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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 JANUARY 31, 1997.
[ ] 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 March 10, 1997
was 4,881,100 shares of Common Stock, no par value.
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<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of January, 31 1997 (unaudited)
and July 31, 1996 3
Consolidated Statements of Operations (unaudited) for the
Three Months and Six Months Ended January 31, 1997 and 1996 4
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended January 31, 1997 and 1996 5
Notes to Consolidated Financial Statements (unaudited) 6
Risk Factors 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
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
(a) Exhibit 27 - Financial Data Schedule E-1
(b) Report on Form 8-K/A. An amendment to the current report
filed, with respect to the acquisition of Ace Novelty Co.
Inc., was filed on September 3, 1996.
SIGNATURES 15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 31, 1997 JULY 31, 1996
---------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................... $ 366,799 $ 531,040
Accounts and notes receivable, less allowance for
doubtful accounts of $2,135,443 and $1,621,603 ......................... 21,834,657 29,306,584
Inventories ................................................................. 38,156,918 42,447,111
Other current assets ........................................................ 4,657,368 4,203,291
------------- -------------
Total current assets ................................................... 65,015,742 76,488,026
Property and equipment, net ...................................................... 15,460,371 15,130,186
Goodwill, less accumulated amortization
of $183,378 and $17,943 ..................................................... 12,152,899 11,024,013
Other assets ..................................................................... 1,764,312 1,920,689
------------- -------------
Total assets ........................................................... $ 94,393,324 $ 104,562,914
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft .............................................................. $ 1,280,528 $ 2,357,436
Notes payable to banks and others ........................................... 16,786,815 21,775,809
Note payable to shareholder ................................................. 3,000,000 3,000,000
Current maturities of long-term debt ........................................ 3,543,407 4,518,411
Current obligations under capital leases .................................... 542,312 379,534
Accounts payable, trade ..................................................... 12,759,963 15,334,237
Other accrued liabilities ................................................... 4,476,939 5,021,357
Income taxes payable ........................................................ 1,328,826 1,776,737
Deferred income tax payable ................................................. 466,243 223,459
------------- -------------
Total current liabilities .............................................. 44,185,033 54,386,980
------------- -------------
Long-term liabilities:
Long-term debt, net of current maturities ................................... 9,285,552 10,434,378
Obligations under capital leases ............................................ 773,916 661,826
Deferred income tax payable ................................................. 465,311 379,661
------------- -------------
Total liabilities ...................................................... 54,709,812 65,862,845
------------- -------------
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; 4,881,100 and 4,841,100 shares issued ...................... 1,000 1,000
Additional paid-in capital .................................................. 34,130,347 33,746,597
Cumulative foreign currency translation adjustments ......................... (1,095,004) (414,306)
Retained earnings ........................................................... 6,647,169 5,366,778
------------- -------------
Total shareholders' equity ............................................. 39,683,512 38,700,069
------------- -------------
Total liabilities & shareholders' equity ............................... $ 94,393,324 $ 104,562,914
============= =============
</TABLE>
The accompany notes are an integral part of the Consolidated Financial
Statements.
