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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission file number
July 31, 1997 0-26374
PLAY BY PLAY TOYS & NOVELTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Texas 74-2623760
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4400 Tejasco
San Antonio, Texas 78218
(Address of principal executive offices and zip code)
(210) 829-4666
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
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None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, no par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. ( )
As of October 20, 1997, the aggregate market value of the voting stock
held by non-affiliates of the registrant (based upon the last reported sale
price of the Common Stock of the registrant as quoted on the National Market
System of the National Association of Securities Dealers Automated Quotation
System) was $68,286,564. (For purposes of calculating the preceding amount only,
all directors, executive officers and shareholders holding 5% or greater of the
registrant's Common Stock are assumed to be affiliates). The number of shares of
Common Stock of the registrant outstanding as of October 20, 1997 was 4,904,100.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement for its annual meeting of
shareholders are incorporated by reference into Items 10, 11, 12 and 13 of Part
III. The registrant intends to file such Proxy Statement no later than 120 days
after the end of the fiscal year covered by this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. Business 2
General 2
Business History 2
Business Strategy 4
Products 6
Licensed Products 7
Non-Licensed Products 7
License Agreements 8
Sales, Marketing and Distribution 8
Design and Development 11
Manufacturers and Suppliers 11
Advertising 12
Vending Operations 12
Competition 13
Product Liability 13
Government Regulation 13
Tariffs and Duties 13
Trademarks 14
Employees 14
Risk Factors 15
ITEM 2. Properties 20
ITEM 3. Legal Proceedings 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Shareholder Matters 21
Market Information 21
Stockholders 21
Dividends and Distributions 21
ITEM 6. Selected Consolidated Financial Data 22
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
General 23
Results of Operations 25
Liquidity and Capital Resources 28
Seasonality 30
Inflation 30
New Accounting Pronouncements 30
ITEM 8. Financial Statements and Supplementary Data 31
ITEM 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 31
PART III
ITEM 10. Directors and Executive Officers of the Registrant 31
ITEM 11. Executive Compensation 31
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management 31
ITEM 13. Certain Relationships and Related Transactions 31
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 32
SIGNATURES 33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE F-1
INDEX TO EXHIBITS E-1
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PART I
ITEM 1. BUSINESS
GENERAL
THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, WITHOUT LIMITATION, COMPETITIVE AND ECONOMIC
FACTORS, PRICE CHANGES BY COMPETITORS, RELATIONSHIPS WITH LICENSORS, ABILITY TO
MANAGE GROWTH, ABILITY TO SOURCE PRODUCTS, INTERNATIONAL TRADE RELATIONS,
MANAGEMENT OF QUARTER TO QUARTER RESULTS, INCREASES IN COSTS OF RAW MATERIALS,
TIMING OF TECHNOLOGICAL ADVANCES BY THE COMPANY AND ITS COMPETITORS, LACK OF
ACCEPTANCE BY CONSUMERS OF NEW PRODUCTS, AND THE OTHER FACTORS DISCUSSED BELOW
IN "RISK FACTORS", ELSEWHERE HEREIN. UPDATED INFORMATION WILL BE PERIODICALLY
PROVIDED BY THE COMPANY AS REQUIRED BY THE SECURITIES EXCHANGE ACT OF 1934. AS
USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS
PLAY-BY-PLAY TOYS & NOVELTIES, INC., A TEXAS CORPORATION, AND ITS WHOLLY OWNED
SUBSIDIARIES.
The Company designs, develops, markets and distributes stuffed toys,
novelty items and its PLAY-FACES(R) line of sculpted toy pillows based on
license 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.
