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 APRIL 30, 1996.
[ ] 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 0-26374
PLAY BY PLAY TOYS & NOVELTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Texas 74-2623760
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4400 Tejasco
San Antonio, Texas 78218-0267
(Address of principal executive offices and zip code)
(210) 829-4666
(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 preceding 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 [ ].
The aggregate number of the Registrant's shares outstanding on June 13,
1996 was 4,841,100 Common Stock, no par value.
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of July 31, 1995 and
April 30, 1996 (Unaudited) ........................................ 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three Months and Nine Months Ended April 30, 1995 and 1996 ........ 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended April 30, 1995 and 1996 ......................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited) .... 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 Security Holders ................. 14
Item 6. Exhibits and Reports on Form 8-K .................................... 14
SIGNATURES ..................................................................... 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
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JULY 31, 1995 APRIL 30, 1996
------------- --------------
(UNAUDITED)
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Current assets:
Cash and cash equivalents .................................. $ 15,569,051 $ 2,195,409
Short-term investments ..................................... 973,168 --
Accounts and note receivable, less allowance for doubtful
accounts of $946,466 and $1,219,234 ...................... 9,815,032 13,978,012
Inventories ................................................ 13,791,984 25,543,727
Prepaid royalties .......................................... 139,311 936,371
Other current assets ....................................... 627,579 903,178
------------ ------------
Total current assets .................................... 40,916,125 43,556,697
Property and equipment, net .................................. 4,277,439 5,744,819
Net assets of discontinued operations ........................ 1,713,611 --
Other assets ................................................. 177,947 1,067,440
------------ ------------
Total assets ............................................ $ 47,085,122 $ 50,368,956
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to shareholder ............................... $ 2,500,000 $ --
Current maturities of long-term debt and capital lease
obligations .............................................. 315,161 165,998
Accounts payable, trade .................................... 9,784,180 8,647,053
Obligations under royalty agreements ....................... 504,151 929,657
Other accrued liabilities .................................. 292,041 845,226
Income taxes payable ....................................... 585,946 1,210,513
Deferred income taxes payable .............................. 511,285 468,199
------------ ------------
Total current liabilities ............................... 14,492,764 12,266,646
------------ ------------
Long-term liabilities:
Long-term debt and capital leases, net of current maturities 61,009 109,189
Deferred income tax payable ................................ 166,748 231,893
------------ ------------
Total long-term liabilities ............................. 227,757 341,082
------------ ------------
Total liabilities ....................................... 14,720,521 12,607,728
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock - no par value; 10,000,000 shares
authorized; no shares issued
Common stock - no par value; 20,000,000 shares
authorized; 4,565,700 and 4,841,100 shares issued ....... 1,000 1,000
Additional paid-in capital ................................. 30,171,150 33,501,247
Cumulative foreign currency translation adjustments ........ 127,913 (380,345)
Retained earnings .......................................... 2,114,538 4,639,326
------------ ------------
32,414,601 37,761,228
Less cost of stock in treasury - 24,600 shares ............. (50,000) --
------------ ------------
Total shareholders' equity .............................. 32,364,601 37,761,228
------------ ------------
Total liabilities and shareholders' equity .............. $ 47,085,122 $ 50,368,956
============ ============
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
---------------------------- ----------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
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Net sales .......................... $ 11,776,738 $ 14,301,523 $ 31,087,714 $ 49,763,965
Cost of sales ...................... 7,714,053 9,261,917 20,020,398 33,474,023
------------ ------------ ------------ ------------
Gross profit ....................... 4,062,685 5,039,606 11,067,316 16,289,942
Selling, general and administrative
expenses ......................... 3,068,451 3,446,090 8,766,348 11,233,343
------------ ------------ ------------ ------------
Income from operations ............. 994,234 1,593,516 2,300,968 5,056,599
Interest expense ................... (278,352) (67,282) (731,460) (176,767)
Other income, net .................. -- 63,400 -- 599,906
------------ ------------ ------------ ------------