3
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31, SIX MONTHS ENDED JANUARY 31,
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ............................................. $ 22,039,390 $ 12,022,872 $ 61,929,911 $ 35,462,442
Cost of sales ......................................... 13,825,327 7,809,139 42,301,198 24,212,106
------------ ------------ ------------ ------------
Gross profit ..................................... 8,214,063 4,213,733 19,628,713 11,250,336
Selling, general and administrative
expenses ............................................ 7,536,477 3,312,236 15,472,513 7,787,253
------------ ------------ ------------ ------------
Operating income ................................. 677,586 901,497 4,156,200 3,463,083
Interest expense ...................................... (996,520) (35,988) (2,104,217) (109,485)
Other income .......................................... 9,698 245,675 9,136 536,506
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income tax ............................. (309,236) 1,111,184 2,061,119 3,890,104
Income tax benefit (provision) ........................ 143,710 (469,236) (780,728) (1,588,393)
------------ ------------ ------------ ------------
Income (loss) from continuing operations .............. (165,526) 641,948 1,280,391 2,301,711
Discontinued operations:
Loss from discontinued operations ................ -- (32,585) -- (123,038)
------------ ------------ ------------ ------------
Net income (loss) ................................ $ (165,526) $ 609,363 $ 1,280,391 $ 2,178,673
============ ============ ============ ============
Income (loss) per share:
Continuing operations ............................ $ (0.03) $ 0.14 $ 0.26 $ 0.48
Discontinued operations .......................... -- (0.01) -- (0.03)
------------ ------------ ------------ ------------
Net income (loss) per share ........................... $ (0.03) $ 0.13 $ 0.26 $ 0.45
============ ============ ============ ============
Weighted average shares outstanding ................... 4,881,100 4,841,100 4,861,100 4,841,100
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
4
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................................... $ 1,280,391 $ 2,178,673
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization ..................................................... 1,011,323 424,372
Provision for doubtful accounts receivable ........................................ 568,156 614,062
Deferred income tax provision ..................................................... 328,434 257,618
Stock distributed as compensation ................................................. 38,750 --
Gain on sale of property and equipment ............................................ (9,923) (2,718)
Change in operating assets and liabilities (net of TLC acquisition):
Accounts and notes receivable ................................................... 7,994,111 (170,353)
Inventories ..................................................................... 5,070,986 (11,152,658)
Prepaids and other assets ....................................................... (291,618) (1,136,593)
Accounts payable and accrued liabilities ........................................ (8,037,180) 1,696,879
Income taxes payable ............................................................ (461,852) 86,867
------------ ------------
Net cash provided by (used in) operating
activities .................................................................. 7,491,578 (7,203,851)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ................................................... (1,085,767) (634,226)
Proceeds from sale of property and equipment ......................................... -- 14,493
Investment of TLC, net of cash ....................................................... 124,083 --
Redemption of short-term investments ................................................. -- 973,168
Payments for intangible assets ....................................................... (13,981) (45,715)
------------ ------------
Net cash provided by (used in) investing activities .......................... (975,665) 307,720
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of over-allotment of common stock, net ........................ -- 3,380,097
Repayment of Revolving Credit Agreement, net ......................................... (4,988,994) --
Proceeds from long-term debt ......................................................... 572,775 --
Repayment of long-term debt .......................................................... (2,221,975) (2,500,000)
Repayment of capital lease obligations ............................................... (339,103) --
Decrease in bank overdraft ........................................................... 1,076,908 --
Repayment of long-term debt and capital lease obligations ............................ -- (227,236)
------------ ------------
Net cash provided by (used in) financing activities .......................... (5,900,389) 652,861
------------ ------------
Effect of foreign currency exchange rates .............................................. (779,765) (412,264)
------------ ------------
Decrease in cash and cash equivalents .................................................. (164,241) (6,655,534)
Cash and cash equivalents at beginning of period ....................................... 531,040 15,569,051
------------ ------------
Cash and cash equivalents at end of period ............................................. $ 366,799 $ 8,913,517
============ ============
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
5
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited 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 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. and Subsidiaries (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 fiscal year ended July 31, 1996, which is on
file with the United States Securities and Exchange Commission.
Earnings per share is calculated using the weighted average number of
common shares and common share equivalents outstanding during the period.
2. INVENTORIES
Inventories are comprised of the following:
JANUARY 31, JULY 31,
1997 1996
Purchased for resale $37,863,924 $42,303,526
Operating supplies 292,994 143,585
----------- -----------
Total $38,156,918 $42,447,111
=========== ===========
During the three-month period ended January 31, 1997, the Company recorded
an inventory adjustment of approximately $525,000 for which some portion may
have related to the quarter ended October 31, 1996.