BUSINESS HISTORY
Over the last three fiscal years, the Company's net sales have grown from
$32.6 million for fiscal 1994 to $137.4 million in 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 82.0% 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, SUPERMAN, BATMAN,
and characters featured in SPACE JAM (the motion picture), THE FLINTSTONES(TM)
and POPEYE(TM) and on popular, classic trademark licenses such as The Coca-Cola
Company's COCA-COLA(R) brand stuffed toys, including the COCA-COLA(R) POLAR
BEAR, and Harley-Davidson Motor Company's HARLEY HOG(TM). 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(R) line of sculpted toy pillows shaped in the
facial likeness of licensed animated characters. The
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PLAY-FACES(R) line is based upon popular, classic characters, including The Walt
Disney Company's animated characters, LOONEY TUNES, ANIMANIACS, SUPERMAN,
BATMAN, and SPACE JAM characters, SESAME STREET CHARACTERS, GARFIELD(TM) 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(R) line by adding full-bodied PLAY-FACES(R),
which are being sold in the domestic sections of the mass retailer. The Company
believes its PLAY-FACES(R) line is a distinct product category that enhances its
ability to acquire additional character and trademark licenses. PLAY-FACES(R)
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(TM)" which talk and sing
together utilizing infrared technology. The Company began selling "TALKIN'
TOTS(TM)" during the fourth quarter of fiscal 1997 and began television
advertising during the first quarter of fiscal 1998. The Company also developed
a retail line of Looney Tunes products during 1997, including standing, sitting
and bean bag stuffed toys, and another television promoted electronic stuffed
toy, the "TORNADO TAZ(TM)". The "TORNADO TAZ(TM)" is a TASMANIAN DEVIL(TM) that
spins, shakes, grunts and laughs. The Looney Tunes products include such
characters as TWEETY(TM), SYLVESTER(TM), TASMANIAN DEVIL(TM), BUGS BUNNY(TM),
SPEEDY GONZALES(TM), YOSEMITE SAM(TM), and DAFFY DUCK(TM).
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 Sea World, family entertainment centers such as Tilt, Dave and Buster's,
Inc. 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(R) (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 (the "Ace
Acquisition") 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 we have 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;
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o demonstrated ability to develop new and innovative toys such as "TALKIN'
TOTS(TM)" and "TORNADO TAZ(TM)", new licensed products such as the
COCA-COLA(R) brand stuff toys, and new product categories such as thE
PLAY-FACES(R) 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 facility located throughout North America and Europe allowing
the Company to better serve its customers which typically have multiple
locations and have very little 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 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(R) 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(TM)", "TORNADO TAZ", PLAY-FACES(R) product lines,
Harley-Davidson Motor Company's HARLEY HOG(TM), and the COCA-COLA(R) 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
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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 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(TM)" and "TORNADO TAZ") and product categories (such as
PLAY-FACES(R)). Since fiscal 1994, retail sales HaVE grown at a weighted average
rate of 127.3% domestically, and at a weighted average rate of 110.4%
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 business which
have complimentary 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.
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PRODUCTS
The Company markets a variety of licensed and non-licensed stuffed 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(R) ...................... 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(R) ...................... 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%
======== ======== ========
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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.
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, which include
standing, sitting and bean bag stuffed toys.
PLAY-FACES(R). During the first quarter of fiscal 1995, the Company began
selling its PLAY-FACES(R) line of sculpted toy pillows shaped in the facial
likenesses of licensed animated characters. PLAY-FACES(R) are sold primarily to
retail customers and have a suggested retail price of under $20. The Company
believes its PLAY-FACES(R) 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(R) line by adding different sizes of
PLAY-FACES(R) products and securing additional character licenses. PLAY-FACES(R)
products accounted for 12.0% of the Company's net sales for fiscal 1997. During
fiscal 1997, the Company further developed the line by adding full-bodied
PLAY-FACES(R), which are being sold in the domestic sections of mass retailers.
ELECTRONIC TOYS. During 1997, the Company introduced a television promoted
electronic stuffed toy, TORNADO TAZ. TORNADO TAZ is a plush depiction Tasmanian
Devil(TM) that spins, shakes, grunts and laughs. The Company began selling this
product 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.