Income before income tax ........... 715,882 1,589,634 1,569,508 5,479,738
Income tax provision ............... (261,573) (567,166) (567,555) (2,155,559)
------------ ------------ ------------ ------------
Income from continuing operations .. 454,309 1,022,468 1,001,953 3,324,179
Loss from discontinued operations .. (12,248) (676,353) (60,658) (799,391)
------------ ------------ ------------ ------------
Net income ......................... $ 442,061 $ 346,115 $ 941,295 $ 2,524,788
============ ============ ============ ============
Earnings (loss) per share
From continuing operations ....... $ 0.18 $ 0.21 $ 0.39 $ 0.69
From discontinued operations ..... (0.01) (0.14) (0.02) (0.17)
------------ ------------ ------------ ------------
Net earnings per share ........... $ 0.17 $ 0.07 $ 0.37 $ 0.52
============ ============ ============ ============
Weighted average shares outstanding: 2,541,100 4,841,100 2,541,100 4,842,669
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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NINE MONTHS ENDED APRIL 30,
---------------------------
1995 1996
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Cash flows provided by (used in) operating activities:
Net income .................................................. $ 941,295 $ 2,524,788
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Loss from discontinued operations ....................... -- 799,391
Depreciation and amortization ........................... 347,303 482,541
Provision for doubtful accounts receivable .............. 322,571 614,061
Deferred income tax provision ........................... 107,774 22,058
Gain on sale of property and equipment .................. (23,151) (3,169)
Stock distributed as compensation ....................... 14,915 --
Change in operating assets and liabilities:
Accounts and notes receivable ......................... (2,393,696) (3,619,393)
Inventories ........................................... (606,104) (11,751,743)
Prepaid royalties ..................................... (148,167) (797,060)
Prepaids and other assets ............................. (501,012) (581,091)
Obligations under royalty agreements .................. (176,671) 425,506
Accounts payable and accrued liabilities .............. 2,470,841 (533,939)
Income taxes payable .................................. (196,450) 624,567
----------- ------------
Net cash provided by (used in) operating activities 159,448 (11,793,483)
----------- ------------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment .......................... (769,301) (1,951,281)
Proceeds from sale of property and equipment ................ 84,851 14,493
Increase in net assets of discontinued operations ........... (56,005) --
Redemption of short-term investments ........................ -- 973,168
Payments for intangibles .................................... (2,712) (837,395)
----------- ------------
Net cash used in investing activities .............. (743,167) (1,801,015)
----------- ------------
Cash flows provided by (used in) financing activities:
Proceeds from exercise of over-allotment of common stock, net -- 3,380,097
Repayment of notes payable .................................. (1,133,275) (2,500,000)
Proceeds from long-term debt and capital lease obligations .. 1,613,423 67,041
Repayment of long-term debt and capital lease obligations ... (489,524) (218,024)
----------- ------------
Net cash provided by (used in) financing activities (9,376) 729,114
----------- ------------
Effect of foreign currency exchange rates .................... 269,293 (508,258)
----------- ------------
Decrease in cash and cash equivalents ........................ (323,802) (13,373,642)
Cash and cash equivalents at beginning of period ............. 323,802 15,569,051
----------- ------------
Cash and cash equivalents at end of period ................... $ -- $ 2,195,409
=========== ============
</TABLE>
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements and
related disclosures have been prepared in accordance with generally accepted
accounting principles applicable to interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The year-end
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation of the financial position and interim results
of Play By Play Toys & Novelties, Inc. (the "Company") as of and for the periods
presented have been included. Certain amounts in the financial statements for
the prior period have been reclassified to conform with the current year
presentation. Because the Company's business is seasonal, results for interim
periods are not necessarily indicative of those which may be expected for a full
year.
The financial information included herein should be read in conjunction
with the Company's consolidated financial statements and related notes in its
Annual Report on Form 10-K for the year ended July 31, 1995, which is on file
with the United States Securities and Exchange Commission (the "SEC").
Earnings per share is calculated using the weighted average number of
common shares and common share equivalents outstanding during the period.
Primary and fully diluted earnings per share are the same for all periods
presented. The Company's common share equivalents for the three and nine months
ended April 30, 1996, were -0- and 1,569, respectively, and were included in the
computation of earnings per share pursuant to the treasury stock method.