6
<PAGE>
3. ACQUISITIONS
In November 1996, the Company, through its wholly-owned subsidiary Play By
Play Toys & Novelties Europe S.A., acquired all of the outstanding capital stock
of The TLC Gift Company Limited ("TLC") based in Doncaster, England. The Company
effected the purchase of TLC by issuing 40,000 shares of restricted common stock
to the sellers of TLC. The shares had a fair market value of $345,000 at the
date of acquisition. The acquisition has been accounted for using the purchase
method of accounting, and, accordingly, the purchase price has been allocated to
the assets purchased and the liabilities assumed based on the fair values at the
date of acquisition. The Company acquired assets with an approximate value of
$2.1 million and assumed liabilities of approximately $2.7 million, resulting in
goodwill of approximately $1 million which will be amortized on a straight-line
basis over 20 years. The operating results have been included in the Company's
consolidated financial statements since the date of acquisition.
Relative to the acquisition of Ace Novelty Co., Inc. at June 20, 1996, the
Company has adjusted the purchase price allocation and expects to continue
adjusting such purchase price allocation during the allocation period as
contingent assets and liabilities are determined or realized in accordance with
Statement of Financial Accounting Standards No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises." The Company increased
goodwill approximately $2.3 million during the six-month period ended January
31, 1997 as a result of such purchase price reallocation.
4. STOCK OPTIONS
During the second quarter of fiscal 1997, the Compensation Committee
granted incentive stock options to purchase 153,000 shares of Common Stock under
the Play By Play Toys & Novelties, Inc. 1994 Incentive Plan (the "Incentive
Plan") and nonqualified stock options outside of the Incentive Plan to purchase
191,500 shares of Common Stock to certain officers and employees of the Company.
The options generally have an immediate to four-year vesting period and are
exercisable at prices ranging from $8.00 to $12.10 which were 100% to 110% of
the closing sales price of the Common Stock on the date of grant.
In addition to the stock options granted as described in the preceding
paragraph, the Company granted nonqualified stock options outside of the
Incentive Plan to purchase 50,000 shares of Common Stock to the directors of the
Company. These stock options were granted at an exercise price of $11.00 which
was 100% of the closing sales price of the Common Stock on the date of grant.
One-half of these options vest six months from the date of grant and one-half
vest on the first anniversary of the date of grant.
7
<PAGE>
RISK FACTORS
THIS FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, WITHOUT LIMITATION, THE SUCCESSFUL INTEGRATION OF
ACE NOVELTY CO. INC. ("ACE") AND THE TLC GIFT COMPANY LIMITED ("TLC"),
COMPETITIVE AND ECONOMIC FACTORS, PRICE CHANGES BY COMPETITORS, RELATIONSHIPS
WITH LICENSORS, ABILITY TO MANAGE GROWTH, ABILITY TO SOURCE PRODUCTS,
INTERNATIONAL TRADE RELATIONS, MANAGEMENT OF QUARTER-TO-QUARTER RESULTS,
INCREASES IN COSTS OF RAW MATERIALS, TIMING OF TECHNOLOGICAL ADVANCES BY THE
COMPANY AND ITS COMPETITORS, LACK OF ACCEPTANCE BY CONSUMERS OF NEW PRODUCTS,
AND THE OTHER FACTORS DISCUSSED IN THIS SECTION AND ELSEWHERE HEREIN, AND OTHER
RISKS DETAILED FROM TIME-TO-TIME IN THE COMPANY'S REPORTS FILED WITH THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION, INCLUDING, WITHOUT LIMITATION, THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JULY 31, 1996.
UPDATED INFORMATION WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY
THE SECURITIES EXCHANGE ACT OF 1934.