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 ended 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 towards preferences of licensed
merchandise, 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
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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. 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 1997, the Company entered the large doll market
with the introduction of a set of interactive dolls, the "TALKIN' TOTS(TM)"
which talk and sing together utilizing infrared technology. A squeeze of each
doll's hands initiates the pre-recorded singing of the alphabet and two other
nursery rhymes. The nursery rhymes are recorded in several languages. The
Company began selling this product during the fourth quarter of fiscal 1997.
Sales of "TALKIN' TOTS(TM)" 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.
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. 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 subsidiary are considered international sales.
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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 Sea World, 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.
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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
fiscal 1997, 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. The Company has
acquired the necessary software programs to participate in EDI programs with its
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(R),
fundraising and premium customers. Fun Services(R) consist of sales to
approximately 50 franchisees throughout the United States whereby Play-By-Play
is the franchisor. The Fun Services(R) franchisees sell products at schools,
churches and company fairs. The most significant sales program is the Santa's
Secret Shop(R) which offers school children and their families the opportunity
to purchase Christmas gifts on the school premises during the holiday season.
Fun Services(R) sales during fiscal 1997 were $7.0 million. The fundraising
distribution channels consist 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 premiums and
fundraising 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 may, in accordance with industry practice, assist
retailers to enable them 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 began its international expansion 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 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, through twelve independent commissioned sales representatives 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
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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. The Company's
international product line generally includes its products offered in the United
States. The Company also 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 as to whom the Company can sell its products. The Company
believes that fully utilizing these licenses is a growth opportunity.
Additionally, the Company also plans to introduce certain new retail products,
such as "TALKIN' TOTS(TM)" and "TORNADO TAZ(TM)", 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
has generally had a limited access to license products.
Amusement customers include theme parks such as Port Aventura, Isla Magica
and Monte Tibidabo in Spain and Alton Towers, H. B. Leisure and Chessington Park
in the United Kingdom, Fort Fun Abenteurland and Warner Bros. 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, Cana 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(R) 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, more easily manage quality and
shipping schedules and 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
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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 PLAY-FACES(R) 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.
The principal materials used in the production and sale of the Company's
products are taffeta, polyester, polystyrene, acrylic textiles, plastics and
polyvinyl chloride. The manufacturers who deliver completed or partially
completed products to the Company generally purchase these materials. 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 campaign for the first time in fiscal
1997 in conjunction with the introduction of the "TALKIN' TOTS(TM)" and "TORNADO
TAZ(TM)". 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 if its
advertising budget to promote its products through retail catalogs,
advertisements 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 approximately
$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(TM), AMUSEMENT BUSINESS(TM) and REPLAY MAGAZINE(TM).
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 Texas, of which approximately 800 are on a month-to-month
arrangements. The other approximately 600 coin-operated amusement game machines
are generally operated under month-to-month arrangements with numerous other
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.
Approximately 2.3%, 4.6% and 7.9% of the Company's 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.
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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. 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.
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 $20.0 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.
GOVERNMENT 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 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 Most
Favored Nation ("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
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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. 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-Play(R) and
PLAY-FACES(R) in the United States and in Spain. The Company has filed an
application to register "TALKIN' TOTS(TM)" and "TORNADO TAZ" as trademarks 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 operation. Of the 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. A
union represents some of the Company's employees at the Chicago, Illinois
facility. 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.
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RISK FACTORS
THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, COMPETITIVE AND ECONOMIC FACTORS, PRICE CHANGES BY
COMPETITORS, RELATIONSHIPS WITH LICENSORS, ABILITY TO MANAGE GROWTH, ABILITY TO
SOURCE PRODUCTS, INTERNATIONAL TRADE RELATIONS, MANAGEMENT OF QUARTER TO QUARTER
RESULTS, INCREASES IN COSTS OF RAW MATERIALS, TIMING OF TECHNOLOGICAL ADVANCES
BY THE COMPANY AND ITS COMPETITORS, LACK OF ACCEPTANCE BY CONSUMERS OF NEW
PRODUCTS, AND THE OTHER FACTORS DISCUSSED IN THIS SECTION AND ELSEWHERE HEREIN.
