AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 25, 1997
REGISTRATION NO. 333-39291
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
(AMENDMENT NO. 2)
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PLAY-BY-PLAY TOYS & NOVELTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
5092
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
TEXAS 74-2623760
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
4400 TEJASCO
SAN ANTONIO, TEXAS 78218-0267
(210) 829-4666
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RAYMOND G. BRAUN
CHIEF FINANCIAL OFFICER
PLAY-BY-PLAY TOYS & NOVELTIES, INC.
4400 TEJASCO
SAN ANTONIO, TEXAS 78218-0267
(210) 829-4666
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S AGENT FOR SERVICE)
------------------------
COPIES OF COMMUNICATION TO:
MICHAEL L. BENGTSON, ESQ. T. MARK KELLY, ESQ.
THOMPSON & KNIGHT, P.C. VINSON & ELKINS L.L.P.
1700 PACIFIC AVENUE, 1001 FANNIN STREET, SUITE 2300
SUITE 3300 HOUSTON, TEXAS 77002
DALLAS, TEXAS 75201
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, no par value........... $70,193,531 $21,270.76
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) In accordance with Rule 457(o) under the Securities Act of 1933, the number
of shares being registered and the proposed maximum offering price per share
are not included in this table.
(2) Estimated in accordance with Rule 457(c) under the Securities Act of 1933,
as amended, solely for the purpose of calculating the registration fee based
upon the average of the high and low sales prices reported on the Nasdaq
National Market on October 28, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 4, 1997
3,135,000 SHARES
[LOGO]
PLAY-BY-PLAY TOYS & NOVELTIES, INC.
COMMON STOCK
------------------------
Of the 3,135,000 shares of Common Stock, no par value ("Common Stock") of
Play-By-Play Toys & Novelties, Inc., a Texas corporation ("Play-By-Play" or
the "Company"), offered hereby (the "Offering"), 2,500,000 shares are being
sold by the Company, and 635,000 shares are being sold by the Selling
Shareholders (as defined herein). The Company will not receive any proceeds from
the sale of the shares offered by the Selling Shareholders. See "Principal and
Selling Shareholders."
The Common Stock is traded on the Nasdaq National Market under the trading
symbol "PBYP." On November 4, 1997, the last reported sales price of the
Common Stock on the Nasdaq National Market was $21.375 per share. See "Price
Range of Common Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN CONSIDERATIONS
RELEVANT TO AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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- ----------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........... $ $ $ $
- ----------------------------------------------------------------------------------------------------
Total(3)............ $ $ $ $
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company and one of the Selling Shareholders have granted the several
Underwriters a 30-day over-allotment option to purchase up to an additional
375,000 and 95,250 shares of Common Stock, respectively, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount, Proceeds to the Company and Proceeds
to the Selling Shareholders will be $ , $ , $ and $ ,
respectively.
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1997.
------------------------
MERRILL LYNCH & CO.
RAUSCHER PIERCE REFSNES, INC.
GERARD KLAUER MATTISON & CO., INC.
------------------------
The date of this Prospectus is , 1997.
<PAGE>
[Cover Art]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES OF COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF SHARES OF
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND THE
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT
OTHERWISE REQUIRES, ALL REFERENCES IN THIS PROSPECTUS TO "PLAY-BY-PLAY" OR THE
"COMPANY" INCLUDE PLAY-BY-PLAY TOYS & NOVELTIES, INC., ITS PREDECESSORS AND
THEIR SUBSIDIARIES. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITH RESPECT TO
THE BUSINESS OF THE COMPANY AND THE INDUSTRY IN WHICH IT OPERATES. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH
MAY CAUSE ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM SUCH FORWARD-LOOKING
STATEMENTS. SEE "DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS" AND "RISK
FACTORS."
THE COMPANY
The Company designs, develops, markets and distributes stuffed toys,
novelty items and its Play-Faces (registered trademark) line of sculpted toy
pillows based on licensed characters and trademarks. The Company also designs,
develops, markets and distributes electronic toys and non-licensed stuffed toys
and markets and distributes a broad line of non-licensed novelty items. The
Company markets and distributes its products in both amusement and retail
markets and believes that it is the leading supplier of stuffed toys and novelty
items to the domestic amusement industry.
Over the last three fiscal years, the Company's net sales have grown from
$32.6 million for fiscal 1994 to $137.4 million for fiscal 1997, representing a
62.4% average annual increase, and net income has increased from $1.1 million
for fiscal 1994 to $6.2 million for fiscal 1997, representing a 82% average
annual increase. The Company's growth in net sales and net income is primarily
attributable to its introduction of new products and its two strategic
acquisitions.
The Company develops its licensed stuffed toys based principally on
popular, classic characters such as Looney Tunes, Animaniacs, Batman, Superman,
characters featured in Space Jam (the motion picture), The Flintstones
(trademark) and Popeye (trademark) and on popular, classic trademark licenses
such as Coca-Cola (registered trademark) brand stuffed toys, including the
Coca-Cola (registered trademark) Polar Bear, and Harley-Davidson Motor Company's
Harley Hog (trademark). The Company develops a licensed stuffed toy by
identifying a character or trademark license, obtaining the necessary license,
designing the product and developing a prototype, and manufacturing the products
through third party manufacturers. The Company believes that products based on
popular, classic characters and trademarks will have a longer and more stable
product life cycle than products based on newer, less established characters and
trademarks. The Company believes its position as a leading supplier to the
domestic amusement industry allows it to more effectively acquire licenses for
products sold to the amusement market. The Company's non-licensed products
include traditional stuffed toys in various sizes, interactive dolls and novelty
items such as low-priced plastic toys and games used primarily as redemption
prizes by its amusement customers. For fiscal 1997, net sales of licensed
products and non-licensed products accounted for 59.7% and 38.0%, respectively,
of the Company's net sales.
The Company commenced its retail product line in fiscal 1995 with its
originally developed Play-Faces (registered trademark) line of sculpted toy
pillows shaped in the facial likenesses of licensed animated characters. The
Play-Faces (registered trademark) line is based upon popular, classic
characters, including The Walt Disney Company's animated characters, Looney
Tunes, Animaniacs, Batman, Superman, Space Jam characters, Sesame Street
Characters, Garfield (trademark) and new characters developed and introduced by
leading entertainment companies, such as the ones presented in The Walt Disney
Company's animated films Toy Story, The Hunchback of Notre Dame, and 101
Dalmatians. During fiscal 1997 the Company further developed the Play-Faces
(registered trademark) line by adding full bodied Play-Faces (registered
trademark) which are being sold in the domestic sections of mass retailers. The
Company believes its Play-Faces (registered trademark) line is a distinct
product category which enhances its ability to acquire
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additional character and trademark licenses. Play-Faces (registered trademark)
products accounted for 12.0% of the Company's net sales for fiscal 1997.
During fiscal 1997, the Company entered the large doll market with a pair
of electronic interactive dolls, the "Talkin' Tots" (trademark), which talk and
sing together utilizing infrared technology. The Company began selling "Talkin'
Tots" (trademark) during the fourth quarter of fiscal 1997 and began television
advertisements during the first quarter of fiscal 1998. The Company also
developed a retail line of Looney Tunes products during fiscal 1997, including
standing, sitting and bean bag stuffed toys and another television promoted
electronic stuffed toy, the "Tornado Taz." The "Tornado Taz" is a Tazmanian
Devil (trademark) that spins, shakes, grunts and laughs. The Looney Tunes
products include such characters as Tweety, (trademark) Sylvester, (trademark)
Tazmanian Devil, (trademark) Bugs Bunny, (trademark) Speedy Gonzales,
(trademark) Yosemite Sam (trademark) and Daffy Duck (trademark).
The Company has a diversified base of customers within the amusement and
retail distribution channels. Amusement customers, which accounted for 69.8% of
net sales for fiscal 1997, include theme parks such as Six Flags, Busch Gardens
and SeaWorld, family entertainment centers such as Dave & Buster's, Inc., Tilt
and Namco, and carnivals and state fairs. In addition to theme parks, family
entertainment centers and carnivals, the Company's amusement distribution
channels include Fun Services (registered trademark) (sales through
franchisees), fundraising and premium (products designed for specific companies)
customers. Retail customers, which accounted for 27.9% of net sales for the same
period, principally consist of mass merchandisers such as Wal-Mart, Kmart and
Target, and specialty retailers such as Toys "R" Us and Kay Bee Toy. No one
customer accounted for more than 10% of net sales for fiscal 1997.
The Company recently completed two strategic acquisitions that have
contributed to its growth. In June 1996, the Company acquired substantially all
of the operating assets, business operations and facilities of Ace Novelty Co.
Inc. ("Ace") for $44.7 million. In November 1996, the Company, through its
wholly-owned subsidiary Play-By-Play Toys & Novelties Europa S.A.
("Play-By-Play Europe"), acquired The TLC Gift Company, Ltd. ("TLC") based
in Doncaster, England for 40,000 shares of Common Stock. The Ace acquisition
provided the Company with several strategic advantages, including significant
distribution channels in the central and western United States, significant
distribution channels in the outdoor amusement markets, key United States and
international classic character licenses for retail and amusement, an in-house
design and development team and additional key personnel. The Company believes
that the Ace acquisition contributed to the Company's profitability in fiscal
1997. Similarly, the TLC acquisition resulted in additional distribution
channels in the U.K., where TLC is headquartered, and other areas of Europe. The
Company believes that the TLC acquisition has begun contributing to the
Company's net earnings and is partially responsible for the significant growth
the Company has experienced internationally.
RECENT DEVELOPMENT
In September 1997, the Company obtained the worldwide license for Baby
Looney Tunes products. This license allows the Company to develop and market
pre-school and infant toys, including molded and stuffed toys, incorporating the
Looney Tunes characters beginning in calendar 1998.
COMPANY STRENGTHS
The Company believes its principal strengths include its:
o emphasis on licenses for popular, classic characters and
trademarks and new characters introduced by leading entertainment
companies;
o demonstrated ability to develop new and innovative toys such as
"Talkin' Tots" (trademark) and "Tornado Taz" (trademark), new licensed
products such as the Coca-Cola (registered trademark) brand stuffed
toys and new product categories such as the Play-Faces (registered
trademark) line;
o position as the leading supplier of stuffed toys and novelty items
to the amusement industry;
4
<PAGE>
o balance between amusement and retail markets, which reduces
seasonality and increases stability of revenues;
o experienced management team with toy and licensing expertise;
o in-house design and development team which provides the Company
the ability to bring more products to market quicker, thereby
taking early advantage of product trends;
o Hong Kong office which results in direct sourcing in the Far East
and the ability to better manage product quality, production and
timely availability of products;
o diverse customer base including over 4,000 customers, with no
customer accounting for greater than 10% of net sales;
o multiple distribution channels which enhance the Company's ability
to sell slower moving items while minimizing the impact on gross
profit margins; and
o distribution facilities located throughout North America and
Europe allowing the Company to better serve its customers which
typically have multiple locations and minimal inventory space.
BUSINESS STRATEGY
The Company's growth strategy includes the following key elements:
LICENSED PRODUCT LINE EXPANSION. The Company believes that by developing
licensed products based principally on popular, classic characters and
trademarks, it has established a core licensed product portfolio that is
characterized by a longer life cycle than is typical in the toy industry. The
Company intends to continue to develop its licensed product line by targeting
licensing opportunities where it can take advantage of licensor advertising,
publicity and media exposure. The Company believes that its broad licensed
product line prevents it from becoming overly dependent on a single product or
customer.
DEVELOPMENT OF INNOVATIVE TOYS AND NEW PRODUCT CATEGORIES. The Company
believes that its Play-Faces (registered trademark) and other license-based
product lines represent distinct product categories which enhance its market
identification and ability to acquire additional character and trademark
licenses. The Company intends to develop new product categories targeted to both
its amusement and retail customers. The Company strives to develop unique
products with broad end-consumer appeal at competitive prices by identifying
previously undeveloped or under-developed products or product categories and
matching them with popular, classic licensed characters and/or trademarks. The
Company believes it has successfully implemented this approach with its Looney
Tunes product lines, "Talkin' Tots (trademark)," "Tornado Taz," Play-Faces
(registered trademark) product lines, Harley-Davidson Motor Company's Harley Hog
(trademark) and Coca-Cola (registered trademark) Polar Bear.
INTERNATIONAL EXPANSION. The Company plans to increase its international
sales, primarily in Europe and Latin America, in both the amusement and retail
channels through the Company's European distribution facilities and independent
distributors. The Company believes that markets outside the United States
present significant opportunities and are generally less competitive than the
United States market. The Company commenced toy distribution and sales
operations in Europe and Latin America in fiscal 1994. Since fiscal 1994,
international net sales have increased at an average annual rate in excess of
100%, and the Company believes there are additional significant opportunities
for growth in international markets. Additionally, with the newly obtained
worldwide manufacturing and distribution rights for Baby Looney Tunes, the
Company will begin selling in new markets for the Company, including the Asia
Pacific countries.
RETAIL MARKET PENETRATION. The Company intends to broaden its retail
distribution both domestically and internationally. Through its licensing and
new product development strategies, the Company plans to further penetrate the
retail market by continuing to develop and introduce new products (such as
"Talkin' Tots" (trademark) and "Tornado Taz") and product categories (such as
Play-Faces (registered trademark)). Since fiscal 1994, retail sales have grown
at an average annual rate of 127.3% domestically and at an average annual rate
of 110%
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<PAGE>
internationally. Based on the Company's small market share of the retail
industry and its proven ability to develop product niches and obtain key
licenses, retail products continue to be a growth opportunity for the Company.
AMUSEMENT MARKET PENETRATION. With the Ace acquisition, the Company
believes that it has become the leading supplier of stuffed toys and novelty
items to the domestic amusement market. The Company believes that this market is
less susceptible to changing consumer preferences than the retail market. The
Company believes that its broad and continually updated line of licensed and
non-licensed stuffed toys and novelty items, its purchasing power and its
reputation as a leading amusement supplier provide the Company with a
competitive advantage over many other suppliers to this market. While the
Company believes there is greater opportunity to grow its retail and
international businesses than its domestic amusement business, the latter
provides the Company with a consistent base of cash flow.
ACQUISITION STRATEGY. The acquisition strategy of the Company is to find
businesses with unique product lines (either licensed or non-licensed) which can
be sold through the Company's existing distribution channels or businesses which
have complementary distribution channels for the Company's existing product
lines. The Company believes that this strategy should result in greater sales
while reducing the combined companies' general and administrative costs. The
Company believes that the Ace and TLC acquisitions accomplished both of these
acquisition objectives.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock Offered:
By the Company....................................................... 2,500,000 shares(1)
By the Selling Shareholders.......................................... 635,000 shares(2)
Total................................................................ 3,135,000 shares
Common Stock to be Outstanding after the Offering......................... 7,453,900 shares(1)(3)
===========
Use of Proceeds........................................................... The net proceeds of the Offering
will be used for repayment of
indebtedness of approximately $32.2
million outstanding under various
debt facilities and for general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol............................................. "PBYP"
</TABLE>
- ------------
(1) Excludes 375,000 shares to be sold by the Company in the event of the
exercise of the Underwriters' over-allotment option.
(2) Excludes 95,250 shares to be sold by one of the Selling Shareholders in the
event of the exercise of the Underwriters' over-allotment option.
(3) Excludes (i) 1,412,700 shares of Common Stock reserved for future issuance
under outstanding options, (ii) 117,000 shares of Common Stock subject to
outstanding warrants and (iii) a maximum of 882,353 shares of Common Stock
issuable upon partial or total conversion, if any, of the Company's
outstanding convertible debentures. See "Management -- 1994 Incentive
Plan" and Notes 9 and 13 of Notes to Consolidated Financial Statements.
RISK FACTORS
An investment in the Common Stock involves certain risks that a potential
investor should carefully evaluate prior to making such an investment. See
"Risk Factors."
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth certain summary financial data of the
Company. The information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus.
YEAR ENDED JULY 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales....................... $ 137,386 $ 74,197 $ 47,730
Gross profit.................... 47,588 24,148 16,714
Income from operations.......... 13,146 6,676 4,036
Net income...................... 6,216 3,668 1,639
Net income per share:
Primary.................... 1.25 .76 .63
Fully Diluted.............. 1.21 .76 .63
JULY 31, 1997
---------------------------
ACTUAL AS ADJUSTED(1)
-------- ---------------
CONSOLIDATED BALANCE SHEET DATA:
Working capital................. $ 35,372 $ 78,586
Total assets.................... 125,906 143,660
Total long-term debt and capital
leases......................... 23,238 16,038
Total liabilities............... 82,237 50,029
Shareholders' equity............ 43,669 94,083
- ------------
(1) As adjusted to give effect to the Offering and the application of the
estimated $50.4 million net proceeds to the Company therefrom. See "Use
of Proceeds" and "Capitalization."
7
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes statements that are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future. All
statements other than statements of historical facts included in this
Prospectus, including, without limitation, statements under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" regarding the Company's
financial position, business strategy and other plans and objectives for future
operations, and future product demand, supply, manufacturing, costs, marketing,
transportation and pricing factors, are forward-looking statements. All
forward-looking statements included in this Prospectus are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update such forward-looking statements. Although the Company
believes that the assumptions and expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct or that the Company will take any actions that may
presently be planned. Certain important factors that could cause actual results
to differ materially from the Company's expectations are disclosed under "Risk
Factors" and elsewhere in this Prospectus. All subsequent written or oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by such factors.
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE COMMON STOCK SHOULD CAREFULLY CONSIDER THE
RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS. AN INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
RISKS ASSOCIATED WITH LICENSE AGREEMENTS. Sales of licensed products
accounted for approximately 59.7% of the Company's net sales during fiscal 1997.
The Company's license agreements generally require minimum guarantees,
obligating the Company to make specified royalty payments regardless of sales.
The Company's existing license agreements generally have terms ranging from one
to four years. As the Company continues to obtain additional licenses, the
Company expects greater pressure to be placed on the Company's liquidity needs
to fund significant additional royalty advances and guarantees of minimum
royalty payments. 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 or renew existing license agreements, or that existing
licenses will not be terminated. There also can be no assurance that the renewal
of existing licenses or obtaining of additional licenses for characters or
trademarks can be effected 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.
Generally, the Company's license agreements require licensor approval before any
merger or reorganization involving the licensee, certain stock sales or
assignment of the license. Certain license agreements require licensor approval
of management changes. 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. Certain 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 which may adversely affect the Company's product
sales.
Approximately 37.5% of the Company's net sales in fiscal 1997 were derived
from the sale of products based on Warner Brothers' "Looney Tunes". As a
result, a loss of the Time Warner license rights would have a material adverse
effect on the Company. The Company expects that Time Warner may from time to
time consider various opportunities, whether developed internally or proposed by
third parties, involving the commercial exploitation of the "Looney Tunes"
characters. Time Warner would be free to pursue such
8
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opportunities directly or with others, including products and markets licensed
to the Company. There can be no assurance that Time Warner will offer any such
business opportunities to the Company or that such opportunities will be offered
on terms acceptable to the Company.
CONSUMER PREFERENCES; NEW PRODUCT INTRODUCTION. As a result of changing
consumer preferences, many toys are successfully marketed for only one or two
years. There can be no assurance that any of the Company's products or any of
the Company's product lines will continue to be popular for any significant
period of time or that new products and product lines introduced by the Company
will achieve an acceptable degree of market acceptance, or that if such
acceptance is achieved, it will be maintained for any significant period of
time. The Company's success will be dependent upon the Company's ability to
enhance existing product lines and develop new products and product lines. The
failure of the Company's new products and product lines to achieve and sustain
market acceptance and to produce acceptable margins could have a material
adverse effect on the Company's financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's future success will be highly
dependent on the continued efforts of Arturo G. Torres, Chairman of the Board
and Chief Executive Officer, Mark A. Gawlik, President and Chief Operating
Officer, Saul Gamoran, Executive Vice President, General Counsel and Secretary,
Raymond G. Braun, Chief Financial Officer and Treasurer, and Francisco Saez
Moya, President, Play-By-Play Europe. Although Mr. Torres is actively involved
in the management of the affairs of the Company, he is also involved in various
private business endeavors. Other than an employment agreement with Mr. Gamoran,
Mr. Braun and two other employees, the Company has no employment agreements or
noncompete agreements with, or key-man life insurance on the lives of, any of
its senior management or employees. The loss of the services of one or more of
such key personnel could have a material adverse effect upon the Company. The
Company's success is also dependent upon its ability to retain its key
management, sales, marketing, financial and product development personnel and to
attract other personnel to satisfy the Company's needs. There can be no
assurance that the Company will be successful in retaining and attracting such
personnel. See "Management."
DEPENDENCE ON THIRD PARTY MANUFACTURERS; INTERNATIONAL RELATIONS. To date,
a substantial portion of the Company's products have been manufactured by third
parties in the People's Republic of China. The Company does not have long-term
contracts with any of these manufacturers. Although the Company has begun to
arrange alternate sources of manufacturing outside of China, the Company has
made no definitive plans for securing alternate sources in the event its present
arrangements with Chinese manufacturers prove impossible to maintain.
Accordingly, there can be no assurance that there would be sufficient alternate
manufacturing facilities to meet the increased demand for production which would
likely result from a disruption of manufacturing sources in China. Furthermore,
such a shift to alternate facilities, if available, would likely result in
increased manufacturing costs and could subject the Company's products to
additional and/or higher quotas, duties, tariffs or other restrictions.
China currently enjoys Most Favored Nation ("MFN") status under United
States tariff laws, which provides the most favorable category of United States
import duties. There has been, and may be in the future, opposition to the
extension of MFN status for China. The loss of MFN status for China would result
in a substantial increase in the import duty of toy products (currently 70% for
non-MFN countries) manufactured in China which would result in increased costs
for the Company. Although the Company would attempt to mitigate this increased
cost by shifting its production to other countries, there can be no assurance
that the Company would be successful in attempting to shift production within a
reasonable period of time. Spain imposes an import duty for products imported
from China that exceed specified levels. To date, the Company has not incurred
any such import duties, although there can be no assurance that the Company will
not be assessed these duties in the future. See "Business -- Manufacturers and
Suppliers" and " -- Tariffs and Duties."
RISK OF FOREIGN OPERATIONS. Foreign operations are generally subject to
risks such as transportation delays and interruptions, political and economic
disruptions, the imposition of tariffs and import and export controls, changes
in governmental policies, delays in and restrictions on the transfer of funds
and currency fluctuations. For example, purchases of inventory by the Company's
European toy subsidiary from its
9
<PAGE>
suppliers in the Far East are subject to currency risk to the extent that there
are fluctuations in the exchange rate between the United States dollar and the
Spanish peseta. Certain of the Company's license agreements call for payment of
royalties in a currency different from the functional currency received upon
sales of the related product. In addition, certain of the Company's foreign
subsidiary's license agreements require a dollar-denominated guarantee by the
Company of the foreign subsidiary obligations to make minimum payments to the
licensor. These arrangements subject the Company to currency risk to the extent
that exchange rates fluctuate from the date that royalty liabilities are
incurred until the date royalties are actually paid to the licensor. While the
Company to date has not experienced any material adverse effects due to its
foreign operations, there can be no assurance that such events will not occur in
the future and any growth of the Company's international operations will subject
it to greater exposure to risks of foreign operations. The Company will from
time to time examine the need, if any, to engage in hedging transactions to
reduce the risk of currency fluctuations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
POTENTIAL FOR PRODUCT LIABILITY CLAIMS. Products that have been or may be
developed or sold by the Company may expose the Company to potential liability
from personal injury or property damage claims by end-users of such products.
The Company has been and is involved in various legal proceedings and claims
incident to the normal conduct of its business. The Company believes that such
legal proceedings and claims, individually and in the aggregate, are not likely
to have a material adverse effect on its financial condition. The Company
currently maintains product liability insurance coverage in the amount of $1.0
million per occurrence, with a $20.0 million umbrella policy. The Company's
license agreements require the Company to carry specified types and amounts of
insurance. There can be no assurance that the Company will be able to maintain
such coverage or obtain additional coverage on acceptable terms, or that such
insurance will provide adequate coverage against any potential claims. Moreover,
even if the Company maintains adequate insurance, any successful claim could
materially and adversely affect the reputation and prospects of the Company. The
Company believes that its products meet all applicable safety standards. See
"Business -- Product Liability" and " -- Legal Proceedings."
COMPETITION. The toy industry is highly competitive. Many of the Company's
competitors have longer operating histories, broader product lines and greater
financial resources and advertising budgets than the Company. In addition, the
toy industry has nominal barriers to entry. Competition is based primarily on
the ability to design and develop new toys, procure licenses for popular
characters and trademarks, and successfully market products. Many of the
Company's competitors, including the Company's licensors, offer similar products
or alternatives to the Company's products. 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. Certain of the
Company's licensors, including The Walt Disney Company, Warner Brothers,
Harley-Davidson Motor Company and The Coca-Cola Company, distribute competing
products through proprietary retail outlets and amusement parks. The Company's
retail toy products compete with other toy products for retail shelf space.
There can be no assurance that shelf space in retail stores will be available to
support the Company's existing products or the expansion of the Company's
products and product lines. There can be no assurance that the Company will be
able to continue to compete effectively in this marketplace. See
"Business -- Competition."
RAW MATERIALS PRICES. The principal raw materials in most of the Company's
products are petrochemical resin derivatives, taffeta, acrylic textiles,
plastics, polyvinyl chloride and other petrochemical derivatives such as
polyethylene and high impact polystyrene. The prices for such raw materials are
influenced by numerous factors beyond the control of the Company, including
general economic conditions, competition, labor costs, import duties and other
trade restrictions and currency exchange rates. Changing prices for such raw
materials may cause the Company's results of operations to fluctuate
significantly. A significant increase in the price of raw materials could have a
material adverse effect on the Company's operating margins unless and until the
increased cost can be passed along to customers.
SEASONALITY; WEATHER. Both the retail and amusement toy industries are
inherently seasonal. Historically, the Company's sales to the amusement industry
have been highest during the third and fourth
10
<PAGE>
fiscal quarters, and collections for those sales have been highest during the
succeeding two fiscal quarters. The Company's sales to the retail toy industry
historically have been highest during its first and fourth fiscal quarters, and
collections from those sales have been highest during the succeeding two fiscal
quarters. The Company's working capital needs and borrowings to fund those needs
have been highest during the third and fourth fiscal quarters. The Company's
international and domestic operations are also subject to risks due to inclement
weather. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
GROWTH STRATEGY. The Company's growth strategy provides for further
development and diversification of the Company's retail and amusement toy
business, including the attempted acquisition of additional license agreements
and further expansion into international markets. Implementation of the strategy
is subject to risks beyond the Company's control, including competition, lack of
market acceptance of new products, changes in economic conditions, the inability
to obtain or renew licenses on commercially reasonable terms and the inability
to finance the increased levels of accounts receivable and inventory necessary
to support sales growth, if any. There can be no assurance that the expansion of
the Company's business will be successfully implemented. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RAPID GROWTH. The Company experienced significant growth in net sales and
net income in fiscal 1995, 1996 and 1997. As a result of the Company's limited
operating history and sales and income growth, period-to-period comparisons of
operating results may not be meaningful and results of operations from prior
periods may not be indicative of future results. There can be no assurance that
the Company will continue to experience growth in, or maintain its present level
of, net sales or net income. Rapid growth also may render the Company unable to
successfully manage inventory, information systems, and other aspects of its
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ACQUISITION RISKS. The Company expects to continue to evaluate and pursue
acquisition opportunities available on terms management considers favorable to
the Company. The success of future acquisitions will depend upon the ability of
the Company's management to assess characteristics of the potential target
companies, such as financial condition, attractiveness of products, suitability
of distribution channels, management ability and the degree to which operations
can be integrated with those of the Company. This assessment is necessarily
inexact and its accuracy is inherently uncertain. This review will not reveal
all existing or potential problems, nor will it permit a buyer to become
sufficiently familiar with the target companies to assess fully their
deficiencies and capabilities. There can be no assurance that the Company's
future acquisitions, if any, will be successful. Any unsuccessful acquisition
could have a material adverse effect on the Company.
SHARES ELIGIBLE FOR FUTURE SALE. Substantially all of the shares of Common
Stock held by the Company's Board of Directors and executive officers are
eligible for sale in the public market pursuant to Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act"), subject to the restrictions of
Rule 144. After giving effect to this Offering, the Company will have
outstanding 7,453,900 shares of Common Stock. After giving effect to the
Offering there are also (i) 1,412,700 shares of Common Stock reserved for
issuance under outstanding options to purchase shares of Common Stock, (ii)
117,000 shares of Common Stock subject to outstanding warrants and (iii) a
maximum of 882,353 shares of Common Stock issuable upon partial or total
conversion, if any, of the Company's outstanding convertible debentures. In
addition, various persons have "piggy-back" and demand registration rights to
register shares of Common Stock issuable upon the exercise of certain warrants
for public sale under the Securities Act. No prediction can be made as to the
effect, if any, that future sales of shares, or the availability of shares for
future sales, will have on the market price of the Common Stock. The sale of
substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely affect the prevailing market price for the Common Stock.
DIVIDEND POLICY. The Company has never paid any cash dividends. For the
foreseeable future, the Company expects to retain earnings to finance the
expansion and development of its business. Any future
11
<PAGE>
payment of cash dividends will be within the discretion of the Company's Board
of Directors, and will depend, among other factors, on the earnings, capital
requirements, operating and financial condition of the Company and other
relevant factors, and compliance with various financing covenants such as those
contained in agreements relative to debt facilities to which the Company is or
may become a party. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ANTI-TAKEOVER PROVISIONS. The Company's Articles of Incorporation and
Bylaws contain, among other things, provisions establishing a classified Board
of Directors, authorizing shares of preferred stock with respect to which the
Board of Directors of the Company has the power to fix the rights, preferences,
privileges and restrictions without any further vote or action by the
shareholders, and requiring a two-thirds vote of shareholders in order to remove
directors, amend the Bylaws and approve certain business combinations with
respect to a "related person." Such provisions could delay, deter or prevent a
merger, consolidation, tender offer, or other business combination or change of
control involving the Company that some or a majority of the Company's
shareholders might consider to be in their best interest, including offers or
attempted takeovers that might otherwise result in such shareholders receiving a
premium over the market price for the Common Stock. The potential issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Common Stock at a
premium over the market price of the Common Stock and may adversely affect the
market price of, and the voting and other rights of the holders of, Common
Stock. The Company has not issued, and currently has no plans to issue, shares
of preferred stock.
POSSIBLE VOLATILITY OF STOCK PRICE. Market prices for the Common Stock may
be influenced by a number of factors, including the Company's operating results,
and other factors affecting the Company specifically, and the toy industry and
the financial markets generally, as well as the depth and liquidity of the
market for the Common Stock. The Company believes that the market price of its
Common Stock will reflect expectations that the Company will be able to continue
to operate and grow its business profitability. If the Company is unable to do
so at a pace that reflects the expectations of the market, investors could sell
shares of the Common Stock at or after the time that it becomes apparent that
such expectations may not be realized, resulting in a decrease in the market
price of the Common Stock. In recent years the stock market has experienced
extreme price and volume fluctuations. This volatility has had a significant
effect on the market prices of securities issued by many companies for reasons
unrelated to their operating performance.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company are estimated to be approximately$50.4
million ($58.0 million if the Underwriters exercise their over-allotment option
in full) assuming an offering price of $21.375 per share, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses.
The Company intends to use the net proceeds for repayment of indebtedness
of approximately $32.2 million outstanding under various debt facilities and
general corporate purposes. Pending application of the net proceeds of the
Offering as described above, they will be invested in short-term,
interest-bearing instruments.
In June 1996, in connection with the Ace acquisition, the Company borrowed
$34.0 million under its Revolving Credit Term Loan with Letter of Credit
Facility (the "Credit Facility") with a bank syndicate group led by The Chase
Manhattan Bank (the "Lenders"). The Credit Facility provides for a $53 million
revolving line of credit commitment, subject to availability under a borrowing
base calculated by reference to the level of eligible accounts receivable and
inventory, and includes a $15 million sublimit for the issuance of letters of
credit. The revolving credit facility matures on June 20, 1998. The Credit
Facility also includes a $12 million acquisition term loan which requires 60
equal monthly principal payments of $200,000 plus accrued interest beginning
August 1, 1996, with the last payment due and payable on June 20, 2001.
Interest on borrowings outstanding under revolving loans under the Credit
Facility is payable monthly at an annual rate equal to, at the Company's option,
(i) the Alternate Base Rate plus 0.50% or (ii) the LIBOR rate plus 2.50%. For
amounts outstanding under the term loans, interest is payable monthly in arrears
at an annual rate equal to, at the Company's option, (i) the Alternate Base Rate
plus 0.75% or (ii) the LIBOR rate plus 2.75%. The "Alternate Base Rate" for
the purpose of this discussion means, as of any day of determination thereof, a
rate per annum equal to the greatest of (i) the prime rate, (ii) the federal
funds effective rate plus 0.50% or (iii) the base CD rate plus 1.00%.
13
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt (including current
maturities of long-term debt) and capitalization of the Company as of July 31,
1997 (i) on a historical basis and (ii) as adjusted to give effect to the
Offering and the application of the estimated $50.4 million net proceeds to the
Company from the Offering described under "Use of Proceeds." The table should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and notes thereto included elsewhere in this Prospectus.
JULY 31, 1997
---------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Short-term debt:
Notes payable to banks and
others......................... $ 22,608 --
Current maturities of long term
debt........................... 3,472 $ 1,072
Current obligations under
capital leases................. 691 691
---------- -----------
$ 26,771 $ 1,763
========== ===========
Long-term debt:
Long term debt, net of current
maturities..................... $ 7,320 $ 120
Convertible subordinated
debentures..................... 15,000 15,000
Obligations under capital
leases......................... 918 918
---------- -----------
Total long-term
debt............... 23,238 16,038
---------- -----------
Shareholders' equity:
Preferred stock -- no par value;
10,000,000 shares authorized;
no shares issued, historical
and as adjusted................ -- --
Common stock -- no par value;
20,000,0000 shares authorized;
4,901,300 shares issued,
historical; 7,453,900 shares
issued, as adjusted(1)......... 1 1
Additional paid-in capital...... 35,006 85,420
Deferred compensation........... (618) (618)
Cumulative foreign currency
translation adjustments........ (2,303) (2,303)
Retained earnings............... 11,583 11,583
---------- -----------
Total shareholders'
equity.................. 43,669 94,083
---------- -----------
Total
capitalization..... $ 66,907 $ 110,121
========== ===========
- ------------
(1) Excludes, after giving effect to the Offering, (i) 1,412,700 shares of
Common Stock reserved for future issuance under outstanding options, (ii)
117,000 shares of Common Stock subject to outstanding warrants and (iii) a
maximum of 882,353 shares of Common Stock issuable upon partial or total
conversion, if any, of the Company's outstanding convertible debentures. See
"Management -- 1994 Incentive Plan" and Notes 9 and 13 of Notes to
Consolidated Financial Statements.
14
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "PBYP." The following table sets forth, for the periods indicated,
the reported high and low closing prices of the Company's Common Stock, as
reported on the Nasdaq National Market:
HIGH LOW
--------- ---------
Fiscal 1996
First Quarter................... $ 14 1/2 $ 10 3/4
Second Quarter.................. 16 3/8 10 3/4
Third Quarter................... 13 7/8 12
Fourth Quarter.................. 16 8
Fiscal 1997
First Quarter................... $ 10 $ 7 1/2
Second Quarter.................. 12 8 1/8
Third Quarter................... 14 1/4 9 3/4
Fourth Quarter.................. 16 12 3/8
Fiscal 1998
First Quarter................... $ 23 5/8 $ 16 1/4
Second Quarter (through November
4, 1997)...................... 21 3/8 20 1/2
On November 4, 1997, the last reported sale price of the Common Stock as
reported on the Nasdaq National Market was $21.375 per share. As of November 4,
1997 there were 79 holders of record of the Common Stock.