RELIANCE ON LICENSE AGREEMENTS. Sales of licensed products accounted for
approximately 49.7% and 53.9% of the Company's net sales during the second
quarter and the first six months of fiscal 1997, respectively. Sales of products
developed and sold under the Company's licenses from The Coca-Cola Company
accounted for approximately 4.7% and 5.7%, those from LOONEY TUNES' characters
accounted for approximately 25.0% and 23.7% and those from Disney characters
accounted for approximately 6.7% and 8.9% of the Company's net sales during the
second quarter and first six months of fiscal 1997, respectively. The Company's
existing license agreements generally have terms ranging from one to two years,
and approximately 69% and 31% of such licenses terminate during fiscal 1997 and
1998, respectively. In the past, the Company has been successful in renewing its
significant licenses and none of its significant licenses have been terminated;
however, there can be no assurance that the Company will be able to procure new
license agreements, renew existing license agreements, or that existing licenses
will not be terminated. In addition, as a result of increased competition for
licenses, the Company has in certain instances been required, and anticipates a
continued requirement in the future, to pay higher royalties and higher minimum
guaranty payments to obtain or renew licenses. There can be no assurance that
the Company will be able to obtain additional or renew existing licenses for
characters or trademarks on commercially reasonable terms. The Company's license
agreements limit both the products that can be manufactured thereunder and the
territories and markets in which such products may be marketed. Certain of the
Company's license agreements require licensor approval before merger,
reorganization, certain stock sales, certain management changes or assignment of
the license, which could affect the growth of the Company. In addition, the
Company's licensors typically have the right to approve, at their sole
discretion, the products developed by the Company and the third party
manufacturer of such products. Obtaining such approvals may be time consuming
and could adversely affect the timing of the introduction of new products. All
of the Company's significant licenses are non-exclusive. Licenses that overlap
the Company's licenses with respect to products, geographic areas and markets
have been and may continue to be granted to competitors of the Company.
INTEGRATION OF ACQUISITIONS. In June and November 1996, the Company
acquired Ace and TLC, respectively, from unrelated parties. The Company acquired
substantially all of the operating assets, business operations and facilities of
the companies, including five warehouse and distribution centers. There can be
no assurance that the Company will be able to successfully integrate and operate
Ace or TLC, nor that the resulting integration expense will not have a
materially adverse effect upon the Company's operating results.
8
<PAGE>
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, THE SUCCESSFUL INTEGRATION OF ACE NOVELTY CO., INC. AND THE
TLC GIFT COMPANY LIMITED, COMPETITIVE AND ECONOMIC FACTORS, PRICE CHANGES BY
COMPETITORS, RELATIONSHIPS WITH LICENSORS, NEW PRODUCT INTRODUCTION, ABILITY TO
MANAGE GROWTH, ABILITY TO SOURCE PRODUCTS, INTERNATIONAL TRADE RELATIONS AND
MANAGEMENT OF QUARTER TO QUARTER RESULTS, INCREASES IN COSTS OF RAW MATERIALS,
TIMING OF TECHNOLOGICAL ADVANCES BY THE COMPANY AND ITS COMPETITORS, LACK OF
ACCEPTANCE BY CONSUMERS OF NEW PRODUCTS, 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.
SEASONALITY
Both the retail and amusement toy industries are inherently seasonal.
Generally, in the past, 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.
RESULTS OF OPERATIONS
The following unaudited table sets forth the Company's results of operations
as a percentage of net sales for the periods indicated below:
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
--------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 62.7 65.0 68.3 68.3
Gross profit 37.3 35.0 31.7 31.7
Selling, general and
administrative expenses 34.2 27.5 25.0 22.0
Operating income 3.1 7.5 6.7 9.8
Interest expense (4.5) (0.3) (3.4) (0.3)
Other income - 2.0 - 1.5
Net income (loss) (0.8) 5.1 2.1 6.1
3
<PAGE>
THREE MONTHS ENDED JANUARY 31, 1997 AND 1996
NET SALES. Net sales for the three months ended January 31, 1997 increased
approximately 83.3% to approximately $22.0 million from approximately $12.0
million in the comparable period in fiscal 1996. The 83.3% increase in net sales
is primarily attributable to the acquisition of Ace, which contributed
approximately $6.9 million in net sales for the second quarter of fiscal 1997.