UPDATED INFORMATION WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY
THE SECURITIES EXCHANGE ACT OF 1934.
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 has 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 market 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 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
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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 employment agreements with Mr. Gamoran
and 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.
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 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
toy European subsidiary from its 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 European subsidiary's license agreements call for payment of royalties
in a currency different from the functional currency, 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
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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 never been and is not currently a defendant in any product
liability lawsuit; however, there can be no assurance that such claims will not
arise in the future based on past, present or future products which are
designed, developed and/or sold by the Company. 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 - Licensing," "-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. See "Business." 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 and polyvinyl chloride and other petrochemical derivatives such as
polyethylene and high impact polystyrene. The prices for such 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 large, rapid 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. 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 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."
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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 1997, 1996 and 1995. 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. The Company has 4,904,100 shares of
Common Stock outstanding as of October 28, 1997. Certain shares of Common Stock
are "restricted securities" under the Securities Act of 1933, as amended (the
"Securities Act"). These "restricted securities," and any shares purchased by
affiliates of the Company, may be sold only if they are registered under the
Securities Act or pursuant to an applicable exemption from the registration
requirements of the Securities Act, including Rule 144 thereunder. There are
also (i) 1,462,500 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 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
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contained in the agreements relative to the credit 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.
19
<PAGE>
ITEM 2. 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.
Approximate
Location Type of Facility Square Footage
-------- ---------------- --------------
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, Office/Warehouse 20,000
Canada and Mississauga,
Ontario
Doncaster, England Office/Showroom/Warehouse 25,500
Valencia, Spain Office/Showroom/Warehouse 70,000
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.
20
<PAGE>
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol "PBYP." The table sets forth, for the periods indicated, the
reported high and low close sale prices of the Company's Common Stock, as
reported on the Nasdaq National Market System:
FISCAL 1997 FISCAL 1996
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
Fiscal Quarter
--------------
First .............. $ 10.00 $ 7.50 $ 14.50 $ 10.75
Second ............. 12.00 8.13 16.38 10.75
Third .............. 14.25 9.75 13.88 12.00
Fourth ............. 16.00 12.38 16.00 8.00
STOCKHOLDERS
According to the records of the Company's transfer agent, the Company had
78 holders of record of the Common Stock as of October 20, 1997. The Company
believes that a substantially larger number of beneficial owners hold such
shares in depository or nominee form.
DIVIDENDS AND DISTRIBUTIONS
The Company has never declared nor 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. The Company is limited from paying dividends by certain
provisions of the Company's Credit Facility. 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."
21
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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 fiscal years ended July 31, 1997, 1996, and
1995 have been derived from the audited Consolidated Financial Statements of the
Company which are included elsewhere in this Form 10-K. The information set
forth below is not necessarily indicative of results of future operations. On
March 31, 1996, the Company sold Restaurants Universal Espana, S.A.
("Restaurants Universal"), its European subsidiary that operated two restaurants
in Spain. The historical financial data for Restaurants Universal has been
reported as discontinued operations and accordingly the historical financial
data for all prior years presented has been restated. This data should be read
in conjunction with, and is qualified in its entirety by, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Consolidated Financial Statements and the Notes thereto, which appear
elsewhere in this Form 10-K.