2. INVENTORIES
Inventories are comprised of the following:
JULY 31, APRIL 30,
1995 1996
----------- -----------
Purchased for resale ............... $13,659,003 $25,355,376
Operating supplies ................. 132,981 188,351
----------- -----------
Total .......................... $13,791,984 $25,543,727
=========== ===========
3. SHAREHOLDERS' EQUITY
Shareholders' equity consists of the following:
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CUMULATIVE
COMMON STOCK FOREIGN
--------------------- ADDITIONAL CURRENCY TOTAL
SHARES PAID-IN TRANSLATION RETAINED TREASURY SHAREHOLDERS'
OUTSTANDING AMOUNT CAPITAL ADJUSTMENTS EARNINGS STOCK EQUITY
----------- ------ ----------- ----------- ---------- --------- ------------
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Balance, August 1, 1995... 4,541,100 $1,000 $30,171,150 $127,913 $2,114,538 $(50,000) $ 32,364,601
Net income................ 2,524,788 2,524,788
Foreign currency
translation
adjustments............. (508,258) (508,258)
Retirement of treasury
stock................... (50,000) 50,000 -
Stock issued in over-
allotment of initial
public offering......... 300,000 3,380,097 3,380,097
--------- ------ ----------- ---------- ---------- --------- -----------
Balance, April 30, 1996 4,841,100 $1,000 $33,501,247 $ (380,345) $4,639,326 $ -- $37,761,228
========= ====== =========== ========== ========== ========= ===========
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In January 1996, the Company's Board of Directors retired all 24,600 shares
of common stock held as treasury stock, and such shares were canceled. As a
result, the $50,000 value assigned to treasury stock has been eliminated with a
corresponding decrease in the additional paid-in capital value as of January 31,
1996.
4. LOSS FROM DISCONTINUED OPERATIONS
Effective March 31, 1996, the Company sold Restaurants Universal Espana,
S.A. ("Restaurants Universal"), its European subsidiary that operated two
restaurants in Spain, to an unrelated third party, for 205,000,000 Spanish
pesetas or approximately U.S. $1.6 million. The sale resulted in a one time,
non-cash, non-recurring charge against earnings of approximately $652,000 in the
third quarter of fiscal 1996. The Company financed the balance of the sales
price of approximately $1.5 million with the acceptance of a non-interest
bearing note from the purchaser which calls for monthly principal payments based
on the greater of six percent of net annual sales of certain of the restaurants,
including the restaurants sold by the Company, or a series of minimum monthly
payments over a period of eight years. The note balance, net of imputed interest
at a rate of 10%, is included in Accounts and Note Receivable on the Condensed
Consolidated Balance Sheet.
The operating results and the loss on the sale of the restaurants have been
reported separately as a component of discontinued operations in the Condensed
Consolidated Statements of Operations for the three months and nine months ended
April 30, 1996. The Company realized no tax benefit from the loss on the sale of
Restaurants Universal. Further, the Company had not previously recorded a tax
benefit on the operating losses of Restaurants Universal. Prior period
consolidated financial statements have been restated to present Restaurants
Universal as a discontinued operation. Summarized results of operations for
Restaurants Universal are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 1996 APRIL 30, 1996
--------- --------------
Net sales ............... $ 379,863 $ 1,516,791
Cost and expenses ....... 403,844 1,663,810
--------- -----------
Net loss ................ $ (23,981) $ (147,019)
========= ===========
5. NOTES PAYABLE
Effective June 12, 1996, the maturity date of the $10.0 million Revolving
Credit and Term Loan Agreement with Letter of Credit Facility (the "Credit
Facility") with NationsBank of Texas, N.A., was extended through August 12,
1996. The Company had no borrowings outstanding under the Credit Facility at
April 30, 1996, however, $5.2 million in letters of credit and banker's
acceptances were outstanding under the Credit Facility.
The Company is negotiating a new credit facility to partially finance the
proposed acquisition of Ace Novelty Co., Inc., as well as to fund the Company's
future working capital needs and to provide for the issuance of letters of
credit. As a condition of the proposed new credit facility, the Chairman of the
Board will loan the Company on a subordinated basis up to $5.0 million.
Effective April 1, 1996, the Company entered into a Master Lease Finance
Agreement with BancBoston Leasing which provides up to $2.0 million in lease
financing. As of April 30, 1996, no amounts were outstanding under this
facility.
6. OTHER
Effective April 1996, the Company became a subscriber to the Workers'
Compensation Insurance Program in the State of Texas.