The Company's toy operations accounted for 96.5% or approximately $21.2 million
of net sales for the second quarter of fiscal 1997 and 92.9% or approximately
$11.2 million of net sales for the second quarter of fiscal 1996. Net sales
derived from vending operations accounted for 3.4% or approximately $760,000 of
the Company's net sales for the second quarter of fiscal 1997 as compared to
6.9% or approximately $831,000 of the Company's net sales for the second quarter
of fiscal 1996. Domestic net toy sales for the second quarter of fiscal 1997
increased 79.3% or approximately $7.5 million, and international net toy sales
increased 155.7% or approximately $2.5 million from approximately $9.6 million
and $1.6 million, respectively, in the comparable quarter in fiscal 1996.
Net sales of licensed products for the three months ended January 31, 1997
increased approximately 81.2% or approximately $4.9 million from approximately
$6.0 million in the comparable period in fiscal 1996. Within licensed products,
for the second quarter of fiscal 1997, LOONEY TUNES and Time Warner
Entertainment Company, L.P. licensed product sales increased approximately
321.1% or approximately $4.2 million and 1170.2% or approximately $1.4 million,
respectively, from approximately $1.3 million and $117,000, respectively, in the
comparable period in fiscal 1996. This increase in licensed products was offset
by a decrease in sales of The Coca-Cola Company licensed products of
approximately 41.5% or approximately $700,000. The approximate 81.2% increase in
licensed product sales is primarily attributable to the acquisition of Ace,
which contributed approximately $3.5 million of the increase in net sales of
licensed products, and the strong European market, which increased approximately
$1.6 million from the comparable period in fiscal 1996. Net sales of
non-licensed products increased 101.2% or approximately $5.2 million from
approximately $5.1 million in the comparable quarter in fiscal 1996. Within
non-licensed products, Ace contributed net sales of approximately $3.4 million
for the second quarter of fiscal 1997. Net sales of non-licensed stuffed toys
increased 128.6% or approximately $5.3 million, from approximately $4.2 million
in the comparable period in fiscal 1996. This increase in non-licensed stuffed
product sales was offset by a decrease in the sale of non-licensed novelty items
of 15.7% or approximately $153,000.
Net toy sales to retail customers for the second quarter of fiscal 1997
and 1996 accounted for 34.0% or approximately $7.5 million and 31.6% or
approximately $3.8 million, respectively, of the Company's net sales. The
approximate 97.5% increase in sales to retail customers from the second quarter
of fiscal 1996 to the second quarter of fiscal 1997 is primarily attributable to
the continued growth in domestic licensed products sales of 65.9% or
approximately $2.1 million and international licensed products sales of 276.5%
or approximately $1.6 million. Licensed stuffed toy sales increased 143.2% or
$4.8 million compared to $3.4 million in the comparable quarter in fiscal 1996.
Net toy sales to amusement customers for the second quarter of fiscal 1997
and 1996 accounted for 62.5% or approximately $13.7 million and 61.4% or
approximately $7.4 million, respectively, of the Company's net sales. The
approximate 86.7% increase in dollar volume is primarily attributable to the
acquisition of Ace, which accounted for approximately $6.4 million.