The Company has never declared or paid cash dividends to date on its Common
Stock and does not anticipate paying any cash dividends on its Common Stock in
the near future. It is the current policy of the Board of Directors (the
"Board") to retain earnings to finance the operations and development of the
Company's business. In addition, the Credit Facility limits the payment of
dividends under certain circumstances. Any future determination as to the
payment of cash dividends will depend on a number of factors, including future
earnings, capital requirements, the financial condition and prospects of the
Company and any restrictions under credit agreements existing from time to time,
as well as such other factors as the Board may deem relevant. There can be no
assurance that the Company will pay dividends in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth selected consolidated financial data for the
Company for the periods and at the dates indicated. The selected consolidated
financial data for the five years ended July 31, 1997 and as of July 31, 1997,
1996, 1995, 1994 and 1993, have been derived from the audited Consolidated
Financial Statements of the Company. This data should be read in conjunction
with, and is qualified in its entirety by, the Consolidated Financial Statements
of the Company and the notes thereto appearing elsewhere in this Prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and the notes
thereto.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA(1):
Net sales....................... $ 137,386 $ 74,197 $ 47,730 $ 32,568 $ 26,649
Cost of sales................... 89,798 50,049 31,016 21,294 18,604
---------- --------- --------- --------- ---------
Gross profit.................... 47,588 24,148 16,714 11,274 8,045
Selling, general and
administrative expenses......... 34,442 17,472 12,678 9,080 8,575
---------- --------- --------- --------- ---------
Income (loss) from operations... 13,146 6,676 4,036 2,194 (530)
Interest expense................ (4,414) (660) (1,051) (606) (387)
Interest and other income....... 208 656 21 2 --
---------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income
tax........................... 8,940 6,672 3,006 1,590 (917)
Income tax (provision)
benefit......................... (2,724) (2,620) (1,108) (710) 223
---------- --------- --------- --------- ---------
Income (loss) from continuing
operations.................... 6,216 4,052 1,898 880 (694)
Income (loss) from discontinued
operations(2)................. -- (145) (259) 125 (597)
Loss on disposal of discontinued
operations(2)................. -- (239) -- -- --
---------- --------- --------- --------- ---------
Income (loss) before minority
interest........................ 6,216 3,668 1,639 1,005 (1,291)
Minority interest in net loss of
subsidiaries.................. -- -- -- 69 60
---------- --------- --------- --------- ---------
Net income (loss)............... $ 6,216 $ 3,668 $ 1,639 $ 1,074 $ (1,231)
========== ========= ========= ========= =========
Net income (loss) per
share -- primary.............. $ 1.25 $ .76 $ .63 $ .43 $ (.50)
========== ========= ========= ========= =========
Net income (loss) per
share -- fully diluted........ $ 1.21 $ .76 $ .63 $ .43 $ (.50)
========== ========= ========= ========= =========
Weighted average shares
outstanding..................... 4,960 4,841 2,612 2,519 2,460
Supplemental pro forma net
income per share(3)........... $ 1.20
==========
<CAPTION>
JULY 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Working capital................. $ 35,372 $ 19,910 $ 26,159 $ 3,927 $ 3,926
Total assets.................... 125,906 104,922 47,300 25,785 20,580
Long-term debt and capital
leases........................ 23,238 11,096 148 332 280
Total liabilities............... 82,237 66,222 15,273 16,675 12,563
Shareholders' equity............ 43,669 38,700 32,027 9,110 8,017
</TABLE>
- ------------
(1) In June 1996, the Company acquired Ace, which was accounted for as a
purchase. Ace assets and certain liabilities are included in the Company's
Consolidated Balance Sheet at July 31, 1996 and its results of operations
were included in the Consolidated Statement of Operations beginning June 21,
1996. For these reasons, the Consolidated Statement of Operations of the
Company for the period subsequent to the acquisition is not comparative to
prior periods.
(2) In fiscal 1993, the Company discontinued its clothing business and sold its
manufacturing facility in Mexico. The amounts shown are net of income tax
benefit of $146 in fiscal 1993. Fiscal years 1995, 1994, and 1993 have been
restated to reflect the disposition of 100% of the stock of Restaurants
Universal, which was sold during the third quarter of fiscal 1996. See Note
5 to the Company's Consolidated Financial Statements.
(3) Supplemental pro forma net income per share is based on the number of
additional shares of Common Stock assumed to be outstanding after the sale
in this offering of 1,600,873 shares at July 31, 1997, based on the number
of shares to be sold at the offering price necessary to raise net proceeds
to pay the offering expenses and to repay certain indebtedness of the
Company as described in "Use of Proceeds," and the application of such
proceeds to repay such indebtedness outstanding at July 31, 1997.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's principal business is to design, develop, market and
distribute stuffed toys, novelty items and sculpted toy pillows based on
licensed characters and trademarks. The Company also designs, develops, markets
and distributes electronic toys and non-licensed stuffed toys. The Company sells
these products to customers in the amusement and retail markets. The Company's
toy operations accounted for 97.7% of net sales from continuing operations for
fiscal 1997. In addition, the Company owns and operates approximately 1,400
coin-operated amusement game machines in Texas. Net sales derived from vending
operations accounted for 2.3% of the Company's net sales for fiscal 1997. Net
sales from continuing operations derived from vending operations as a percentage
of net sales has declined in recent periods as the Company has emphasized its
toy operations, and the Company anticipates that such trend will continue.
In March 1996, the Company sold all of the stock of Restaurants Universal
Espana, its European subsidiary that operated two restaurants in Spain, to an
unrelated third party for $1.6 million. The sale resulted in a non-cash,
non-recurring charge against earnings of $239,000 and a loss from discontinued
operations of $145,000, for a total loss from discontinued operations of
$384,000 in fiscal 1996. The buyer paid $80,000 in cash, and the Company
financed the balance of the sales price.
In June 1996, the Company acquired substantially all of the operating
assets, business operations and facilities of Ace. The purchase price of
approximately $44.7 million consisted of $39.2 million in cash, $2.9 million in
subordinated debt, $2.4 million in related direct costs and $200,000 in the form
of warrants issued by the Company to the former owners of Ace ("Ace Sellers")
to purchase up to 35,000 shares of Common Stock. The Ace acquisition has been
accounted for using the purchase method.
In November 1996, the Company, through Play-By-Play Europe, acquired
all of the outstanding capital stock of TLC based in Doncaster, England for
40,000 shares of restricted Common Stock. The shares of Common Stock had a fair
market value of $345,000 at the date of acquisition. The Company incurred
$144,000 in costs directly related to the acquisition. The acquisition has been
accounted for using the purchase method of accounting.
Net toy sales to amusement customers accounted for 69.8% of the Company's
net sales for fiscal 1997. The Company sells both licensed and non-licensed
products to its amusement customers for use principally as redemption prizes.
Except for television promoted retail products, 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.
Net toy sales to retail customers accounted for 27.9% of the Company's net
sales for fiscal 1997. Since the beginning of fiscal 1994, the Company has
expanded its product offering of licensed stuffed toys through the addition of
several licensed characters and trademarks. Prior to fiscal 1997, substantially
all of the Company's sales to retail customers involved licensed products.
During fiscal 1997, 12.5% of retail sales were from non-licensed goods
consisting principally of the "Talkin' Tots" (trademark). In fiscal 1997, the
Company experienced larger percentage increases in sales to retail customers
than to amusement customers and expects this trend to continue for the
foreseeable future. Also, during fiscal 1997, the Company expanded its retail
product line to include a set of interactive dolls, the "Talkin' Tots"
(trademark), and several Looney Tunes licensed products, including the "Tornado
Taz" electronic stuffed toy, bean bags, standing and sitting stuffed toys, and
various holiday-related stuffed toys. Due to the higher volume purchasing power
enjoyed by many of the larger retail customers, sales to retail customers
typically involve larger dollar amounts but lower gross margins than the
Company's sales to amusement customers. However, gross profit margins on retail
products increased during fiscal 1997 primarily due to the Company's 1997 entry
into the television promoted toy product market with the "Talkin' Tots"
(trademark) and "Tornado Taz." The television promoted products have a higher
gross profit margin that is offset by the associated advertising cost, which is
reported as a component of selling, general and administrative costs. The
Company accrued approximately $1.3 million of television advertising cost in
fiscal 1997 and expects to incur an additional
17
<PAGE>
$3.1 million during the first two fiscal quarters of 1998. Additionally, the
Company anticipates that it will attempt in the future to produce other
television promoted products, which, if successful, should generate continued
higher associated retail profit margins and higher associated advertising costs.
The Company began its international toy operations with the opening of its
distribution facility in Spain in August 1993. Since that time, the Company has
experienced significant sales growth in its international operations,
particularly in Western Europe. European toy operations accounted for 15.4% of
net sales and 27.6% of consolidated operating income for fiscal 1997, including
the effects of the November 1996 acquisition of TLC. The Company anticipates
continued growth in international sales to both the amusement and the retail
markets, including continued growth in sales of licensed products. The Company
generally sells the same non-licensed products in Europe as in the United
States. The Company sells certain licensed products exclusively in certain
international countries while others are sold both domestically and
internationally. The Company's European toy sales have generally resulted in
higher gross margins than domestic toy sales, and the Company believes this
trend will continue.
The Company's international toy sales are made primarily to European
countries by Play-By-Play Europe located in Valencia, Spain and by TLC located
in Doncaster, England. To date, the cost of most direct shipment sales from
third-party manufacturers to the Company's international customers have been
denominated in United States dollars. Accordingly, the Company is exposed to
foreign currency risk from the shipment date until receipt of payment.
Substantially all other sales by such subsidiary are transacted in Spanish
pesetas, the functional currency, and therefore any gain or loss on currency
translation is reported as a component of Shareholders' Equity. When the
Company's subsidiaries purchase inventory from suppliers in the Far East, all
such purchases are made in United States dollars and the Company experiences
currency risk to the extent that the exchange rate between the United States
dollar and the Spanish peseta fluctuates from the date Play-By-Play Europe is
notified that merchandise is shipped until the date it pays for the goods in
United States dollars.
Pursuant to the terms of certain of the Company's license agreements for
the sale of products in Canada, the Company must pay royalties in Canadian
dollars. Play-By-Play Europe also has license agreements for the sale of stuffed
toys in Europe and other continents which require the subsidiary to pay
royalties in United States dollars. As a result of these license agreements, the
Company experiences currency risk to the extent that exchange rates fluctuate
from the date the royalty liability is incurred until the date the royalty is
actually paid to the licensor. Additionally, the Company is exposed to foreign
currency risk for intercompany receivable and payable transactions through the
settlement date.
Historically, no attempt has been made to minimize, by means of hedging or
derivatives, the risk of potential currency fluctuations, since the currency
risk has not been significant to the Company on a consolidated basis. The total
unhedged exposure related to currency risk at July 31, 1997 was $3.2 million.
The Company experienced significant growth in net sales and net income
during 1997 and 1996 due in part to the Ace and TLC acquisitions which occurred
in June and November 1996, respectively. Accordingly, period-to-period
comparisons of operating results may not be meaningful and results of operations
from prior periods may not be indicative of future results.
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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:
YEAR ENDED JULY 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Net sales............................ 100.0% 100.0% 100.0%
Cost of sales........................ 65.4 67.5 65.0
--------- --------- ---------
Gross profit......................... 34.6 32.5 35.0
Selling, general and administrative
expenses........................... 25.1 23.5 26.6
--------- --------- ---------
Operating income..................... 9.5 9.0 8.4
Interest expense and other income.... (3.1) -- (2.2)
Income tax provision................. 2.0 3.5 2.3
--------- --------- ---------
Income from continuing operations.... 4.4 5.5 3.9
Loss from discontinued operations.... -- (.6) (.6)
--------- --------- ---------
Net income........................... 4.4% 4.9% 3.3%
========= ========= =========
FISCAL YEARS ENDED JULY 31, 1997 AND 1996
The comparison between fiscal 1997 and fiscal 1996 was affected by the Ace
acquisition, which occurred on June 20, 1996. Results of operations for fiscal
1996 include approximately 40 days of Ace operations, compared to a full year of
Ace operations in fiscal 1997.
NET SALES. Net sales for the fiscal year ended July 31, 1997 increased
85.2%, or $63.2 million, to $137.4 million from $74.2 million in fiscal 1996.
The increase in net sales was primarily attributable to increased domestic
amusement sales resulting from the Ace acquisition in June 1996, domestic retail
growth of 52.3% and international sales growth of 131.8%. Domestic net toy sales
for fiscal 1997 compared to fiscal 1996 increased 83.7%, or $51.5 million, to
$113.1 million, and international toy sales increased 131.8%, or $12.0 million
to $21.1 million.
Net sales of licensed products for fiscal 1997 increased 89.7%, or $38.7
million, to $81.9 million from $43.2 million in fiscal 1996. The increase in
licensed product sales was primarily attributable to growth of sales of the
Company's licensed products to both retail and amusement customers, and the
Company's European operations, which accounted for $15.0 million of the
Company's net sales of licensed products in fiscal 1997, a 196.9% increase from
fiscal 1996. Within licensed products, sales of Looney Tunes characters
increased 323.3%, or $39.3 million, to $51.4 million for fiscal 1997 from $12.1
million in fiscal 1996. In addition, the Company began selling "Tornado Taz"
during the fourth quarter of fiscal 1997. Sales for the "Tornado Taz" accounted
for $2.0 million, or 1.5%, of the Company's net toy sales for fiscal 1997.
Play-Faces (registered trademark) decreased 13.3%, or $2.5 million, to $16.5
million, from $19.0 million in fiscal 1996. The Company expects that Play-Faces
(registered trademark) sales will continue to decrease in fiscal 1998. Net sales
of non-licensed products increased 90.1%, or $24.7 million, to $52.2 million
from $27.5 million in fiscal 1996. Net sales of non-licensed stuffed toys
increased 75.3%, or $16.6 million, to $38.7 million from $22.1 million in the
comparable period in fiscal 1996. Within non-licensed products, net sales of
novelty items increased 61.8%, or $3.3 million, to $8.7 million, from $5.4
million in fiscal 1996. The Company began selling "Talkin' Tots" (trademark)
during the fourth quarter of 1997. Sales of "Talkin' Tots" (trademark) accounted
for $4.8 million, or 3.6%, of the Company's net toy sales for fiscal 1997.
Net toy sales to retail customers for fiscal 1997 and fiscal 1996 accounted
for 27.9%, or $38.3 million, and 31.3%, or $23.2 million, respectively, of the
Company's net sales. The approximate 65.1% increase in sales to retail customers
from fiscal 1996 to fiscal 1997 was primarily attributable to the continued
growth in domestic and international retail sales of 52.3%, or $10.9 million,
and 176.6%, or $4.2 million, respectively. This growth was primarily
attributable to the introduction of several new product lines added during
fiscal 1997. The decrease in retail sales as a percentage of total sales from
fiscal 1996 to fiscal 1997
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was principally due to the fact that Ace is predominantly a supplier to the
amusement industry whereas, prior to the Ace acquisition, the Company had a more
even sales mix of retail and amusement customers.
Net toy sales to amusement customers for fiscal 1997 and fiscal 1996
accounted for 69.8%, or $95.9 million, and 63.9%, or $47.4 million,
respectively, of the Company's net sales. The 102.0% increase in dollar volume
was primarily attributable to the Ace acquisition and the strong European
market, which accounted for $14.5 million, a 115.8% increase from fiscal 1996.
GROSS PROFIT. Gross profit increased 97.1% to $47.6 million for fiscal
1997 from $24.1 million in fiscal 1996, due to the overall increase in the
Company's net sales. This increase was primarily attributable to the Ace
acquisition. Gross profit as a percentage of net sales increased 2.1% from 32.5%
for fiscal 1996 to 34.6 % for fiscal 1997. This increase was principally a
result of increased European sales, which carry a higher profit margin and
higher domestic retail margins from the television promoted items.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general and administrative expenses increased to 25.1% in fiscal
1997 from 23.5% in fiscal 1996. Such expenses increased 97.1% to $34.4 million
for fiscal 1997 from $17.5 million in fiscal 1996. This increase was primarily
attributable to increased sales, television advertising costs of $1.3 million
and added distribution facilities from the Ace acquisition. Additionally, the
Company incurred increased occupancy costs relative to the establishment of a
distribution facility in Miami, Florida during late 1996, an office in Hong
Kong, the expansion of the Company's distribution facility in Europe and one
distribution facility associated with the acquisition of TLC.
INTEREST EXPENSE AND OTHER INCOME. Interest expense increased 568%, or
$3.7 million, to $4.4 million for fiscal 1997 from $660,000 in fiscal 1996,
principally as a result of the financing of the acquisition of Ace. Other income
decreased 60.6%, or $332,000, due to the interest earned on interest bearing
accounts and short-term securities during fiscal 1996 generated from the 1995
initial public offering. Such interest bearing cash and investments were used to
partially fund the acquisition of Ace.
INCOME TAX EXPENSE. Income tax expense for fiscal 1997 reflects an
effective tax rate of 30.5%, compared to the fiscal 1996 rate of 39.3%. The
decrease is attributable primarily to a low statutory tax rate on sales by the
Hong Kong subsidiary in fiscal 1997, and to an investment tax credit in Spain
related to the November 1996 acquisition of TLC. In addition, in fiscal 1996 a
valuation allowance was recorded against the deferred tax asset related to a
capital loss carryover, which increased the effective rate for that year.
FISCAL YEARS ENDED JULY 31, 1996 AND 1995
The comparison between fiscal 1996 and 1995 was affected by the Ace
acquisition, which occurred on June 20, 1996. Fiscal 1996 results of operations
include approximately 40 days of Ace.
NET SALES. Net sales for the fiscal year ended July 31, 1996 increased
55.5%, or $26.5 million, to $74.2 million from $47.7 million in fiscal 1995. Net
sales attributable to the Ace acquisition accounted for 9.7%, or $7.2 million,
of net sales for fiscal 1996. Net sales derived from vending operations
accounted for 4.6%, or $3.4 million, of the Company's net sales for fiscal 1996
as compared to 7.9% or $3.8 million of the Company's net sales for fiscal 1995.
Domestic net toy sales for fiscal 1996 increased 65.6%, or $24.4 million, and
international net toy sales increased 42.2%, or $2.7 million, from fiscal 1995.
Net sales of licensed products for fiscal 1996 increased 94.1%, or $21.0
million, to $43.2 million from $22.2 million in fiscal year 1995. Within
licensed products for fiscal 1996, sales of PlayFaces increased 150.0%, or $11.4
million, to $19.0 million, from $7.6 million in fiscal 1995. Net sales of
non-licensed products increased 28.6%, or $6.1 million, to $27.5 million from
$21.4 million in fiscal 1995. Within non-licensed products, net sales of novelty
items increased 43.7%, or $1.6 million, to $5.4 million, from $3.8 million in
fiscal 1995. Net sales of non-licensed stuffed toys increased 25.4%, or $4.5
million, to $22.1 million, from $17.6 million in fiscal 1995.
Net toy sales to retail customers for fiscal 1996 and 1995 accounted for
31.3%, or $23.2 million, and 25.2%, or $12.0 million, respectively, of the
Company's net sales. The 92.7% increase in sales to retail customers from fiscal
1995 to fiscal 1996 was primarily attributable to the continued growth in sales
of the
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<PAGE>
Play-Faces (registered trademark) line. Through July 31, 1996, substantially all
sales to retail customers were comprised of licensed merchandise, primarily
Play-Faces (registered trademark).
Net toy sales to amusement customers for fiscal 1996 and 1995 accounted for
63.9%, or $47.4 million, and 66.1%, or $31.6 million, respectively, of the
Company's net sales. The 50.4% increase in sales volume was primarily
attributable to the continued growth in the Company's sales to amusement park
and arcade customers and the Ace acquisition. 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 44.5% to $24.1 million in fiscal 1996
from $16.7 million in fiscal 1995, due primarily to the overall increase in the
Company's net sales. Gross profit as a percentage of net sales decreased 2.5%
from 35.0% for fiscal 1995 to 32.5% for fiscal 1996 due to the increase in sales
of licensed products to the retail market and competitive pressures relating to
non-licensed products in the amusement market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 37.8% to $17.5 million in fiscal 1996, from
$12.7 million in fiscal 1995. This increase was 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 industry tradeshows, and
increased occupancy costs relative to the establishment of a distribution
facility in Miami, Florida. Of the increase, $1.5 million was related to the Ace
acquisition, primarily a result of approximately $1.0 million of increased
salaries related to the Ace personnel added on June 20, 1996. As a percentage of
net sales, the selling, general and administrative expenses decreased to 23.5%
from 26.6%, due primarily to the Company's ability to service a greater volume
of sales without a corresponding increase in selling, general and administrative
expenses.
INTEREST EXPENSE AND OTHER INCOME. Interest expense decreased 37.3% to
$660,000 for fiscal 1996, from $1.1 million 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 using 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 $656,000 during fiscal 1996.
INCOME TAX EXPENSE. Income tax expense for fiscal 1996 reflects an
effective rate of 39.3%, compared to the fiscal 1995 rate of 36.9%. The increase
is attributable primarily to a valuation allowance that was recorded in fiscal
1996 against the deferred tax asset related to a capital loss carryover.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, the Company's working capital was $35.4 million, compared
to $19.9 million at July 31, 1996. This increase was primarily attributable to
the increase in net sales.
The Company satisfies its capital requirements and seasonal liquidity
shortfalls with cash flow primarily from borrowings and secondarily from
operations. The Company's primary capital needs have consisted of funding for
acquisitions, acquisition of inventory, customer receivables, letters of credit,
licenses and international expansion.
During July 1997 the Company completed a private placement of 8%
onvertible debentures with three investment funds in the aggregate amount of
$15 million. The proceeds were used to retire a $3 million subordinated demand
note due to a shareholder, to provide $3 million of collateral on two lines of
credit with certain banks in Spain, and for general corporate purposes. Interest
accrues at 8% per annum, payable monthly until maturity on June 30, 2004.
Interest is payable monthly and no principal is due until June 30, 2000 at which
time principal is payable at a rate of 1% of the outstanding balance monthly
with the
21
<PAGE>
remaining balance due at final maturity date of June 30, 2004. The debt is
convertible into Common Stock at any time during the loan period at a conversion
price of $17 per share, with a one time possible downward adjustment if the
closing bid price of the Common Stock is a price less than $17 following the
release of earnings for fiscal 1998. Such adjustment is based on the Company's
cash flows, but cannot be adjusted to a price less than 90% of the average
market price for the 21 days following the Company's release of earnings for
fiscal 1998. The convertible debt holders may force redemption upon a change of
control of the Common Stock, a change in the composition of two-thirds of the
Company's Board, or if the Common Stock received in conversion cannot be
publicly traded. The Company incurred costs of approximately $731,000 in
connection with the issuance of the convertible debentures. Such costs were
capitalized and are being amortized to interest expense over the seven-year term
of the convertible debentures on a straight-line basis, which approximates the
interest method. The costs will be expensed on a pro rata basis upon the
conversion of all or a portion of the debentures.
In June 1996, in connection with the Ace acquisition, the Company borrowed
$34.0 million under the Credit Facility, $3.0 million under a subordinated loan
from the Company's Chief Executive Officer and $2.9 million under a subordinated
loan from the Ace Sellers. The Credit Facility provides for a $53 million
revolving line of credit commitment, subject to availability under a borrowing
base calculated by reference to the level of eligible accounts receivable and
inventory, and includes a $15 million sublimit for the issuance of letters of
credit. The revolving credit facility matures on June 20, 1998. The Credit
Facility also includes a $12 million acquisition term loan which requires 60
equal monthly principal payments of $200,000 plus accrued interest beginning
August 1, 1996, with the last payment due and payable on June 20, 2001.
Interest on borrowings outstanding under revolving loans under the Credit
Facility is payable monthly at an annual rate equal to, at the Company's option,
(a) the Alternate Base Rate plus 0.50% or (b) the LIBOR rate plus 2.50%. For
amounts outstanding under the term loans, interest is payable monthly in arrears
at an annual rate equal to, at the Company's option, (a) the Bank's Alternate
Base Rate plus 0.75% or (b) the LIBOR rate plus 2.75%. The "Alternate Base
Rate" for the purpose of this discussion means, as of any day of determination
thereof, a rate per annum equal to the greatest of (a) the Prime Rate in effect
on such day, (b) the Federal Funds Effective Rate (as defined in the Credit
Facility) in effect for such day plus 0.50%, or (c) the Base CD Rate in effect
for such day plus 1.00%.
As of July 31, 1997, the revolving loan balance was $22.6 million, the term
loan balance was $9.6 million, and the amount of convertible debt outstanding
was $15 million. As of July 31, 1997, the Company had an aggregate of $7.1
million in outstanding irrevocable letters of credit and bankers' acceptances.
Based on the level of the Company's eligible accounts receivable and inventory
at July 31, 1997, the Company had $13.6 million of additional borrowing capacity
available under the Credit Facility.
As of July 31, 1997, Play-By-Play Europe had an aggregate of approximately
$2.5 million outstanding in irrevocable letters of credit for the purchase of
inventory. The Company's current policy is to permanently reinvest all earnings
from foreign subsidiaries in those operations. This policy restricts the amount
of cash available for distribution by these subsidiaries; however, the Company
may obtain cash from the subsidiaries for repayment of intercompany obligations
incurred in the normal course of business. In the event the Company changes its
policy, a tax liability will be incurred for previous undistributed earnings,
and any distributions would be subject to withholding and current income taxes.
During fiscal years 1996 and 1997, the Company funded its growth
principally from the aforementioned debt facilities and operations. During this
period of time a majority of the Company's net sales has been derived from
licensed products, a trend which the Company believes will continue. As the
Company continues to expand internationally and obtain additional licenses, the
Company expects greater pressure to be placed on the Company's liquidity needs
to fund significant additional royalty advances and guarantees of minimum
royalty payments. Certain of the Company's license agreements require the
Company to maintain standby letters of credit in favor of the licensors in order
to secure the Company's obligations to make minimum guaranteed payments to the
licensors. Accordingly, the Company expects that additional debt and/or equity
offerings will be required in the foreseeable future to fund such growth.
Minimum
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<PAGE>
royalty guarantees have increased from $1.5 million at July 31, 1995 to $6.2
million at July 31, 1997. Additionally, in September 1997, the Company acquired
the worldwide licensing rights to manufacture and distribute Baby Looney Tunes
products.
The Company's operating activities provided net cash of $1.8 million in
fiscal 1997 and used net cash of $13.4 million in fiscal 1996. The cash flow
from operations for fiscal 1997 was primarily affected by changes in accounts
receivable, inventory and accounts payable.
Net cash used in investing activities during fiscal 1997 was $1.3 million
compared to net cash used in investing activities for fiscal 1996 of $39.9
million. For fiscal 1997, net cash used in investing activities consisted
principally of the purchase of property and equipment of $792,000. Additionally,
during fiscal 1997, the Company entered into a non-cash investing and financing
transaction to acquire TLC for 40,000 shares of Common Stock. The Company
anticipates its capital requirements may exceed $4 million during fiscal 1998,
based on plans to purchase and implement new fully integrated systems software
and modernize the Chicago distribution facility. For fiscal 1996, net cash used
in investing activities consisted principally of the purchase of property and
equipment of $1.8 million and acquisition costs relating to Ace, including $39.2
million principally financed from the Credit Facility, which was partially
offset by the redemption of short-term investments of $973,000.
Net cash provided by financing activities during fiscal 1997 was $5.7
million, and net cash provided by financing activities in fiscal 1996 was $38.9
million. During fiscal 1997, cash was used to repay the revolving loan of $2.2
million, repay the term loan of $2.4 million, repay the $3.0 million note to Mr.
Torres and repay the subordinated loan from the Ace Sellers of $1.5 million. In
fiscal 1996, cash provided by financing activities consisted principally of
proceeds from the various debt facilities described above for the Ace
acquisition and 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.
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 two fiscal quarters. The Company's
sales to the retail toy industry have been highest during the first and fourth
fiscal quarters, and collections from those sales have been highest during the
succeeding two 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 amusement
customers and to retail customers, the Company anticipates that its borrowings
to fund working capital needs may become more significant in the third and
fourth fiscal quarters.
The Company utilizes borrowings under the Credit Facility to finance
purchases of inventory and accounts receivable, primarily during the peak
selling season. During fiscal 1997, the highest level of aggregate borrowings
under the Credit Facility was $33.1 million (in June, 1997).
The following sets forth the Company's net sales by fiscal quarter for
fiscal 1997, 1996 and 1995:
FISCAL YEAR
-------------------------------
FISCAL QUARTER 1997 1996 1995
- ---------------------------------------- --------- --------- ---------
(IN THOUSANDS)
First................................... $ 39,891 $ 23,439 $ 10,067
Second.................................. 22,039 12,023 9,244
Third................................... 28,001 14,302 11,777
Fourth.................................. 47,455 24,433 16,643
INFLATION
The Company does not believe that inflation in the United States or Europe
in recent years has had a significant effect on its results of operations.
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RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share." SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share and is designed to improve earnings per
share information by simplifying the existing computational guidelines and
revising the previous disclosure requirements. The statement is effective for
periods ending after December 15, 1997, including interim periods.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Restated Information," which establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997.
The Company does not believe the implementation of these recent accounting
pronouncements will have a material effect on its consolidated financial
statements.
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<PAGE>
BUSINESS
The Company designs, develops, markets and distributes stuffed toys,
novelty items and its Play-Faces (registered trademark)line of sculpted toy
pillows based on licensed characters and trademarks. The Company also designs,
develops, markets and distributes electronic toys and non-licensed stuffed toys
and markets and distributes a broad line of non-licensed novelty items. The
Company markets and distributes its products in both amusement and retail
markets and believes that it is the leading supplier of stuffed toys and novelty
items to the domestic amusement industry. The Company was incorporated in Texas
in 1992. Its principal executive offices are located at 4400 Tejasco, San
Antonio, Texas 78218 and its telephone number is (210) 829-4666.
Over the last three fiscal years, the Company's net sales have grown from
$32.6 million for fiscal 1994 to $137.4 million for fiscal 1997, representing a
62.4% average annual increase, and net income has increased from $1.1 million
for fiscal 1994 to $6.2 million for fiscal 1997, representing an 82% average
annual increase. The Company's growth in net sales and net income is primarily
attributable to its introduction of new products and its two strategic
acquisitions.
The Company develops its licensed stuffed toys based principally on
popular, classic characters such as Looney Tunes, Animaniacs, Batman, Superman,
and characters featured in Space Jam (the motion picture), The Flintstones
(trademark) and Popeye (trademark) and on popular, classic trademark licenses
such as Coca-Cola (registered trademark) brand plush toys, including the
Coca-Cola (registered trademark) Polar Bear, and Harley-Davidson Motor Company's
Harley Hog (trademark). The Company develops a licensed stuffed toy by
identifying a character or trademark license, obtaining the necessary license
designing the product and developing a prototype, and manufacturing the products
through third party manufacturers. The Company believes that products based on
popular, classic characters and trademarks will have a longer and more stable
product life cycle than products based on newer, less established characters and
trademarks. The Company believes its position as a leading supplier to the
domestic amusement industry allows it to more effectively acquire licenses for
products sold to the amusement market. The Company's non-licensed products
include traditional stuffed toys in various sizes, interactive dolls and novelty
items such as low-priced plastic toys and games used primarily as redemption
prizes by its amusement customers. For fiscal 1997, net sales of licensed
products and non-licensed products accounted for 59.7% and 38.0%, respectively,
of the Company's net sales.
The Company commenced its retail product line in fiscal 1995 with its
originally developed Play-Faces (registered trademark) line of sculpted toy
pillows shaped in the facial likenesses of licensed animated characters. The
Play-Faces (registered trademark) line is based upon popular, classic
characters, including The Walt Disney Company's animated characters, Looney
Tunes, Animaniacs, Batman, Superman, Space Jam characters, Sesame Street
Characters, Garfield (trademark) and new characters developed and introduced by
leading entertainment companies, such as the ones presented in The Walt Disney
Company's animated films Toy Story, The Hunchback of Notre Dame, and 101
Dalmatians. During fiscal 1997 the Company further developed the Play-Faces
(trademark) line by adding full bodied Play-Faces (trademark) which are being
sold in the domestic sections of mass retailers. The Company believes its
Play-Faces (trademark) line is a distinct product category which enhances its
ability to acquire additional character and trademark licenses. Play-Faces
(trademark) products accounted for 12.0% of the Company's net sales for fiscal
1997.
During fiscal 1997, the Company entered the large doll market with a pair
of electronic interactive dolls, the "Talkin' Tots" (trademark) which talk and
sing together utilizing infrared technology. The Company began selling "Talkin'
Tots" (trademark) during the fourth quarter of fiscal 1997 and began television
advertisements during the first fiscal quarter of 1998. The Company also
developed a retail line of Looney Tunes products during fiscal 1997, including
standing, sitting and bean bag stuffed toys, and another television promoted
electronic stuffed toy, the "Tornado Taz." The "Tornado Taz" is a Tazmanian
Devil that spins, shakes, grunts and laughs. The Looney Tunes products include
such characters as Tweety (trademark), Sylvester (trademark), Tazmanian Devil
(trademark), Bugs Bunny (trademark), Speedy Gonzales (trademark), Yosemite Sam
(trademark) and Daffy Duck (trademark).
The Company has a diversified base of customers within the amusement and
retail distribution channels. Amusement customers, which accounted for 69.8% of
net sales for fiscal 1997, include theme parks such as Six Flags, Busch Gardens
and SeaWorld, family entertainment centers such as Dave &
25
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Buster's, Inc., Tilt and Namco, and carnivals and state fairs. In addition to
theme parks, family entertainment centers and carnivals, the Company's amusement
distribution channels include Fun Services (sales through franchisees),
fundraising and premium (products designed for specific companies) customers.
Retail customers, which accounted for 27.9% of net sales for the same period,
principally consist of mass merchandisers such as Wal-Mart, Kmart and Target,
and specialty retailers such as Toys "R" Us and Kay Bee Toys. No one customer
accounted for more than 10% of net sales for fiscal 1997.
The Company recently completed two strategic acquisitions that have
contributed to its growth. In June 1996, the Company acquired substantially all
of the operating assets, business operations and facilities of Ace for $44.7
million. In November 1996, the Company, through its wholly-owned subsidiary
Play-By-Play Europe, acquired TLC for 40,000 shares of Common Stock. The Ace
acquisition provided the Company with several strategic advantages, including
significant distribution in the central and western United States, significant
distribution channels in the outdoor amusement markets, key United States and
international classic character licenses for retail and amusement, an in-house
design and development team and additional key personnel. The Company believes
that the Ace acquisition contributed to the Company's profitability in fiscal
1997. Similarly, the TLC Acquisition resulted in additional distribution
channels in the U.K., where TLC is headquartered, and other areas of Europe. The
Company believes that the TLC Acquisition has begun contributing to the
Company's net earnings and is partially responsible for the significant growth
the Company has experienced internationally.
