1996 is computed based on the projected annualized effective tax rate of 18%
applied to the pre-tax book income 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 tax-able income and potential
restrictions on the utilization of net operating loss carryovers.
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.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 1996, the Company had cash, cash equivalents and short-term
investments of approximately $4.6 million, a $1.6 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, offset by net cash used in operating activities of
approximately $8.9 million, net cash used in investing activities of
approximately $2.6 million, and repayment of bank loans of approximately
$767,000.
The positive cash flow in the first nine months of 1996 was largely the result
of the exercise of the IPO Warrants, the Company's net income before
depreciation and amortization of $3.1 million, and an increase in accounts
payable of approximately $3.4 million, partially offset by an increase in
inventory of approximately $8.3 million, an increase in prepaid expenses and
other current assets of approximately $4.3 million, an increase in property and
equipment of approximately $2.6 million, an increase in other assets of
approximately $1.6 million, a decrease in accrued liabilities of approximately
$821,000, a decrease in loans payable of approximately $767,000 and an increase
in accounts receivable of approximately $585,000.
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 (the "ARM Agreement") entered into with BNY
Financial Corporation ("BNY") in July 1995. The terms of the ARM Agreement, as
amended, provide that BNY 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 ARM Agreement
with BNY. The ARM 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.
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
12
<PAGE>
and accounts receivable. There can be no assurance that 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 July and September 1996, the Company's board of directors and shareholders,
respectively, approved (i) the Company's reincorporation in Delaware and (ii) 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 reincorporation
into Delaware was effected on October 25, 1996.
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 its first product in July 1993. Although the Company has achieved
approximately $168 million in cumulative net sales through September 30, 1996,
the Company incurred substantial operating losses in 1993 and 1994 and at
September 30, 1996 had an accumulated deficit of approximately $38.8 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, success-fully 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.
---------
Manufacturing of certain of these items, in particular V-Link, in commercial
------
quantities has not commenced or is just commencing. The Company expects that
completing the development and 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 manufacture of V-Link. If the
------
Company is not able to complete the development, tooling, manufacture and
successful marketing of its 1996
13
<PAGE>
product lines, the Company's operating results and financial condition would be
materially adversely affected.
Dependence on YES! Gear. The majority of the Company's current product lines
- -----------------------
are sold under the YES! Gear brand. Within YES! Gear, , the Company's Yak Bak
--------- -------
and Power Penz lines of products accounted for 62% and 15% of the Company's
----------
third quarter 1996 sales; the remaining YES! Gear products constituted 19% of
---------
the Company's sales in the third quarter of 1996. 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.
Just in Time Inventory; Compressed Sales Cycles. Most of the Company's most
- -----------------------------------------------
significant customers have adopted inventory management systems to track sales
of particular products and rely on reorders being filled rapidly by suppliers,
rather than maintaining large on-hand inventories to meet consumer demand. While
these systems reduce a retailer's investment in inventory, they increase
pressure on suppliers like the Company to fill orders promptly and shift a
significant portion of inventory risk to the supplier. In conjunction with an
apparent delay in the beginning of the holiday selling cycle in 1996 (caused to
a certain extent by the presidential election), the limited inventory carried by
the Company's customers may reduce or delay consumer sell through which in turn
could impair the Company's ability to obtain reorders of its product in
quantities necessary to permit the Company to achieve planned sales and income
growth. In addition, the Company may be required to incur substantial additional
expense to fill late reorders in order to ensure the product is available at
retail prior to Christmas; these may include drop-shipment expense and higher
advertising allowances which would otherwise be born by the Company's customers.
In the event that anticipated reorders do not materialize, the Company may also
incur increased inventory carrying costs.
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
14
<PAGE>
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 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
15
<PAGE>
or other events beyond the Company's control, including political or regulatory
changes.
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 People's 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.
Dependence on Restrictive Facility. The Company is dependent on the ARM
- ----------------------------------
Agreement with BNY Financial Corporation 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of shareholders held on September 24, 1996, the Company's
shareholders approved (i) the Company's reincorporation in Delaware and (ii) 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 number of shares
voting at that meeting were as follows:
<TABLE>
<CAPTION>
For Against Abstain Not Voted
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
Reincorporation in Delaware 8,516,253 304,129 25,717 0
Increase in 1995 Stock Option Plan 6,836,162 817,269 1,173,698 19,000
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
4.1(1) Certificate of Incorporation of Registrant.
4.2(1) Bylaws of Registrant.
11.1 Statement Regarding Computation of Net Loss Per Share
27.1 Financial Data Schedule for the quarter ended September 30,
1996.
----------
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form 8-B filed with Securities and
Exchange Commission on October 31, 1996.
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
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 November 6, 1996 /s/ Donald D. Kingsborough
---------------- ----------------------------------
Donald D. Kingsborough
Chief Executive Officer
(Principal Executive Officer)
Date November 6, 1996 /s/ Sol Kershner
---------------- ----------------------------------
Sol Kershner
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ------------
4.1(1) Certificate of Incorporation of Registrant.
4.2(1) Bylaws of Registrant.
11.1 Statement Regarding Computation of Net Loss Per Share
27.1 Financial Data Schedule for the quarter ended
September 30, 1996.
- ----------
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form 8-B filed with the Securities and Exchange
Commission on October 31, 1996.
19
<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 ended September 30, Six months ended September 30,
-------------------------------- ------------------------------
1996 1995 1996 1995
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 3,391 $ 3,080 $ 1,285 $ (817)
Computation of weighted average common and common
equivalent shares outstanding:
Weighted average common shares outstanding 14,005 8,984 13,843 3,963
Weighted average options outstanding 454 449 341
Weighted average warrants outstanding 455 1,317 455
Common equivalent shares from stock options
granted or issued during the twelve-month
period prior to the Company's proposed
initial public offering - 58
-------- -------- --------- --------
Shares used in computing net loss per share 14,913 10,750 14,638 4,021
======== ======== ========= ========
Net income (loss) per share $ 0.23 $ 0.29 $ 0.09 $ (0.20)
======== ======== ========= ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 0 4,595
<SECURITIES> 0 0
<RECEIVABLES> 0 27,327
<ALLOWANCES> 0 482
<INVENTORY> 0 20,380
<CURRENT-ASSETS> 0 60,702
<PP&E> 0 10,367
<DEPRECIATION> 0 6,798
<TOTAL-ASSETS> 0 66,113
<CURRENT-LIABILITIES> 0 22,225
<BONDS> 0 18
0 0
0 0
<COMMON> 0 82,612
<OTHER-SE> 0 (38,199)
<TOTAL-LIABILITY-AND-EQUITY> 0 66,113
<SALES> 29,636 50,122
<TOTAL-REVENUES> 29,636 50,122
<CGS> 16,475 27,668
<TOTAL-COSTS> 16,475 27,668
<OTHER-EXPENSES> 8,767 20,502
<LOSS-PROVISION> 106 175
<INTEREST-EXPENSE> 206 516
<INCOME-PRETAX> 4,199 1,567
<INCOME-TAX> 808 282
<INCOME-CONTINUING> 3,391 1,285
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,391 1,285
<EPS-PRIMARY> .23 .09
<EPS-DILUTED> .23 .09
</TABLE>