GROSS PROFIT. Gross profit increased approximately 94.9% to approximately
$8.2 million for the second quarter of fiscal 1997 from approximately $4.2
million in the same period in fiscal 1996, due primarily to the overall increase
in the Company's net sales. Gross profit as a percentage of net sales increased
approximately 2.3% from 35.0% to approximately 37.3% for the second quarter of
fiscal 1997. This increase is primarily attributable to increased European sales
which carry a higher profit margin, and better profit margins domestically due
to increased manufacturing volumes. Additionally, the Company
10
<PAGE>
recorded an inventory adjustment during the second quarter of fiscal 1997 of
approximately $525,000 for which some portion may relate to the first quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 127.5% to approximately $7.5 million for the
second quarter of fiscal 1997 from approximately $3.3 million in the comparable
period in fiscal 1996. This increase is primarily attributable to increased
selling expenses of 58.0% or approximately $2.4 million, including payroll
related costs, sales commissions associated with the increase in the Company's
sales, increased costs related to the production of merchandise catalogs, and
increased occupancy costs relative to the establishment of a distribution
facility in Miami, Florida, an office in Hong Kong, the expansion of the
Company's distribution facility in Europe, the addition of four distribution and
warehouse facilities associated with the acquisition of Ace and one distribution
facility associated with the acquisition of TLC. As a percentage of net sales,
these expenses increased to approximately 34.2% from approximately 27.5%, due
primarily to the fixed administrative costs associated with the larger
infrastructure described above. With the acquisition of Ace, the higher
administrative costs as a percentage of sales compared to the prior years is
expected during the second quarter as such quarter is between major retail and
amusement/carnival selling seasons. Accordingly, the fixed overhead costs are a
much larger percentage of sales than the pre-acquisition period. However, during
the Company's peak sales period, the third and fourth quarters, the general and
administrative costs are expected to shrink substantially as a percentage of
sales.
INTEREST EXPENSE AND OTHER INCOME. Interest expense increased 2669.0% to
approximately $997,000 for the second quarter of fiscal 1997 from approximately
$36,000 in the comparable period in fiscal 1996 as a result of the financing of
the acquisition of Ace. Other income decreased 96.1% or approximately $236,000
primarily due to the interest earned on interest bearing accounts and short-term
securities during the second quarter of fiscal 1996, such cash equivalents, were
used to partially fund the acquisition of Ace.
SIX MONTHS ENDED JANUARY 31, 1997 AND 1996
NET SALES. Net sales for the six months ended January 31, 1997 increased
approximately 74.6% to approximately $61.9 million from approximately $35.5
million in the comparable period in fiscal 1996. The approximate 74.6% increase
in net sales is primarily attributable to the acquisition of Ace, which
contributed approximately $23.5 million. The Company's toy operations accounted
for 97.4% or approximately $60.3 million of net sales for the first half of
fiscal 1997 and 95.0% or approximately $33.7 million of net sales for the first
half of fiscal 1996. Net sales derived from vending operations accounted for
2.5% or approximately $1.6 million of the Company's net sales for the first half
of fiscal 1997 as compared to 4.8% or approximately $1.7 million of the
Company's net sales for the comparable period in fiscal 1996. Domestic net toy
sales for the first half of fiscal 1997 increased 73.6% or approximately $22.2
million, and international toy sales increased 126.1% or approximately $4.4
million from approximately $30.2 million and approximately $3.5 million,
respectively, in the comparable period in fiscal 1996.
Net sales of licensed products for the first half of fiscal 1997 increased
51.3% or approximately $11.3 million, from approximately $22.0 million in the
comparable period in fiscal 1996. Within licensed products, for the first half
of fiscal 1997, LOONEY TUNES and Time Warner Entertainment Company, L.P.
licensed products sales increased 146.6% or approximately $8.7 million and
492.3% or approximately $3.4 million, respectively, from approximately $6.0
million and approximately $683,000, respectively, in the comparable period in
fiscal 1996. This increase in sales of licensed products was offset by a
decrease in sales of The Coca-Cola Company licensed products of 31.9% or
approximately $1.7 million. The increase in licensed product sales is primarily
attributable to the acquisition of Ace, which accounted for approximately $9.9
million of the increase in net sales of licensed products, and strong European
market, which accounted for approximately $3.4 million, an approximate 232.9%
increase from the comparable period in fiscal 1996. The increase in net sales of
licensed products is partially offset by a decrease of 18.4% or approximately
$2.4 million in PLAY-FACES(R) product sales. Net sales of non-licensed products
increased
11
<PAGE>
131.5% or approximately $15.3 million from approximately $11.6 million in the
comparable period in fiscal 1996. Within non-licensed products, Ace's net sales
accounted for approximately $13.7 for the first half of fiscal 1997. Net sales
of non-licensed stuffed toys increased 179.7% or approximately $15.5 million,
from approximately $8.6 million in the comparable period in fiscal 1996. This
increase in non-licensed product sales was offset by a decrease in the sale of
non-licensed novelty items of 5.0% or approximately $153,000.