COMPANY STRENGTHS
The Company believes its principal strengths include its:
o emphasis on licenses for popular, classic characters and
trademarks and new characters introduced by leading entertainment
companies;
o demonstrated ability to develop new and innovative toys such as
"Talkin' Tots (trademark)" and "Tornado Taz", new licensed products
such as the Coca-Cola (registered trademark) brand stuffed toys and new
product categories such as the Play-Faces (trademark) line;
o position as the leading supplier of stuffed toys and novelty items
to the amusement industry;
o balance between amusement and retail markets, which reduces
seasonality and increases stability of revenues;
o experienced management team with toy and licensing expertise;
o in-house design and development team which provides the Company
the ability to bring more products to market quicker, thereby
taking early advantage of product trends;
o Hong Kong office which results in direct sourcing in the Far East
and the ability to better manage product quality, production and
timely availability of products;
o diverse customer base including over 4,000 customers, with no
customer accounting for greater than 10% of net sales;
o multiple distribution channels which enhance the Company's ability
to sell slower moving items while minimizing the impact on gross
profit margins; and
o distribution facilities located throughout North America and
Europe allowing the Company to better serve its customers which
typically have multiple locations and minimal inventory space.
BUSINESS STRATEGY
The Company's growth strategy includes the following key elements:
LICENSED PRODUCT LINE EXPANSION. The Company believes that, by developing
licensed products based principally on popular, classic characters and
trademarks, it has established a core licensed product portfolio that is
characterized by a longer life cycle than is typical in the toy industry. The
Company intends to continue to develop its licensed product line by targeting
licensing opportunities where it can take
26
<PAGE>
advantage of licensor advertising, publicity and media exposure. The Company
believes that its broad licensed product line prevents it from becoming overly
dependent on a single product or customer.
DEVELOPMENT OF INNOVATIVE TOYS AND NEW PRODUCT CATEGORIES. The Company
believes that its Play-Faces (trademark) and other licensed-based product lines
represent distinct product categories which enhance its market identification
and ability to acquire additional character and trademark licenses. The Company
intends to develop new product categories targeted to both its amusement and
retail customers. The Company strives to develop unique products with broad
end-consumer appeal at competitive prices by identifying previously undeveloped
or under-developed products or product categories and matching them with
popular, classic licensed characters and/or trademarks. The Company believes it
has successfully implemented this approach with its Looney Tunes product lines,
"Talkin' Tots (trademark)", "Tornado Taz," Play-Faces (trademark) product lines,
Harley-Davidson Motor Company's Harley Hog (trademark)and Coca-Cola (registered
trademark) Polar Bear.
INTERNATIONAL EXPANSION. The Company plans to increase its international
sales, primarily in Europe and Latin America, in both the amusement and retail
channels through the Company's European distribution facilities and independent
distributors. The Company believes that markets outside the United States
present significant opportunities and are generally less competitive than the
United States market. The Company commenced toy distribution and sales
operations in Europe and Latin America in fiscal 1994. Since fiscal 1994,
international net sales have increased at an average annual rate in excess of
100%, and the Company believes there are additional significant opportunities
for growth in international markets. Additionally, with the newly obtained
worldwide manufacturing and distribution rights for Baby Looney Tunes, the
Company will begin selling in new markets for the Company, including the Asia
Pacific countries.
RETAIL MARKET PENETRATION. The Company intends to broaden its retail
distribution both domestically and internationally. Through its licensing and
new product development strategies, the Company plans to further penetrate the
retail market by continuing to develop and introduce new products (such as
"Talkin' Tots (trademark)" and "Tornado Taz") and product categories (such as
Play-Faces (trademark)). Since fiscal 1994, retail sales have grown at an
average annual rate of 127.3% domestically and at an average annual rate of 110%
internationally. Based on the Company's small market share of the retail
industry and its proven ability to develop product niches and obtain key
licenses, retail products continue to be a growth opportunity for the Company.
AMUSEMENT MARKET PENETRATION. With the Ace acquisition, the Company
believes that it has become the leading supplier of stuffed toys and novelty
items to the domestic amusement market. The Company believes that this market is
less susceptible to changing consumer preferences than the retail market. The
Company believes that its broad and continually updated line of licensed and
non-licensed stuffed toys and novelty items, its purchasing power and its
reputation as a leading amusement supplier provide the Company with a
competitive advantage over many other suppliers to this market. While the
Company believes there is greater opportunity to grow its retail and
international businesses than its domestic amusement business, the latter
provides the Company with a consistent base of cash flow.
ACQUISITION STRATEGY. The acquisition strategy of the Company is to find
businesses with unique product lines (either licensed or non-licensed) which can
be sold through the Company's existing distribution channels or businesses which
have complementary distribution channels for the Company's existing product
lines. The Company believes that this strategy should result in greater sales
while reducing the combined companies' general and administrative costs. The
Company believes that the Ace and TLC acquisitions accomplished both of these
acquisition objectives.
INDUSTRY BACKGROUND
According to the Toy Manufacturers of America, Inc. ("TMA"), an industry
trade group, total domestic shipments of toys, excluding video games and
accessories, were approximately $13.9 billion in 1996. According to the TMA, the
United States is the world's largest toy market, followed by Japan and Western
Europe. The Company estimates that the two largest U.S. toy companies, Mattel,
Inc. and Hasbro, Inc., collectively hold a dominant share of the domestic
non-video toy market. In addition, hundreds of
27
<PAGE>
smaller companies compete in the design and development of new toys, the
procurement of licenses, the improvement and expansion of previously introduced
products and product lines, and the marketing and distribution of toy products.
A substantial majority of the toys sold in the U.S. are manufactured,
either in whole or in part, overseas where labor rates are comparatively low.
The largest foreign producer markets are China and, to a lesser extent, other
countries in the Far East.
Toy manufacturers sell their products either directly to retailers, or to
wholesalers who carry the product lines of many manufacturers. Retail toy sales
have become increasingly concentrated through a small number of large chains,
such as Toys "R" Us, Wal-Mart Stores, Kmart, Target Stores, Kay-Bee Toys, a
division of Consolidated Stores Inc., which generally feature a large selection
of toys, some at discount prices, and seek to maintain lower inventory levels to
reduce their inventory risk. According to the TMA, the top five U.S. toy
retailers collectively hold more than half of the domestic retail market for toy
sales, and their collective market share has grown in recent years.
In the amusement industry, stuffed toys and novelty items are used
primarily as redemption prizes for games of skill and chance, designed for and
operated in theme parks, carnivals, arcades and family entertainment centers.
The Company believes that amusement industry game revenue has experienced
considerable growth due to the expansion of family entertainment center chains
such as Dave & Buster's, Tilt and Aladdin's Castle and improvement in the
quality of redemption merchandise and merchandising display techniques.
PRODUCTS
The Company markets a variety of licensed and non-licensed stuffed toys,
electronic toys and novelty items. The following chart shows the breakdown of
the Company's net toy sales (which does not include vending sales) by principal
product category:
YEAR ENDED JULY 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
Licensed products:
Stuffed toys.................... $ 63.4 $ 24.2 $ 14.6
Play-Faces (registered trademark) 16.5 19.0 7.6
Electronic toys................. 2.0 -- --
--------- --------- ---------
81.9 43.2 22.2
--------- --------- ---------
Non-licensed products:
Stuffed toys.................... 38.7 22.1 17.6
Novelty items................... 8.8 5.4 3.8
Electronic toys................. 4.8 -- --
--------- --------- ---------
52.3 27.5 21.4
--------- --------- ---------
Total...................... $ 134.2 $ 70.7 $ 43.6
========= ========= =========
(AS A PERCENTAGE OF NET TOY
SALES)
Licensed products:
Stuffed toys.................... 47.3% 34.2% 33.5%
Play-Faces (registered trademark) 12.3 26.9 17.5
Electronic toys................. 1.5 -- --
--------- --------- ---------
61.1 61.1 51.0
--------- --------- ---------
Non-licensed products:
Stuffed toys.................... 28.8 31.2 40.3
Novelty items................... 6.5 7.7 8.7
Electronic toys................. 3.6 -- --
--------- --------- ---------
38.9 38.9 49.0
--------- --------- ---------
Total...................... 100.0% 100.0% 100.0%
========= ========= =========
28
<PAGE>
LICENSED PRODUCTS
In developing its licensed products, the Company seeks to take advantage of
media exposure and goodwill accompanying its licensed characters and trademarks
as well as the advertising and promotional expenses incurred by its licensors.
Net sales of licensed products were $81.9 million and $43.2 million (59.7% and
58.2% of net sales) during fiscal 1997 and 1996, respectively. The following
chart sets forth certain of the Company's character and trademark licenses:
<TABLE>
<CAPTION>
CHARACTER OR
LICENSOR TRADEMARK LICENSE PRODUCTS TERRITORY*
- ------------------------------------- ------------------------------------ ------------------------------ ---------------------
<S> <C> <C> <C>
Warner Brothers LOONEY TUNES (Bugs Bunny (trademark), Stuffed toys, PLAY-FACES United States, Canada
Tasmanian Devil (trademark), Sylvester (registered trademark), and certain countries
(trademark), Tweety (trademark), novelties, wallhooks and in Europe and Latin
PorkyPig (trademark), Daffy Duck bookends America
(trademark), Speedy Gonzales
(trademark),Wile E. Coyote
(trademark), Road Runner
(trademark), Elmer Fudd
(trademark), Yosemite Sam
(trademark), Pepe le Pew
(trademark)and others)
BABY LOONEY TUNES Pre-school and infant toys, Worldwide
including molded and stuffed
toys
ANIMANIACS Stuffed toys United States
BATMAN Stuffed toys and novelties United States and
Canada
SUPERMAN Stuffed toys and novelties United States and
Canada
QUEST FOR CAMELOT Stuffed toys, PLAY-FACES United States
(registered trademark) and
novelties
HANNA BARBERA CHARACTERS Stuffed toys, PLAY-FACES United States, Canada
(Flintstones (trademark), Tom and (registered trademark), and certain countries
Jerry (trademark) Scooby-Doo novelties, wallhooks and in Europe and Latin
(trademark), Jetsons (trademark) backpacks America
and others)
The Walt Disney Company STANDARD CHARACTERS (Mickey Mouse, Play-FACES (registered United States, Canada
Minnie Mouse, Donald Duck, Daisy trademark), bookends and and certain countries
Duck, Huey, Duey, Louie, Pluto and backpacks in Europe
Goofy)
WINNIE THE POOH PLAY-FACES (registered United States, Canada
trademark), wallhooks and certain countries
and backpacks in Europe
101 DALMATIONS PLAY-FACES (registered United States, Canada
trademark), wallhooks and and certain countries
backpacks in Europe
THE LITTLE MERMAID PLAY-FACES (registered United States and
trademark) and wallhooks Canada
MULAN PLAY-FACES (registered United States
trademark) and wallhooks
The Coca-Cola Company COCA-COLA (registered trademark) Stuffed toys and novelties United States and
AND COKE (registered trademark) certain countries in
Europe and Latin
America
Harley-Davidson Motor Company HARLEY-DAVIDSON AND HARLEY HOG Stuffed toys United States and
(trademark) Canada
National Football League Properties, NFL (trademark) TEAM LOGOS Stuffed toys and novelties United States
Inc.
National Basketball Association NBA TEAM LOGOS Stuffed toys United States
Properties, Inc.
Children's Television Workshop SESAME STREET Stuffed toys, PLAY-FACES United States, Canada
(registered trademark) and and certain countries
wallhooks in Europe
(TABLE CONTINUED ON FOLLOWING PAGE)
29
<PAGE>
<CAPTION>
CHARACTER OR
LICENSOR TRADEMARK LICENSE PRODUCTS TERRITORY*
- ------------------------------------- ------------------------------------ ------------------------------ -------------------
Jim Henson Productions, Inc. MUPPETS (Kermit the Frog, Miss Piggy PLAY-FACES (registered trademark) United States
and others)
Paws, Inc. GARFIELD (trademark) Stuffed toys, PLAY-FACES United States and
(registered trademark), certain countries in
bookends and wallhooks Europe
Informatica Servicios y Productos, REAL-MADRID CLUB DE FUTBOL Stuffed toys Worldwide
S.A. (registered trademark)
Barcelona Futbol Club BARCELONA FUTBOL CLUB Stuffed toys Spain
Real Betis Balompie S.A.D. REAL BETIS BALOMPIE Stuffed toys Spain
(registered trademark)
</TABLE>
- ------------
* Certain territories are limited to retail, amusement, and/or fund-raising
distribution channels.
STUFFED TOYS. The Company designs, develops, markets and distributes over
1,500 different stuffed toys based upon its licenses for children's
entertainment characters and corporate trademarks. Generally, the Company offers
a variety of sizes and styles of its licensed stuffed toys. The Company seeks to
develop its products around both existing and newly-acquired licenses for
commercially established characters and trademarks. The Company's licensed
stuffed toys are generally sold to both amusement customers as redemption prizes
and to retail customers. Licensed stuffed toy products have suggested retail
prices ranging from $5 to $30. To date, the Company's most successful licensed
stuffed toy products have been the Looney Tunes characters.
PLAY-FACES (registered trademark). During the first quarter of fiscal 1995,
the Company began selling its Play-Faces (registered trademark) line of sculpted
toy pillows shaped in the facial likenesses of licensed animated characters.
Play-Faces (registered trademark) are sold primarily to retail customers and
have a suggested retail price of under $20. The Company believes its Play-Faces
(registered trademark) line is a distinct product category which has enhanced
its ability to acquire additional character and trademark licenses. The Company
has expanded its Play-Faces (registered trademark) line by adding different
sizes of Play-Faces (registered trademark) products and securing additional
character licenses. Play-Faces (registered trademark) products accounted for
12.0% of the Company's net sales for fiscal 1997. During fiscal 1997 the Company
further developed the Play-Faces (registered trademark) line by adding full
bodied Play-Faces (registered trademark) which are being sold in the domestic
sections of mass retailers.
ELECTRONIC TOYS. During fiscal 1997, the Company introduced a television
promoted electronic stuffed toy, Tornado Taz. Tornado Taz is a plush depiction
of the Tazmanian Devil that spins, shakes, grunts and laughs. The Company began
selling this product during the fourth quarter of fiscal 1997. Sales for Tornado
Taz accounted for $2.0 million, or 1.5%, of the Company's net toy sales for
fiscal 1997.
NON-LICENSED PRODUCTS
The Company markets and distributes a broad line of non-licensed products,
including stuffed toys, electronic toys and novelty items. The Company's
non-licensed product line includes stuffed and electronic toys designed and
developed by the Company, stuffed toy and novelty product lines selected and
modified by the Company from the product lines of third party manufacturers, and
stuffed toys and novelty items purchased directly from third party
manufacturers. Net sales of non-licensed products were $52.3 million and $27.5
million (38.0% and 37.0% of net sales) during fiscal 1997 and 1996,
respectively.
STUFFED TOYS. The Company designs, develops, markets and distributes a
broad line of non-licensed stuffed toys, consisting principally of generic
animal characters and a broad variety of seasonal and holiday characters. The
Company's non-licensed stuffed toys are principally marketed to the amusement
market as redemption prizes. The Company frequently redesigns, by color and
otherwise, its product line. Over the two year period ending July 31, 1997,
sales of non-licensed stuffed toys have decreased as a percentage of total net
toy sales primarily due to changing consumer trends toward preferences of
licensed merchandise
30
<PAGE>
and the Company's decision to focus its working capital on the growth of its
licensed products and novelty item sales. No single non-licensed stuffed toy
accounted for more than 10% of the Company's net sales during fiscal 1997, 1996
or 1995.
NOVELTY ITEMS. The Company markets and distributes a broad line of novelty
items to the amusement market for use as redemption prizes. The Company's
novelty items principally include plastic toys, cosmetic jewelry, novelty school
supplies, inexpensive electronic toys and radios, rubber balls and styrofoam
gliders. The Company frequently changes its mix of novelty items. For example,
in response to changing customer demand, the Company is now supplying hard candy
to amusement customers for use as redemption prizes. For fiscal 1997, sales of
candy were not significant. No single novelty item accounted for more than 10%
of the Company's net sales or 10% of the Company's net sales of novelty items
during fiscal 1997.
ELECTRONIC TOYS. During fiscal 1997, the Company entered the large doll
market with a set of electronic interactive dolls, the "Talkin' Tots"
(trademark), which talk and sing together utilizing infrared technology. The
Company began television promotion of "Talkin' Tots (trademark)" during Fall
1997. The Company began selling this product during the fourth quarter of fiscal
1997. Sales for the "Talkin' Tots" (trademark) accounted for $4.8 million, or
3.6%, of the Company's net toy sales for fiscal 1997.
LICENSE AGREEMENTS
Approximately 59.7%, 58.2% and 46.6% of the Company's net sales in fiscal
1997, 1996 and 1995, respectively, were derived from product lines based on
entertainment character or corporate trademark licenses. The Company's products
based on trademarks licensed by Looney Tunes characters accounted for 37.5% of
net sales in fiscal 1997. The Company's licenses generally have terms of one to
four years and permit sales in specified geographic territories and distribution
channels. The Company's license agreements typically require the payment of
non-refundable advances and guaranteed minimum royalties on sales of licensed
products. Certain of the Company's material licenses are non-exclusive. The
Company emphasizes licenses that permit the Company to market toys based on
characters or trademarks which develop their own popular identity, often through
exposure in television programs, movies, cartoons and comic books and, in the
case of popular, classic characters, often through exposure over many years. The
Company's license agreements require the Company to obtain approval of the
Company's third party manufacturer and approval of the product from the
licensor. Generally, the Company's license agreements also require the Company
to carry specified types and amounts of insurance. The Company's license
agreements generally require licensor approval prior to merger, reorganization,
certain stock sales or any assignment of the license, and certain of the license
agreements require prior approval by the licensor of certain management changes
of the licensee. The Company believes that it maintains good working
relationships with its licensors.
In addition to seeking licenses for popular, classic characters and
trademarks, the Company also seeks to acquire licenses for new characters
developed and introduced by leading entertainment companies. The successful
marketing of a product based on a character generally requires the Company to
anticipate and evaluate the popularity of such characters, and to capitalize on
the success of such character in a timely manner. A determination to acquire a
character license must frequently be made before the commercial introduction of
the property in which the new licensed character appears. Since many toy
products based on licensed characters are successfully marketed for only one or
two years, the success of the Company's character licensing program is dependent
upon the ability of management to acquire licenses and to develop the
corresponding products in a timely manner.
SALES, MARKETING AND DISTRIBUTION
The Company markets and distributes its products domestically and
internationally to a diverse customer base within the amusement and retail toy
markets. The following table sets forth information concerning the Company's
domestic and international net toy sales (which do not include vending sales) by
distribution channel. Sales by the domestic division, including export sales,
are considered domestic sales.
31
<PAGE>
The export sales for fiscal 1997, 1996 and 1995 were $5.6 million, $3.7 million
and $2.0 million, respectively. Sales by the European toy subsidiary are
considered international sales.
YEAR ENDED JULY 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
Domestic toy sales:
Retail.......................... $ 31.7 $ 20.8 $ 10.4
Amusement....................... 81.4 40.8 26.8
--------- --------- ---------
113.1 61.6 37.2
--------- --------- ---------
International toy sales:
Retail.......................... 6.6 2.4 1.6
Amusement....................... 14.5 6.7 4.8
--------- --------- ---------
21.1 9.1 6.4
--------- --------- ---------
Total...................... $ 134.2 $ 70.7 $ 43.6
========= ========= =========
(AS A PERCENTAGE OF NET TOY
SALES)
Domestic toy sales:
Retail.......................... 23.6% 29.4% 23.9%
Amusement....................... 60.7 57.7 61.4
--------- --------- ---------
84.3 87.1 85.3
--------- --------- ---------
International toy sales:
Retail.......................... 4.9 3.4 3.8
Amusement....................... 10.8 9.5 10.9
--------- --------- ---------
15.7 12.9 14.7
--------- --------- ---------
Total...................... 100.0% 100.0% 100.0%
========= ========= =========
DOMESTIC SALES. The Company's domestic sales are to amusement customers
including theme parks such as Six Flags, Busch Gardens and SeaWorld, family
entertainment centers such as Dave and Buster's, Tilt and Namco, carnivals,
state fairs and arcade operations, and retail customers including mass
merchandisers such as Wal-Mart, Kmart and Target and specialty retailers such as
Toys "R" Us and Kay Bee Toys. During fiscal 1997, 1996 and 1995, no domestic
customer accounted for more than 10% of net sales to domestic customers.
The Company markets its products to amusement and retail customers in the
United States through 78 salaried and commissioned in-house salespersons and
through 19 commissioned independent sales representatives. The Company's
in-house and independent sales representatives generally utilize product
samples, catalogs, brochures and other promotional materials to market the
Company's products at trade shows, on-site visits to customers and customer
visits to the Company's showrooms. The Company maintains domestic product
showrooms in San Antonio, Texas; New York, New York; Woodinville, Washington;
and Miami, Florida; where it displays its amusement and retail product lines.
The Company's product catalogs and brochures are designed and developed
in-house. Senior management of the Company coordinates and supervises the
Company's sales personnel and coordinates the Company's independent sales
representatives and directly participates in marketing to its customers. No
sales representative generated more than 10% of net sales to domestic customers
during fiscal 1997.
The Company distributes its products from its San Antonio, Texas; Los
Angeles, California; Brooklyn, New York; Chicago, Illinois; Miami, Florida;
Woodinville, Washington; and Burnaby, British Columbia, Canada distribution
facilities and arranges direct shipment from the Far East to its larger retail
customers. During the third quarter of fiscal 1996, the Company established an
office in Hong Kong to enhance its product development and purchasing
capabilities, centralize quality control and expand its vendor base in the Far
East.
32
<PAGE>
The Company's retail customers are among the largest toy retailers in the
United States. Retail customers, which accounted for 27.9% of net sales for the
same period, principally consist of mass merchandisers such as Wal-Mart, Kmart
and Target, and specialty retailers such as Toys "R" Us and Kay Bee Toys. Due
to their purchasing volumes and desire to minimize inventory risk, these
retailers are increasingly requiring suppliers, including the Company, to
maintain more of the inventory on hand domestically. Accordingly, the Company is
participating in the electronic data interchange ("EDI") programs with
Wal-Mart, Target, Sears and Toys "R" Us and is testing the EDI programs with
Kmart, Spencer Gifts, Hills Department Store, JC Penney and Mervyns. The Company
plans to participate in EDI programs of several of its other major retail
customers. To participate with additional customers, the Company notifies the
customer(s) of its desire to participate, and, upon the successful exchange of
test data, the Company seeks approval to become an EDI participant with the
customer. No fees or other commitments are required to participate. The Company
believes that this participation will allow the Company to monitor store
inventory levels, schedule production to meet anticipated reorders and maintain
sufficient inventory levels to both serve its customers and better manage its
inventory. The Company does not anticipate that it will be required to make
significant additional capital expenditures or to hire additional employees in
order to participate in such EDI programs.
In addition to theme parks, family entertainment centers and carnivals, the
Company's amusement distribution channels include Fun Services (registered
trademark), fundraising and premium customers. Fun Services (registered
trademark) consists of sales to approximately 50 franchisees throughout the
United States whereby the Company is the franchisor. The Fun Services
(registered trademark) franchisees sell products at schools, churches and
company fairs. The most significant Fun Services (registered trademark) sales
program is Santa's Secret Shop (registered trademark), which offers school
children and their families the opportunity to purchase Christmas gifts on
school premises during the holiday season. Fun Services (registered trademark)
sales during fiscal 1997 were $7.1 million. The fundraising distribution channel
consists principally of various not-for-profit organizations or their
independent event contractors. The premiums distribution channel designs,
develops and/or sources stuffed toys and novelty items customized for companies.
These products are typically distributed by the customer to their clients or
employees. During fiscal 1997 the fundraising and premiums sales totaled $8.6
million.
Generally, the Company does not sell any of its products on consignment and
accepts returns only for defective merchandise. In certain instances, where
retailers are unable to resell the quantity of products which they have ordered
from the Company, the Company assists retailers in selling such excess inventory
by offering discounts and other concessions. Returns, concessions and canceled
orders have historically been immaterial to the Company's net sales.
INTERNATIONAL SALES. The Company commenced its international operations
with the opening of its distribution facility in Spain in August 1993. In
November 1996, the Company acquired TLC with distribution facilities in
Doncaster, England. The Company's principal international customers are located
in Spain, the United Kingdom, France, Benelux, Italy, Germany, Portugal, Israel,
Scandinavia, Ireland, Greece, Austria and certain Eastern European countries.
The Company has also commenced distribution to countries in the Middle East and
South Africa.
The Company markets its products to amusement and retail customers in
Europe through twenty independent commissioned sales representatives located in
Spain and through twelve independent distributors located in the United Kingdom
and Ireland and through twenty-two independent distributors located in France,
Benelux, Italy, Germany, Austria, Portugal, Malta, Greece, South Africa, the
Middle East, Scandinavia and Eastern Europe, each of which markets products
principally within the country in which it is located. Foreign independent
distributors typically retain their own sales representatives. The Company
maintains product showrooms in Valencia, Spain and Doncaster, England to display
its European product lines, and the Company's independent distributors maintain
product showrooms to display the Company's products.
The Company distributes its amusement and retail products to European
customers through its Company-operated European facilities and through its
independent distributors' facilities. The Company's international product line
generally includes its products offered in the United States. The Company also
33
<PAGE>
offers products based upon licenses from domestic licensors which are exclusive
to the European market and licenses from foreign licensors such as certain major
professional soccer teams in Europe.
The Company believes that the retail industry in Europe is generally less
competitive than that of the United States, although some of the larger American
companies have a significant presence in the European markets. The Company's
license agreements in Europe are generally broader than its domestic license
agreements. Additionally, the European licenses generally provide broader
availability in terms of to whom the Company can sell its products. The Company
believes that fully utilizing these licenses is a growth opportunity. The
Company also plans to introduce certain new retail products, such as "Tornado
Taz" and "Talkin' Tots (trademark)," to the European market.
The amusement industry in Europe is fragmented and competitors are
generally local. The Company believes that it was the first to develop and use a
product catalogue for European amusement sales. The amusement industry in Europe
historically has generally had a limited access to licensed products.
International amusement customers include theme parks such as Port
Aventura, Isla Magica and Monte Tibidabo in Spain, Alton Towers, H. B. Leisure
and Chessington Park in the United Kingdom, Fort Fun Abenteurland and Warner
Brothers Movie World in Germany, Parc Asterix in France, Walibi in Belgium and
Efteling in Holland, and carnivals, fairs and arcade operations. International
retail customers include mass merchandisers such as J-Sainsbury, Tetco, British
Homes Stores, Aucham, Casa, Alcampo, Toys "R" Us, El Corte Ingles, Hipercor,
Ca na de Azucar and specialty retailers.
DESIGN AND DEVELOPMENT
The Company relies on its senior management personnel and its marketing
department to target licensing opportunities and its product development
department to design and develop additions to its product line. The Company
typically drafts initial product drawings and produces toy prototypes in-house.
The Company maintains its sample design department in San Antonio, Texas. The
design department enables the Company to expedite the approval of licensed
products from licensors which usually retain the right to approve the licensed
products being marketed by the Company. To date, the Company has experienced
little difficulty in obtaining licensor approval of these products. The
Company's marketing department also designs product packaging and promotional
materials. To minimize some of the risk associated with introducing new
products, the Company normally solicits the reactions of select customers to
prototypes prior to production.
MANUFACTURERS AND SUPPLIERS
The Company contracts with third party manufacturers in the Far East,
principally within The People's Republic of China, to manufacture its stuffed
toy products and Play-Faces (registered trademark) products. The Company's
novelty items and electronic toys are manufactured by third parties located in
China, Taiwan and Hong Kong. The Company's senior management negotiates the
majority of its manufacturing contracts without using agents. During the third
quarter of fiscal 1996, the Company established an office in Hong Kong to
enhance the Company's product development and purchasing capabilities, to aid in
the management of quality control and shipping schedules and to expand its
vendor base in the Far East. The Far East is the largest and most widely used
manufacturing center of toys in the world. Decisions related to the choice of
manufacturer are based on price, quality of merchandise, consistency and the
ability of a manufacturer to meet the Company's timing requirements for
delivery. The Company is not a party to long-term contractual or other
arrangements with any manufacturer and often uses more than one manufacturer to
produce a single product. The majority of the Company's manufacturing is
arranged directly by the Company with the manufacturing facilities. No
manufacturer accounted for more than 10% of the Company's purchases of toy
products during fiscal 1997, with the exception of Tri-State Manufacturing
(China), Ltd. ("Tri-S"), which accounted for 26.3% of such purchases during
fiscal 1997. During such period, Tri-S manufactured PlayFaces and licensed
stuffed toys. Tri-S is currently one of several manufacturers of these products
for the Company. While the Company believes that it is not dependent on any
single manufacturer in the Far East, the Company could be materially, adversely
affected by political or economic disruptions affecting the business or
operations of third party manufacturers located in the Far East.
34
<PAGE>
The principal materials used in the production and sale of the Company's
products are taffeta, polyester, polystyrene, acrylic textiles, plastics and
polyvinyl chloride. These materials are generally purchased by the manufacturers
who deliver completed or partially completed products to the Company. In order
to reduce transportation costs, the Company typically will import certain large
toys as skins and stuff them with either polystyrene or polyester at its
warehouse facilities in the United States or Europe. The Company believes that
an adequate supply of raw materials used in the manufacture of its products is
readily available from existing and alternative sources at reasonable prices.
ADVERTISING
The Company implemented a television advertising campaign for the first
time in fiscal 1997 in conjunction with the introduction of "Talkin' Tots
(trademark)" and "Tornado Taz". The Company intends to continue to utilize a
promotional strategy whereby the Company will advertise certain of its
proprietary products. The Company believes that television advertising, properly
utilized, has a positive effect on sales. Although a majority of the Company's
advertising budget is allocated to television, the Company continues to expend a
portion of its advertising budget to promote its products through retail
catalogs, advertisement in trade magazines, and cooperative promotional efforts
of retailers. In addition, the Company believes its licensed products benefit
from favorable media exposure such as television programs, movies, commercials,
cartoons and comic books, and by advertising, promotional and other media events
generated by licensors. The Company's advertising expenses were $2.7 million,
$688,000 and $519,000 during fiscal years 1997, 1996 and 1995, respectively.
Aside from television promotions, advertising expenses consist primarily of
costs incurred in the design, development, printing and shipping of Company
catalogs and a limited number of advertisements in trade publications such as
The Toy Book, Amusement Business and Replay Magazine.
VENDING OPERATIONS
The Company owns and operates approximately 1,400 coin-operated amusement
game machines (crane machines, compact disc juke boxes and video game machines)
located in Pizza Hut restaurants in Texas, of which approximately 800 are on
month-to-month arrangements. The other approximately 600 coin-operated amusement
game machines are generally operated under month-to-month arrangements with
numerous small businesses. The Company believes that operating crane machines
improves its ability to serve its amusement customers. The Company shares
machine revenues with the owners of locations where the machines are placed. The
Company's vending operations represented 2.3%, 4.6% and 7.9% of its net sales in
fiscal 1997, 1996 and 1995, respectively, were derived from the Company's
vending operations. The Company currently intends to maintain its present level
of vending operations. However, the Company anticipates that its vending
revenues will continue to decrease as a percentage of net sales due to the
Company's decision to focus its working capital on the growth of its licensed
product sales.
COMPETITION
The Company faces vigorous competition in the sale of its products.
Competitive factors include new product development, the procurement of
licenses, timely shipment of products, price, product appeal and the
availability of retail shelf space. The toy industry is highly fragmented with
several hundred domestic and international toy companies, importers and
distributors. The Company competes with many larger, better capitalized
companies, including the Company's licensors, in the design, development,
marketing, and distribution of toys, and the procurement of licenses. The
Company's principal competitors in the retail industry include all major toy
companies. Many of the Company's competitors, including the Company's licensors,
offer similar products or alternatives to the Company's products. 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.
Certain of the Company's licensors, including The Walt Disney Company, Warner
Brothers, Harley-Davidson Motor Company and The Coca-Cola Company, distribute
competing products through proprietary retail outlets and amusement parks. In
addition, the Company faces competition from a number of smaller toy companies,
some of which market single products.
35
<PAGE>
PRODUCT LIABILITY
Products that have been or may be developed or sold by the Company may
expose the Company to potential liability from personal injury or property
damage claims by end-users of such products. The Company currently maintains
product liability insurance coverage in the amount of $1.0 million per
occurrence, with a $20 million umbrella liability policy. There can be no
assurance that the Company will be able to maintain such coverage or obtain
additional coverage on acceptable terms, or that such insurance will provide
adequate coverage against any potential claims. Moreover, even if the Company
maintains adequate insurance, any successful claim could materially and
adversely affect the reputation and prospects of the Company.
GOVERNMENTAL REGULATION
The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Product Safety Act. Those laws
empower the Consumer Products Safety Commission (the "Consumer Commission") to
protect consumers from hazardous toys and other articles. The Consumer
Commission has the authority to exclude from the market articles which are found
to be hazardous and can require a manufacturer to repurchase such toys under
certain circumstances. Any such determination by the Consumer Commission is
subject to court review. Similar state and local laws exist in the United States
and in many jurisdictions throughout the world. The Company maintains a quality
control program, including the inspection of goods at factories and the
retention of independent testing laboratories in Hong Kong, to ensure compliance
with applicable laws. The Company believes it is in material compliance with all
applicable consumer safety laws.
The sale of franchises is regulated by the Federal Trade Commission and by
certain state agencies located in jurisdictions where the Company has
franchisees. Principally, these regulations require certain written disclosures
be made prior to the offer for sale of a franchise. The disclosure documents are
subject to state review and registration requirements and must be periodically
updated, not less frequently than annually. In addition, some states have
relationship laws which prescribe the basis for terminating a franchisees'
rights and regulate both the Company's and its franchisee's post-termination
rights and obligations. The Company believes it is in material compliance with
all applicable franchise laws.
TARIFFS AND DUTIES
In December 1994, the United States approved a trade agreement pursuant to
which import duties on toys, games, dolls and other specified items were
eliminated effective January 1, 1995, from products manufactured in all MFN
countries (including China). Increases in quotas, duties, tariffs or other
changes or trade restrictions which may be imposed in the future could have a
material adverse effect on the Company's financial condition, operating results
or ability to import products. In particular, the Company's costs could be
increased if China's MFN status is revoked. The loss of MFN status for China
would result in substantial duties on the cost of toy products manufactured in
China and imported into the United States. Currently there is no duty on the
import of these products.
The Company could attempt to mitigate the effects of an increase in duty by
shifting its manufacturing to other countries, but there can be no assurance
that the Company would be successful in this regard within a reasonable period
of time. The Company cannot predict what regulatory changes may occur or the
type or amount of any financial impact on the Company that these changes could
have in the future.
Spain imposes an import duty for products imported from China that exceed
specified levels. To date, the Company has not incurred any such import duties,
although there can be no assurance that the Company will not be assessed these
duties in the future.
TRADEMARKS
The Company has registered trademarks for Play-By-PlayT and Play-Faces
(registered trademark) in the United States and in Spain. The Company believes
it has the right to use these marks for the product categories on which they
36
<PAGE>
are currently used. The Company has filed an application to register "Talkin'
Tots" (trademark) as a trademark in the United States.
EMPLOYEES
As of July 31, 1997, the Company employed approximately 600 people in its
toy operations and 20 people in its vending operations. Of the approximately 600
employees in the toy operations, approximately 360 are engaged in warehousing
and distribution, 118 are engaged in finance and administration, 94 are engaged
primarily in sales and marketing and 28 are engaged in product development. Some
of the Company's employees at the Chicago, Illinois facility are represented by
a union. In Spain, the Company is subject to various governmental regulations
relative to its employees, and has standard national employment contracts with
all of its Spanish employees. The Company believes its relationship with its
employees is satisfactory.
PROPERTIES
The Company's principal executive offices, principal warehouse and showroom
are located at 4400 Tejasco, San Antonio, Texas, where the Company occupies
18,450 square feet of office space, 3,240 square feet of showroom space and
202,620 square feet of warehouse space, pursuant to lease agreements that expire
during January and December 2003.