7. SUBSEQUENT EVENT
On May 1, 1996, the Company entered into an agreement with Ace Novelty Co.,
Inc. of Bellevue, Washington and certain of its subsidiaries and its
stockholders ("Ace") to acquire, through the Company's wholly owned subsidiary,
Ace Novelty Acquisition Co., Inc., certain of Ace's operating assets, business
operations and facilities, including four warehouses and distribution centers
located in Bellevue, Washington, Los Angeles, California, Chicago, Illinois and
Burnaby, British Columbia, Canada for approximately $44 million in cash, debt
and the assumption of certain liabilities. Although, the Company and Ace have
entered into a definitive Asset Purchase Agreement, consummation of the proposed
transaction is subject to a number of conditions, including, without limitation,
finalizing the Company's acquisition financing and obtaining licensor consents.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations are forward looking statements that involve risks and
uncertainties that could cause actual results to differ materially, including,
without limitation, consumation of the proposed acquisition of Ace, and its
successful integration as set forth in note 7 to the Company's unaudited
Condensed Consolidated Financial Statements attached hereto, relationships with
licensors, new product introduction, ability to manage growth, ability to source
products, international trade relations and management of quarter-to-quarter
results, and other risks detailed from time-to-time in the Company's SEC
reports, including the Form S-1 registration statement dated July 19, 1995 (see
"Risk Factors"). Updated information will be periodically provided by the
Company as required by the Securities Exchange Act of 1934.
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations as a
percentage of net sales for the periods indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
----------------- -----------------
1995 1996 1995 1996
----- ----- ----- -----
Net sales ....................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ................... 65.5 64.8 64.4 67.3
Gross profit .................... 34.5 35.2 35.6 32.7
Selling, general and
administrative expenses ....... 26.1 24.1 28.2 22.6
Income from operations .......... 8.4 11.1 7.4 10.2
Interest expense ................ (2.4) (0.5) (2.4) (0.4)
Other income, net ............... -- 0.4 -- 1.2
Income from continuing operations 3.9 7.1 3.2 6.7
Loss from discontinued operations (0.1) (4.7) (0.2) (1.6)
Net income ...................... 3.8 2.4 3.0 5.1
THREE MONTHS ENDED APRIL 30, 1996 AND 1995
NET SALES. Net sales for the quarter ended April 30, 1996 ("third
quarter of fiscal 1996") increased approximately 21.4% to approximately $14.3
million from approximately $11.8 million in the comparable period in fiscal
1995. The Company's toy operations accounted for approximately 93.6% or
approximately $13.4 million of net sales for the third quarter of fiscal 1996
and approximately 91.2% or approximately $10.7 million of net sales for the
third quarter of fiscal 1995. Net sales derived from vending operations
accounted for approximately 6.2% or approximately $890,000 of the Company's net
sales for the third quarter of fiscal 1996 as compared to approximately 8.1% or
approximately $959,000 of the Company's net sales for the third quarter of
fiscal 1995. Domestic net toy sales for the third quarter of fiscal 1996
increased approximately 20.5% to approximately $10.9 million, and international
net toy sales increased approximately 47.5% to approximately $2.4 million from
approximately $9.1 million and $1.6 million, respectively, in the comparable
quarter in fiscal 1995.
Net sales of licensed products for the third quarter of fiscal 1996
increased approximately 42.0% to approximately $7.1 million, from approximately
$5.0 million in the comparable period in fiscal 1995. Within licensed products
for the third quarter of fiscal 1996, sales of PLAY-FACES(R) increased
approximately 39.0% to approximately $2.4 million, from approximately $1.7
million in the comparable quarter in fiscal 1995. Net sales of non-licensed
products increased approximately 9.6% to approximately $6.3 million from
approximately $5.7 million in the comparable quarter in fiscal 1995. Within
non-licensed products, net sales of novelty items decreased approximately 14.4%
to approximately $860,000, from approximately $1.0 million in the comparable
period in fiscal 1995. Net sales of non-licensed stuffed toys increased
approximately 14.7% to approximately $5.4 million, from approximately $4.7
million in the comparable period in fiscal 1995.
Net toy sales to retail customers for the third quarter of fiscal 1996
and 1995 accounted for approximately 19.3% or approximately $2.8 million and
approximately 19.6% or approximately $2.3 million, respectively, of the
Company's net sales. The approximate 19.6% increase in sales to retail customers
from the third quarter of fiscal 1995 to the third quarter of fiscal 1996 is
primarily attributable to the continued growth in sales of the Play-Faces(R)
line. To date, substantially all sales to retail customers have been comprised
of licensed merchandise, primarily PLAY-FACES(R).