Net toy sales to retail customers for the first half of fiscal 1997 and
1996 accounted for 30.5% or approximately $18.9 million and 43.1% or
approximately $15.3 million, respectively, of the Company's net sales. The
approximate 23.5% increase in sales to retail customers from the first half of
fiscal 1996 to the first half of fiscal 1997 is primarily attributable to the
continued growth in international sales of 232.9% or approximately $2.4 million.
The decrease in retail sales as a percentage of total sales from the first half
of fiscal 1996 to 1997 is principally due to the fact that Ace is predominantly
a supplier to the amusement/carnival industry whereas the Company has a more
even sales mix of retail and amusement customers.
Net toy sales to amusement customers for the first half of fiscal 1997 and
1996 accounted for 67.0% or approximately $41.5 million and 52.0% or
approximately $18.4 million, respectively, of the Company's net sales. The
approximate 125.1% increase in dollar volume is primarily attributable to the
acquisition of Ace, which accounted for approximately $23.0 million, and strong
European market, which accounted for approximately $4.5 million, an approximate
82.1% increase from the comparable period in fiscal 1996. The increase in net
toy sales to amusement customers for the first half of fiscal 1997 was partially
offset by a decrease in the crane division's sales of 39.9% or approximately
$3.3 million from the comparable period in fiscal 1996.
GROSS PROFIT. Gross profit increased approximately 74.5% to approximately
$19.6 million for the first half of fiscal 1997 from approximately $11.3 million
in the first half of fiscal 1996, due to the overall increase in the Company's
net sales. Gross profit as a percentage of net sales remained flat for the first
half of fiscal 1997 from the comparable period in fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately 98.7% to approximately $15.5
million for the first half of fiscal 1997 from approximately $7.8 million in the
comparable period in fiscal 1996. This increase is primarily attributable to
increased selling expenses of 66.3% or approximately $5.1 million, including
increased payroll related costs, sales commissions associated with the increase
in the Company's sales, increased costs related to the production of merchandise
catalogs, and increased occupancy costs relative to the establishment of a
distribution facility in Miami, Florida, an office in Hong Kong, the expansion
of the Company's distribution facility in Europe, the addition of four
distribution and warehouse facilities associated with the acquisition of Ace and
one distribution facility associated with the acquisition of TLC. As a
percentage of net sales, these expenses increased to approximately 25.0% from
approximately 22.0%, due primarily to the acquisition of Ace which accounted for
approximately $5.8 million of selling, general and administrative expenses.
INTEREST EXPENSE AND OTHER INCOME. Interest expense increased
approximately 1821.9% to approximately $2.1 million for the first half of fiscal
1997 from approximately $109,000 in the comparable period in fiscal 1996 as a
result of the financing of the acquisition of Ace. Other income decreased 98.3%
or approximately $527,000 due to the interest earned on interest bearing
accounts and short-term securities during the first half of fiscal 1996. Such
funds were used to partially fund the acquisition of Ace.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1997, the Company's working capital was approximately $20.8
million, compared to approximately $31.0 million at January 31, 1996. In June,
1996, pursuant to the Ace acquisition, the Company entered into a $65.0 million
revolving credit and term loan under a Revolving Credit Term Loan
12
<PAGE>
with Letter of Credit Facility, ("Credit Facility"), among The Chase Manhattan
Bank, formerly Chemical Bank, as agent, Heller Financial, Inc., Texas Commerce
Bank N.A., Union Bank of California and Bank of America. Additionally, the
Company entered into a $3.0 million subordinated loan from the Company's
Chairman of the Board and Chief Executive Officer, and a $2.9 million
subordinated loan from the Ace sellers, both loans pursuant to the acquisition.