The Company owns the property and building comprised of 9,920 square feet
of office space, 6,480 square feet of showroom space, and 363,100 square feet of
distribution center, warehouse and manufacturing space located in Chicago,
Illinois. The Company has a 51% ownership interest in the property and building
comprised of 6,400 square feet of office space, 6,220 square feet of showroom
space, and 234,740 square feet of distribution center, warehouse and
manufacturing space located in Los Angeles, California. The remaining 49%
interest in the Los Angeles, California facility is owned by and leased from the
Ace Sellers.
The Company also leases the space occupied by its other offices,
warehouses, distribution centers, manufacturing facilities and showrooms. The
following table summarizes these leases:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION TYPE OF FACILITY SQUARE FOOTAGE
- ------------------------------------- -------------------------------- ---------------
<S> <C> <C>
New York, New York................... Showroom 4,600
Los Angeles, California.............. Warehouse 102,000
Warehouse/Storage 17,000
Brooklyn, New York................... Warehouse/Stuffing Operations 40,000
Miami, Florida....................... Showroom/Warehouse 27,000
Woodinville, Washington.............. Office/Warehouse 34,100
Kowloon, Hong Kong, China............ Office/Showroom/Warehouse 2,300
Burnaby, British Columbia, Canada and
Mississauga, Ontario............... Office/Warehouse 20,000
Doncaster, South Yorkshire,
England.............................. Office/Showroom/Warehouse 25,500
Valencia, Spain...................... Office/Showroom/Warehouse 70,000
</TABLE>
The Company believes that additional office, showroom and warehouse space
is readily available and that such new space, together with the Company's
existing facilities, will be adequate and suitable for the operation of its
business for the foreseeable future.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings and claims incident to
the normal conduct of its business. The Company believes that such legal
proceedings and claims, individually and in the aggregate, are not likely to
have a material adverse effect on its financial condition.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the directors and executive officers of the Company and their
respective ages and positions are as follows:
NAME AGE POSITION
- -------------------------------- --- ----------------------------------------
Arturo G. Torres................ 60 Chief Executive Officer and Chairman of
the Board
Mark A. Gawlik.................. 35 President, Chief Operating Officer and
Director
Raymond G. Braun................ 41 Chief Financial Officer, Treasurer and
Director
Saul Gamoran.................... 38 Executive Vice President, General
Counsel, Secretary and Director
Francisco Saez Moya............. 48 President --Play-By-Play Europe and
Director
Ottis W. Byers.................. 52 Director
Steve K.C. Liao................. 51 Director
Tomas Duran..................... 52 Director
Berto Guerra, Jr................ 47 Director
James F. Place.................. 65 Director
ARTURO G. TORRES has been Chief Executive Officer and Chairman of the Board
of the Company since April 1993. Prior thereto, Mr. Torres was the Founder,
Chairman of the Board, Chief Executive Officer and President of Pizza
Management, Inc. ("PMI") from its inception in 1972 to its eventual sale in
1992. PMI was the largest (approximately 240 restaurants) private Pizza Hut,
Inc. franchisee in the world with operations in the United States, the
Commonwealth of Puerto Rico, Spain and the United States Virgin Islands.
Although Mr. Torres is actively involved in the management of the Company, he is
also involved in various private business endeavors which include Veladi Ranch,
Inc., a 3,000 head registered hereford ranch, and Veladi Ranch Steak House,
Inc., a privately held steak house chain with ten restaurants open.
MARK A. GAWLIK has been President and a Director of the Company since its
inception in January 1992, and became Chief Operating Officer in April 1993.
From January 1990 until the May 1992 acquisition by the Company, Mr. Gawlik was
General Manager of the Toys and Novelties Division of PMI. From February 1986 to
December 1989, Mr. Gawlik was Controller of PMI. From June 1983 through February
1986, he was employed by Deloitte, Haskins & Sells, San Antonio, Texas, most
recently as Senior Accountant. Mr. Gawlik received a Bachelor of Business
Administration degree in accounting, summa cum laude, from The University of
Texas in 1984.
RAYMOND G. BRAUN has been Chief Financial Officer, Treasurer and a Director
of the Company since January 1997. Prior to that, Mr. Braun was a partner with
the independent accounting and advisory firm of Coopers & Lybrand L.L.P. Mr.
Braun served in various roles at Coopers & Lybrand since 1980, having joined
that firm after graduating from The University of Texas at Austin with a
Bachelor of Business Administration degree in accounting.
SAUL GAMORAN has been Executive Vice President, General Counsel, Secretary
and a Director of the Company since May 1996. From April 1995 through May 1996,
Mr. Gamoran was President of Renaissance Strategies, Ltd., a consulting firm
specializing in consumer products. From June 1988 through March 1995, he was
Executive Vice President of Ace. Mr. Gamoran is a past board member of the TMA.
Mr. Gamoran received a Juris Doctor degree from Northwestern University in 1984
and a Bachelor of Science degree in speech from Northwestern University in 1981.
FRANCISCO SAEZ MOYA has been President of Play-By-Play Europe since April
1995. From May 1992 until April 1995, Mr. Moya was Vice President-European
Operations of the Company and has served as a Director since May 1992. Mr. Moya
also serves as Administrator of Play-By-Play Europe, a position he has held
since 1989. From May 1986 through May 1992, he served as Vice President-Spain
for the Restaurant Division of PMI. Mr. Moya is fluent in English, Spanish,
Italian, Portuguese and French. Mr. Moya
38
<PAGE>
received a M.H.C.C. degree in Hotel and Catering Management-Accounting from the
College of Further Education of Hastings, England in 1973.
OTTIS W. BYERS has been a Director of the Company since September 1995.
Since February 1995, Mr. Byers has been owner and Vice President of B.N.
Transport, Inc., Cleveland, Texas. From 1978 through 1994, Mr. Byers owned Byers
Enterprises, which operated three Mexican food restaurants in Texas. Mr. Byers
received a Bachelor of Science degree in history from Sam Houston State
University in 1968.
STEVE K. C. LIAO has been a Director of the Company since October 1995.
Since 1989, Mr. Liao has also been a real estate investor and property manager
of multi-family properties in Houston, Texas.
TOMAS DURAN has been a Director of the Company since November 1992. Mr.
Duran has owned an insurance consulting business located in Corpus Christi,
Texas since August 1992. From 1988 through July 1992, he was Director of
Management and Budget and Senior City Manager for the City of Corpus Christi,
Texas. Mr. Duran served as Trade Representative for the Monterrey, Veracruz and
Mexico City Foreign Trade Mission and served as President of the Texas Public
Employees Labor Relations Association from 1985 through 1986. Mr. Duran studied
engineering at Universidad de Madrid, Madrid, Spain from 1964 through 1965 and
received a Bachelor of Arts degree in international relations from West Texas
State University in 1970.
BERTO GUERRA, JR. has been a Director of the Company since its inception in
May 1992. Mr. Guerra is the Managing Director-Corporate Development of
Southwestern Bell Telephone, and has been employed by that company or another
subsidiary since 1978. Mr. Guerra served on President Bush's Hispanic Alliance
on Free Trade from 1989 through 1992 and the College of Education Foundation
Advisory Council of The University of Texas from 1988 to the present. In April
1995, Mr. Guerra was elected to the Board of Trustees of The University of
Texas-Pan American Foundation. Mr. Guerra received a Bachelor of Science degree
in interdisciplinary management from Southwest Texas State University in 1984.
JAMES F. PLACE has been a Director of the Company since October 1994. Since
1967, Mr. Place has owned and managed various commercial real estate properties
and other investments primarily located in Texas, which has been his primary
business occupation since 1967. Mr. Place was a director of PMI from 1976 to
June 1992. Mr. Place has been a director of Grand Prix Tours, Inc., a tour
operator for automobile racing events, since January 1988.
There are no family relationships among any of the executive officers or
directors of the Company.
The Company's Articles of Incorporation divide the Board into three classes
of as equal size as possible, with the terms of each class expiring in
consecutive years so that only one class is elected in any given year.
Successors to directors whose terms have expired are required to be elected by
shareholder vote. Vacancies in unexpired terms and any additional positions
created by Board action are filled by action of the existing Board. The terms of
Messrs. Torres, Gamoran and Guerra will expire at the 1998 annual meeting of
shareholders; the terms of Messrs. Moya, Byers and Liao will expire at the 1999
annual meeting of shareholders and the terms of Messrs. Gawlik, Braun, Duran and
Place will expire at the 2000 annual meeting of shareholders. The executive
officers of the Company are elected annually by the Board following the annual
meeting of shareholders and serve at the discretion of the Board until their
successors are elected and qualified.
Outside members of the Board are compensated $1,000 per meeting for
attending Board meetings, $500 per meeting for attending Board committee
meetings and receive reimbursement for out-of-pocket expenses incurred for
attendance at meetings. During fiscal 1997, total outside directors' fees of
$23,000 were paid in cash. Management directors receive no fees for their
services as directors.
BOARD COMMITTEES
The Company's Board has two standing committees: the Audit Committee and
the Compensation Committee. The functions of the Audit Committee, of which
Messrs. Byers, Duran, Guerra, Liao and Place are members, are to make
recommendations to the Board regarding the engagement of the Company's
independent accountants and to review with management and the independent
accountants the Company's
39
<PAGE>
internal controls, financial statements, basic accounting and financial policies
and practices, audit scope and competency of accounting personnel. The Audit
Committee held four meetings during fiscal 1997. The functions of the
Compensation Committee, of which Messrs. Byers, Duran, Guerra, Place and Liao
are members, are to review and recommend to the Board the compensation, stock
options and employment benefits of all officers of the Company, to administer
the 1994 Incentive Plan, to fix the terms of other employee benefit arrangements
and to make awards under such arrangements. The Compensation Committee held
three meetings during fiscal 1997. During fiscal 1997, none of the individuals
serving on the Compensation Committee was an officer or employee of the Company.
No executive officer of the Company has served as a member of the board of
directors or the compensation committee of any company one of whose executive
officers include a member of the Board or the Compensation Committee of the
Company, other than Mr. Torres.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN COMPENSATION. The following table sets forth
all compensation paid for the last three fiscal years to the Company's Chief
Executive Officer and each of the Company's other executive officers whose
annual salary exceeded $100,000 on an annualized basis for the fiscal year
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION -------------------------------
----------------------------------------------- RESTRICTED (#) SHARES
NAME AND FISCAL OTHER ANNUAL STOCK UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS OPTIONS(2)(3)(4)
- ------------------------------------- ------ --------- --------- --------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Arturo G. Torres..................... 1997 $ 284,635 -- -- -- 60,000
Chairman of the Board 1996 $ 196,962 68,250 -- -- 10,000
and Chief Executive 1995 $ 180,692 -- -- -- 15,000
Officer
Mark A. Gawlik....................... 1997 $ 190,000 -- -- -- 30,000
President and Chief 1996 $ 152,884 $ 30,250 -- -- 10,000
Operating Officer 1995 $ 128,077 $ -- -- -- 12,000
Raymond G. Braun..................... 1997 $ 101,635 -- -- -- 200,000
Chief Financial Officer 1996 -- -- -- -- --
and Treasurer (5) 1995 -- -- -- -- --
Saul Gamoran......................... 1997 $ 180,008 -- -- -- 30,000
Executive Vice 1996 $ 31,731 -- -- -- 100,000
President, Secretary 1995 -- -- -- -- --
and General Counsel
Francisco Saez Moya.................. 1997 $ 156,057 -- -- -- 30,000
President -- Play-By-Play 1996 $ 125,000 $ 16,000 -- -- --
Europe 1995 -- -- -- -- 12,000
Jay B. Foreman....................... 1997 -- -- -- -- --
Vice President -- U.S. 1996 102,615 $ 20,000 -- -- --
Operations(6) 1995 $ 125,689 -- -- -- --
</TABLE>
NAME AND ALL OTHER
PRINCIPAL POSITION COMPENSATION
- ------------------------------------- ------------
Arturo G. Torres..................... --
Chairman of the Board --
and Chief Executive --
Officer
Mark A. Gawlik....................... --
President and Chief --
Operating Officer --
Raymond G. Braun..................... --
Chief Financial Officer --
and Treasurer (5) --
Saul Gamoran......................... --
Executive Vice --
President, Secretary --
and General Counsel
Francisco Saez Moya.................. --
President -- Play-By-Play --
Europe --
Jay B. Foreman....................... --
Vice President -- U.S. --
Operations(6) --
- ------------
(1) Certain of the Company's executive officers receive personal benefits in
addition to salary; however, the Company has concluded that the aggregate
amounts of such personal benefits did not exceed the lesser of $50,000 or
10% of annual salary reported for any named executive officer.
(2) All 1995 options were originally granted on April 13, 1995, for the number
of shares indicated. All such options were canceled and re-priced on
December 9, 1996. The options are exercisable according to the original
vesting schedule in five annual increments of 20% each.
(3) All 1996 options were originally granted on September 29, 1995, except for
Mr. Gamoran's which were granted on May 16, 1996. All such options were
re-priced on December 9, 1996. The options were exercisable according to the
original vesting schedule in five annual increments of 20% each.
(4) The outstanding options have been granted pursuant to the Company's 1994
Incentive Stock Option Plan except for Mr. Braun, who was granted 200,000
non-qualified stock options pursuant to his employment agreement.
(5) Mr. Braun joined the Company on January 2, 1997.
(6) Mr. Foreman resigned from the Company on February 29, 1996 and ceased
consulting with the Company on April 30, 1996.
40
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
individual grants of options that were made during fiscal 1997 to the executive
officers named in the Summary Compensation Table. This table is intended to
allow shareholders to ascertain the number and size of option grants made during
the fiscal year, the expiration date of the grants, and the grant date present
value of such options under specified assumptions.
<TABLE>
<CAPTION>
% OF
NUMBER OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS
OPTIONS/ GRANTED TO EXERCISE
SARS EMPLOYEES OR BASE GRANT DATE
GRANTED IN FISCAL PRICE EXPIRATION PRESENT VALUE
NAME (#) YEAR(1) ($/SH) DATE ($/SH)(2)
- ------------------------- ----------- ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Arturo G. Torres......... 60,000 14.56% 12.10 12/9/02 1.84
Mark A. Gawlik........... 30,000 7.28% 11.00 12/9/06 3.66
Raymond G. Braun......... 200,000 48.54% 8.00 1/1/07 5.81
Saul Gamoran............. 30,000 7.28% 11.00 12/9/06 3.66
Francisco Saez Moya...... 30,000 7.28% 11.00 12/9/06 3.66
- ------------
</TABLE>
(1) Based upon 412,000 options to purchase shares of Common Stock granted in
fiscal 1997.
(2) The per share value is based on the Black-Scholes Option pricing model. The
calculation included the following assumptions: estimated volatility of
23.6% (based on historical stock prices of comparable companies); risk-free
interest rate ranging from 5.39% to 6.67% (based on returns available
through U.S. Treasury bonds); no dividend yield; and on expected life of
options of 5 years for 10-year options and expected life of 2.5 years for
5-year options. Option values are dependent on general market conditions and
the performance of the Common Stock. There can no assurance that the values
in this table will be realized.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES. The following table sets forth, with respect to the executive officers
named in the Summary Compensation Table, information with respect to the
aggregate amount of options exercised during fiscal 1997, any value realized
thereon, the number of unexercised options at the end of the fiscal year
(exercisable and unexercisable) and the value with respect thereto.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS
SHARES OPTIONS/SARS AT AT FISCAL
ACQUIRED FISCAL YEAR END(#) YEAR-END($)(1)
ON VALUE ---------------------------- -----------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ---------------------------------------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Arturo G. Torres........................ -- -- 55,000 30,000 187,000
Mark A. Gawlik.......................... -- -- 37,000 15,000 166,500
Raymond G. Braun........................ -- -- 20,000 180,000 150,000
Saul Gamoran............................ -- -- 61,667 68,333 277,502
Francisco Saez Moya..................... -- -- 27,000 15,000 121,500
</TABLE>
NAME UNEXERCISABLE
- ---------------------------------------- -------------
Arturo G. Torres........................ 102,000
Mark A. Gawlik.......................... 67,500
Raymond G. Braun........................ 1,350,000
Saul Gamoran............................ 307,499
Francisco Saez Moya..................... 67,500
- ------------
(1) Total value of options based on a fair market value of $15.50 per share as
of July 31, 1997, the last reported sale price of the Common Stock as
reported by the Nasdaq National Market on that date.
EMPLOYMENT ARRANGEMENTS
Other than employment agreements with Mr. Gamoran, Mr. Braun, James A.
Weisfield and one other employee, the Company does not have employment
agreements with any of its United States employees. The Company does have
standard national employment contracts with all of its Spanish employees.
In May 1996, the Company entered into an employment agreement with Mr.
Gamoran, which agreement will automatically expire three years thereafter,
unless it is terminated by the Company or Mr. Gamoran. The agreement has a three
year term and provides for a non-competition covenant and the grant of certain
stock options as disclosed under "Management." In November 1996, the Company
entered into
41
<PAGE>
an employment agreement with Mr. Braun, which agreement will automatically
expire three years thereafter, unless it is terminated by the Company or Mr.
Braun. The agreement has a three year term and provides for the grant of certain
stock options as disclosed under "Management."
On June 20, 1997, the Company entered into an employment agreement with
James A. Weisfield, an employee of the Company. The agreement has a is
terminable without cause and provides for a non-competition covenant and
participation in the 1994 Incentive Plan.
1994 INCENTIVE PLAN
SCOPE. During fiscal 1995, the Board of Directors and shareholders of the
Company approved the Play-By-Play Toys & Novelties, Inc. 1994 Incentive Plan
(the "Incentive Plan"). The Incentive Plan authorizes the Company to award
incentive stock options and nonqualified stock options to purchase Common Stock
and restricted stock to officers and other employees of the Company. On June 27,
1996, the Company registered with the Securities and Exchange Commission the
700,000 shares authorized under the Incentive Plan. On August 29, 1997, the
Board of Directors amended the Incentive Plan to increase the number of shares
authorized to award incentive options and nonqualified stock options by 600,000
shares to 1,300,000 shares. This amendment will be placed on the December 1997
shareholder meeting agenda for approval. The purpose of the Incentive Plan is to
attract, retain and motivate officers and employees. If an award made under the
Incentive Plan expires, is canceled or is otherwise terminated, those shares
will be available for future awards under the Incentive Plan. The Incentive Plan
will terminate on August 24, 2004.
ADMINISTRATION. The Incentive Plan is administered by a committee (the
"Committee"). Subject to the provisions of the Incentive Plan, the Committee
has authority to select those officers and other employees of the Company to
receive awards, to determine the time or times of receipt, to determine the
types of awards and the number of shares covered by the awards, and to establish
the terms, conditions and provisions of such awards.
STOCK OPTIONS. Both incentive stock options and nonqualified stock options
(collectively referred to as "Stock Options") may be granted pursuant to the
Incentive Plan. All Stock Options granted under the Incentive Plan will have an
exercise price per share to be determined by the Committee, provided that the
exercise price per share under each Stock Option shall not be less than the fair
market value of a share of Common Stock at the time the Stock Option is granted
(110% of such fair market value in the case of incentive stock options granted
to a shareholder who owns 10% or more of the Company's Common Stock). The
maximum term for all Stock Options granted under the Incentive Plan is ten years
(five years in the case of an incentive stock option granted to a shareholder
who owns 10% or more of the Company's Common Stock). Stock Options are
exercisable at such time and in such installments as the Committee may provide
at the time the Stock Option is granted. During fiscal 1997, the Compensation
Committee granted incentive stock options to purchase 162,000 shares of Common
Stock under the Incentive Plan to certain officers and employees of the Company.
At July 31, 1997, 637,800 incentive stock options were outstanding. The options
generally have a four-year vesting period and are exercisable at prices per
share ranging from $9.75 to $15.95. One-fifth of such options will become
exercisable six months after the date of grant and on each of the first four
anniversaries of the date of grant. In the event of a change in control of the
Company, as defined in the Incentive Plan, awards under the Incentive Plan
become exercisable within 60 days of the change in control. The number of
options exercisable as of July 31, 1997 were 315,300.
On September 29, 1995, the Board modified the terms of the incentive stock
options granted to Messrs. Torres, Gawlik and Moya during fiscal 1995, such that
the options vest and become exercisable within one year from the date of grant.
The exercise price per share of all such Stock Options is equal to $13.48. On
May 16, 1996, Mr. Gamoran was granted 100,000 options to purchase stock in the
Company at $13.75 per share. Of the 100,000 options granted to Mr. Gamoran,
20,000 of said options vested immediately, and one-third of the remaining
options will become exercisable on each of the first three anniversaries of the
date of grant. Mr. Gamoran shall have a period of five years from the date of
each vesting in which to exercise these options. All options granted to the
officers of the Company prior to December 9, 1996 were canceled and re-issued at
an exercise price of $11.00 per share, with Mr. Torres' exercise price being
$12.10 per share, or 100% and 110% respectively, of the quoted close price of
the Company's Common Stock on such dates. The vesting periods for such options
were modified to give credit for the prior holding periods.
42
<PAGE>
RESTRICTED STOCK. Restricted stock awards are grants of Common Stock made
to officers and employees subject to conditions established by the Committee.
The terms of a restricted stock award, including the restrictions placed on such
shares and the time or times at which such restrictions will lapse, shall be
determined by the Committee at the time the award is made. Unless the Committee
determines otherwise, holders of restricted stock shall have the right to vote
the shares of restricted stock and to receive all dividends thereon. The
Committee may determine at the time of an award of restricted stock that
dividends paid on such shares may be paid to the grantee or deferred. Deferred
dividends (together with any interest accrued thereon) will be paid upon the
lapsing of the restrictions on the shares of restricted stock or forfeited upon
the forfeiture of the shares of restricted stock. The agreements evidencing
awards of restricted stock shall set forth the terms and conditions of such
awards and the effect of a grantee's termination of employment. No restricted
stock has been issued pursuant to the Incentive Plan as of July 31, 1997.
TERMINATION AND AMENDMENT. The Incentive Plan may be terminated or amended
by the Board of Directors, provided that, in the absence of shareholder
approval, no amendment of the Incentive Plan may materially increase the total
number of shares of Common Stock with respect to which awards may be made under
the Incentive Plan, change the exercise price of a Stock Option, materially
modify the requirements as to eligibility for participation in the Incentive
Plan or materially increase the benefits accruing to participants under the
Incentive Plan. No amendment of the Incentive Plan may adversely alter or impair
any Stock Option or share of restricted stock awarded under the Incentive Plan
prior to such amendment without the consent of the holder thereof.
NON-PLAN OPTIONS
In addition to the Stock Options granted pursuant to the Incentive Plan,
during fiscal 1997 the Company granted nonqualified stock options outside of the
Incentive Plan to purchase 10,000 shares of Common Stock (the "Non-Plan
Options") to each of the outside Directors of the Company, Messrs. Byers,
Duran, Guerra, Liao and Place. The Non-Plan Options were granted at an exercise
price equal to $11.00, or 100% of the closing sales price of the Common Stock on
the date of the grant, and expire five years thereafter. Half of such options
vest six months from the date of grant and the remainder vest twelve months from
the date of grant. The number of Non-Plan Options exercisable as of July 31,
1997 were 79,400.
On August 29, 1997, the Company granted nonqualified stock options outside
of the Incentive Plan to purchase 20,000 shares of Common Stock to each of
Messrs. Byers, Duran, Guerra, Liao and Place. The Non-Plan Options were granted
at an exercise price equal to $19.00, or 100% of the quoted close price of the
Common Stock on the date of grant, and expire five years thereafter. Half of
such options vest six months from the date of grant and the remainder vest
twelve months from the date of grant.
In connection with the employment of Raymond Braun in January 1997, options
to purchase 200,000 shares of Common Stock were granted at a purchase price of
$8.00 per share. These options vest on or after the first day of each calendar
month, commencing February 1, 1997, through and including January 1, 2002, up to
one sixtieth (1/60) of the total number of shares. In connection with these
option grants, the Company recognized $82,000 of compensation expense and
$618,000 of unearned compensation in fiscal 1997.
On August 29, 1997, the Board granted stock options to purchase 412,500
shares of Common Stock to certain officers and employees of the Company at an
exercise price of $19 per share.
43
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of October 31, 1997, and as adjusted
to give effect to the sale of 3,135,000 shares of Common Stock in the Offering,
by (i) each person the Company knows to be the beneficial owner of 5% or more of
the outstanding shares of Common Stock, (ii) each Named Executive Officer, (iii)
each director of the Company and (iv) all executive officers and directors of
the Company as a group. Except as indicated in the footnotes to this table and
pursuant to applicable community property laws, the Company believes that each
shareholder named in this table has sole investment and voting power with
respect to the shares set forth opposite such shareholder's name.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING OFFERING
---------------------- SHARES BEING ----------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------- ----------- ------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C>
Arturo G. Torres(1)..................... 1,535,990(1) 30.79% 500,000 1,035,990(1) 13.74%
Mark A. Gawlik.......................... 230,321 4.65 -- 230,321 3.07
Francisco Saez Moya..................... 275,586 5.57 82,200 193,386 2.58
Berto Guerra, Jr........................ 53,465 1.09 15,000 38,465 *
James F. Place.......................... 39,873 * 5,000 34,873 *
Tomas Duran............................. 18,300 * 10,800 7,500 *
Raymond G. Braun........................ 40,930 * -- 40,930 *
Saul Gamoran............................ 76,667 1.54 -- 76,667 1.02
Ottis W. Byers.......................... 16,000 * 11,000 5,000 *
Steve K. C. Liao........................ 18,500 * 11,000 7,500 *
----------- ------------ -----------
All directors and executive officers as
a group (10 persons).................. 2,305,632 635,000 1,670,632
============
</TABLE>
- ------------
* Less than 1%
(1) Includes 49,200 shares held in trust for the benefit of Mr. Torres' three
minor children (16,400 shares each), for which Mr. Torres is the trustee.
The business address of all executive officers and directors of the Company
is 4400 Tejasco, San Antonio, Texas 78218.
44
<PAGE>
CERTAIN TRANSACTIONS
To partially finance the acquisition of Ace, in June 1996 Mr. Torres
provided a $3.0 million unsecured subordinated demand loan to the Company.
During fiscal 1997, the Company paid Mr. Torres $257,800 in interest expense.
The note was repaid in full in July 1997.
On February 19, 1997, Play-By-Play Europe entered into an agreement
with Banco Santander, S.A., Valencia, Spain, to open a $2.0 million standby
letter of credit, which is personally guaranteed with 35,000 shares of the
Company's Chief Executive Officer's personal common stock investment in a
company that is not affiliated with Play-By-Play. No remuneration was paid by
the Company to its Chief Executive Officer as consideration for this guarantee.
The letter of credit will mature on October 31, 1997. The Company believes that
it will be able to successfully renew this letter of credit on substantially
similar terms.
The Company leases a building used as a video arcade located in Odessa,
Texas, from Mr. Torres. Rental expense for such arcade was approximately $7,400
during fiscal 1997. The Company believes that the terms of the lease are fair
and reasonable and are on terms at least as favorable as would be available from
non-affiliated parties.
Mr. Place, a Director of the Company, is a partner in Espinoza's Pizza
Company, Ltd. ("Espinoza") which owns and operates 11 restaurants in which the
Company has placed coin-operated amusement game machines. Espinoza was paid, as
its percentage of revenues attributable to such games, approximately $101,000
during fiscal 1997. The Company believes that the arrangements with and the
amounts paid to Espinoza are fair and reasonable and are on terms at least as
favorable as would be available from non-affiliated parties.
Mr. Torres leases seven land and building packages to Pizza Hut of America,
Inc. ("Pizza Hut") and one land and building package to Espinoza. The Company
has entered into revenue sharing agreements with Pizza Hut and Espinoza
concerning the placement of amusement machines which may benefit Mr. Torres due
to percentage rent provisions in these real property leases. The Company paid
Pizza Hut approximately $700,000 and Espinoza approximately $101,000 during
fiscal 1997, pursuant to the terms of such revenue sharing agreements. The
Company believes the amounts paid to Pizza Hut and Espinoza were fair and
reasonable and were on terms at least as favorable as would be available from
non-affiliated parties.
During fiscal 1996, Play-By-Play Europe subcontracted stuffing services to
a company, Tuexa Export, S.A. ("Tuexa"), whose major shareholder was Mr. Moya.
As of October 8, 1996, Mr. Moya sold his interest in Tuexa for a nominal amount.
The Company paid Tuexa $100,000 during the period from August 1, 1996 through
October 8, 1996. The Company believes that the arrangements with and the amount
paid to Tuexa are fair and reasonable and are on terms at least as favorable as
would be available from non-affiliated parties.
Mr. Duran, a Director of the Company, is an insurance agent acting on
behalf of the insurance companies that provide health and property insurance to
the Company. Mr. Duran received commissions from the insurance companies in the
amount of $36,000 for the year ended July 31, 1997 related to insurance
purchased by the Company. In this regard, the Company incurred premiums of
approximately $956,000 for insurance premiums in the year ended July 31, 1997.
The Company believes that the arrangements with and the amounts paid to the
insurance companies are fair and reasonable.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 20,000,000
shares of Common Stock, no par value, of which 4,904,100 shares are currently
outstanding and (ii) 10,000,000 shares of preferred stock, no par value
("Preferred Stock"), none of which are currently outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held in the
election of directors and on all other matters submitted to a vote of
shareholders. Cumulative voting of shares of Common Stock is prohibited.
Accordingly, holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election.
Subject to the prior rights of the holders of Preferred Stock, holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor. See
"Price Range of Common Stock and Dividend Policy." Upon the liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive ratably the net assets of the Company available after
payment of all debts and other liabilities and payment in full to holders of
shares of Preferred Stock then outstanding, if any, of any amount required to be
paid under the terms of such Preferred Stock. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of Common Stock are, and the shares offered by the Company in this
offering will be, when issued and paid for, validly, fully paid and
nonassessable.
PREFERRED STOCK
Pursuant to the Company's Articles of Incorporation, the Board of Directors
is authorized to issue from time to time up to 10,000,000 shares of Preferred
Stock, in one or more series, and the Board of Directors is authorized to fix
the dividend rights, dividend rates, any conversion rights or right of exchange,
any voting right, any rights and terms of redemption (including sinking fund
provisions), the redemption price or prices, the liquidation preferences and any
other rights, preferences, privileges and restrictions of any series of
Preferred Stock and the number of shares constituting such series and the
designation thereof. There are no shares of Preferred Stock outstanding and the
Company has no present plans to issue any shares of Preferred Stock.
Depending upon the rights of such Preferred Stock, the issuance of
Preferred Stock could have an adverse effect on holders of Common Stock by
delaying or preventing a change in control of the Company, diluting the voting
rights of holders of Common Stock, making removal of the present management of
the Company more difficult or resulting in restrictions upon the payment of
dividends and other distributions to the holders of Common Stock, including,
without limitation, any liquidation of preferences which may relate to such
Preferred Stock.
CERTAIN ANTI-TAKEOVER MATTERS
The Company's Articles of Incorporation provide for the Board of Directors
to be divided into three classes of directors of as equal size as possible, with
the term of each class expiring in consecutive years so that only one class is
elected in any given year, resulting in directors serving staggered three-year
terms. As a result, approximately one-third of the Board of Directors will be
elected each year. The classified board provision could increase the likelihood
that, in the event of a takeover of the Company, incumbent directors would
retain their positions and, consequently, may have the effect of discouraging,
delaying or preventing a change of control of the Company.
The Company's Articles of Incorporation provide that directors may be
removed from office, but only for cause, and that any action taken by
shareholders to remove one or more directors for cause may only be taken by the
affirmative vote of the holders of at least two-thirds of the shareholders at a
meeting called for such purpose. However, if the Company's Board of Directors,
by an affirmative vote of at least two-thirds of all members of the Board of
Directors then in office, recommends removal of a director or directors to the
shareholders, such removal may be affected by the affirmative vote of a majority
of the shareholders at a
46
<PAGE>
meeting of the shareholders called for that purpose. The Company's Bylaws may be
adopted, amended or repealed by a two-thirds vote of (i) the shareholders or
(ii) the full Board of Directors.
The Company's Articles of Incorporation require, in addition to any vote
required by law or agreement, the affirmative vote by at least two-thirds of
either (i) the outstanding shares of "voting stock" or (ii) the Board of
Directors, in order to approve, authorize, adopt or consummate by the Company
and any of its subsidiaries any "business combination" with a "related
person." A "business combination" includes (i) any merger or consolidation of
the Company with or into a "related person," (ii) any merger or consolidation
of a "related person" with or into the Company, (iii) any transfer of a
substantial part (20% or more) of the assets of the Company to a "related
person," (iv) any transfer of a substantial part (20% or more) of the assets of
a "related person" to the Company, (v) the issuance of any securities of the
Company to a "related person," (vi) certain reclassifications and
recapitalizations, (vii) any partial or complete liquidation, spin-off, split
off, or split-up or similar transaction of the Company involving a "related
person," and (vii) any transaction, event, agreement, contract, commitment or
other arrangement that provides for, is intended to or is likely to have an
effect similar to the above. A "related person" includes, but is not limited
to, any person that owns or is the beneficial owner of five percent or more of
the outstanding shares of the Company's voting stock. "Voting stock"
constitutes shares which are entitled to vote for the election of the Company's
directors. A related person's voting stock is excluded from the calculation of
shareholder votes relating to a "business combination."
REGISTRATION RIGHTS
In connection with the Company's July 1997 issuance of its 8% convertible
debentures in the aggregate amount of $15 million, the Company granted to the
holders of Common Stock received upon conversion, if any, of such convertible
debentures certain demand and "piggy-back" registration rights. The piggy-back
registration rights entitle such holders to have their shares of Common Stock
included in a registration statement filed by the Company with the Securities
and Exchange Commission. In addition, the Ace Sellers have similar
"piggy-back" registration rights covering 35,000 shares of Common Stock
received upon exercise of a warrant.
In connection with the Company's initial public offering in 1995, the
Company granted to the managing underwriters of such offering certain
"piggy-back" registration rights, which entitle such parties to have their
shares of Common Stock, if any, received upon exercise of warrants held by such
parties to be included in a registration statement filed by the Company with the
Securities and Exchange Commission in connection with an underwritten offering
of Common Stock.
These parties have waived their registration rights with respect to this
Offering.
WARRANTS
In connection with the Ace acquisition, the Company issued to the Ace
Sellers a warrant to purchase 35,000 shares of Common Stock at an exercise price
of $14.90 per share. This warrant is exercisable through May 1, 2001.
In connection with its 1995 initial public offering, the Company granted to
the managing underwriters warrants to purchase an aggregate of 82,000 shares of
Common Stock at an exercise price of $14.70 per share. These warrants are
exercisable through July 19, 2000.
LIMITATION ON LIABILITY
As authorized by the Texas Business Corporation Act, the Company's Articles
of Incorporation provide that to the fullest extent permitted by Texas law, as
the same exists or may hereafter be amended, directors and former directors of
the Company will not be liable to the Company or its shareholders for monetary
damages for an act or omission occurring in their capacity as a director. Texas
law does not currently authorize the elimination or limitation of the liability
of a director to the extent the director is found liable (i) for any breach of
the director's duty of loyalty to the Company or its shareholders, (ii) for acts
or omissions not in good faith that constitute a breach of duty of the director
of the Company or that
47
<PAGE>
involve intentional misconduct or a knowing violation of law, (iii) for
transactions from which the director received an improper benefit, whether or
not the benefit resulted from action taken within the scope of the director's
office, or (iv) for acts or omissions for which the liability of a director is
expressly provided by law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Substantially all of the shares of Common Stock held by the Company's Board
of Directors and executive officers are eligible for sale in the public market
pursuant to Rule 144 under the Securities Act, subject to the restrictions of
Rule 144. In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated) is entitled to sell Restricted Shares if at
least one year has passed since the later of the time such shares were acquired
from the Company or an affiliate of the Company. Rule 144 provides, however,
that within any three-month period such person may only sell up to the greater
of (i) 1% of the then outstanding shares of Common Stock (74,539 shares upon
completion of the Offering) or (ii) the average weekly trading volume in the
Common Stock during the four calendar weeks immediately preceding the date on
which notice of the sale is filed with the Securities and Exchange Commission.