Net toy sales to amusement customers for the third quarter of fiscal
1996 and 1995 accounted for approximately 74.4% or approximately $10.6 million
and approximately 71.6% or approximately $8.4 million, respectively, of the
Company's net sales. The approximate 26.1% increase in sales volume is primarily
attributable to the continued growth in the Company's sales to amusement park
and arcade customers and an increase in sales to customers in Latin America. The
Company sells both licensed and non-licensed products to its amusement customers
for use principally as redemption prizes. Sales to amusement customers generally
result in higher gross margins than sales to retail customers, with gross
margins from the sale of licensed products to amusement customers generally
exceeding those of non-licensed products.
GROSS PROFIT. Gross profit increased approximately 24.0% to
approximately $5.0 million for the third quarter of fiscal 1996 from
approximately $4.1 million in the same period in fiscal 1995, due primarily to
the overall increase in the Company's net sales. Gross profit as a percentage of
net sales increased approximately 0.7% from approximately 34.5% for the third
quarter of fiscal 1995 to approximately 35.2% for the third quarter of fiscal
1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately 12.3% to approximately $3.4
million for the third quarter of fiscal 1996, from approximately $3.1 million in
the comparable period in fiscal 1995. This increase is primarily attributable to
increased selling expenses, including payroll related costs, sales commissions
associated with the increase in the Company's sales, increased costs associated
with the development of new products and product lines, increased costs related
to the production of merchandise catalogs, increased travel and entertainment
expenses related to the Company's expanded presence at toy industry tradeshows,
and increased occupancy costs relative to the establishment of a distribution
facility in Miami, Florida, the opening of an office in Hong Kong, and the
expansion of the Company's distribution facility in Europe. As a percentage of
net sales, these expenses decreased to approximately 24.1% from approximately
26.1%, due primarily to the Company's ability to service a greater volume of
sales without a corresponding increase in selling, general and administrative
expenses. The Company anticipates that selling, general and administrative
expenses will continue to increase in future periods as a result of the above
referenced factors as well as from the expansion of the Company's headquarters
facility, among other things.
INTEREST EXPENSE AND OTHER INCOME. Interest expense decreased
approximately 74.9% to approximately $67,000 for the third quarter of fiscal
1996, from approximately $278,000 in the comparable period in fiscal 1995 due to
the retirement of the Company's notes payable and substantially all long-term
debt during the fourth quarter of fiscal 1995 and the first quarter of fiscal
1996 with the net proceeds from the Company's initial public offering. The
balance of certain proceeds from the initial public offering was invested in
interest bearing accounts and short-term securities earning interest income of
approximately $63,000 for the third quarter of fiscal 1996.
LOSS FROM DISCONTINUED OPERATIONS. Effective March 31, 1996, the
Company sold Restaurants Universal Espana, S.A. ("Restaurants Universal"), a
European subsidiary that operated two restaurants in Spain, to an unrelated
third party, for 205,000,000 Spanish pesetas or approximately U.S. $1.6 million.
The Company incurred a loss from discontinued operations of approximately
$24,000 for the three months ended April 30, 1996. In addition, the sale of the
restaurants resulted in a one time, non-cash, non-recurring charge against
earnings of approximately $652,000 in the third quarter of fiscal 1996. The
Company financed the balance of the sales price of approximately $1.5 million
with the acceptance of a non-interest bearing note from the purchaser which
calls for monthly principal payments based on the greater of six percent of net
annual sales of certain of the restaurants, including the restaurants sold by
the Company, or a series of minimum monthly payments over a period of eight
years. The note balance, net of imputed interest at a rate of 10%, is reflected
in Accounts and Note Receivable on the Condensed Consolidated Balance Sheets.
The operating results and the loss on the sale of the restaurants have
been reported separately as a component of discontinued operations in the
Condensed Consolidated Statements of Operations. The Company realized no tax
benefit from the loss on the sale of Restaurants Universal. Further, the Company
had not previously recorded a tax benefit on the operating losses of Restaurants
Universal. Prior period consolidated financial statements have been restated to
present Restaurants Universal as a discontinued operation.