As of January 31, 1997, the revolving loan balance was approximately $16.8
million, the term loan balance was $10.8 million, the subordinated shareholder
loan was $3.0 million, and the subordinated loan from the Ace sellers was $1.9
million.
The Company's operating activities provided net cash of approximately $7.5
million in the first six months of fiscal 1997 and used net cash of
approximately $7.2 million in the first six months of fiscal 1996. The cash flow
from operations for the first six months ended January 31, 1997 was primarily
affected by net income and changes in accounts and notes receivable, inventory,
prepaid assets, accounts payable and accrued liabilities.
Net cash used in investing activities in the first six months of fiscal
1997 was approximately $976,000 compared to net cash provided by investing
activities for the first six months of fiscal 1996 of approximately $308,000.
For the first six months of fiscal 1997, net cash used in investing activities
consisted principally of the purchase of property and equipment of approximately
$1.1 million. For the first six months of fiscal 1996, net cash provided by
investing activities consisted principally of the redemption of short-term
investments of approximately $973,000 offset by the purchases of property and
equipment of approximately $634,000.
Net cash used in financing activities in the first six months of fiscal
1997 was approximately $5.9 million and net cash provided by financing
activities in the first six months of fiscal 1996 was approximately $653,000. In
the first six months of fiscal 1997, cash used to repay the revolving loan of
approximately $5.0 million, repayment of the term loan of $1.2 million and
repayment of the subordinated loan from the Ace sellers of $1.0 million. In the
first six months of fiscal 1996, cash provided by financing activities consisted
principally of 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 capital lease obligations.
The Company is considering a private placement of additional debt or
equity financing to fund expected future expenditures required for the continued
significant growth of the European and retail operations, and for the marketing
of the newly developed "Talkin' Tots" dolls and other new toys in existing and
new product lines. Although the Company believes that it has the ability to
raise additional equity or debt financing, no assurance can be given that any
such effort would be successful.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Play By Play Toys & Novelties, Inc. was
held on December 9, 1996, for the purpose of electing directors and approving
the appointment of independent auditors. Proxies for the meeting were solicited
pursuant to Regulation 14A of the Securities Exchange Act of 1934 and there was
no solicitation in opposition to those nominees of the Board of Directors. All
of the Board of Director's nominees for directors as listed in the proxy
statement were elected with the number of votes cast for each nominee as
follows:
FOR WITHHELD AUTHORITY
Mark A. Gawlik 2,797,068 500
Tomas Duran 2,797,068 500
James F. Place 2,797,068 500
The proposal to appoint Coopers & Lybrand L.L.P. as independent auditors for
the Company for the fiscal year ending July 31, 1997, was ratified by the
following vote:
YES NO ABSTAIN
2,794,468 2,600 500
14
<PAGE>
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 17th day of March 1997.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By: /S/ RAYMOND G. BRAUN
Raymond G. Braun
CHIEF FINANCIAL OFFICER
15
<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 F-3 AND F-4 OF THE COMPANY'S FORM 10-Q FOR THE SIX
MONTHS ENDED JANUARY 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 366,799
<SECURITIES> 0
<RECEIVABLES> 23,970,100
<ALLOWANCES> 2,135,443
<INVENTORY> 38,156,918
<CURRENT-ASSETS> 65,015,742
<PP&E> 18,069,973
<DEPRECIATION> 2,609,602
<TOTAL-ASSETS> 94,393,324
<CURRENT-LIABILITIES> 44,185,033
<BONDS> 0
1,000
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 94,393,324
<SALES> 61,929,911
<TOTAL-REVENUES> 61,929,911
<CGS> 42,301,198
<TOTAL-COSTS> 42,301,198
<OTHER-EXPENSES> 15,472,513
<LOSS-PROVISION> 568,156
<INTEREST-EXPENSE> 2,104,217
<INCOME-PRETAX> 2,061,119
<INCOME-TAX> 780,728
<INCOME-CONTINUING> 1,280,391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,280,391
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