Under Rule 144(k), any person who has not been an affiliate of the Company for a
period of three months preceding a sale of Restricted Shares is entitled to sell
such shares without regard to such volume limitations if at least two years have
passed since the later of the time such shares were acquired from the Company or
an affiliate of the Company. Shares held by persons who are deemed to be
affiliates of the Company are subject to such volume limitations regardless of
how long they have been owned or how they were acquired. The Company is unable
to estimate the number of Restricted Shares that may be sold from time to time
under Rule 144, since such number will depend on the market price and trading
volume for the Common Stock, the personal circumstances of the sellers and other
factors.
The Company and its executive officers and directors have agreed that, for
a period of 90 days after the date of this Prospectus, they will not, without
the prior written consent of the representatives of the Underwriters, sell or
otherwise dispose of any of their shares of Common Stock other than shares
issued in connection with employee benefit plans.
After giving effect to the Offering, the Company will have outstanding
7,453,900 shares of Common Stock. There are also, after giving effect to the
Offering, (i) 1,412,700 shares of Common Stock reserved for issuance under
outstanding options to purchase shares of Common Stock, (ii) 117,000 shares of
Common Stock subject to outstanding warrants and (iii) a maximum of 882,353
shares of Common Stock issuable upon partial or total conversion, if any, of the
Company's outstanding convertible debentures. In addition, various persons have
"piggy-back" and demand registration rights to register shares of Common Stock
issuable upon the exercise of certain warrants for public sale under the
Securities Act. The preparation and filing of any registration statements filed
in connection with the exercise of registration rights will be at the expense of
the Company. See "Description of Capital Stock -- Registration Rights."
The Company has filed a registration statement on Form S-8 under the
Securities Act to register certain of the shares of Common Stock currently
issuable or reserved for future issuance under the Incentive Plan or pursuant to
the Non-Plan Options. Shares purchased upon exercise of the Non-Plan Options or
options granted pursuant to the Incentive Plan generally are available for
resale in the public market to the extent the stock transfer restriction
agreements with the Underwriters have expired, except that any such shares
issued to affiliates are subject to the volume limitations and certain other
restrictions of Rule 144.
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market price of Common Stock. Nevertheless, sales of significant amounts of
Common Stock could adversely affect the prevailing market price of Common Stock,
as well as impair the ability of the Company to raise capital through the
issuance of additional equity securities.
49
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Purchase Agreement
(the "Purchase Agreement") among the Company, the Selling Shareholders and
each of the Underwriters named below (the "Underwriters"), the Company and the
Selling Shareholders have agreed to sell to each of the Underwriters, and each
of the Underwriters severally has agreed to purchase from the Company and the
Selling Shareholders, the aggregate number of shares of Common Stock set forth
opposite its name below. The Purchase Agreement provides that the obligations of
the Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby if any such shares are purchased.
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............
Rauscher Pierce Refsnes, Inc............
Gerard Klauer Mattison & Co., Inc.......
---------
Total..................... 3,135,000
=========
The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a discount not in excess of $ per share to
obtain certain other dealers. After the Offering, the public offering price,
concession and discount may be changed.
The Company and one of the Selling Shareholders have granted the
Underwriters an option, exercisable for 30 days after the date of this
Prospectus, to purchase up to an additional 375,000 and 95,250 shares of Common
Stock, respectively, at the public offering price set forth on the cover page
hereof, less the underwriting discount. The Underwriters may exercise this
option to cover overallotments, if any, made on the sale of the shares of Common
Stock offered hereby. If the Underwriters exercise this option, each Underwriter
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the foregoing table bears to the 3,135,000
shares of Common Stock initially offered hereby.
The Company and its executive officers and directors have agreed not to (i)
directly or indirectly offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, or dispose of or transfer any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for
Common Stock or file any registration statement under the Securities Act with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
whether any such swap or transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise, for a period of 90 days from the date of this Prospectus without the
prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated on
behalf of the Underwriters, except for any shares of Common Stock issued or
options to purchase Common Stock granted pursuant to the Company's benefit plans
described above.
50
<PAGE>
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act or to contribute to payments which the Underwriters may be
required to make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with this Offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Underwriters may
reduce that short position by purchasing Common Stock in the open market. The
Underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment options described above.
The Underwriters may also impose a penalty bid on certain Underwriters and
selling group members. This means that if the Underwriters purchase shares of
Common Stock in the open market to reduce the Underwriters' short position or to
stabilize the price of the Common Stock, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
In connection with this Offering, the Underwriters or their respective
affiliates and selling group members (if any) who are qualified market makers on
Nasdaq may engage in "passive market making" in the Common Stock on the Nasdaq
National Market in accordance with Rule 103 of Regulation M under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Rule 103 permits, upon
the satisfaction of certain conditions, underwriters and selling group members
participating in a distribution that are also Nasdaq market makers in the
security being distributed (or a related security) to engage in limited market
making transactions during the period when Regulation M under the Exchange Act
would otherwise prohibit such activity. Rule 103 prohibits underwriters and
selling group members engaged in passive market making generally from entering a
bid or effecting a purchase at a price that exceeds the highest bid for those
securities displayed on the Nasdaq National Market by a market maker that is not
participating in the distribution. Under Rule 103, each underwriter or selling
group member engaged in passive market making is subject to a daily net purchase
limitation equal to 30% of such entity's average daily trading volume during the
two full consecutive calendar months immediately preceding the date of the
filing of the registration statement under the Securities Act pertaining to the
security to be distributed (or such related security).
In the ordinary course of their business, certain of the Underwriters have
engaged in transactions with and performed services for the Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby is being passed upon for
the Company by Thompson & Knight, P.C., Dallas, Texas. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by Vinson
& Elkins L.L.P., Houston, Texas.
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<PAGE>
EXPERTS
The consolidated balance sheets of Play-By-Play Toys & Novelties, Inc. as
of July 31, 1997 and 1996 and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for the years ended July 31,
1997, 1996 and 1995, and the consolidated statements of operations and cash
flows of Ace Novelty Co., Inc. for the years ended December 31, 1995 and 1994,
included in this Prospectus have been included herein in reliance on the reports
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 (as amended and together with all exhibits
thereto, the "Registration Statement") under the Securities Act, with respect
to the shares of Common Stock offered by this Prospectus. This Prospectus
constitutes a part of the Registration Statement and does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted from this Prospectus as permitted by the rules and regulations of the
Securities and Exchange Commission. Statements in this Prospectus about the
contents of any contract or other document are not necessarily complete;
reference is made in each instance to the copy of the contract or other document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in all respects by such reference. The Registration Statement and
accompanying exhibits and schedules may by inspected and copies may be obtained
(at prescribed rates) at the public reference facilities of the Securities and
Exchange Commission at Judiciary Plaza, 450 Fifth Street, NW, Room 1024,
Washington, D.C. 20549. Copies of the Registration Statement may also be
inspected at the Securities and Exchange Commission's regional offices at 7
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
The Company is subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, files periodic reports, proxy statements
and other information with the Securities and Exchange Commission. Such periodic
reports, proxy statements and other information will be available for inspection
and copying at the public reference facilities and regional offices referred to
above. In addition, these reports, proxy statements and other information may
also be obtained from the web site that the Securities and Exchange Commission
maintains at HTTP://WWW.SEC.GOV.
52
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Play By Play Toys & Novelties, Inc.
and Subsidiaries Consolidated
Financial Statements:
Report of Independent
Accountants.................... F-2
Consolidated Balance Sheets as
of July 31, 1997 and 1996...... F-3
Consolidated Statements of
Income for the Years Ended July
31, 1997, 1996 and 1995........ F-4
Consolidated Statements of
Shareholders' Equity for the
Years Ended July 31, 1997,
1996 and 1995................. F-5
Consolidated Statements of Cash
Flows for the Years Ended July
31, 1997, 1996
and 1995...................... F-6
Notes to Consolidated Financial
Statements..................... F-7
Ace Novelty Co., Inc. and
Subsidiaries Consolidated Financial
Statements:
Report of Independent
Accountants.................... F-25
Consolidated Statements of
Operations for the Three Months
Ended March 31, 1996
(Unaudited) and the Years Ended
December 31, 1995 and 1994..... F-26
Consolidated Statements of Cash
Flows for the Three Months
Ended March 31, 1996
(Unaudited) and the Years Ended
December 31, 1995 and 1994..... F-27
Notes to Consolidated Financial
Statements..................... F-28
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and Board of Directors
Play By Play Toys & Novelties, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Play By
Play Toys & Novelties, Inc. and Subsidiaries as of July 31, 1997 and 1996 and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended July 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Play By Play Toys & Novelties, Inc. and Subsidiaries as of July 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended July 31, 1997 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND
L.L.P.
Austin, Texas
October 20, 1997
F-2
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31,
--------------------------------
1997 1996
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents.......... $ 4,960,612 $ 531,040
Accounts and notes receivable, less
allowance for doubtful
accounts of $3,213,653 and
$1,621,603...................... 37,728,254 28,820,318
Inventories........................ 47,239,520 41,101,301
Other current assets............... 3,781,724 4,203,291
--------------- ---------------
Total current assets.......... 93,710,110 74,655,950
Property and equipment, net.......... 14,985,887 15,130,186
Goodwill, less accumulated
amortization of $365,433 and
$17,943.............................. 14,412,736 13,215,035
Other assets......................... 2,796,841 1,920,689
--------------- ---------------
Total assets.................. $ 125,905,574 $ 104,921,860
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft..................... $ 461,220 $ 2,357,436
Note payable to shareholder........ -- 3,000,000
Notes payable to banks and
others............................. 22,607,721 21,775,809
Current maturities of long-term
debt............................... 3,472,017 4,518,411
Current obligations under capital
leases............................. 691,333 379,534
Accounts payable, trade............ 22,340,182 15,693,183
Other accrued liabilities.......... 5,831,652 5,021,357
Income taxes payable............... 2,437,432 1,776,737
Deferred income tax payable........ 496,431 223,459
--------------- ---------------
Total current liabilities..... 58,337,988 54,745,926
--------------- ---------------
Long-term liabilities:
Long-term debt, net of current
maturities......................... 7,320,233 10,434,378
Convertible subordinated
debentures......................... 15,000,000 --
Obligations under capital leases... 917,506 661,826
Deferred income tax payable........ 660,918 379,661
--------------- ---------------
Total liabilities............. 82,236,645 66,221,791
--------------- ---------------
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;
4,901,300 and 4,841,100 shares
issued.......................... 1,000 1,000
Additional paid-in capital......... 35,006,539 33,746,597
Deferred compensation.............. (618,333) --
Cumulative foreign currency
translation adjustments......... (2,303,027) (414,306)
Retained earnings.................. 11,582,750 5,366,778
--------------- ---------------
Total shareholders' equity.... 43,668,929 38,700,069
--------------- ---------------
Total liabilities and
shareholders' equity....... $ 125,905,574 $ 104,921,860
=============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------------------------
1997 1996 1995
--------------- -------------- --------------
<S> <C> <C> <C>
Net sales............................ $ 137,386,257 $ 74,197,301 $ 47,730,510
Cost of sales........................ 89,797,884 50,049,224 31,015,788
--------------- -------------- --------------
Gross profit.................... 47,588,373 24,148,077 16,714,722
Selling, general and administrative
expenses............................. 34,441,660 17,471,966 12,678,196
--------------- -------------- --------------
Operating income................ 13,146,713 6,676,111 4,036,526
Interest expense..................... (4,414,701) (660,135) (1,051,209)
Interest income...................... 215,895 547,807 21,438
Other income (loss).................. (7,785) 107,981 --
--------------- -------------- --------------
Income from continuing
operations before
income tax.................... 8,940,122 6,671,764 3,006,755
Income tax provision................. (2,724,150) (2,619,649) (1,108,157)
--------------- -------------- --------------
Income from continuing
operations.................... 6,215,972 4,052,115 1,898,598
Discontinued operations:
Loss from discontinued
operations...................... -- (145,036) (259,361)
Loss on disposal of discontinued
operations.................... -- (239,002) --
--------------- -------------- --------------
Net income...................... $ 6,215,972 $ 3,668,077 $ 1,639,237
=============== ============== ==============
Income per share:
Primary:
Continuing operations...... $ 1.25 $ 0.84 $ 0.73
Discontinued operations.... -- (0.08) (0.10)
--------------- -------------- --------------
Net income per share....... $ 1.25 $ 0.76 $ 0.63
=============== ============== ==============
Fully diluted:
Continuing operations...... $ 1.21 $ 0.84 $ 0.73
Discontinued operations.... -- (0.08) (0.10)
--------------- -------------- --------------
Net income per share....... $ 1.21 $ 0.76 $ 0.63
=============== ============== ==============
Weighted average shares outstanding:
Primary......................... 4,959,585 4,841,100 2,612,333
=============== ============== ==============
Fully diluted................... 5,178,625 4,841,100 2,612,333
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
------------------ PAID-IN DEFERRED TRANSLATION RETAINED TREASURY
SHARES AMOUNT CAPITAL COMPENSATION ADJUSTMENTS EARNINGS STOCK
-------- ------ ---------- ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 1, 1994................. 2,514,120 $1,000 $9,282,916 -- $ (183,868) $ 59,464 $(50,000)
Net income.............................. 1,639,237
Stock distributed as compensation....... 26,980 14,915
Foreign currency translation
adjustments........................... 389,788
Stock issued in initial public
offering.............................. 2,000,000 20,873,319
-------- ------ ---------- ------------ ----------- ---------- --------
Balance, July 31, 1995.................. 4,541,100 1,000 30,171,150 -- 205,920 1,698,701 (50,000)
Net income.............................. 3,668,077
Warrants issued......................... 245,350
Foreign currency translation
adjustments........................... (620,226)
Stock issued for exercise of
over-allotment option of IPO.......... 300,000 3,380,097
Retirement of treasury
stock................................. (50,000) 50,000
-------- ------ ---------- ------------ ----------- ---------- --------
Balance, July 31, 1996.................. 4,841,100 1,000 33,746,597 -- (414,306) 5,366,778 --
Net income.............................. 6,215,972
Acquisition of TLC...................... 40,000 345,000 (47,470)
Foreign currency translation
adjustments........................... (1,841,251)
Exercise of stock options............... 20,200 214,942
Deferred employee compensation.......... 700,000 $ (700,000)
Amortization of deferred compensation... 81,667
-------- ------ ---------- ------------ ----------- ---------- --------
Balance, July 31, 1997.................. 4,901,300 $1,000 $35,006,539 $ (618,333) $(2,303,027) $11,582,750 $ --
======== ====== ========== ============ =========== ========== ========
</TABLE>
TOTAL
SHAREHOLDERS'
EQUITY
--------------
Balance, August 1, 1994................. $9,109,512
Net income.............................. 1,639,237
Stock distributed as compensation....... 14,915
Foreign currency translation
adjustments........................... 389,788
Stock issued in initial public
offering.............................. 20,873,319
--------------
Balance, July 31, 1995.................. 32,026,771
Net income.............................. 3,668,077
Warrants issued......................... 245,350
Foreign currency translation
adjustments........................... (620,226)
Stock issued for exercise of
over-allotment option of IPO.......... 3,380,097
Retirement of treasury
stock................................. --
--------------
Balance, July 31, 1996.................. 38,700,069
Net income.............................. 6,215,972
Acquisition of TLC...................... 297,530
Foreign currency translation
adjustments........................... (1,841,251)
Exercise of stock options............... 214,942
Deferred employee compensation.......... --
Amortization of deferred compensation... 81,667
--------------
Balance, July 31, 1997.................. $43,668,929
==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------------------------
1997 1996 1995
-------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 6,215,972 $ 3,668,077 $ 1,639,237
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization.... 2,041,950 806,860 735,327
Provision for doubtful accounts
receivable.................... 2,024,847 1,163,346 660,569
Deferred income tax provision
(benefit)..................... 554,229 (74,913) (100,007)
Amortization of deferred
compensation.................. 81,667 -- --
Gain on sale of property and
equipment..................... (51,356) (3,718) (33,800)
Loss from discontinued
operations.................... -- 159,359 --
Stock distributed as
compensation.................. -- -- 14,915
Change in operating assets and
liabilities (net of
acquisitions):
Accounts and notes
receivable............... (9,822,434) (7,030,009) (3,500,808)
Inventories................ (5,343,092) (13,325,525) (2,051,931)
Prepaids and other
assets................... 985,489 (2,488,704) 150,026
Accounts payable and
accrued liabilities...... 4,513,600 2,519,138 4,317,955
Income taxes payable....... 647,106 1,190,791 336,141
-------------- --------------- --------------
Net cash provided by
(used in) operating
activities............ 1,847,978 (13,415,298) 2,167,624
-------------- --------------- --------------
Cash flows from investing activities:
Purchase of property and equipment.... (791,869) (1,770,244) (1,176,147)
Proceeds from sale of property and
equipment.......................... -- 7,794 112,487
Proceeds from sale of restaurants..... -- 79,643 --
Purchase of TLC, net of cash
acquired........................... (488,811) -- --
Purchase of Ace, net of cash
acquired........................... -- (39,168,902) --
Maturity (purchase) of short-term
investments........................ -- 973,168 (973,168)
Payments for intangible assets........ (29,999) (45,919) (27,860)
-------------- --------------- --------------
Net cash used in
investing
activities............ (1,310,679) (39,924,460) (2,064,688)
-------------- --------------- --------------
Cash flows from financing activities:
Proceeds from public offering of
common
stock, net......................... -- 3,380,097 20,873,319
Net borrowings (repayments) under
Revolving Credit Agreement......... 831,912 19,342,177 (5,505,799)
Payment of note payable to
shareholder........................ (3,000,000) -- --
Costs related to issuance of debt..... (823,862) (755,115) --
Proceeds from long-term debt.......... 15,000,000 14,900,000 121,090
Repayment of long-term debt........... (3,964,594) (99,869) (537,088)
Repayment of capital lease
obligations........................ (628,658) (202,753) (198,997)
Proceeds from exercise of stock
options............................ 214,942 -- --
Increase (decrease) in bank
overdraft.......................... (1,896,216) 2,357,436
-------------- --------------- --------------
Net cash provided by
financing
activities............ 5,733,524 38,921,973 14,752,525
-------------- --------------- --------------
Effect of foreign currency exchange
rates................................. (1,841,251) (620,226) 389,788
-------------- --------------- --------------
Increase (decrease) in cash
and cash equivalents....... 4,429,572 (15,038,011) 15,245,249
Cash and cash equivalents at beginning
of period............................. 531,040 15,569,051 323,802
-------------- --------------- --------------
Cash and cash equivalents at end of
period................................ $ 4,960,612 $ 531,040 $ 15,569,051
============== =============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-6
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION
Play By Play Toys & Novelties, Inc. ("PBP," and together with all
majority-owned subsidiaries, the "Company") was formed in January 1992, and
purchased the amusement toy operations on May 18, 1992 from Pizza Management,
Inc., a company previously owned by the Company's CEO.
The Company's principal business is to design, develop, market and
distribute stuffed toys, electronic plush toys and sculpted toy pillows and to
market and distribute a broad line of novelty items. The Company sells these
products to customers in the amusement and retail markets. The Company's toy
operations accounted for 97.7% of net sales for fiscal 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PBP and all
majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Certain reclassifications have
been made to the prior years' consolidated financial statements to conform with
the current year presentation.
PERVASIVENESS OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
All balance sheet accounts of foreign subsidiaries are translated from
foreign currencies into U.S. dollars at the year-end rates of exchange, while
income and expense accounts are translated at average currency exchange rates in
effect during the period. The resulting translation adjustment is recorded as a
separate component of shareholders' equity. Gains and losses from foreign
currency transactions (transactions denominated in a currency other than the
entity's functional currency) are included in other income. The foreign currency
transaction gain (loss) for fiscal 1997 and 1995 was not material, and a gain of
$108,000 was recorded in fiscal 1996. Transaction gains and losses occur
primarily from sales in Europe and purchases of products by the Company's
foreign subsidiaries from suppliers in the Far East.
Pursuant to the terms of certain of the Company's license agreements, the
Company must pay royalties on these licenses in Canadian dollars. The Company's
subsidiary in Spain also has a license agreement that requires the subsidiary to
pay royalties in United States dollars. As a result of these license agreements,
the Company experiences currency risk to the extent that exchange rates
fluctuate from the date the royalty liability is incurred until the date the
royalty is actually paid to the licensor. Additionally, the Company is exposed
to foreign currency risk for intercompany receivable and payable transactions
through the settlement date.
Historically, no attempt has been made to manage, by means of hedging or
derivatives, the risk of potential currency fluctuations. The total unhedged
exposure related to currency risk at July 31, 1997 was $3.2 million.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
time deposits with original maturities of three months or less to be cash
equivalents.
F-7
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and cash equivalents and trade
receivables. The Company's cash and cash equivalents consist of highly liquid
cash deposits in major financial institutions. The Company's trade receivables
result primarily from its retail and amusement operations and reflect a broad
customer base. The Company generally requires no collateral from its customers;
however, it routinely assesses the financial strength of its customers. No
customer accounted for more than 10% of the Company's net sales in fiscal 1997,
1996 and 1995.
The majority of the Company's manufacturing is arranged directly by the
Company with the manufacturing facilities. To date, a substantial portion of the
Company's products have been manufactured by third parties in the People's
Republic of China. The Company does not have long-term contracts with any of the
manufacturers. Although the Company has begun to arrange alternate sources of
manufacturing outside of China, the Company has made no definitive plans for
securing alternate sources in the event its present arrangements with Chinese
manufacturers prove impossible to maintain, and there can be no assurance that
there would be sufficient alternate manufacturing facilities to meet the
increased demand for production which would likely result from a disruption of
manufacturing sources in China. No manufacturer accounted for more than 10% of
the Company's purchases of toy products during fiscal 1997, 1996 or 1995, with
the exception of Tri-State Manufacturing (China), Ltd. ("Tri-S"), which
accounted for 26.3%, 24.5% and 25.6% of such purchases during fiscal 1997, 1996
and 1995, respectively. During such period, Tri-S manufactured plush PLAY-FACES
(registered trademark) and the COCA-COLA (registered trademark) brand plush
POLAR BEAR products. Tri-S is currently one of several manufacturers of these
products for the Company.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost of PBP's U.S.
inventory is primarily determined using the last-in, first-out (LIFO) method.
Operating supplies and inventory at PBP's subsidiary in Spain and from the
acquisition of Ace Novelty Co., Inc. ("Ace") are determined by the first-in,
first-out (FIFO) method, and inventory-in-transit is determined based on the
specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Maintenance and repairs are
charged to operations, and replacements or betterments are capitalized. Property
or equipment sold, retired, or otherwise disposed of is removed from the
accounts, and any gains or losses thereon are included in operations.
Depreciation and amortization are determined using the straight-line method.
Property and equipment is depreciated and amortized as follows:
TERM
--------------------------------------
Building............................. 20 years
Equipment............................ 10 years
Vehicles............................. 3 years
Computer equipment................... 7 years
Leasehold improvements............... Life of the lease (5-20 years)
INTANGIBLE ASSETS
Goodwill represents the excess purchase price over the fair value of net
assets acquired and is amortized over twenty to forty years (principally forty
years) using the straight-line method.
F-8
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other intangible assets consist primarily of debt issuance costs, which are
amortized over the term of the related debt on a straight-line basis, which
approximates the interest method.
IMPAIRMENT OF LONG-LIVED ASSETS
At each balance sheet date, the Company evaluates the propriety of the
carrying amount of its long-lived assets. In the event that facts and
circumstances indicate that the cost of long-lived assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation of impairment
is required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value is required. The
Company recorded no such write-downs during any of the periods presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the consolidated balance sheet of cash and
cash equivalents, short-term investments, accounts and notes receivable,
accounts payable, and long term debt approximates its fair value. The Company
estimates the fair value of notes receivable by discounting the future cash
flows of the instrument, using the Company's incremental rate of borrowing for a
similar instrument.
REVENUE RECOGNITION
Revenues from sales to customers are recognized when products are shipped.
ADVERTISING
The costs of producing media advertising is capitalized as incurred and
amortized over the related product sales, not to exceed the advertising period.
Committed media communication costs are accrued as a cost of sale of the related
product. Cost incurred in the production of catalogs are deferred and charged to
operations in the period in which the related catalogs are mailed.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between tax basis of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
The Company does not provide U.S. Federal income taxes on undistributed
earnings of its foreign subsidiaries as such earnings are intended to be
permanently reinvested in those operations.
EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of common
and common equivalent shares (when dilutive) outstanding during each period.
Common equivalent shares include stock options and warrants. Earnings per share
assuming full dilution is determined by dividing net income plus tax-effected
convertible debt interest by the weighted average number of common shares
outstanding during the year after giving effect for common stock equivalents
arising from stock options and for convertible debt assumed converted to common
stock.
3. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share". SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share and is designed to improve earnings per
share information by simplifying the existing computational guidelines and
revising the previous disclosure
F-9
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
requirements. The statement is effective for periods ending after December 15,
1997, including interim periods.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Restated Information," which establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997.
Management does not believe the implementation of these recent accounting
pronouncements will have a material effect on its consolidated financial
statements.
4. ACQUISITIONS
In June 1996, the Company acquired substantially all of the operating
assets, business operations and facilities (the "Acquisition") of Ace. The
operating results of the Acquisition are included in the Company's consolidated
results of operations from the date of acquisition. The purchase price of
approximately $44.7 million consists of $39.2 million in cash, $2.9 million in
subordinated debt, $2.4 million in related direct costs, and $0.2 million in the
form of warrants issued by the Company to the former owners of Ace ("Sellers")
to purchase up to 35,000 shares of the Company's Common Stock, commencing one
year from the date of acquisition. The Acquisition has been accounted for using
the purchase method. The Company recorded approximately $14.1 million of
goodwill, which is the excess of the total purchase price over the fair value of
net assets acquired. Included in the calculation of net assets is approximately
$3.8 million in certain trade payables and accrued liabilities, which the
Company assumed. This goodwill is being amortized on a straight-line basis over
a 40-year period.
The debt incurred by the Company in connection with the Acquisition
consisted of (i) approximately $34.0 million in revolving credit and term loans
under the Revolving Credit Term Loan with Letter of Credit Facility dated June
20, 1996 ("Credit Facility"), which has a maximum aggregate commitment of $65
million among The Chase Manhattan Bank, formerly Chemical Bank, (the "Bank")
as agent, Heller Financial, Inc., Bank of America, Union Bank of California, and
Texas Commerce Bank N.A. (the "Lenders"), and the Company, Ace Novelty
Acquisition Co., Inc. ("ANAC") and Newco Novelty, Inc., a wholly owned
subsidiary of ANAC, as borrowers (see Note 9) (ii) a $3.0 million subordinated
loan from the Company's Chief Executive Officer, and (iii) a $2.9 million
subordinated loan from Sellers.
The following is a summary of the Ace assets acquired and liabilities
assumed, at the date of Acquisition:
Current assets....................... $ 26,779,000
Property and equipment, net.......... 8,737,000
Goodwill............................. 14,054,000
--------------
Total assets.................. $ 49,570,000
==============
Current liabilities.................. $ 4,826,000
==============
F-10
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
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, Ltd. ("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 Company incurred $144,000 in costs directly related to
the 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
$1.9 million and assumed liabilities of $2.6 million, resulting in goodwill of
$1.1 million which is being 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, the Company adjusted the purchase price
allocation as contingent assets and liabilities were determined or realized in
accordance with Statement of Financial Accounting Standards No. 38, "Accounting
for Preacquisition Contingencies of Purchase Enterprises." The Company
increased goodwill approximately $821,000 during the year ended July 31, 1997 as
a result of such purchase price allocation.
5. DISCONTINUED OPERATIONS
In March 1996, the Company sold all of the stock of Restaurants Universal
Espa~na, S.A. ("Restaurants Universal"), its European subsidiary that operated
two restaurants in Spain, to an unrelated third party, for 205,000,000 Spanish
pesetas, which was approximately $1.6 million at the date of the sale. The sale
resulted in a non-cash, non-recurring charge against earnings of approximately
$239,000 and a loss from discontinued operations of approximately $145,000, for
a total loss from discontinued operations of $384,000 in fiscal year 1996.
The buyer paid approximately $80,000 in cash, and 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 specific
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 of approximately $450,000 calculated at a rate of 10%, is
included in accounts and notes receivable on the Consolidated Balance Sheet. In
the event that the buyer of the stock of Restaurants Universal fails to meet
three months of the agreed-upon installment payments, whether alternate or
consecutive, the Company may cancel the contract, with all of the stock
reverting back to the Company.
The operating results and the loss on the sale of the restaurants have been
reported separately as a component of discontinued operations in the
Consolidated Statements of Income for the twelve months ended July 31, 1996 and
1995. 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. Summarized results of
operations for Restaurants Universal are as follows:
YEAR ENDED JULY 31,
--------------------------
1996 1995
------------ ------------
Net sales............................... $ 1,516,791 $ 2,531,857
Cost of sales........................... 1,630,501 2,053,722
Net loss................................ (145,036) (259,361)
F-11
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INITIAL PUBLIC OFFERING
On July 19, 1995, the Company sold 2,000,000 shares of its common stock in
an initial public offering at a price of $12.25 per share. The net proceeds from
the issuance and sale of common stock amounted to $20.9 million after deducting
underwriter discounts and issuer expenses. Portions of the net proceeds were
used to repay outstanding bank debt of $3.3 million plus accrued interest, and
debt to the principal shareholder of $2.6 million plus accrued interest.
On August 1, 1995, the underwriters of the Company's initial public
offering purchased an additional 300,000 shares of the Company's common stock at
$12.25 per share by exercising their over-allotment option. The net proceeds
from the issuance and sale of the common stock amounted to $3.4 million after
deducting underwriters' discounts and issuer expenses. The remaining outstanding
debt to the principal shareholder of $2.5 million plus accrued interest was
retired in August 1, 1995 with a portion of the net proceeds.
7. INVENTORIES
Inventories consist of the following:
JULY 31,
------------------------------
1997 1996
-------------- --------------
Purchased for resale.................... $ 46,898,557 $ 40,957,716
Operating supplies...................... 340,963 143,585
-------------- --------------
Total.............................. $ 47,239,520 $ 41,101,301
============== ==============
Replacement cost of inventories approximates LIFO cost at each of the
balance sheet dates. At July 31, 1997 and 1996 inventories in the amount of
$26.2 million and $22.3 million, respectively, were valued using the FIFO and
specific identification methods. The excess current cost over the LIFO value of
inventories was $215,000 and $195,000 at July 31, 1997 and 1996, respectively.
8. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JULY 31,
------------------------------
1997 1996
-------------- --------------
Buildings............................... $ 4,583,842 $ 4,583,842
Equipment............................... 10,226,021 10,511,198
Vehicles................................ 565,906 300,668
Computer equipment...................... 1,694,072 571,312
Leasehold improvements.................. 1,347,063 974,194
-------------- --------------
18,416,904 16,941,214
Accumulated depreciation and
amortization.......................... (3,431,017) (1,811,028)
-------------- --------------
$ 14,985,887 $ 15,130,186
============== ==============
F-12
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. PROPERTY AND EQUIPMENT (CONTINUED)
Included in property and equipment in the accompanying consolidated balance
sheets are the following assets held under capital leases:
JULY 31,
--------------------------
1997 1996
------------ ------------
Equipment............................... $ 755,594 $ 1,080,794
Computer equipment...................... 965,369 226,613
Accumulated amortization................ (486,911) (239,562)
------------ ------------
$ 1,234,052 $ 1,067,845
============ ============
9. NOTES PAYABLE AND LONG-TERM DEBT
JULY 31,
------------------------------
1997 1996
-------------- --------------
Notes Payable:
Revolving line of credit........ $ 22,607,721 $ 21,775,809
Unsecured note payable to
principal shareholder due on
demand; interest payable
monthly. Note was repaid in
July 1997..................... -- 3,000,000
-------------- --------------
$ 22,607,721 $ 24,775,809
============== ==============
Long-Term Debt:
Term loan....................... $ 9,600,000 $ 12,000,000
Convertible Subordinated
Debentures.................... 15,000,000 --
Notes payable to banks,
financing companies and others
due in monthly installments
with interest rates ranging
from 7.4% to 12.03%
collateralized by equipment... 1,192,250 2,952,789
-------------- --------------
25,792,250 14,952,789
Less current maturities......... (3,472,017) (4,518,411)
-------------- --------------
$ 22,320,233 $ 10,434,378
============== ==============
In June 1996, the Company entered into the Credit Facility (see Note 4)
which replaced the Company's $10 million credit facility. The Credit Facility
includes a $53 million revolving line of credit commitment, subject to
availability under a borrowing base calculated by reference to the level of
eligible accounts receivable and inventory, and a $15 million sublimit for the
issuance of letters of credit. The revolving credit facility matures on June 20,
1998. The $65 million Credit Facility also includes a $12 million term loan,
which requires sixty equal monthly principal payments of $200,000 plus accrued
interest beginning August 1, 1996, with the last payment due and payable on June
20, 2001.
Interest on borrowings outstanding under the revolving line of credit is
payable monthly at an annual rate equal to, at the Company's option, (i) the
Bank's Alternate Base Rate plus 0.50% or (ii) the LIBOR rate plus 2.50%. The
weighted average interest rate was 8.19% and 8.09% for the years ended July 31,
1997 and 1996, respectively. For amounts outstanding under the term loan,
interest is payable monthly in arrears at an annual rate equal to, at the
Company's option, (i) the Bank's Alternate Base Rate plus 0.75% or (ii) the
LIBOR rate determination thereof, a rate per annum equal to the sum of (a) the
greater of (i) the Prime Rate, (ii) the Federal Funds Effective Rate plus 0.5%,
and (iii) the Base CD Rate plus 1.0%. The weighted average interest rate was
8.48% and 8.38% for the years ended July 31, 1997 and 1996, respectively. In
fiscal 1996, the Company incurred $755,000 in costs related to obtaining the
Credit Facility, which is being
F-13
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
amortized pro rata over the two year term of the line of credit and the five
year term of the $12 million loan. The Company is amortizing such costs using
the straight-line method, which approximates the interest method. Further, the
Credit Facility is subject to an annual fee, payable quarterly, of 0.50% of the
unused portion of the revolving credit commitment, a fee of 2.0% of the face
amount of letters of credit when issued and an annual administrative fee equal
to $100,000.
The Credit Facility is collateralized by a first lien on substantially all
of the Company's domestic assets, and 65% of the issued and outstanding stock of
its foreign subsidiaries.
As of July 31, 1997, the Company had $7.1 million in outstanding
irrevocable letters of credit and bankers' acceptances. Based on the level of
the Company's eligible accounts receivable and inventory at July 31, 1997, the
Company had $13.6 million of additional borrowing capacity available under the
Credit Facility, all of which could be used to support borrowings under the
revolving credit line or additional letters of credit.
The Credit Facility contains certain restrictive covenants and conditions
among which are a prohibition from paying dividends, limitations on further
indebtedness, restrictions on dispositions and acquisitions of assets,
limitations on advances to third parties and foreign subsidiaries and compliance
with certain financial covenants, including but not limited to a maximum total
debt ratio and minimum interest expense coverage. In addition, the Credit
Facility prohibits the Company's Chief Executive Officer from significantly
reducing his ownership in the Company below specified levels.