NINE MONTHS ENDED APRIL 30, 1996 AND 1995
NET SALES. Net sales for the nine months ended April 30, 1996 ("nine
months of fiscal 1996") increased approximately 60.1% to approximately $49.8
million, from approximately $31.1 million in the comparable period in fiscal
1995. The Company's toy operations accounted for approximately 94.6% or
approximately $47.1 million of net sales for the nine months of fiscal 1996 and
approximately 90.1% or approximately $28.0 million of net sales for the
comparable period of fiscal 1995. Net sales derived from vending operations
accounted for approximately 5.2% or approximately $2.6 million of the Company's
net sales for the nine months of fiscal 1996 as compared to approximately 9.0%
or approximately $2.8 million of the Company's net sales for the comparable
period in fiscal 1995. Domestic net toy sales for the nine months of fiscal 1996
increased approximately 70.6% or approximately $17.0 million, and international
toy sales increased approximately 53.5% or approximately $2.1 million, from
approximately $24.1 million and approximately $3.9 million, respectively, in the
comparable period in fiscal 1995.
Net sales of licensed products for the nine months of fiscal 1996
increased approximately 125.8% or approximately $16.2 million, from
approximately $12.9 million in the comparable period in fiscal 1995. Within
licensed products, sales of PLAY-FACES(R) increased approximately 276.5% or
approximately $10.4 million, from approximately $3.8 million in the comparable
period in fiscal 1995. Net sales of non-licensed products increased
approximately 18.9% or approximately $2.9 million, from approximately $15.1
million in the comparable period in fiscal 1995. Within non-licensed products,
net sales of novelty items increased by approximately 60.9% or approximately
$1.5 million, from approximately $2.4 million in the comparable period in fiscal
1995. Net sales of non-licensed stuffed toys increased approximately 10.9% or
approximately $1.4 million, from approximately $12.7 million in the comparable
period in fiscal 1995.
Net toy sales to retail customers for the nine months of fiscal 1996
and 1995 accounted for approximately 36.2% or approximately $18.0 million and
approximately 22.6% or approximately $7.0 million, respectively, of the
Company's net sales. The approximate 156.2% increase in sales to retail
customers in the nine months of fiscal 1995 compared to the nine months of
fiscal 1996 is primarily attributable to continued growth in sales of
PLAY-FACES(R) in part due to the expansion of the line to include animated
characters from The Walt Disney Company, including MICKEY MOUSE, MINNIE MOUSE
and WINNIE THE POOH, Marvel Entertainment Group, Inc.'s SPIDER-MAN(R) and other
Marvel characters, Paw's, Incorporated's GARFIELD(TM) and Time Warner
Entertainment Company, L.P.'s ANIMANIACS and the opening of several new retail
accounts, including Dayton Hudson's Target(R) and Kay Bee Toy stores. As a
result, the Company has experienced larger percentage increases in sales to
retail customers than to amusement customers during the nine months of fiscal
1996 as compared to the comparable period in 1995. To date, substantially all
sales to retail customers have been comprised of licensed merchandise, primarily
PLAY-FACES(R).
Net toy sales to amusement customers for the nine months of fiscal 1996
and 1995 accounted for approximately 58.4% or approximately $29.1 million and
approximately 67.4% or approximately $21.0 million, respectively, of the
Company's net sales. The increase is primarily attributable to the growth in the
Company's sales to fundraising and amusement crane merchandise customers and in
sales to customers in Latin America over the same period a year ago.