During fiscal 1997, the Credit Facility was amended to change certain
covenant requirements. The Company incurred $92,800 in costs related to these
Amendments, which is being amortized on a straight-line basis over the remaining
life of the Credit Facility.
To partially finance the Acquisition, the Company's Chief Executive Officer
provided a $3.0 million unsecured demand loan. Interest on this loan was payable
monthly at a per annum rate equal to the lesser of the Credit Agreement's
Alternate Base Rate or the Maximum Lawful Rate. The note was repaid in full in
July 1997.
As part of the consideration for the Acquisition, the Sellers (see Note 4)
received a $2.9 million note (the "Ace Note") from the Company. The first
installment on the Ace Note in the amount of $600,000 was due and payable two
business days following the determination of the final balance sheet of Ace and
accrues interest at 8.0% per annum. The second installment on the Ace Note in
the amount of $1.0 million was paid on December 20, 1996. The third installment
on the Ace Note in the amount of $500,000 was paid June 20, 1997 and is also
subject to offset against any claims by the Company against the Sellers. The
fourth installment on the Ace Note is due and payable on June 21, 1998 and is
also subject to offset against any claims by the Company against the Sellers.
Interest on the Ace Note, other than with respect to the first installment of
$600,000, is payable monthly in arrears at a rate of 12.0% per annum during the
first six months and 10.0% per annum thereafter, except with respect to the
final payment due June 21, 1998, which will continue to bear interest at 12.0%
per annum. Payment of all obligations under the Ace Note is subordinate to
payment of the Credit Facility. The Ace Note is collateralized by certain assets
of the Company, claims on which are also subordinate to the Credit Facility.
During July 1997, the Company completed a private placement of $15 million
of convertible debentures. The proceeds were used to retire a $3 million
subordinated demand note due to a shareholder, provide $3 million as collateral
on two lines of credit with banks in Spain and for general corporate purposes.
Interest accrues at 8% per annum, payable monthly until maturity on June 30,
2004. Principal is payable commencing June 30, 2000 at a rate of 1% of the
outstanding balance monthly, with the remaining balance due at maturity. The
debt is convertible into Company stock at any time during the loan period at a
conversion price of $17 per share. The conversion price will be adjusted in 1998
if the closing bid price of
F-14
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
the Company's common stock for the 21 days following the Company's release of
1998 earnings (the "Adjustment Bid Price") is less than $17. Such adjustment
is based on the Company's cash flows, but cannot be adjusted to a price less
than 90% of the Adjustment Bid Price. The debenture holders may force redemption
if there is a change of control of the voting stock, two-thirds of the Board
changes without approval of the holders, or the Company stock cannot be publicly
traded. The Company incurred costs of approximately $731,000 in connection with
the issuance of the convertible debentures. Such costs were capitalized and are
being amortized to interest expense over the seven-year term of the convertible
debentures on a straight-line basis, which approximates the interest method.
The Convertible Loan Agreement contains certain restrictive covenants and
conditions among which place limitations on further indebtedness, liens,
investments, and dividends and requires compliance with certain financial
covenants and specified ratios. In addition, the Company shall own at all times
all of the capital stock, or other equity interests in its subsidiaries.
As of July 31, 1997, the Company's Spanish subsidiary had $2.5 million
outstanding in irrevocable letters of credit.
The following is a summary of short-term borrowings under the $65 million
Credit Facility and other notes payable:
YEAR ENDED JULY 31,
------------------------------
1997 1996
-------------- --------------
Month-end maximum loan balance during
the period......................... $ 33,144,752 $ 24,775,993
Weighted average interest rate at
period-end......................... 8.19% 8.20%
The aggregate amount of maturities on long-term borrowings as of July 31,
1997 were as follows:
Year ended July 31:
1998....................... $ 3,472,017
1999....................... 2,459,986
2000....................... 2,728,247
2001....................... 4,091,546
2002....................... 1,489,807
Beyond..................... 11,550,647
--------------
$ 25,792,250
==============
10. COMMITMENTS AND CONTINGENCIES
CONTRACT
The Company owns and operates amusement game machines in a restaurant
franchise on a month-to-month basis pursuant to terms similar to those of an
agreement with the restaurant franchise that expired in June 1995. The Company's
portion of revenues from the machines during the term of the expired agreement
approximated $2.5 million, $2.5 million and $1.4 million in the years ended July
31, 1997, 1996 and 1995, respectively. Management is unable to determine the
impact, if any, on future operations of the Company if the relationship is not
continued or if it is continued under terms less favorable than those of the
expired contract.
F-15
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
GUARANTEED PURCHASES
The Company has entered into a guaranteed purchase agreement for $4.4
million to reserve airtime in conjunction with the television advertisements of
the "TALKIN' TOTSE" and "TORNADO TAZ". The television campaign began
national and spot market television advertising during the first fiscal quarter
of 1998.
CAPITAL LEASES
The Company leases equipment under capital lease agreements which expire at
various dates through 2002. The lease agreements generally provide purchase
options and require the Company to pay property taxes, utilities and insurance.
Future minimum lease payments under capital leases at July 31, 1997 are as
follows:
Year ended July 31:
1998.......................... $ 818,439
1999.......................... 712,823
2000.......................... 205,946
2001.......................... 38,028
2002.......................... 34,505
------------
Total minimum lease payments......... 1,809,741
Less amounts representing interest... (200,902)
------------
1,608,839
Less current portion................. (691,333)
------------
Long-term obligations under capital
leases............................... $ 917,506
============
OPERATING LEASES
The Company leases its equipment, vehicles and operating facilities,
consisting primarily of warehouse, distribution and office space, under
operating leases expiring at various dates through 2007. The lease agreements
generally provide renewal options and require the Company to pay property taxes,
utilities and insurance. Rent expense under operating leases was $2.5 million,
$1.5 million and $1.7 million for the years ended July 31, 1997, 1996 and 1995,
respectively.
Minimum rental payments required under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year at July 31, 1997
are as follows:
Year ended July 31:
1998.......................... $ 2,586,944
1999.......................... 2,427,478
2000.......................... 1,833,974
2001.......................... 1,442,374
2002.......................... 1,462,456
Thereafter........................... 5,000,877
--------------
Total minimum lease payments.... $ 14,754,103
==============
ROYALTIES
The Company markets its products under a variety of trademarks for which
the Company pays associated royalties based on sales of the related products.
Approximately 59.7%, 58.2% and 46.6% of the Company's net sales in fiscal 1997,
1996 and 1995, respectively, were derived from product lines based on
F-16
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
entertainment character or corporate trademark licenses. The Company's products
based on trademarks licensed for LOONEY TUNES' characters accounted for 37.5%,
16.4% and 11.4% of net sales in fiscal 1997, 1996 and 1995, respectively. The
Company's products based on trademarks licensed by The Coca-Cola Company
accounted for 4.5%, 13.8% and 16.5% of net sales in fiscal 1997, 1996 and 1995,
respectively. No other license accounted for more than 10% of the Company's net
sales. Some licenses are renewable at the option of the Company upon payment of
certain minimum guaranteed payments or the attainment of certain sales levels
during the initial term of the license. However, there can be no assurance that
the Company will be able to renew its most successful licenses, or obtain new
licenses. Substantially all of the license agreements are for periods of one to
four years and include guaranteed minimum royalty payments over the life of the
agreements. Royalty expense is recorded based on sales for the period multiplied
by the contractual royalty rate for the related licenses.
Future guaranteed minimum royalty obligations by year-end and in the
aggregate under license agreements consist of the following at July 31, 1997:
Year ended July 31:
1998............................... $ 3,423,118
1999............................... 2,553,811
2000............................... 205,000
------------
Total minimum royalty payments.......... $ 6,181,929
============
LETTERS OF CREDIT
The Company had commitments in the normal course of business, including
outstanding irrevocable letters of credit and bankers' acceptances to certain
banks approximating $9.6 million at July 31, 1997, relating primarily to the
purchase of merchandise from various third-party overseas manufacturers.
Liabilities under letters of credit are recorded when the Company is notified
that merchandise has been shipped.
LEGAL PROCEEDINGS
The Company is from time to time subject to routine litigation incidental
to its business. The Company's management believes that the results of pending
legal proceedings will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
YEAR 2000 COMPLIANCE
The Company and its subsidiaries are taking actions to provide that their
computer systems are capable of processing for the periods in the year 2000 and
beyond. The costs associated with this are not expected to significantly affect
operating cash flow, however there is no assurance that the Company's actions in
this regard will be successful.
11. ADVERTISING EXPENSES
Advertising expenses consist primarily of costs incurred in the design,
development, printing and shipping of Company catalogs, television advertisement
costs and a limited number of advertisements in trade publications. The Company
implemented a television campaign for the first time in fiscal 1997 in
conjunction with the introduction of the "TALKIN' TOTSE" and "TORNADO TAZ".
In fiscal 1997, the Company expensed $1.3 million in television advertisement
costs. The Company's total advertising expenses, including television
advertisement costs, were $2.7 million, $688,000 and $519,000 during fiscal
1997, 1996 and 1995, respectively.
F-17
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAX
Income tax provision (benefit) is as follows:
YEAR ENDED JULY 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Federal:
Current provision............... $ 974,246 $ 1,987,531 $ 782,053
Deferred provision (benefit).... 554,229 (74,913) (100,007)
------------ ------------ ------------
Total Federal.............. 1,528,475 1,912,618 682,046
------------ ------------ ------------
State -- current..................... 255,102 323,007 79,613
------------ ------------ ------------
Foreign -- current................... 940,573 384,024 346,498
------------ ------------ ------------
Net provision for income taxes.. $ 2,724,150 $ 2,619,649 $ 1,108,157
============ ============ ============
Reconciliations of the differences between income taxes computed at the
Federal statutory tax rates and income tax provision are as follows:
YEAR ENDED JULY 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Income taxes computed at Federal
statutory rates..................... $ 3,039,641 $ 2,137,659 $ 934,114
Foreign tax differentials............. (531,107) 172,097 105,653
Valuation allowance on capital loss
carryover........................... -- 135,693 --
State tax provision................... 168,367 213,185 52,545
Other -- net.......................... 47,249 (38,985) 15,845
------------ ------------ ------------
Total provision.................. $ 2,724,150 $ 2,619,649 $ 1,108,157
============ ============ ============
The foreign tax differential at July 31, 1997 results primarily from a low
effective tax rate on sales by the Hong Kong subsidiary, and from an investment
tax credit in Spain related to the investment in the TLC operations in the U.K.
The tax effects of the significant temporary differences that comprise the
deferred tax assets and liabilities are as follows:
YEAR ENDED JULY 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Assets:
Current:
Accounts receivable............... $ 707,422 $ 406,011 $ 218,984
Capital loss carryover............ 135,693 135,693 --
Other -- net...................... 324,971 86,514 123,112
Valuation allowance............... (135,693) (135,693) --
------------ ------------ ------------
Gross deferred tax assets.... 1,032,393 492,525 342,096
------------ ------------ ------------
Liabilities:
Current -- LIFO inventory valuation.. 1,528,824 715,984 853,381
Non-current -- basis of property and
equipment......................... 660,918 379,661 166,748
------------ ------------ ------------
Gross deferred tax
liabilities............... 2,189,742 1,095,645 1,020,129
------------ ------------ ------------
Net deferred tax
liabilities............... $ 1,157,349 $ 603,120 $ 678,033
============ ============ ============
The Company recorded a valuation allowance on the capital loss carryover as
management is uncertain that the Company will be able to realize the benefit in
future periods. Management believes it is more likely
F-18
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAX (CONTINUED)
than not that the benefit of the remaining deferred tax assets will be realized,
and thus has not recorded a valuation allowance on these amounts.
Income taxes are not provided on undistributed earnings of foreign
subsidiaries as those earnings are intended to be permanently reinvested in
those operations. These earnings could become subject to additional tax upon
distribution in the form of dividends or otherwise. It is not practicable to
estimate the amount of additional U.S. tax that might be payable on the foreign
earnings; however, any foreign income taxes previously paid would reduce U.S.
income taxes payable.
13. SHAREHOLDERS' EQUITY
STOCK OPTIONS
The Company has a Non-Qualified Stock Option Plan and a 1994 Incentive Plan
(the "Plans"). The Company has reserved 700,000 shares of its common stock for
issuance upon exercise of options granted or to be granted under the Plans.
These options generally vest six months from the date of the grant to four or
five years. Under the Plans and at the discretion of the Board of Directors,
awards may be granted to officers and employees of the Company in the form of
incentive stock options and restricted stock. Stock options may be exercised at
a purchase price determined by the Board of Directors, provided that the
exercise price per share shall be an amount not less than 100% of the fair
market value on the date the option is granted or 110% of fair market value for
beneficial owners of 10% or more of the Company's outstanding shares. The
maximum term for all Stock Options granted under the Plans is ten years (five
years in the case of an incentive stock option granted to a shareholder who owns
10% or more of the Company's Common Stock.) In August 1997, the Board of
Directors approved a resolution to increase the number of shares issuable under
the Plans with an additional 600,000 shares of the Company's common stock. The
resolution is subject to shareholder approval at the next Annual Meeting of
Shareholders on December 11, 1997. In addition, 512,500 stock options were
granted at the market price on the date of grant.
In January 1997, the Company granted options to purchase 200,000 shares of
the Company's common stock at $8.00 per share, in connection with an officer's
employment agreement. These options vest in equal monthly amounts over a
five-year period commencing February 1, 1997. The Company recognized $81,667 of
compensation expense in fiscal 1997 and has recorded $618,333 in unearned
compensation as of July 31, 1997 related to these options.
Subject to shareholders' approval, the Company's Board of Directors voted
that options granted to officers of the Company prior to December 1996 be
re-priced to the fair market value on the date of repricing, which was $11.00,
or 110% of fair market value for beneficial owners of 10% or more of the
Company's outstanding shares of common stock. The number of shares re-priced was
159,000. The original exercise price of the shares ranged from $13.475 to
$14.58. Such options shall vest as originally granted.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation". Accordingly, no compensation cost
has been recognized for the stock plan.
F-19
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's stock options as of July 31, 1997
and 1996 and the changes during the year ended on those dates is presented
below:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------------------
1997 1996
----------------------- -----------------------
WEIGHTED WEIGHTED
# SHARES OF AVERAGE # SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of the
year............................... 614,000 $12.99 151,000 $13.48
Granted.............................. 412,000 9.66 476,000 11.94
Exercised............................ 20,200 12.57 -- N/A
Forfeited............................ 49,300 11.28 13,000 13.48
Expired.............................. 6,700 13.73 -- N/A
Outstanding at end of year........... 949,800 10.72 614,000 12.29
Exercisable at end of year........... 394,700 12.10 114,800 13.79
</TABLE>
1997 1996
Weighted-average fair value of
options granted at premium......... $1.83 $3.66
Weighted-average fair value of
options granted at-the-money....... 3.62 3.46
Weighted-average fair value of
options granted at a discount...... 5.81 N/A
Weighted-average fair value of
modifications to options........... 1.09 0.35
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for all grants in 1997 and 1996: dividend yield of 0.00%;
risk-free interest rate ranges from 5.39% to 6.67%; an expected life of options
of 5 years for 10-year options and expected life of 2.5 years for 5-year
options; and a volatility of 23.6% for all grants.
During fiscal 1997 and 1996, 159,000 and 13,000 previously granted options
were modified, respectively, to reduce the exercise price and, in some
instances, accelerate vesting. The "Outstanding at end of year" number of
shares underlying options in the table above and the table below reflects the
modified terms of these options. The fair value of each modification of
previously granted stock options is estimated on the date of the modification
using the Black-Scholes option-pricing model to determine the amount of value
added to each option at the time of modification. The weighted-average
assumptions are the same as for the options granted during fiscal 1997 and 1996.
Options as of July 31, 1997 are summarized below:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
-------------------------------------------------------- -----------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE
---------------------- ----------- ------------------- ---------------- -----------
<S> <C> <C> <C> <C>
$9.49 to $13.00 781,600 9.32 $ 9.96 203,700
$13.01 to $15.95 168,200 8.02 14.25 191,000
----------- -----------
949,800 9.09 10.72 394,700
=========== ===========
</TABLE>
WEIGHTED
RANGE OF AVERAGE
EXERCISE PRICES EXERCISE PRICE
---------------------- --------------
$9.49 to $13.00 $10.35
$13.01 to $15.95 13.97
12.10
F-20
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SHAREHOLDERS' EQUITY (CONTINUED)
NON-EMPLOYEE STOCK OPTIONS
In addition to the options described above, the Company granted 3,000
premium options with an exercise price of $13.48 to a non-employee during fiscal
1995, prior to the effective date of SFAS 123 for the Company. As of July 31,
1996, 1,200 were exercisable. As of July 31, 1997, 1,800 were exercisable and
3,000 were outstanding with a remaining contractual term of 7.73 years.
PRO FORMA NET INCOME AND NET INCOME PER COMMON SHARE
Had the compensation cost for the Company's Plans been determined on a
basis consistent with SFAS 123, the Company's net income and net income per
common share for 1997 and 1996 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
7/31/97 7/31/97 7/31/96 7/31/96
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
SFAS 123 charge................ -- $ 944,600 -- $ 408,579
APB 25 charge.................. $ 81,667 81,667 -- --
Net income..................... 6,215,972 5,353,039 $ 3,668,077 3,259,498
Net income per common share.... 1.25 1.08 0.76 0.67
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards granted prior to
the 1996 fiscal year.
WARRANTS
In connection with the initial public offering in July 1995, the Company
sold warrants to the underwriters for a nominal amount that allows for the
purchase of up to 82,000 shares of the Company's Common Stock. The warrants are
exercisable at $14.70 for a period of four years beginning July 20, 1996.
In addition to the cash paid to the Sellers of Ace (see Note 4), the
Company issued to the Sellers a warrant to purchase up to 35,000 common shares
of the Company' s common stock at a price per share of $14.90. The warrant is
exercisable for a period of five years beginning June 20, 1997. The estimated
value of the warrant of $245,350 was recorded as an increase in goodwill, with
an offsetting increase in additional paid-in capital.
PREFERRED STOCK
Pursuant to the Company's Articles of Incorporation, the Board is
authorized to issue from time to time up to 10,000,000 shares of Preferred
Stock, in one or more series, and the Board is authorized to fix the dividend
rights, dividend rates, any conversion rights or right of exchange, any voting
right, any rights and terms of redemption (including sinking fund provisions),
the redemption rights or prices, the liquidation preferences and any other
rights, preferences, privileges and restrictions of any series of Preferred
Stock and the number of shares constituting such series and the designation
thereof. There were no shares of Preferred Stock outstanding as of July 31,
1997.
14. TRANSACTIONS WITH RELATED PARTIES
The accompanying consolidated statements of operations include the
following amounts related to construction services provided to the principal
shareholder:
YEAR ENDED JULY 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Net sales............................... $ -- -- $ 162,119
Selling, general and administrative
expenses.............................. -- $ 106,650 140,973
F-21
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The principal shareholder leases seven land and building packages to a
third party. The Company incurred costs of $700,000, $900,000 and $1.0 million
in the years ended July 31, 1997, 1996 and 1995, respectively, for revenue
sharing arrangements with the third party in connection with the Company's
vending operations. The Company incurred costs of $101,000, $103,000 and
$108,000 for revenue sharing arrangements in the years ended July 31, 1997, 1996
and 1995, respectively, in connection with its vending operations with an entity
related to another shareholder that is also a director of the Company.
One of the Company's directors is affiliated with an insurance company
which provides health and property insurance to the Company. The Company paid
the insurance company $956,000 for insurance premiums during fiscal 1997.
During fiscal 1996, the Company's subsidiary in Spain subcontracted
stuffing services to a company whose major shareholder is the Company's
Executive Vice President of European Operations, and is that subsidiary's
president. The Company was invoiced $392,000 for work performed in the year
ended July 31, 1996. The Company requested the subsidiary's president, as an
accommodation to the Company, concerning the Company's sale of Tuexa, to remain
a shareholder of such company. As of October 8, 1996, the subsidiary's president
sold his interest in Tuexa for a nominal amount, per prior agreement.
Interest expense on notes payable to related parties approximated $257,800,
$30,000 and $550,000 for the years ended July 31, 1997, 1996 and 1995,
respectively. Fees incurred under guaranty agreements with the principal
shareholder were $77,000 in the year ended July 31, 1997.
On February 19, 1997, the Company's European subsidiary, Play By Play
Europe, S.A., entered into an agreement with Banco Santander, S.A. Valencia to
open a $2.0 million US dollar standby letter of credit which is collaterized by
35,000 shares of the Company's Chief Executive Officer's personal common stock
investment in an unaffiliated company. No remuneration was paid by the Company
to its Chief Executive Officer as consideration for this guarantee. The standby
letter of credit will mature on October 31, 1997. The Company believes that it
will be able to successfully renew this letter of credit on substantially
similar terms.
15. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information with respect to payments of interest and
income taxes is as follows:
YEAR ENDED JULY 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Interest paid........................ $ 3,794,534 $ 422,948 $ 1,083,520
Income taxes paid.................... 942,437 1,594,078 675,562
The Company incurred capital lease obligations of $1.2 million, $966,979
and $164,827 in the years ended July 31, 1997, 1996 and 1995, respectively.
In November 1996, the Company issued 40,000 shares of restricted common
stock to the sellers of TLC in connection with the acquisition. The shares had a
fair market value of $345,000 at the date of acquisition.
The Company recorded $700,000 as deferred compensation related to the
options to purchase 200,000 shares of common stock, which were granted to an
officer in January 1997. At July 31, 1997, the unamortized balance was $618,333.
During fiscal 1996 the Company retired all of the 24,600 shares of Treasury
Stock outstanding by reducing additional paid-in capital by the $50,000 cost of
those shares. The Company issued a note payable
F-22
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUPPLEMENTAL CASH FLOW DISCLOSURES (CONTINUED)
for $2,900,000 and warrants to purchase up to 35,000 shares of the Company's
Common Stock to the Sellers of Ace to partially finance the Acquisition. The
warrants were valued at $245,350 (see Note 4). The Company recorded a note
receivable for 205,000,000 pesetas, or $1.6 million, from the buyers of the
stock of Restaurants Universal (see Note 5).
16. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates primarily in one industry segment, the sale of stuffed
toys and novelty items, primarily to customers in the retail and amusement
markets both domestically through its U.S. operations and in Europe through
subsidiaries located in Spain and England. There were no material amounts of
sales or transfers among geographic areas and no material amounts of U.S. export
sales.
Information by geographic location is as indicated below. The toys and
novelties industry segment includes sales of toy products and vending operations
for each of the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------------------------
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Net sales:
United States...................... $ 116,294,714 $ 65,096,521 $ 41,313,956
Europe............................. 21,091,543 9,100,780 6,416,554
--------------- --------------- --------------
$ 137,386,257 $ 74,197,301 $ 47,730,510
=============== =============== ==============
Net operating income:
United States...................... $ 9,518,030 $ 5,458,622 $ 2,761,995
Europe............................. 3,628,683 1,217,489 1,274,531
--------------- --------------- --------------
$ 13,146,713 $ 6,676,111 $ 4,036,526
=============== =============== ==============
Identifiable assets:
United States...................... $ 103,838,251 $ 92,957,657 $ 36,046,163
Europe............................. 22,067,323 11,964,203 9,210,074
--------------- --------------- --------------
$ 125,905,574 $ 104,921,860 $ 45,256,237
=============== =============== ==============
</TABLE>
17. SUBSEQUENT EVENTS
In September 1997, the Company signed an exclusive worldwide license
agreement with Warner Bros. Consumer Products, a unit of Time Warner
Entertainment Co. to design, manufacture and distribute Warner Bros.' Baby
Looney Tunes lines.
In August 1997, the Company's subsidiary in Spain signed two lines of
credit in U.S. dollars for a term of one year. The Company's U.S. operations
collateralized the lines of credit by depositing $3.0 million in an
interest-bearing account.
The Company intends to make a public offering of up to 3,135,000 shares of
its common stock. Of the 3,135,000 shares of common stock to be offered,
2,500,000 shares will be issued and sold by the Company. The remaining 635,000
shares are to be sold by the selling shareholders. The Company will not receive
any of the proceeds from the sale of shares by the selling shareholders.
F-23
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized operating results of the Company by quarter for fiscal years
1997 and 1996 are presented as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1997
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales............................... $ 39,891 $ 22,039 $ 28,001 $ 47,455
Gross profit............................ 11,415 8,214 11,061 16,898
Operating income........................ 3,479 677 2,592 6,399
Net income (loss)....................... 1,446 (166) 1,025 3,911
Net income (loss) per
share -- primary...................... 0.30 (0.03) 0.21 0.77
Net income (loss) per share -- fully
diluted............................... 0.30 (0.03) 0.21 0.73
<CAPTION>
1996
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales............................... $ 23,439 $ 12,023 $ 14,302 $ 24,433
Gross profit............................ 7,036 4,214 5,040 7,858
Operating income........................ 2,562 901 1,594 1,619
Loss on disposal of discontinued
operations............................ -- -- (239) --
Loss from discontinued operations....... (90) (33) (22) --
Net income.............................. 1,569 609 621 869
Net income per share.................... 0.32 0.13 0.13 0.18
</TABLE>
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Ace Novelty Co., Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations and
cash flows of Ace Novelty Co., Inc. and Subsidiaries for each of the two years
in the period ended December 31, 1995. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 9 to the consolidated financial statements, in May
1996, the Company entered into an agreement to sell substantially all of its net
assets and operations in exchange for cash, notes and the assumption of
liabilities.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Ace Novelty Co., Inc. and Subsidiaries for each of the two
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
April 25, 1996, except for Note 9 as to which
the date is May 1, 1996
F-25
<PAGE>
ACE NOVELTY CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED DECEMBER 31,
MARCH 31, -------------------------------
1996 1995 1994
-------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Sales................................ $ 11,324,632 $ 66,036,152 $ 86,015,180
Cost of sales........................ 7,460,882 45,808,236 69,356,564
-------------- -------------- ---------------
3,863,750 20,227,916 16,658,616
Selling, general and administrative
expenses........................... 3,868,549 20,508,075 31,283,883
-------------- -------------- ---------------
Loss from continuing
operations...................... (4,799) (280,159) (14,625,267)
-------------- -------------- ---------------
Other income (expense):
Interest income................. (133,714) 593,804 608,726
Interest expense................ (990,480) (5,009,045) (4,878,319)
Other........................... (56,523) 1,096,260 1,079,739
-------------- -------------- ---------------
(1,180,717) (3,318,981) (3,189,854)
-------------- -------------- ---------------
Loss from continuing operations
before income tax benefit..... (1,185,516) (3,599,140) (17,815,121)
Income tax benefit................... 380,474 2,470,500 1,691,988
-------------- -------------- ---------------
Loss from continuing
operations...................... (805,042) (1,128,640) (16,123,133)
Discontinued operations, net of
income tax........................... -- 320,794 --
-------------- -------------- ---------------
Net loss................... $ (805,042) $ (807,846) $ (16,123,133)
============== ============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE>
ACE NOVELTY CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED DECEMBER 31,
MARCH 31, ---------------------------------
1996 1995 1994
-------------- --------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Operating activities:
Net loss........................... $ (805,042) $ (807,846) $ (16,123,133)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and
amortization............... 253,677 1,044,268 1,444,248
Gain on sale of assets........ 10,346 (251,416) (37,962)
Deferred income taxes......... -- (2,470,500) 1,356,427
Changes in:
Notes and accounts
receivable, net.......... (2,715,009) 6,182,237 1,277,282
Inventories................ (1,043,294) 6,429,161 6,545,626
Prepaid expenses and other
current assets........... 7,742 461,265 1,857,920
Due from related parties... 75,677 (616,658) 452,039
Adjustment due from related
parties.................. -- -- 2,627,998
Accounts payable and
accrued liabilities...... 634,915 (1,994,919) 389,427
Accrued employee
retirement............... 4,513 (151,453) 12,872
Federal, state and foreign
income taxes
receivable/payable....... (20,717) 1,140,150 2,287,201
-------------- --------------- ----------------
Net cash provided by
(used in) operatingX
activities......... (3,597,192) 8,964,289 2,089,945
-------------- --------------- ----------------
Investing activities:
Acquisition of business............ -- -- (4,001,000)
Additions to equipment and
leasehold improvements........... (44,282) (1,313,086) (2,426,081)
Proceeds from sale of discontinued
operations, equipment and other
assets........................... -- 1,746,294 37,962
-------------- --------------- ----------------
Net cash provided by
(used in) investing
activities......... (44,282) 433,208 (6,389,119)
-------------- --------------- ----------------
Financing activities:
Advances to shareholders and
related parties.................. (116,040) (249,064) (2,556,496)
Repayments from shareholders and
related parties.................. 497,931 2,842,138 --
Principal payments on long-term
debt............................. (349,574) (2,522,977) (721,534)
Proceeds from long-term debt....... -- -- 7,625,606
Bank overdraft..................... 367,798 230,551 (4,093,536)
Proceeds from notes payable........ 14,604,249 89,846,730 106,619,000
Principal payments on notes
payable.......................... (11,344,000) (99,741,960) (101,551,643)
Advances from shareholders and
related parties.................. 2,167 56,968 278,430
Repayments to shareholders and
related parties.................. (12,386) (121,617) (1,058,699)
-------------- --------------- ----------------
Net cash provided by
(used in) financing
activities......... 3,650,145 (9,659,231) 4,541,128
-------------- --------------- ----------------
Foreign currency translation............ 24,290 133,271 (335,689)
-------------- --------------- ----------------
Net increase (decrease) in cash and cash
equivalents........................... 32,961 (128,463) (93,735)
Cash and cash equivalents:
Beginning of Period................ 32,421 160,884 254,619
-------------- --------------- ----------------
End of Period...................... $ 65,382 $ 32,421 $ 160,884
============== =============== ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE>
ACE NOVELTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Ace Novelty Co., and Subsidiaries (the "Company") sells stuffed toys and
novelty products to the amusement industry in the United States and Canada,
including the nation's premier theme parks and family entertainment centers. The
Company designs, develops, markets and distributes stuffed toys based upon
licenses for children's entertainment characters and corporate trademarks as
well as proprietary characters developed and owned by the Company.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Ace Novelty
Co., Inc. and its wholly-owned subsidiaries, Specialty Manufacturing Ltd.,
Bairnbright Company, Ltd., Carecraft Co., Ltd., Easy Success Company, Ltd. and
TTM Manufacturing Company. TTM Manufacturing Company was liquidated in 1994.
Bairnbright Company, Ltd. and Carecraft Co., Ltd. were liquidated in 1995. All
significant intercompany balances and transactions have been eliminated in the
financial statements.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are depreciated on the straight-line
method over the estimated useful lives of the assets as follows:
Equipment............................ 4 - 8 years
Leasehold improvements............... Term of lease
or useful life,
whichever is shorter
Maintenance and repairs are charged to expense as incurred and expenditures
for major improvements are capitalized. Gains or losses on dispositions of
properties are reflected in income at the time of disposal.
INCOME TAXES
The differences between the tax bases of assets and liabilities and their
financial statement amounts are reflected as deferred income taxes using enacted
tax rates. A valuation allowance is established for deferred tax assets if it is
more likely than not that all or some portion of the deferred tax asset will not
be realized. Income tax expense or benefit is the tax payable or receivable for
the period and the change during the period in net deferred tax assets and
liabilities.
FOREIGN EXCHANGE
The Company translates the assets and liabilities of its foreign operations
at rates of exchange in effect at year-end. Revenues, expenses and cash flows of
foreign operations are translated at the average rates of exchange during the
year. Gains and losses resulting from translations of the balance sheet accounts
are accumulated as a separate component of stockholders' equity until such time
that the foreign entity is sold or liquidated.
REVENUE RECOGNITION
Sales and related costs are recorded by the Company upon shipment of
products to buyers.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-28
<PAGE>
ACE NOVELTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACME ACQUISITION:
In January 1994, the Company acquired substantially all the assets of ACME
Premium Supply Co. and K&A Enterprises, Inc. ("Collectively "ACME"). The
acquisition of ACME's assets was accounted for as a purchase. The purchase price
of the assets acquired including assumed liabilities was approximately
$4,001,000. In addition, the Company advanced $2,000,000 to a related entity to
acquire real property previously leased to ACME. Net assets acquired included
approximately $14,278,000 of current assets, $1,165,000 of property, plant and
equipment, $162,000 of other assets and $11,604,000 of assumed liabilities.
3. DISCONTINUED OPERATIONS:
In 1994, the Company decided to sell its Print Shop division. Accordingly,
the operations of the Print Shop division are stated separately as a
discontinued operation in the accompanying consolidated financial statements of
the Company. In 1995 and 1994, the division's sales were $2,304,187, and
$6,315,538, respectively. In April 1995, the division was sold for $4,520,000
which resulted in a gain of $320,794, net of the 1995 loss from operation of the
division of $179,206.
4. EMPLOYEE BENEFIT PLANS:
DEFINED BENEFIT PENSION PLAN:
Prior to 1991, the Company suspended its defined benefit pension plan such
that employees in the plan at the date of suspension no longer earn additional
benefits and no new employees are eligible to enter the plan.
The funding policy for the suspended defined benefit plan is to contribute
amounts actuarially determined as necessary to provide benefits to participants,
and in amounts necessary to meet the minimum contribution level stipulated by
the Employee Retirement Income Security Act of 1974 and the Internal Revenue
Code.
Pension cost (credit) included the following components:
1995 1994
---------- ------------
Interest cost on projected benefit
obligation........................... $ 88,152 $ 88,676
Expected return on plan assets....... (89,472) (37,654)
Net amortization of prior gains...... (16,554) (148,386)
---------- ------------
Net periodic pension (credit)........ $ (17,874) $ (97,364)
========== ============
The assumptions used in the actuarial calculations were as follows:
1995 1994
--------- ---------
Discount or settlement rate.......... 7.25% 8.0%
Expected long-term rate of return on
assets............................... 8.00% 8.0%
DEFINED CONTRIBUTION PLAN:
The defined contribution plan covers substantially all employees with at
least one year of service and who have attained the age of 21 years. A portion
of the Company contribution is discretionary and a portion is a percentage match
of the employees contribution. The Company contributions for December 31, 1995
and 1994 were $47,670 and $63,128, respectively.
F-29
<PAGE>
ACE NOVELTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases office, sales and warehouse space, primarily from
related parties, under non-cancelable operating leases expiring through 2010.
Net rental expense under these leases and other month-to-month agreements
was $1,302,742 and $1,706,200 in 1995 and 1994, respectively.
ROYALTIES
The Company licenses trademarks and entertainment characters and pays
associated royalties based on sales of the related products. Substantially all
of the license agreements are for periods of one to four years and include
guaranteed minimum royalty payments over the life of the agreements. Royalty
expenses are reported in cost of sales in the statement of operations.
CONTINGENCIES
The Company is involved in various legal matters arising in the normal
course of business including a dispute with the purchaser of the print shop
division. The dispute arose over the operation of the business during the
transition of ownership. In addition, certain regulatory agencies are reviewing
the sale of the division for possible regulatory violations. Although the
outcome is not determinable at this time, management believes that the ultimate
outcome of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of note and trade receivables.
The concentration of credit risk with respect to note and trade receivables is
generally limited due to the large number of customers comprising the Company's
customer base, and their dispersion across different industries and geographies.
As such, the Company generally does not require collateral from its customers.
6. TRANSACTIONS WITH RELATED PARTIES:
The Company sells certain merchandise and provides management services to
companies owned by officers/shareholders of the Company. In addition, the
Company leases certain offices, sales and warehouse space from related parties.
A summary of these transactions and the balances at December 31 is presented
below:
1995 1994
-------------- --------------
Sales of merchandise.................... $ -- $ 1,910,666
Rent expense............................ 1,327,777 1,339,870
Interest expense........................ 174,632 130,561
Interest and management fee income...... 965,673 996,171
F-30
<PAGE>
ACE NOVELTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES:
Income taxes consist of the following:
1995 1994
-------------- --------------
Taxes currently refundable before giving
effect to foreign tax credits:
Federal................................. $ -- $ (2,558,048)
State................................... -- (430,058)
Foreign................................. -- (60,309)
-------------- --------------
-- (3,048,415)
Deferred taxes.......................... (2,470,500) 1,356,427
-------------- --------------
Total income tax (benefit)......... $ (2,470,500) $ (1,691,988)
============== ==============
Deferred Federal income taxes are provided for temporary differences which
result principally from use of accelerated depreciation methods for certain
assets, inventory costs (Uniform Capitalization Rules), bad debts, and certain
other accruals.
The Company's effective income tax rate differs from the U.S. Statutory
Federal income tax rate of 34% due to certain expenses that are not deductible
for income tax purposes, the lower rates of foreign jurisdictions and state
taxes.
8. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company made interest payments of $4,932,461 and $4,502,764 in the
years ended December 31, 1995 and 1994, respectively. The Company made no income
tax payments in 1995 or 1994.
9. SUBSEQUENT EVENT:
In May 1996, the Company entered into an agreement to sell substantially
all its net assets and operations in exchange for cash, notes and the assumption
of liabilities. The Company will also receive forgiveness of debt from certain
lenders.
F-31
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary...................... 3
Disclosure Regarding Forward-Looking
Statements............................ 8
Risk Factors............................ 8
Use of Proceeds......................... 13
Capitalization.......................... 14
Price Range of Common Stock and Dividend
Policy................................ 15
Selected Consolidated Financial Data.... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 17
Business................................ 25
Management.............................. 38
Principal and Selling Shareholders...... 44
Certain Transactions.................... 45
Description of Capital Stock............ 46
Shares Eligible for Future Sale......... 49
Underwriting............................ 50
Legal Matters........................... 51
Experts................................. 52
Available Information................... 52
Index to Financial Statements........... F-1
3,135,000 SHARES
[LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
RAUSCHER PIERCE REFSNES, INC.
GERARD KLAUER MATTISON & CO., INC.
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by Play-By-Play Toys & Novelties, Inc. (the
"Registrant" or the "Company") in connection with the registration of the
securities offered hereby, other than underwriting discounts and commissions,
are as follows:
SEC Registration Fee.................... $ 21,271
NASD Filing Fee......................... 7,538
Blue Sky Qualification Fees and
Expenses.............................. 5,000
Accounting Fees and Expenses............ 100,000
Legal Fees and Expenses................. 100,000
Printing and Engraving Expenses......... 60,000
Miscellaneous........................... 47,576
----------
Total.............................. $ 341,385
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Play-By-Play Toys & Novelties, Inc. (the "Registrant") is incorporated in
Texas. Under Section 2.02 of the Business Corporation Act of the State of Texas,
a Texas corporation has the power, under specified circumstances, to indemnify
its directors, officers, employees and agents in connection with actions, suits
or proceedings brought against them by a third party or in the right of the
corporation, by reason of the fact that they were or are such directors,
officers, employees or agents, against expenses incurred in any action, suit or
proceedings. Article Eight of the Articles of Incorporation and Section 59 of
the Bylaws of the Registrant provides for indemnification of directors and
officers to the fullest extent permitted by the Business Corporation Act of the
State of Texas. Reference is made to the Articles of Incorporation and the
Bylaws of the Registrant, filed as Exhibits 3.1 and 3.2 hereto.
The Registrant carries liability insurance coverage for its directors and
officers for certain liabilities incurred in connection with the performance of
their duties.
The Underwriting Agreement contains provisions by which each Underwriter
severally agrees to indemnify the Registrant, any person controlling the
Registrant within the meaning of Section 15 of the Securities Act of 1933 (the
"Act") or Section 20 of the Securities Exchange Act of 1934, each director of
the Registrant, and each officer of the Registrant who signs this Registration
Statement with respect to information relating to such Underwriter furnished in
writing by or on behalf of such Underwriter expressly for use in the
Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On October 21, 1994, the Registrant issued 5,000 shares of Common Stock to
Ma Jin Sheng, an independent agent of the Registrant, and Mr. Ma recognized
$2,267 of compensation as a result of such issuance.
During July 1997 the Company completed a private placement of 8%
convertible debentures with three investment funds, Banc One Capital Partners
II, Ltd., Renaissance Capital Growth & Income Fund III, Inc., and Renaissance US
Growth & Income Trust PLC, in the aggregate amount of $15 million. The final
maturity date is June 30, 2004. The debt is convertible into Common Stock at any
time during the loan period at a conversion price of $17 per share with a one
time possible downward adjustment if the closing bid price of the Common Stock
is a price less than $17. Such adjustment is based on the Company's cash flows,
but cannot be adjusted to a price less than 90% of the average market price for
the 21 days following the Company's release of earnings for fiscal 1998. The
convertible debt holders may force redemption if
II-1
<PAGE>
there is a change of control of the Common Stock, twothirds of the Board changes
without approval of such holders or the Common Stock received in conversion
cannot be publicly traded.
The Company completed the above issuances without registration with the
Securities and Exchange Commission, in reliance upon the exemption from
registration provided by certain safe harbor provisions of Regulation D
promulgated by the Securities and Exchange Commission pursuant to the Securities
Act. In complying with this safe harbor, the Company relied upon representations
from the purchasers that such parties were "accredited investors" within the
meaning of Rule 501 of Regulation D.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
1 -- Form of Underwriting Agreement.*
2.1 -- Asset Purchase Agreement dated May 1, 1996, among Ace Novelty Acquisition Co., Inc., the
Registrant, Ace Novelty Co., Inc., Specialty Manufacturing Ltd., ACME Acquisition Corp.
and Benjamin H. Mayers and Lois E. Mayers, Ronald S. Mayers, Karen Gamoran and Beth
Weisfield, as amended by Amendment No. 1 dated June 20, 1996 (filed as Exhibits 2.1 and
2.2 to Form 8-K (Date of Event: May 1, 1996) and incorporated herein by reference).
3.1 -- Amended Articles of Incorporation of the Registrant (filed as Exhibit 3.1 to Registration
Statement on Form S-1 (No. 33-92204) and incorporated herein by reference).
3.2 -- Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to Registration
Statement on Form S-1 (No. 33-92204) and incorporated herein by reference).
4.1 -- Specimen of Common Stock Certificate (filed as Exhibit 4.1 to Registration Statement on
Form S-1 (No. 33-92204) and incorporated herein by reference).
4.2 -- Form of Warrant Agreement and Form of Warrant (filed as Exhibit 4.2 to Registration
Statement on Form S-1 (No. 33-92204) and incorporated herein by reference).
4.3 -- Form of Play-By-Play Toys & Novelties, Inc. Grant of Incentive Stock Option (filed as
Exhibit 4.3 to Registration Statement on Form S-1 (No. 33-92204) and incorporated herein
by reference).
4.4 -- Form of Play-By-Play Toys & Novelties, Inc. Nonqualified Stock Option Agreement (filed as
Exhibit 4.4 to Registration Statement on Form S-1 (No. 33-92204) and incorporated herein
by reference).
4.5 -- Warrant to Purchase Common Stock issued by the Registrant to Ace Novelty Co., Inc. (filed
as Exhibit 4 to Form 8-K (Date of Event: May 1, 1996) and incorporated herein by
reference).
5 -- Opinion of Thompson & Knight, P.C., counsel for the Registrant.*
10.1 -- Play-By-Play Toys & Novelties, Inc. 1994 Incentive Plan (filed as Exhibit 10.1 to
Registration Statement on Form S-1 (No. 33-92204) and incorporated herein by reference).
10.2 -- Credit Agreement dated June 20, 1996, among the Registrant, Ace Novelty Acquisition Co.,
Inc., Newco Novelty, Inc. and Chemical Bank, as agent for the lenders (filed as Exhibit
10.1 to Form 8-K (Date of Event: May 1, 1996) and incorporated herein by reference.
10.3 -- Promissory Note dated June 20, 1996, of Ace Novelty Acquisition Co, Inc. payable to the
order of Ace Novelty Co., Inc. in the principal sum of $2,900,000 (filed as Exhibit 10.5
to Form 8-K (Date of Event: May 1, 1996) and incorporated herein by reference).
II-2
<PAGE>
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
- ------------------------ ------------------------------------------------------------------------------------------
10.4 -- Employment Agreement dated November 4, 1996, between the Registrant and Raymond G. Braun,
as amended by Amendment No. 1 dated August 29, 1997 (filed as Exhibit 10.4 to Form 10-K
for the year ended July 31, 1997, and incorporated herein by reference).
10.5 -- Non-Qualified Stock Option Agreement dated November 4, 1996, between the Registrant and
Raymond G. Braun, as amended by Amendment No. 1 dated August 29, 1997 (filed as Exhibit
10.5 to Form 10-K for the year ended July 31, 1997, and incorporated herein by reference).
10.6 -- Employment Agreement dated May 2, 1996, between the Registrant and Saul Gamoran, as
amended by Amendment No. 1 dated May 16, 1996 (filed as Exhibit 10.6 to Form 10-K for the
year ended July 31, 1997, and incorporated herein by reference).
10.7 -- Employment Agreement dated June 20, 1997, between the Registrant and James A. Weisfield
(filed as Exhibit 10.7 to Form 10-K for the year ended July 31, 1997, and incorporated
herein by reference).
10.8 -- Subordinated Convertible Debenture Agreements dated July 3, 1997, between the Registrant
and each of Renaissance Capital Growth and Income Fund III, Inc., Renaissance U.S. Growth
and Income Trust PLC and Banc One Capital Partners II, Ltd. (the "Convertible Lenders")
(filed as Exhibit 10.8 to Form 10-K for the year ended July 31, 1997, and incorporated
herein by reference).
10.9 -- Convertible Loan Agreement dated July 3, 1997, among the Registrant, the Convertible
Lenders and Renaissance Capital Group, Inc. (filed as Exhibit 10.9 to Form 10-K for the
year ended July 31, 1997, and incorporated herein by reference).
10.10 -- License Agreement dated March 22, 1994 by and between Warner Bros., a division of Time
Warner Entertainment, L.P., and the Registrant (as successor by assignment to Ace Novelty,
Inc.) (filed as Exhibit 10.10 to Form 10-K for the year ended July 31, 1997, and
incorporated herein by reference).
10.11 -- License Agreement dated March 22, 1996 by and between Warner Bros., a division of Time
Warner Entertainment, L.P., and the Registrant (as successor by assignment to Ace Novelty,
Inc.) (filed as Exhibit 10.11 to Form 10-K for the year ended July 31, 1997, and
incorporated herein by reference).
10.12 -- License Agreement dated September 10, 1997 by and between Warner Bros., a division of Time
Warner Entertainment, L.P., and the Registrant (as successor by assignment to Ace Novelty,
Inc.) (filed as Exhibit 10.12 for the year ended July 31, 1997, and incorporated herein by
reference).
11 -- Computation of Earnings Per Share (filed as Exhibit 11 to Form 10-K for the year ended
July 31, 1997, and incorporated herein by reference).
21 -- Subsidiaries of the Registrant. (filed as Exhibit 21 to the Form 10-K for the year ended
July 31, 1997, and incorporated herein by reference).
23.1 -- Consent of Thompson & Knight, P.C. (included as a part of Exhibit 5).
23.2 -- Consent of Coopers & Lybrand L.L.P.*
23.3 -- Consent of Coopers & Lybrand L.L.P.*
24 -- Powers of Attorney included at page II-4.**
- ------------
</TABLE>
* Filed herewith.
** Previously filed.
Confidential treatment has been requested with respect to a portion of this
Exhibit.
(b) Financial Statement Schedule
The following financial statement schedule of the Registrant is included in
this Registration Statement.
Schedule II -- Valuation and Qualifying Accounts
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreements, certificates in such
denominations and registered in such names as required by the particular
Underwriter, to permit prompt delivery to each purchaser.
The undersigned Registrant also hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each posteffective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN
ANTONIO, STATE OF TEXAS, ON THIS 25TH DAY OF NOVEMBER, 1997.
PLAY-BY-PLAY TOYS & NOVELTIES, INC.
By: /s/RAYMOND G. BRAUN
RAYMOND G. BRAUN
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------------------------------------------ -----------------
By /s/ARTURO G. TORRES* Chairman of the Board and November 25, 1997
ARTURO G. TORRES Chief Executive Officer
(Principal Executive Officer)
By /s/MARK A. GAWLIK* President, Chief Operating November 25, 1997
MARK A. GAWLIK Officer and Director
By /s/RAYMOND G. BRAUN Chief Financial Officer, November 25, 1997
RAYMOND G. BRAUN Treasurer and Director
(Principal Financial and
Accounting Officer)
By /s/SAUL GAMORAN* Executive Vice President, November 25, 1997
SAUL GAMORAN General Counsel, Secretary and
Director
By /s/FRANCISCO SAEZ MOYA* President -- Play-By-Play November 25, 1997
FRANCISCO SAEZ MOYA Europe and Director
By /s/OTTIS W. BYERS* Director November 25, 1997
OTTIS W. BYERS
By /s/STEVE K.C. LIAO* Director November 25, 1997
STEVE K.C. LIAO
By /s/TOMAS DURAN* Director November 25, 1997
TOMAS DURAN
By /s/BERTO GUERRA, JR.* Director November 25, 1997
BERTO GUERRA, JR.
By /s/JAMES F. PLACE* Director November 25, 1997
JAMES F. PLACE
*By: /s/RAYMOND G. BRAUN
RAYMOND G. BRAUN
ATTORNEY-IN-FACT
II-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Play By Play Toys & Novelties, Inc. and Subsidiaries
In connection with our audits of the consolidated financial statements of
Play By Play Toys & Novelties, Inc. and Subsidiaries as of July 31, 1997 and
1996 and for each of the three years in the period ended July 31, 1997, which
consolidated financial statements are included in the Prospectus, we have also
audited the financial schedule included herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Austin, Texas
October 20, 1997
S-1
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS* OF PERIOD
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Allowances for doubtful accounts:
Year ended July 31, 1995............. $ 358,628 $ 660,569 $ 72,731 $ 946,466
Year ended July 31, 1996............. 946,466 1,163,346 488,209 1,621,603
Year ended July 31, 1997............. 1,621,603 2,024,847 432,797 3,213,653
</TABLE>
- ------------
* Deductions relate to write-offs, which are net of recoveries of $24,406,
$28,704, and $64,457 in 1997, 1996 and 1995, respectively.
S-2
PLAY-BY-PLAY TOYS & NOVELTIES, INC.
(a Texas corporation)
3,135,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: o, 1997
<PAGE>
[[ Table of Contents will generate here ]]
i
<PAGE>
Draft of November 24, 1997
PLAY-BY-PLAY TOYS & NOVELTIES, INC.
(a Texas corporation)
3,135,000 Shares of Common Stock
(No par value)
PURCHASE AGREEMENT
o l, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Rauscher Pierce Refsnes, Inc.
Gerard Klauer Mattison & Co., Inc.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Play-By-Play Toys & Novelties, Inc., a Texas corporation (the
"Company"), and the persons listed in Schedule B hereto (the"Selling
Shareholders"), confirm their respective agreements with Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of
the other Underwriters named in Schedule A hereto (collectively, the
"Underwriters", which term shall also include any underwriter substituted as
hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Rauscher
Pierce Refsnes, Inc., and Gerard Klauer Mattison & Co., Inc. are acting as
representatives (in such capacity, the "Representatives"), with respect to (i)
the sale by the Company and the Selling Shareholders, acting severally and not
jointly, and the purchase by the Underwriters, acting severally and not jointly,
of the respective numbers of shares of Common Stock, no par value, of the
Company ("Common Stock") set forth in Schedules A and B hereto and (ii) the
grant by the Company and one of the Selling Shareholders to the Underwriters,
acting severally and not jointly, of the option described in Section 2(b) hereof
to purchase all or any part of 470,250 additional shares of Common Stock to
cover over-allotments, if any. The aforesaid 3,135,000 shares of Common Stock
(the "Initial Securities") to be purchased by the Underwriters and all or any
part of the 470,250 shares of Common Stock subject to the option described in
Section 2(b) hereof (the "Option Securities") are hereinafter called,
collectively, the "Securities".
2
<PAGE>
The Company and the Selling Shareholders understand that the
Underwriters propose to make a public offering of the Securities as soon as the
Representatives deem advisable after this Agreement has been executed and
delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-39291) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated November 4, 1997 together with the
Term Sheet and all references in this Agreement to the date of the Prospectus
shall mean the date of the Term Sheet. For purposes of this Agreement, all
references to the Registration Statement, any preliminary prospectus, the
Prospectus or any Term Sheet or any amendment or supplement to any of the
foregoing shall be deemed to include the copy filed with the Commission pursuant
to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each Underwriter,
as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule
3
<PAGE>
462(b) Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information
has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement,
the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. Neither the
Prospectus nor any amendments or supplements thereto, at the time the
Prospectus or any such amendment or supplement was issued and at the
Closing Time (and, if any Option Securities are purchased, at the Date
of Delivery), included or will include an untrue statement of a
material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434 and
the Prospectus shall not be "materially different", as such term is
used in Rule 434, from the prospectus included in the Registration
Statement at the time it became effective. The representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in
reliance upon and in conformity with information furnished to the
Company in writing by any Underwriter through Merrill Lynch expressly
for use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) INDEPENDENT ACCOUNTANTS. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(iii) FINANCIAL STATEMENTS. The financial statements included
in the Registration Statement and the Prospectus, together with the
related schedules and notes, present fairly the financial position of
the Company and of Ace Novelty Co., Inc. and their consolidated
subsidiaries at the dates indicated and the statement of operations,
shareholders' equity and cash flows of the Company and its consolidated
subsidiaries and the consolidated statements of operations and cash
flows of Ace Novelty Co., Inc. and its consolidated subsidiaries for
the periods specified; said financial statements have been prepared in
conformity with
4
<PAGE>
generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The supporting
schedules included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included
in the Prospectus present fairly the information shown therein and have
been compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement.
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business
(a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its subsidiaries, other than
those in the ordinary course of business, which are material with
respect to the Company and its subsidiaries considered as one
enterprise, and (C) there has been no dividend or distribution of any
kind declared, paid or made by the Company on any class of its capital
stock.
(v) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Texas and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing
in each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect.
(vi) GOOD STANDING OF SUBSIDIARIES. Each "significant
subsidiary" of the Company (as such term is defined in Rule 1-02 of
Regulation S-X) (each a "Subsidiary" and, collectively, the
"Subsidiaries") has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a
Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock
of each such Subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and is owned by the Company, directly or
through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity; none of the
outstanding shares of capital stock of any Subsidiary was issued in
violation of the preemptive or similar rights of any securityholder of
such Subsidiary. The only subsidiaries of the Company are the
subsidiaries listed on Exhibit 21 to the Registration Statement.
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(vii) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Historical" under the caption "Capitalization" (except
for subsequent issuances, if any, pursuant to this Agreement, pursuant
to reservations, agreements or employee benefit plans referred to in
the Prospectus or pursuant to the exercise of convertible securities or
options referred to in the Prospectus). The shares of issued and
outstanding capital stock, including the Securities to be purchased by
the Underwriters from the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable;
none of the outstanding shares of capital stock, including the
Securities to be purchased by the Underwriters from the Selling
Shareholders, was issued in violation of the preemptive or other
similar rights of any securityholder of the Company.
(viii) AUTHORIZATION OF AGREEMENT. This Agreement has been
duly authorized, executed and delivered by the Company.
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The
Securities to be purchased by the Underwriters from the Company have
been duly authorized for issuance and sale to the Underwriters pursuant
to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set
forth herein, will be validly issued and fully paid and non-assessable;
the Common Stock conforms to all statements relating thereto contained
in the Prospectus and such description conforms to the rights set forth
in the instruments defining the same; no holder of the Securities will
be subject to personal liability by reason of being such a holder; and
the issuance of the Securities is not subject to the preemptive or
other similar rights of any securityholder of the Company.
(x) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company nor
any of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, lease or other agreement
or instrument to which the Company or any of its subsidiaries is a
party or by which it or any of them may be bound, or to which any of
the property or assets of the Company or any subsidiary is subject
(collectively, "Agreements and Instruments") except for such defaults
that would not result in a Material Adverse Effect; and the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein and in the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectus
under the caption "Use of Proceeds") and compliance by the Company with
its obligations hereunder have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined
below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
subsidiary pursuant to, the Agreements and Instruments (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that
would not result in a Material Adverse Effect), nor will such action
result in any violation of the provisions
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of the charter or by-laws of the Company or any subsidiary or any
applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Company or any subsidiary or
any of their assets, properties or operations. As used herein, a
"Repayment Event" means any event or condition which gives the holder
of any note, debenture or other evidence of indebtedness (or any person
acting on such holder's behalf) the right to require the repurchase,
redemption or repayment of all or a portion of such indebtedness by the
Company or any subsidiary.
(xi) ABSENCE OF LABOR DISPUTE. No labor dispute with the
employees of the Company or any subsidiary exists or, to the knowledge
of the Company, is imminent, and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its
or any subsidiary's principal suppliers, manufacturers, customers or
contractors, which, in either case, may reasonably be expected to
result in a Material Adverse Effect.
(xii) ABSENCE OF PROCEEDINGS. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company or any subsidiary, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which
might reasonably be expected to result in a Material Adverse Effect, or
which might reasonably be expected to materially and adversely affect
the properties or assets thereof or the consummation of the
transactions contemplated in this Agreement or the performance by the
Company of its obligations hereunder; the aggregate of all pending
legal or governmental proceedings to which the Company or any
subsidiary is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xiii) ACCURACY OF EXHIBITS. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits thereto which
have not been so described and filed as required.
(xiv) POSSESSION OF INTELLECTUAL PROPERTY. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary
to carry on the business now operated by them, and neither the Company
nor any of its subsidiaries has received any notice or is otherwise
aware of any infringement of or conflict with asserted rights of others
with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or any of its
subsidiaries therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or
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finding) or invalidity or inadequacy, singly or in the aggregate, would
result in a Material Adverse Effect.
(xv) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement, except such as have been
already obtained or as may be required under the 1933 Act or the 1933
Act Regulations or state securities laws.
(xvi) POSSESSION OF LICENSES AND PERMITS. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and
other authorizations (collectively, "Governmental Licenses") issued by
the appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them; the
Company and its subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure
so to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect would not have a Material Adverse Effect; and neither
the Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(xvii) TITLE TO PROPERTY. The Company and its subsidiaries
have good and marketable title to all real property owned by the
Company and its subsidiaries and good title to all other properties
owned by them, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any
kind except such as (a) are described in the Prospectus or (b) do not,
singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company or any of its subsidiaries; and all of
the leases and subleases material to the business of the Company and
its subsidiaries, considered as one enterprise, and under which the
Company or any of its subsidiaries holds properties described in the
Prospectus, are in full force and effect, and neither the Company nor
any subsidiary has any notice of any material claim of any sort that
has been asserted by anyone adverse to the rights of the Company or any
subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such subsidiary
to the continued possession of the leased or subleased premises under
any such lease or sublease.
(xviii) COMPLIANCE WITH CUBA ACT. The Company has complied
with, and is and will be in compliance with, the provisions of that
certain Florida act relating to disclosure of doing business with Cuba,
codified as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
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(xix) INVESTMENT COMPANY ACT. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the
Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended (the "1940 Act").
(xx) ENVIRONMENTAL LAWS. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its subsidiaries is in violation of any federal, state,
local or foreign statute, law, rule, regulation, ordinance, code,
policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative order,
consent, decree or judgment, relating to pollution or protection of
human health, the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata) or
wildlife, including, without limitation, laws and regulations relating
to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum
or petroleum products (collectively, "Hazardous Materials") or to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any of its
subsidiaries and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of
its subsidiaries relating to Hazardous Materials or any Environmental
Laws.
(xxi) REGISTRATION RIGHTS. Other than the persons listed on
Schedule E, from whom valid waivers have been obtained, there are no
persons with registration rights or other similar rights to have any
securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the 1933 Act.
(b) REPRESENTATIONS AND WARRANTIES BY THE SELLING SHAREHOLDERS. Each
Selling Shareholder severally represents and warrants to each Underwriter as of
the date hereof, as of the Closing Time, and, if the Selling Shareholder is
selling Option Securities on a Date of Delivery, as of each such Date of
Delivery, and agrees with each Underwriter, as follows:
(i) ACCURATE DISCLOSURE. To the best knowledge of such Selling
Shareholder, the representations and warranties of the Company
contained in Section 1(a) hereof are true and correct; such Selling
Shareholder has reviewed and is familiar with the Registration
Statement and the Prospectus and neither the Prospectus nor any
amendments or supplements thereto includes any untrue statement of a
material fact or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
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which they were made, not misleading; such Selling Shareholder is not
prompted to sell the Securities to be sold by such Selling Shareholder
hereunder by any information concerning the Company or any subsidiary
of the Company which is not set forth in the Prospectus.
(ii) AUTHORIZATION OF AGREEMENTS. Each Selling Shareholder has
the full right, power and authority to enter into this Agreement and a
Power of Attorney and Custody Agreement (the "Power of Attorney and
Custody Agreement") and to sell, transfer and deliver the Securities to
be sold by such Selling Shareholder hereunder. The execution and
delivery of this Agreement and the Power of Attorney and Custody
Agreement and the sale and delivery of the Securities to be sold by
such Selling Shareholder and the consummation of the transactions
contemplated herein and compliance by such Selling Shareholder with its
obligations hereunder have been duly authorized by such Selling
Shareholder and do not and will not, whether with or without the giving
of notice or passage of time or both, conflict with or constitute a
breach of, or default under, or result in the creation or imposition of
any tax, lien, charge or encumbrance upon the Securities to be sold by
such Selling Shareholder or any property or assets of such Selling
Shareholder pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, license, lease or other
agreement or instrument to which such Selling Shareholder is a party or
by which such Selling Shareholder may be bound, or to which any of the
property or assets of such Selling Shareholder is subject, nor will
such action result in any violation of the provisions of the charter or
by-laws or other organizational instrument of such Selling Shareholder,
if applicable, or any applicable treaty, law, statute, rule,
regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over such Selling Shareholder or any of its properties.
(iii) GOOD AND MARKETABLE TITLE. Such Selling Shareholder has
and will at the Closing Time and, if any Option Securities are
purchased, on the Date of Delivery have good and marketable title to
the Securities to be sold by such Selling Shareholder hereunder, free
and clear of any security interest, mortgage, pledge, lien, charge,
claim, equity or encumbrance of any kind, other than pursuant to this
Agreement; and upon delivery of such Securities and payment of the
purchase price therefor as herein contemplated, assuming each such
Underwriter has no notice of any adverse claim, each of the
Underwriters will receive good and marketable title to the Securities
purchased by it from such Selling Shareholder, free and clear of any
security interest, mortgage, pledge, lien, charge, claim, equity or
encumbrance of any kind.
(iv) DUE EXECUTION OF POWER OF ATTORNEY AND CUSTODY AGREEMENT.
Such Selling Shareholder has duly executed and delivered, in the form
heretofore furnished to the Representatives, the Power of Attorney and
Custody Agreement with [Name of Attorney-in-Fact] as attorney-in-fact
(the "Attorney-in-Fact") and [Name of Custodian], as custodian (the
"Custodian"); the Custodian is authorized to deliver the Securities to
be sold by such Selling Shareholder hereunder and to accept payment
therefor; and the Attorney-in-Fact is authorized to execute and deliver
this Agreement and the certificate referred to in Section 5(f) or that
may be required pursuant to Sections 5(l) and 5(m) on behalf of such
Selling Shareholder, to sell, assign and transfer to the Underwriters
the Securities to be sold
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by such Selling Shareholder hereunder, to determine the purchase price
to be paid by the Underwriters to such Selling Shareholder, as provided
in Section 2(a) hereof, to authorize the delivery of the Securities to
be sold by such Selling Shareholder hereunder, to accept payment
therefor, and otherwise to act on behalf of such Selling Shareholder in
connection with this Agreement.
(v) ABSENCE OF MANIPULATION. Such Selling Shareholder has not
taken, and will not take, directly or indirectly, any action which is
designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Securities.
(vi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
consent, approval, authorization, order, registration, qualification or
decree of, any court or governmental authority or agency, domestic or
foreign, is necessary or required for the performance by each Selling
Shareholder of its obligations hereunder or in the Power of Attorney
and Custody Agreement, or in connection with the sale and delivery of
the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except such as may have previously been
made or obtained or as may be required under the 1933 Act or the 1933
Act Regulations or state securities laws.
(vii) RESTRICTION ON SALE OF SECURITIES. During a period of 90
days from the date of the Prospectus, such Selling Shareholder will
not, without the prior written consent of Merrill Lynch, (i) offer,
pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the 1933 Act with respect to any
of the foregoing or (ii) enter into any swap or any other agreement or
any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not
apply to the Securities to be sold hereunder, nor shall the foregoing
apply to shares of Common Stock issued or options to purchase Common
Stock granted pursuant to the Company's employee benefit plans
described in the Prospectus.
(viii) CERTIFICATES SUITABLE FOR TRANSFER. Certificates for
all of the Securities to be sold by such Selling Shareholder pursuant
to this Agreement, in suitable form for transfer by delivery or
accompanied by duly executed instruments of transfer or assignment in
blank with signatures guaranteed, have been placed in custody with the
Custodian with irrevocable conditional instructions to deliver such
Securities to the Underwriters pursuant to this Agreement.
(ix) NO ASSOCIATION WITH NASD. Neither such Selling
Shareholder nor any of his affiliates directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under
common control with, or has any other association with (within the
meaning
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of Article I, Section 1(m) of the By-laws of the National Association
of Securities Dealers, Inc.), any member firm of the National
Association of Securities Dealers, Inc.
(c) OFFICER'S CERTIFICATES. Any certificate signed by any officer of
the Company or any of its subsidiaries delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby; and any
certificate signed by or on behalf of the Selling Shareholders as such and
delivered to the Representatives or to counsel for the Underwriters pursuant to
the terms of this Agreement shall be deemed a representation and warranty by
such Selling Shareholder to the Underwriters as to the matters covered thereby.
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company and each Selling Shareholders, severally and not jointly,
agree to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company and
each Selling Shareholder, at the price per share set forth in Schedule C, that
proportion of the number of Initial Securities set forth in Schedule B opposite
the name of the Company or such Selling Shareholder, as the case may be, which
the number of Initial Securities set forth in Schedule A opposite the name of
such Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof, bears to the total number of Initial Securities, subject, in
each case, to such adjustments among the Underwriters as the Representatives in
their sole discretion shall make to eliminate any sales or purchases of
fractional securities.
(b) OPTION SECURITIES. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company and Arturo G. Torres, a Selling Shareholder, acting
severally and not jointly, hereby grant an option to the Underwriters, severally
and not jointly, to purchase up to an additional 375,000 and 92,250 shares of
Common Stock, respectively, as set forth in Schedule B, at the price per share
set forth in Schedule C, less an amount per share equal to any dividends or
distributions declared by the Company and payable on the Initial Securities but
not payable on the Option Securities. The option hereby granted will expire 30
days after the date hereof and may be exercised in whole or in part from time to
time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Initial Securities upon
notice by the Representatives to the Company and Arturo G. Torres setting forth
the number of Option Securities as to which the several Underwriters are then
exercising the option and the time and date of payment and delivery for such
Option Securities. Any such time and date of delivery (a "Date of Delivery")
shall be determined by the Representatives, but shall not be later than seven
full business days after the exercise of said option, nor in any event prior to
the Closing Time, as hereinafter defined. If the option is exercised as to all
or any portion of the Option Securities, each of the Underwriters, acting
severally and not jointly, will purchase that proportion of the total number of
Option Securities then being purchased which the number of Initial Securities
set forth in Schedule A opposite the name of such Underwriter bears to the total
number of Initial Securities, subject in each case to such
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adjustments as the Representatives in their discretion shall make to eliminate
any sales or purchases of fractional shares. [Address whether the Company's or
the Selling Shareholder's Option Shares will be sold first or whether the shares
will be sold pro rata or allocated in some other fashion]
(C) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Vinson
& Elkins L.L.P., 1001 Fannin, Suite 3600, Houston, Texas 77002, or at such other
place as shall be agreed upon by the Representatives and the Company and the
Selling Shareholders, at 9:00 A.M. (Eastern time) on the third (fourth, if the
pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day
after the date hereof (unless postponed in accordance with the provisions of
Section 10), or such other time not later than ten business days after such date
as shall be agreed upon by the Representatives and the Company and the Selling
Shareholders (such time and date of payment and delivery being herein called
"Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company and the Selling Shareholders, on each Date of Delivery as
specified in the notice from the Representatives to the Company and the Selling
Shareholders.
Payment shall be made to the Company and the Selling Shareholders by
wire transfer of immediately available funds to bank accounts designated by the
Company and the Custodian pursuant to each Selling Shareholder's Power of
Attorney and Custody Agreement, as the case may be, against delivery to the
Representatives for the respective accounts of the Underwriters of certificates
for the Securities to be purchased by them. It is understood that each
Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such Underwriter from its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representatives may request in writing at least
one full business day before the Closing Time or the relevant Date of Delivery,
as the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
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SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Representatives immediately, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted for
filing under Rule 424(b) was received for filing by the Commission and, in the
event that it was not, it will promptly file such prospectus. The Company will
make every reasonable effort to prevent the issuance of any stop order and, if
any stop order is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) FILING OF AMENDMENTS The Company will give the Representatives
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectus,
will furnish the Representatives with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representatives or counsel
for the Underwriters shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished or
will deliver to the Representatives and counsel for the Underwriters, without
charge, signed copies of the Registration Statement as originally filed and of
each amendment thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Representatives, without charge, a
conformed copy of the Registration Statement as originally filed and of each
amendment thereto (without exhibits) for each of the Underwriters. The copies of
the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the Prospectus
(as amended or supplemented) as such
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Underwriter may reasonably request. The Prospectus and any amendments or
supplements thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement and in the
Prospectus. If at any time when a prospectus is required by the 1933 Act to be
delivered in connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the opinion of
counsel for the Underwriters or for the Company, to amend the Registration
Statement or amend or supplement the Prospectus in order that the Prospectus
will not include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not misleading
in the light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at any
such time to amend the Registration Statement or amend or supplement the
Prospectus in order to comply with the requirements of the 1933 Act or the 1933
Act Regulations, the Company will promptly prepare and file with the Commission,
subject to Section 3(b), such amendment or supplement as may be necessary to
correct such statement or omission or to make the Registration Statement or the
Prospectus comply with such requirements, and the Company will furnish to the
Underwriters such number of copies of such amendment or supplement as the
Underwriters may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best efforts, in
cooperation with the Underwriters, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other jurisdictions
(domestic or foreign) as the Representatives may designate and to maintain such
qualifications in effect for a period of not less than one year from the later
of the effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the effective date of the Registration Statement and any Rule
462(b) Registration Statement.
(g) RULE 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the Prospectus
under "Use of Proceeds".