GROSS PROFIT. Gross profit increased approximately 47.2% to
approximately $16.3 million for the nine months of fiscal 1996 from
approximately $11.1 million in the nine months of fiscal 1995, due to the
overall increase in the Company's net sales. Gross profit as a percentage of net
sales decreased approximately 2.9% from approximately 35.6% to approximately
32.7% for the nine months of fiscal 1996. This decrease is primarily
attributable to a shift in sales mix, primarily in the first quarter of fiscal
1996, which resulted in a greater percentage of retail sales as compared to the
same period in 1995. The Company's sales to retail customers have generally
produced lower gross margins than sales to amusement customers. Competitive
pressures associated with sales to customers in the retail market, a greater
percentage of retail sales being shipped from domestic stock rather than sourced
directly from the Far East, higher raw material costs passed on to the Company
by manufacturers which were not passed on to the Company's customers, and
unexpected transportation and temporary storage costs caused by the delay of the
expansion of Company's Brooklyn and Los Angeles warehouse facilities contributed
to the overall decline in the Company's gross margins. The Company anticipates
that the above factors will continue to negatively pressure the Company's
margins for at least the next quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately 28.0% to approximately $11.2
million for the nine months of fiscal 1996 from approximately $8.8 million in
the comparable period in fiscal 1995. This increase is primarily attributable to
increased selling expenses, including increased payroll related costs, sales
commissions, increased costs associated with the development of new products and
product lines, increased costs related to the production of merchandise
catalogs, increased bad debt expense associated with the Company's increased
sales volume and increased occupancy costs relative to the establishment of a
distribution facility in Miami, Florida, the opening of an office in Hong Kong,
and the expansion the Company's distribution facility in Europe. As a percentage
of net sales, these expenses decreased to approximately 22.6% from approximately
28.2%, due primarily to the Company's increased retail sales which have less
selling and administrative costs as a percentage of net sales. Retail sales are
generally made on an FOB direct basis and thus have lower associated
administrative costs resulting in the favorable leveraging of selling, general
and administrative expenses. The Company anticipates that selling, general and
administrative expenses will continue to increase in future periods as a result
of the above referenced factors and the expansion of the Company's headquarters
facility, among other things.
INTEREST EXPENSE AND OTHER INCOME. Interest expense decreased
approximately 75.8% to approximately $177,000 for the nine months of fiscal 1996
from approximately $731,000 in the comparable period in fiscal 1995 due to the
retirement of the Company's note payable and substantially all long-term debt
during the fourth quarter of fiscal 1995 and the first quarter of fiscal 1996
with the net proceeds from the Company's initial public offering. Certain
proceeds from the initial public offering were invested in interest-bearing
accounts and short-term securities earning interest income of approximately
$480,000 for the nine months of fiscal 1996.
LOSS FROM DISCONTINUED OPERATIONS. Effective March 31, 1996, the
Company sold Restaurants Universal Espana, S.A. ("Restaurants Universal"), a
European subsidiary that operated two restaurants in Spain, to an unrelated
third party, for 205,000,000 Spanish pesetas or approximately U.S. $1.6 million.
The Company incurred a loss from discontinued operations of approximately
$147,000 for the nine months ended April 30, 1996. In addition, the sale of the
restaurants resulted in a one time, non-cash, non-recurring charge against
earnings of approximately $652,000 in the nine months of fiscal 1996. The
Company financed the balance of the sales price of approximately $1.5 million by
the acceptance of a non-interest bearing note from the purchaser which calls for
monthly principal payments based on the greater of six percent of net annual
sales of certain of the restaurants, including the restaurants sold by the
Company, or a series of minimum monthly payments over a period of eight years.
The note balance, net of imputed interest at a rate of 10%, is included in
Accounts and Note Receivable on the Condensed Consolidated Balance Sheet.
The operating results and the loss on the sale of the restaurants have
been reported separately as a component of discontinued operations in the
Condensed Consolidated Statements of Operations. The Company realized no tax
benefit from the loss on the sale of Restaurants Universal. Further, the Company
had previously not recorded a tax benefit on the operating losses of Restaurants
Universal. Prior period consolidated financial statements have been restated to
present Restaurants Universal as a discontinued operation.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1996, the Company's working capital was approximately
$31.3 million, compared to approximately $26.4 million at July 31, 1995. The
increase is primarily attributable to the exercise of the over-allotment option
by the underwriters of the Company's initial public offering in August 1995.
The Company's operating activities used net cash of approximately $11.8
million in the nine months of fiscal 1996 and provided net cash of approximately
$159,000 in the nine months of fiscal 1995. The Company's operations used $11.8
million in cash in the nine months ended April 30, 1996, due primarily to
changes in accounts and notes receivable, including the acceptance of a $1.5
million note receivable from the purchaser of the discontinued operations,
inventory, accounts payable and accrued liabilities offset by net income and
changes in income taxes payable. The Company's inventory levels have continued
to increase since July 31, 1995 to meet projected demand and increased sales
level.