(i) LISTING. The Company will use its best efforts to effect and
maintain the quotation of the Securities on the Nasdaq National Market and will
file with the Nasdaq National Market all documents and notices required by the
Nasdaq National Market of companies that have securities
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that are traded in the over-the-counter market and quotations for which are
reported by the Nasdaq National Market.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 90 days from
the date of the Prospectus, the Company will not, without the prior written
consent of Merrill Lynch, (i) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any share of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or file any registration
statement under the 1933 Act with respect to any of the foregoing or (ii) enter
into any swap or any other agreement or any transaction that transfers, in whole
or in part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Securities to be sold hereunder and (B) any shares of Common Stock issued or
options to purchase Common Stock granted pursuant to existing employee benefit
plans of the Company referred to in the Prospectus.
(k) REPORTING REQUIREMENTS. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
SECTION 4. Payment of Expenses.
(a) EXPENSES. The Company and the Selling Shareholders will pay or
cause to be paid all expenses incident to the performance of their obligations
under this Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters, (iv) the fees and disbursements of the Company's counsel,
accountants and other advisors, (v) the qualification of the Securities under
securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto, (vi) the printing and
delivery to the Underwriters of copies of each preliminary prospectus, any Term
Sheets and of the Prospectus and any amendments or supplements thereto, (vii)
the preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities and (ix) the filing fees incident
to, and the reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities Dealers,
Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees
and expenses incurred in connection with the inclusion of the Securities in the
Nasdaq National Market.
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(b) EXPENSES OF THE SELLING SHAREHOLDERS. The Selling Shareholders,
jointly and severally, will pay all expenses incident to the performance of
their respective obligations under, and the consummation of the transactions
contemplated by this Agreement, including (i) any stamp duties, capital duties
and stock transfer taxes, if any, payable upon the sale of the Securities to the
Underwriters, and their transfer between the Underwriters pursuant to an
agreement between such Underwriters, and (ii) the fees and disbursements of
their respective counsel and accountants.
(c) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5, Section 9(a)(i)
or Section 11 hereof, the Company and the Selling Shareholders shall reimburse
the Underwriters for all of their out-of-pocket expenses, including the
reasonable fees and disbursements of counsel for the Underwriters.
(d) ALLOCATION OF EXPENSES. The provisions of this Section shall not
affect any agreement that the Company and the Selling Shareholders may make for
the sharing of such costs and expenses.
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and the Selling Shareholders
contained in Section 1 hereof or in certificates of any officer of the Company
or any subsidiary of the Company or on behalf of any Selling Shareholder
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission, and any request on the part
of the Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the Underwriters. A prospectus
containing the Rule 430A Information shall have been filed with the Commission
in accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b).
(b) OPINION OF COUNSEL FOR COMPANY. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Thompson & Knight, P.C., counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, together with signed or reproduced
copies of such letter for each of the other Underwriters to the effect set forth
in Exhibit A hereto and to such further effect as counsel to the Underwriters
may reasonably request.
(c) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS. At Closing Time,
the Representatives shall have received the favorable opinion, dated as of
Closing Time, of Klenda, Mitchell, Austerman & Zuercher, L.L.C., and [NAME OF
OTHER COUNSEL], counsel for the Selling Shareholders, in form and substance
satisfactory to counsel for the Underwriters, together with signed or reproduced
copies of such letter for each of the other Underwriters to the effect set forth
in Exhibit B hereto and to such further effect as counsel to the Underwriters
may reasonably request.
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(d) OPINION OF COUNSEL FOR UNDERWRITERS. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Vinson & Elkins L.L.P., counsel for the Underwriters, together with
signed or reproduced copies of such letter for each of the other Underwriters
with respect to the matters set forth in clauses (i), (ii), (v), (vi) (solely as
to preemptive or other similar rights arising by operation of law or under the
charter or by-laws of the Company), (viii) through (x), inclusive, (xii), (xiv)
(solely as to the information in the Prospectus under "Description of Capital
Stock--Common Stock") and the penultimate paragraph of Exhibit A hereto. In
giving such opinion such counsel may rely, as to all matters governed by the
laws of jurisdictions other than the law of the State of New York and the
federal law of the United States and the General Corporation Law of the State of
Delaware, upon the opinions of counsel satisfactory to the Representatives. Such
counsel may also state that, insofar as such opinion involves factual matters,
they have relied, to the extent they deem proper, upon certificates of officers
of the Company and its subsidiaries and certificates of public officials.
(e) OFFICERS' CERTIFICATE. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, and the Representatives shall have
received a certificate of the President or a Vice President of the Company and
of the chief financial or chief accounting officer of the Company, dated as of
Closing Time, to the effect that (i) there has been no such material adverse
change, (ii) the representations and warranties in Section 1(a) hereof are true
and correct with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to Closing
Time, and (iv) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or are contemplated by the Commission.
(f) CERTIFICATE OF SELLING SHAREHOLDERS. At Closing Time, the
Representatives shall have received a certificate of an Attorney-in-Fact on
behalf of each Selling Shareholder, dated as of Closing Time, to the effect that
(i) the representations and warranties of each Selling Shareholder contained in
Section 1(b) hereof are true and correct in all respects with the same force and
effect as though expressly made at and as of Closing Time and (ii) each Selling
Shareholder has complied in all material respects with all agreements and all
conditions on its part to be performed under this Agreement at or prior to
Closing Time.
(g) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of this
Agreement, the Representatives shall have received from Coopers & Lybrand L.L.P.
a letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter for
each of the other Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(h) BRING-DOWN COMFORT LETTER. At Closing Time, the Representatives
shall have received from Coopers & Lybrand L.L.P. a letter, dated as of Closing
Time, to the effect that they
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reaffirm the statements made in the letter furnished pursuant to subsection (g)
of this Section, except that the specified date referred to shall be a date not
more than three business days prior to Closing Time.
(i) APPROVAL OF LISTING. At Closing Time, the Securities shall have
been approved for inclusion in the Nasdaq National Market, subject only to
official notice of issuance.
(j) NO OBJECTION. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(k) LOCK-UP AGREEMENTS. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the form of
Exhibit C hereto signed by the persons listed on Schedule D hereto.
(l) CONDITIONS TO PURCHASE OF OPTION SECURITIES. In the event that the
Underwriters exercise their option provided in Section 2(b) hereof to purchase
all or any portion of the Option Securities, the representations and warranties
of the Company and the Selling Shareholders contained herein and the statements
in any certificates furnished by the Company, any subsidiary of the Company and
the Selling Shareholders hereunder shall be true and correct as of each Date of
Delivery and, at the relevant Date of Delivery, the Representatives shall have
received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(e) hereof remains true and correct as of such Date of
Delivery.
(ii) CERTIFICATE OF SELLING SHAREHOLDERS. A certificate, dated
such Date of Delivery, of an Attorney-in-Fact on behalf of each Selling
Shareholder confirming that the certificate delivered at Closing Time
pursuant to Section 5(f) remains true and correct as of such Date of
Delivery.
(iii) OPINION OF COUNSEL FOR COMPANY. The favorable opinion of
Thompson & Knight, P.C., counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, dated such Date of
Delivery, relating to the Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(b) hereof.
(iv) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS. The
favorable opinion of Klenda, Mitchell, Austerman & Zuercher, L.L.C. and
[NAME OF OTHER COUNSEL], counsel for the Selling Shareholders, in form
and substance satisfactory to counsel for the Underwriters, dated such
Date of Delivery, relating to the Option Securities to be purchased on
such Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(c) hereof.
(v) OPINION OF COUNSEL FOR UNDERWRITERS. The favorable opinion
of Vinson & Elkins L.L.P., counsel for the Underwriters, dated such
Date of Delivery, relating to the
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Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Section 5(d)
hereof.
(vi) BRING-DOWN COMFORT LETTER. A letter from Coopers &
Lybrand L.L.P., in form and substance satisfactory to the
Representatives and dated such Date of Delivery, substantially in the
same form and substance as the letter furnished to the Representatives
pursuant to Section 5(g) hereof, except that the "specified date" in
the letter furnished pursuant to this paragraph shall be a date not
more than five days prior to such Date of Delivery.
(m) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of Delivery
counsel for the Underwriters shall have been furnished with such documents and
opinions as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company and the Selling Shareholders in connection with the
issuance and sale of the Securities as herein contemplated shall be satisfactory
in form and substance to the Representatives and counsel for the Underwriters.
(n) TERMINATION OF AGREEMENT. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option Securities
on a Date of Delivery which is after the Closing Time, the obligations of the
several Underwriters to purchase the relevant Option Securities, may be
terminated by the Representatives by notice to the Company at any time at or
prior to Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party except as
provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any
such termination and remain in full force and effect.
SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF UNDERWRITERS. The Company and the Selling
Shareholders, jointly and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom
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of a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided
that (subject to Section 6(d) below) any such settlement is effected
with the written consent of the Company and the Selling Shareholders;
and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel of Merrill Lynch),
reasonably incurred in investigating, preparing or defending against
any litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever based
upon any such untrue statement or omission, or any such alleged untrue
statement or omission, to the extent that any such expense is not paid
under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the 430A Information and the
Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); provided, further, that
with respect to the Selling Shareholders listed on Schedule E, this indemnity
agreement shall only apply with respect to written information furnished to the
Company by such Selling Shareholder expressly for use in the Registration
Statement (or any amendment thereto), including the 430A Information and the
Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto). Notwithstanding anything in
this Section 6(a) to the contrary, each Selling Shareholder's aggregate
liability under this Section 6(a) shall be limited to an amount equal to the net
proceeds (after deducting the Underwriters' discount but before deducting
expenses) received by such Selling Shareholder from the sale of Securities
pursuant to this Agreement.
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act, and the Selling Shareholders against any
and all loss, liability, claim, damage and expense described in the indemnity
contained in subsection (a) of this Section, as incurred, but only with respect
to untrue statements or omissions, or alleged untrue statements or omissions,
made in the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through
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Merrill Lynch expressly for use in the Registration Statement (or any amendment
thereto) or such preliminary prospectus or the Prospectus (or any amendment or
supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In case such an action is brought against any indemnified party, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party, to assume the
defense thereof, with counsel satisfactory to such indemnified party; provided,
however, that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be one or more legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnifying party shall not have the
right to direct the defense of such action on behalf of such indemnified party
or parties and such indemnified party or parties shall have the right to select
separate counsel to defend such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof and approval by such indemnified
party of counsel appointed to defend such action, the indemnifying party will
not be liable to such indemnified party under this Section 6 for any legal or
other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof,
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that in connection with such action the indemnifying party shall not be
liable for the expenses of more than one separate counsel (in addition to local
counsel) in any one action or separate but substantially similar actions in the
same jurisdiction arising out of the same general allegations or circumstances,
designated by Merrill Lynch in the case of paragraph (a) of this Section 6,
representing the indemnified parties under such paragraph (a) who are parties to
such action or actions) or (ii) the indemnifying party does not promptly retain
counsel satisfactory to the indemnified party or (iii) the indemnifying party
has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. No indemnifying party shall, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or
contribution could be sought under this Section 6 or Section 7 hereof (whether
or not the indemnified parties are actual or potential parties thereto), unless
such settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) SETTLEMENT WITH CONSENT IF FAILURE TO REIMBURSE. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature
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contemplated by Section 6(a)(ii) effected without its written consent if (i)
such settlement is entered into more than 60 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 45 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement. Notwithstanding the immediately preceding sentence,
if at any time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for reasonable expenses under Section
6(a)(iii), an indemnifying party shall not be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its consent if such
indemnifying party, prior to the date of settlement, (i) reimburses such
indemnified party in accordance with such request to the extent such
indemnifying party considers such request to be reasonable and (ii) provides
written notice in reasonable detail to the indemnified party of the reasons such
indemnifying party considers the unpaid balance as unreasonable.
(e) CUMULATIVE AGREEMENTS. The provisions of this Agreement shall not
affect any agreement between the Company and the Selling Shareholders with
respect to indemnification and contribution.
(f) CERTAIN PROCEDURES REGARDING ENFORCEMENT AGAINST SELLING
SHAREHOLDERS. In making a claim for indemnification under this Section 6 (other
than pursuant to clause (a)(iii) of this Section 6) or contribution under
Section 7 by the Company or the Selling Shareholders, the indemnified parties
may proceed against either (i) both the Company and the Selling Shareholders or
(ii) the Company only, but may not proceed solely against the Selling
Shareholders; provided, however, that the indemnified parties may elect to
proceed solely against the Selling Shareholders if (i) the Company files a
petition for relief under the United States Bankruptcy Code (the "Bankruptcy
Code"), (ii) an order for relief is entered against the Company in an
involuntary case under the Bankruptcy Code and such order remains in effect for
60 consecutive days, (iii) the Company makes an assignment for the benefit of
its creditors or (iv) any court orders or approves the appointment of a receiver
of custodian for the Company or a substantial portion of its assets and such
order continues in effect for 60 consecutive days (the events set forth in
clauses (i) through (iv) above, inclusive, being referred to herein as the
"Company Insolvency Events").
In the event that the indemnified parties are entitled to seek
indemnity or contribution hereunder against any loss, liability, claim, damage
and expense incurred with respect to a final judgment from a trial court then,
as a precondition to any indemnified party obtaining indemnification or
contribution from the Selling Shareholders (but not the Company alone), the
indemnified parties shall first obtain a final judgment from a trial court that
such indemnified parties are entitled to indemnity or contribution with respect
to such loss, liability, claim, damage or expense (the "Final Judgment") under
the terms of this Agreement and shall seek to satisfy such Final Judgment in
full from the Company by making a written demand upon the Company for such
satisfaction. Only in the event such Final Judgment shall remain unsatisfied in
whole or in part 45 days following the date of receipt by the Company of such
demand shall any indemnified party have the right to take action to satisfy such
Final Judgment by making demand directly on the Selling Shareholders (but only
if and to the extent the Company has not already satisfied such Final Judgment,
whether by settlement, release or otherwise). The indemnified parties may
exercise this
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right to first seek to obtain payment from the Company and thereafter obtain
payment from the Selling Shareholders without regard to the pursuit by any party
of its rights to the appeal of such Final Judgment. The indemnified parties
shall, however, be relieved of their obligation to first obtain a Final
Judgment, seek to obtain payment from the Company with respect to such Final
Judgment or, having sought such payment, to wait such 45 days after failure by
the Company to immediately satisfy any such Final Judgment if any of the Company
Insolvency Events shall have occurred.
The provisions of this paragraph (f) are not intended to require any
indemnified party to obtain a Final Judgment before obtaining reimbursement of
expenses pursuant to clause (a)(iii) of this Section 6. However, the indemnified
parties shall first seek to obtain such reimbursement in full from the Company
by making a written demand upon the Company for such reimbursement. Only in the
event such expenses shall remain unreimbursed in whole or in part 45 days
following the date of receipt by the Company of such demand shall any
indemnified party have the right to receive reimbursement of such expenses from
the Selling Shareholders by making written demand directly on the Selling
Shareholders (but only if and to the extent the Company has not already
satisfied the demand for reimbursement, whether by the provisions of the last
sentence of Section 6(d) or by settlement, release or otherwise). The
indemnified parties shall, however, be relieved of their obligation to first
seek to obtain such reimbursement in full from the Company or, having made
written demand therefor, to wait such 45 days after failure by the Company to
immediately reimburse such expenses if any of the Company Insolvency Events
shall have occurred.
Notwithstanding anything to the contrary set forth in this paragraph
(f), the foregoing provisions shall not prohibit (i) the delivery by the
indemnified parties to the Selling Shareholders a notice of commencement of any
action as required pursuant to paragraph (c) above, (ii) the commencement of any
action against both the Company and the Selling Shareholders to enforce a claim
for indemnification under this Section 6 or contribution under Section 7
(provided, however, that following the commencement of such action, the
indemnified parties shall comply in all respects with their obligations under
the second and third paragraphs of this paragraph (f) to first seek
indemnification or reimbursement of expenses in such action from Company before
making written demand directly on the Selling Shareholders) or (iii) the taking
of any other action that is necessary, in the judgment of the Representatives
based on the advice of their counsel, to prevent the forfeiture of the right to
seek indemnification or contribution against the Selling Shareholders, whether
as a result of the application of any period of limitations or repose or any
procedural or other rules relating to the joinder of necessary parties or
otherwise.
SECTION 7. CONTRIBUTION. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other hand from
the offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative
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<PAGE>
fault of the Company and the Selling Shareholders on the one hand and of the
Underwriters on the other hand in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other hand in
connection with the offering of the Securities pursuant to this Agreement shall
be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Securities pursuant to this Agreement (before deducting
expenses) received by the Company and the Selling Shareholders and the total
underwriting discount received by the Underwriters, in each case as set forth on
the cover of the Prospectus, or, if Rule 434 is used, the corresponding location
on the Term Sheet, bear to the aggregate initial public offering price of the
Securities as set forth on such cover.
The relative fault of the Company and the Selling Shareholders on the
one hand and the Underwriters on the other hand shall be determined by reference
to, among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Selling Shareholders or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 7
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, (i) no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission and (ii) each Selling
Shareholder shall not be required to contribute any amount in excess of the
amount of the net proceeds (after deducting the Underwriters' discount but
before deducting expenses) received by such Selling Shareholder from the sale of
Securities pursuant to this Agreement less any amount previously indemnified by
such Selling Shareholder under Section 6.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
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<PAGE>
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries or the Selling Shareholders submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any Underwriter or controlling person, or by or on behalf of the
Company or the Selling Shareholders, and shall survive delivery of the
Securities to the Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Representatives may terminate this
Agreement, by notice to the Company and the Selling Shareholders, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representatives, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the Nasdaq National Market, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either Federal
or New York authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or
26
<PAGE>
they are obligated to purchase under this Agreement (the "Defaulted
Securities"), the Representatives shall have the right, within 24 hours
thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the Underwriters to purchase and of the Company
to sell the Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the (i) Representatives or (ii) the Company and any
Selling Shareholder shall have the right to postpone Closing Time or the
relevant Date of Delivery, as the case may be, for a period not exceeding seven
days in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10.
SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING SHAREHOLDERS OR THE
COMPANY. (a) If a Selling Shareholder shall fail at Closing Time or at a Date of
Delivery to sell and deliver the number of Securities which such Selling
Shareholder or Selling Shareholders are obligated to sell hereunder, and the
remaining Selling Shareholders do not exercise the right hereby granted to
increase, pro rata or otherwise, the number of Securities to be sold by them
hereunder to the total number to be sold by all Selling Shareholders as set
forth in Schedule B hereto, then the Underwriters may, at option of the
Representatives, by notice from the Representatives to the Company and the
non-defaulting Selling Shareholders, either (a) terminate this Agreement without
any liability on the fault of any non-defaulting party except that the
provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or
(b) elect to purchase the Securities which the non-defaulting Selling
Shareholders and the Company have agreed to sell hereunder. No action taken
pursuant to this Section 11 shall relieve any Selling Shareholder so defaulting
from liability, if any, in respect of such default.
27
<PAGE>
In the event of a default by any Selling Shareholder as referred to in
this Section 11, each of the Representatives, the Company and the non-defaulting
Selling Shareholders shall have the right to postpone Closing Time or Date of
Delivery for a period not exceeding seven days in order to effect any required
change in the Registration Statement or Prospectus or in any other documents or
arrangements.
(b) If the Company shall fail at Closing Time or at the Date of
Delivery to sell the number of Securities that it is obligated to sell
hereunder, then this Agreement shall terminate without any liability on the part
of any nondefaulting party; provided, however, that the provisions of Sections
1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant
to this Section shall relieve the Company from liability, if any, in respect of
such default.
SECTION 12. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at 1221 McKinney, Suite
2700, Houston, Texas 77010, attention of Alan J. Blackburn; notices to the
Company shall be directed to it at 4400 Tejasco, San Antonio, Texas 78218,
attention of President; and notices to the Selling Shareholders shall be
directed to the attention of o.
SECTION 13. PARTIES. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters, the Company and the Selling Shareholders
and their respective successors. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person, firm or
corporation, other than the Underwriters, the Company and the Selling
Shareholders and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriters, the Company and the Selling Shareholders
and their respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of Securities from any
Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 14. SELLING SHAREHOLDER CONSENT. Whenever this Agreement
requires the consent of the Selling Shareholders, the consent of only Arturo G.
Torres will be required.
SECTION 15. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 16. EFFECT OF HEADINGS. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
28
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and the Attorney-in-Fact for
the Selling Shareholders a counterpart hereof, whereupon this instrument, along
with all counterparts, will become a binding agreement among the Underwriters,
the Company and the Selling Shareholders in accordance with its terms.
Very truly yours,
PLAY-BY-PLAY TOYS & NOVELTIES, INC.
By:_________________________________
Title:
[Name of Attorney-in-Fact]
By:_________________________________
As Attorney-in-Fact acting on behalf of the
Selling Shareholders named in Schedule B
hereto
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
RAUSCHER PIERCE REFSNES, INC.
GERARD KLAUER MATTISON & CO., INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:__________________________________________
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
29
<PAGE>
SCHEDULE A
NAME OF UNDERWRITER NUMBER OF
------------------- INITIAL
SECURITIES
----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................................
Rauscher Pierce Refsnes, Inc.....................................
Gerard Klauer Mattison & Co., Inc................................
-----------
Total............................................................ 3,135,000
===========
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SCHEDULE B
Maximum
Number of
Number of Initial Option-Securities
Securities to be Sold to Be Sold
--------------------- ----------
PLAY-BY-PLAY TOYS & NOVELTIES, INC. .. 2,500,000 375,000
Arturo G. Torres ..................... 500,000 92,250
Francisco Saez Moya .................. 82,200
Berto Guerra, Jr. .................... 15,000
Ottis W. Byers ....................... 11,000
Steve K. C. Liao ..................... 11,000
Tomas Duran .......................... 10,800
James F. Place ....................... 5,000
----------- -------
Total ................................ 3,135,000 480,000
=========== =======
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<PAGE>
SCHEDULE C
PLAY-BY-PLAY TOYS & NOVELTIES, INC.
3,135,000 Shares of Common Stock
(No par value)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $o.
2 The purchase price per share for the Securities to be paid by the
several Underwriters shall be $o, being an amount equal to the initial public
offering price set forth above less $o per share; provided that the purchase
price per share for any Option Securities purchased upon the exercise of the
over-allotment option described in Section 2(b) shall be reduced by an amount
per share equal to any dividends or distributions declared by the Company and
payable on the Initial Securities but not payable on the Option Securities.
32
<PAGE>
SCHEDULE D
List of persons and entities
subject to lock-up
1. Play-By-Play Toys & Novelties, Inc.
2. Arturo G. Torres
3. Mark A. Gawlik
4. Raymond G. Braun
5. Saul Gamoran
6. Francisco Saez Moya
7. Ottis W. Byers
8. Steve K. C. Liao
9. Tomas Duran
10. Berto Guerra, Jr.
11. James F. Place
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<PAGE>
SCHEDULE E
List of Outside Selling Shareholders
1. Ottis W. Byers
2. Steve K.C. Liao
3. Tomas Duran
4. Berto Guerra, Jr.
5. James F. Place
34
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Texas.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus in the column entitled "Actual" under
the caption "Capitalization" (except for subsequent issuances, if any, pursuant
to the Purchase Agreement or pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectus or pursuant to the exercise of
convertible securities or options referred to in the Prospectus); the shares of
issued and outstanding capital stock of the Company, including the Securities to
be purchased by the Underwriters from the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; and none of
the outstanding shares of capital stock of the Company was issued in violation
of the preemptive or other similar rights of any securityholder of the Company.
(v) The Securities to be purchased by the Underwriters from the Company
have been duly authorized for issuance and sale to the Underwriters pursuant to
the Purchase Agreement and, when issued and delivered by the Company pursuant to
the Purchase Agreement against payment of the consideration set forth in the
Purchase Agreement, will be validly issued and fully paid and non-assessable and
no holder of the Securities is or will be subject to personal liability by
reason of being such a holder.
(vi) The issuance and sale of the Securities by the Company and the
sale of the Securities by the Selling Shareholders is not subject to the
preemptive or other similar rights of any securityholder of the Company.
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<PAGE>
(vii) Each Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Prospectus and is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would not
result in a Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock of each
Subsidiary has been duly authorized and validly issued, is fully paid and
non-assessable and, to the best of our knowledge, is owned by the Company,
directly or through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding
shares of capital stock of any Subsidiary was issued in violation of the
preemptive or similar rights of any securityholder of such Subsidiary.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the Prospectus pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); and, to the best of our knowledge, no
stop order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or threatened
by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus, and each amendment or supplement to the Registration
Statement and Prospectus, as of their respective effective or issue dates (other
than the financial statements and supporting schedules included therein or
omitted therefrom, as to which we need express no opinion) complied as to form
in all material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
(xi) If Rule 434 has been relied upon, the Prospectus was not
"materially different," as such term is used in Rule 434, from the prospectus
included in the Registration Statement at the time it became effective.
(xii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the charter and by-laws of the Company and
the requirements of the Nasdaq National Market.
(xiii) To the best of our knowledge, there is not pending or threatened
any action, suit, proceeding, inquiry or investigation, to which the Company or
any subsidiary is a party, or to which the property of the Company or any
subsidiary is subject, before or brought by any court or
A-2
<PAGE>
governmental agency or body, domestic or foreign, which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect the properties or assets thereof or
the consummation of the transactions contemplated in the Purchase Agreement or
the performance by the Company of its obligations thereunder.
(xiv) The information in the Prospectus under "Description of Capital
Stock--Common Stock", "Business--Governmental Regulation", "Business--Tariffs
and Duties", "Business-- Trademarks", "Business--Properties", "Business--Legal
Proceedings", "Description of Capital Stock--Preferred Stock", "Description of
Capital Stock--Registration Rights" and in the Registration Statement under Item
14, to the extent that it constitutes matters of law, summaries of legal
matters, the Company's charter and bylaws or legal proceedings, or legal
conclusions, has been reviewed by us and is correct in all material respects.
(xv) To the best of our knowledge, there are no statutes or regulations
that are required to be described in the Prospectus that are not described as
required.
(xvi) All descriptions in the Registration Statement of contracts and
other documents to which the Company or its subsidiaries are a party are
accurate in all material respects; to the best of our knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto,
and the descriptions thereof or references thereto are correct in all material
respects.
(xvii) To the best of our knowledge, neither the Company nor any
subsidiary is in violation of its charter or by-laws and no default by the
Company or any subsidiary exists in the due performance or observance of any
material obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other agreement or
instrument that is described or referred to in the Registration Statement or the
Prospectus or filed or incorporated by reference as an exhibit to the
Registration Statement.
(xviii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and the
1933 Act Regulations, which have been obtained, or as may be required under the
securities or blue sky laws of the various states, as to which we need express
no opinion) is necessary or required in connection with the due authorization,
execution and delivery of the Purchase Agreement or for the offering, issuance,
sale or delivery of the Securities.
(xix) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use Of Proceeds") and
A-3
<PAGE>
compliance by the Company with its obligations under the Purchase Agreement do
not and will not, whether with or without the giving of notice or lapse of time
or both, conflict with or constitute a breach of, or default or Repayment Event
(as defined in Section 1(a)(x) of the Purchase Agreement) under or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any subsidiary pursuant to any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or any other
agreement or instrument, known to us, to which the Company or any subsidiary is
a party or by which it or any of them may be bound, or to which any of the
property or assets of the Company or any subsidiary is subject (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that would not
have a Material Adverse Effect), nor will such action result in any violation of
the provisions of the charter or by-laws of the Company or any subsidiary, or
any applicable law, statute, rule, regulation, judgment, order, writ or decree,
known to us, of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any subsidiary or any of their
respective properties, assets or operations.
(xx) To the best of our knowledge, there are no persons with
registration rights or other similar rights to have any securities registered
pursuant to the Registration Statement or otherwise registered by the Company
under the 1933 Act.
(xxi) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, Intellectual Property necessary to carry on the business
now operated by them, and, to the best of our knowledge, neither the Company nor
any of its subsidiaries has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with respect to any
Intellectual Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its subsidiaries therein, and which infringement or conflict
(if the subject of any unfavorable decision, ruling or finding) or invalidity or
inadequacy, singly or in the aggregate, would result in a Material Adverse
Effect.
(xxii) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the 1940
Act.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time such Registration
Statement or any such amendment became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time the Prospectus
was issued, at the time any such amended or supplemented prospectus was issued
or at the Closing Time, included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary
A-4
<PAGE>
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
A-5
<PAGE>
Exhibit B
FORM OF OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS
TO BE DELIVERED PURSUANT TO SECTION 5(c)
(i) No filing with, or consent, approval, authorization, license, order,
registration, qualification or decree of, any court or governmental authority or
agency, domestic or foreign, (other than the issuance of the order of the
Commission declaring the Registration Statement effective and such
authorizations, approvals or consents as may be necessary under state securities
laws, as to which we need express no opinion) is necessary or required to be
obtained by the Selling Shareholders for the performance by each Selling
Shareholder of its obligations under the Purchase Agreement or in the Power of
Attorney and Custody Agreement, or in connection with the offer, sale or
delivery of the Securities.
(ii) Each Power of Attorney and Custody Agreement has been duly executed
and delivered by the respective Selling Shareholders named therein and
constitutes the legal, valid and binding agreement of such Selling Shareholder.
(iii) The Purchase Agreement has been duly authorized, executed and
delivered by or on behalf of each Selling Shareholder.
(iv) The Attorney-in-Fact has been duly authorized by the Selling
Shareholders to deliver the Securities on behalf of the Selling Shareholders in
accordance with the terms of the Purchase Agreement.
(v) The execution, delivery and performance of the Purchase Agreement and
the Power of Attorney and Custody Agreement and the sale and delivery of the
Securities and the consummation of the transactions contemplated in the Purchase
Agreement and in the Registration Statement and compliance by the Selling
Shareholders with its obligations under the Purchase Agreement have been duly
authorized by all necessary action on the part of the Selling Shareholders and
do not and will not, whether with or without the giving of notice or passage of
time or both, conflict with or constitute a breach of, or default under or
result in the creation or imposition of any tax, lien, charge or encumbrance
upon the Securities or any property or assets of the Selling Shareholders
pursuant to, any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, license, lease or other instrument or agreement to which any
Selling Shareholder is a party or by which they may be bound, or to which any of
the property or assets of the Selling Shareholders may be subject nor will such
action result in any violation of the provisions of the charter or by-laws of
the Selling Shareholders, if applicable, or any law, administrative regulation,
judgment or order
B-1
<PAGE>
of any governmental agency or body or any administrative or court decree having
jurisdiction over such Selling Shareholder or any of its properties.
(vi) To the best of our knowledge, each Selling Shareholder has valid and
marketable title to the Securities to be sold by such Selling Shareholder
pursuant to the Purchase Agreement, free and clear of any pledge, lien, security
interest, charge, claim, equity or encumbrance of any kind, and has full right,
power and authority to sell, transfer and deliver such Securities pursuant to
the Purchase Agreement. By delivery of a certificate or certificates therefor
such Selling Shareholder will transfer to the Underwriters who have purchased
such Securities pursuant to the Purchase Agreement (without notice of any defect
in the title of such Selling Shareholder and who are otherwise bona fide
purchasers for purposes of the Uniform Commercial Code) valid and marketable
title to such Securities, free and clear of any pledge, lien, security interest,
charge, claim, equity or encumbrance of any kind.
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time such Registration
Statement or any such amendment became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time the Prospectus
was issued, at the time any such amended or supplemented prospectus was issued
or at the Closing Time, included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
B-2
<PAGE>
[FORM OF LOCK-UP FROM DIRECTORS AND OFFICERS PURSUANT TO SECTION 5(K)]
Exhibit C
o, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
RAUSCHER PIERCE REFSNES, INC.
GERARD KLAUER MATTISON & CO., INC.
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: PROPOSED PUBLIC OFFERING BY PLAY-BY-PLAY TOYS & NOVELTIES, INC.
Dear Sirs:
The undersigned, a shareholder and an officer and/or director of Play-By-
Play Toys & Novelties, Inc., a Texas corporation (the "Company"), understands
that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Rauscher Pierce Refsnes, Inc. and Gerard Klauer Mattison &
Co., Inc. propose to enter into a Purchase Agreement (the "Purchase Agreement")
with the Company and the Selling Shareholders providing for the public offering
of shares (the "Securities") of the Company's common stock, no par value (the
"Common Stock"). In recognition of the benefit that such an offering will confer
upon the undersigned as a shareholder and an officer and/or director of the
Company, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees with each
underwriter to be named in the Purchase Agreement that, during a period of 90
days from the date of the Purchase Agreement, the undersigned will not, without
the prior written consent of Merrill Lynch, directly or indirectly, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of the Company's
Common Stock or any securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or hereafter acquired by the undersigned or
with respect to which the undersigned has or hereafter acquires the power of
C-1
<PAGE>
disposition, or file any registration statement under the Securities Act of
1933, as amended, with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction is to be settled by delivery
of Common Stock or other securities, in cash or otherwise.
Very truly yours,
Signature: __________________________
Print Name: _________________________
C-2
EXHIBIT 5
November 24, 1997
Play-By-Play Toys & Novelties, Inc.
4400 Tejasco
San Antonio, TX 78218-0267
Ladies and Gentlemen:
We have acted as special counsel for Play-By-Play Toys & Novelties, Inc.,
a Texas corporation (the "Company"), in connection with the preparation of the
Company's Registration Statement on Form S-1 (No. 333-39291) (the "Registration
Statement"), filed with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), in
connection with the proposed offering of 3,135,000 shares (the "Shares") of the
common stock, no par value (the "Common Stock"), of the Company, of which
2,500,000 shares (plus 375,000 shares subject to an underwriters' over-allotment
option) are being offered by the Company and 635,000 shares (plus 95,250 shares
subject to an underwriters' over-allotment option) are being offered by the
Selling Shareholders (as defined in the Registration Statement). The Shares are
proposed to be sold by the Company and the Selling Shareholders pursuant to a
Purchase Agreement (as defined in the Registration Statement), the form of which
is filed as Exhibit 1 to the Registration Statement.
In connection the foregoing, we have examined the originals or copies,
certified or otherwise authenticated to our satisfaction, of such corporate
records of the Company, agreements and other instruments, certificates of public
officials and of officers of the Company and other instruments and documents as
we have deemed necessary as a basis for the opinions hereinafter expressed.
Where facts material to the opinions hereinafter expressed were not
independently established by us, we have relied upon the statements of officers
of the Company where we deemed such reliance appropriate under the
circumstances.
Based upon the foregoing, it is our opinion that (i) the Shares to be sold
pursuant to the Registration Statement have been duly and validly authorized,
(ii) the 635,000 shares of Common Stock to be sold by the Selling Shareholders
are legally issued, fully paid and nonassessable and (iii) the 2,500,000 shares
of Common Stock to be sold by the Company, when issued and delivered as
described in the prospectus forming a part of the Registration Statement, will
be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the SEC as an exhibit
to the Registration Statement and to the reference to us under "Legal Matters"
in the prospectus forming a part of the Registration Statement. In giving this
consent, we do not thereby admit that we fall within the
<PAGE>
Play-By-Play Toys & Novelties, Inc.
November 24, 1997
Page 2
category of persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the SEC thereunder.
Respectfully submitted,
Thompson & Knight, P.C.
A Professional Corporation
By: /s/ MICHAEL L. BENGTSON,
Michael L. Bengtson,
Shareholder
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 2 to the registration
statement on Form S-1 (File No. 333-39291) of our report dated October 20, 1997,
on our audits of the consolidated financial statements and financial statement
schedule of Play by Play Toys & Novelties, Inc. and Subsidiaries. We also
consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Austin, Texas
November 25, 1997
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 2 to the registration
statement on Form S-1 (File No. 333-39291) of our report dated April 25, 1996,
except for Note 9 as to which the date is May 1, 1996, on our audits of the
consolidated statements of operations and cash flows of Ace Novelty Co., Inc.
and Subsidiaries. We also consent to the reference to our firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
Seattle, Washington
November 25, 1997