Net cash used in investing activities in the nine months of fiscal 1996
was approximately $1.8 million and net cash used in investing activities for the
nine months of fiscal 1995 was approximately $743,000. For the nine months of
fiscal 1996, net cash used in investing activities consisted principally of the
purchase of property and equipment of approximately $1.9 million, related
primarily to the expansion of the Company's office and distribution facilities
and upgrades to the Company's computer systems, and deferred acquisition costs
totaling $784,000 incurred by the Company relative to the proposed acquisition
of Ace offset by the redemption of short-term investments of approximately
$973,000. For the nine months of fiscal 1995, net cash used in investing
activities consisted primarily of the purchase of property and equipment of
approximately $769,000.
Net cash provided by financing activities in the nine months of fiscal
1996 was approximately $729,000 and net cash used in financing activities in the
nine months of fiscal 1995 was approximately $9,000. In the nine months of
fiscal 1996, cash provided by financing activities consisted principally of the
receipt of the net proceeds from the issuance of common stock in connection with
the exercise of the over-allotment option by the underwriters of the Company's
initial public offering, net of retirements of outstanding debt and repayment of
capital lease obligations. In the nine months of fiscal 1995, cash used in
financing activities consisted primarily of repayments of borrowings and capital
lease obligations.
Since July 1995, the Company has experienced an unfavorable foreign
currency translation impact relative to its European toy operations due
primarily to the weakening of the Spanish peseta against the U.S. dollar. The
net impact of this decline is reflected in the Company's Condensed Consolidated
Balance Sheets under the caption Cumulative Foreign Currency Translation
Adjustments.
The Company is negotiating a new credit facility to partially finance
the acquisition of Ace, as well as to fund the Company's working capital needs.
As a condition of the proposed new credit facility, the Chairman of the Board
will loan the Company on a subordinated basis up to $5.0 million. The Company
believes that its current available cash, net cash provided by operating
activities and borrowings under the Company's current Credit Facility and new
credit facility will be sufficient to meet the Company's cash requirements
through fiscal 1997.
SEASONALITY
Both the retail and amusement toy industries are inherently seasonal.
Generally, the Company's sales to the amusement industry have been highest
during the third and fourth fiscal quarters, and collections for those sales
have been highest during the succeeding fiscal quarters. The Company's sales to
the retail toy industry have been highest during its first and fourth fiscal
quarters, and collections from those sales have been highest during the
succeeding fiscal quarters. The Company's working capital needs and borrowings
to fund those needs have been highest during the third and fourth fiscal
quarters. As a result of the Company's increased sales to the amusement industry
and increased penetration of the retail market, the Company anticipates that its
sales, collections and borrowings to fund working capital needs may become more
significant in the third and fourth fiscal quarters.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Reference is made to the Company's Form 10-Q for the quarterly period
ended January 31, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) REPORTS ON FORM 8-K.
A Report on Form 8-K, dated May 14, 1996, was filed
electronically on May 15, 1996, reporting Item 5. Other Events, in connection
with the agreement between the Company and Ace Novelty Co., Inc. of Bellevue,
Washington and certain of its subsidiaries and its stockholders ("Ace") to
acquire, through its wholly owned subsidiary, Ace Novelty Acquisition Co., Inc.,
certain of the assets and assume certain of the liabilities of Ace. Consummation
of the proposed transaction is subject to finalizing the Company's acquisition
financing and obtaining licensor consents.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 14th day of June 1996.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By: /s/ JOE M. GUERRA
Joe M. Guerra
CHIEF FINANCIAL OFFICER,
TREASURER AND SECRETARY
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED STATEMENTS OF
OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE NINE MONTHS
ENDED APRIL 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> APR-30-1996
<CASH> 2,195,409
<SECURITIES> 0
<RECEIVABLES> 15,197,246
<ALLOWANCES> 1,219,234
<INVENTORY> 25,543,727
<CURRENT-ASSETS> 43,556,697
<PP&E> 7,259,910
<DEPRECIATION> 1,515,091
<TOTAL-ASSETS> 50,368,956
<CURRENT-LIABILITIES> 12,266,646
<BONDS> 0
1,000
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 50,368,956
<SALES> 49,763,965
<TOTAL-REVENUES> 49,763,965
<CGS> 33,474,023
<TOTAL-COSTS> 33,474,023
<OTHER-EXPENSES> 11,233,343
<LOSS-PROVISION> 573,369
<INTEREST-EXPENSE> 176,767
<INCOME-PRETAX> 5,479,738
<INCOME-TAX> 2,155,559
<INCOME-CONTINUING> 3,324,179
<DISCONTINUED> (799,391)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,524,788
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
</TABLE>