<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 (2) ...................................... $ 137,386 $ 74,197 $ 47,730 $ 32,568 $ 26,649
Income (loss) from continuing operations ........... $ 6,216 $ 4,052 $ 1,898 $ 880 $ (694)
Income (loss) from discontinued operations (2) ..... -- $ (384) $ (259) $ 125 $ (597)
Net income (loss) .................................. $ 6,216 $ 3,668 $ 1,639 $ 1,074 $ (1,231)
Primary earnings (loss) per share .................. $ 1.25 $ 0.76 $ 0.63 $ 0.43 $ (0.50)
Fully diluted earnings (loss) per share ............ $ 1.21 $ 0.76 $ 0.63 $ 0.43 $ (0.50)
Average number of shares outstanding - primary ..... 4,960 4,841 2,612 2,519 2,460
Average number of shares outstanding - fully diluted 5,179 4,841 2,612 2,519 2,460
JULY 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
CONSOLIDATED BALANCE SHEET DATA (1):
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, including 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 Espana, which was sold during the third quarter of
fiscal 1996. See Note 5 to the Company's Consolidated Financial
Statements.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, COMPETITIVE AND ECONOMIC FACTORS, PRICE CHANGES BY
COMPETITORS, RELATIONSHIPS WITH LICENSORS, ABILITY TO MANAGE GROWTH, ABILITY TO
SOURCE PRODUCTS, INTERNATIONAL TRADE RELATIONS, MANAGEMENT OF QUARTER TO QUARTER
RESULTS, INCREASES IN COSTS OF RAW MATERIALS, TIMING OF TECHNOLOGICAL ADVANCES
BY THE COMPANY AND ITS COMPETITORS, LACK OF ACCEPTANCE BY CONSUMERS OF NEW
PRODUCTS, AND THE OTHER FACTORS DISCUSSED IN "RISK FACTORS", AND ELSEWHERE
HEREIN. THE COMPANY AS REQUIRED BY THE SECURITIES EXCHANGE ACT OF 1934 WILL
PERIODICALLY PROVIDE UPDATED INFORMATION.
The following discussion and analysis, together with the accompanying
consolidated financial statements and related notes, will aid in understanding
the Company's results of operations as well as its financial position, cash
flows, indebtedness and other key financial information.
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 1400
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 consists 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 the Company's Common Stock. The
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.
23
<PAGE>
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 involve license products. During
fiscal 1997, 12.5% of retail sales were from non-licensed goods consisting
principally of the "TALKIN' TOTS(TM)". 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. Also during
fiscal 1997, the Company expanded its retail product line to include a set of
interactive dolls, the "TALKIN' TOTS(TM)", 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(TM)" 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
$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 cost.
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 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 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 its 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
24
<PAGE>
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.
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%
======== ======== ========
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
dollars, to $113.1 million dollars, 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 the in fiscal year 1996. The
increase in licensed product sales was primarily attributable to growth of sales
of 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(TM)"
during the fourth quarter of fiscal 1997. Sales for the "TORNADO TAZ(TM)"
accounted for $2.0 million, or 1.5%, of the Company's
25
<PAGE>
net toy sales for fiscal 1997. PLAY-FACES(R) decreased 13.3% or $2.5 million, to
$16.5 million, from $19.0 million in fiscal 1996. The Company expects that
PLAY-FACES(R) 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(TM)" during the fourth quarter of
fiscal 1997. Sales of the "TALKIN' TOTS(TM)" 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 is 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 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
is 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 in 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, the 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 cost 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
approximately $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 approximately $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.
26
<PAGE>
YEARS ENDED JULY 31, 1996 AND 1995
The comparison between fiscal 1996 and fiscal 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 attributed 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 PLAY-FACES(R) 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 PLAY-FACES(R) line. Through July 31, 1996, substantially all sales to
retail customers were comprised of licensed merchandise, primarily
PLAY-FACES(R).
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 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 as result of $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
27
<PAGE>
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, acquisitions of inventory, customer receivables, letters of
credit, licenses and international expansion.
During July 1997, the Company completed a private placement of 8%
convertible 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 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 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.
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 $15.0 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 $12.0 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.
28
<PAGE>
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 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, (b) the Federal Funds
Effective Rate plus 0.50%, or (c) the Base CD Rate 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 purpose 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 1996 and 1997, the Company funded its growth 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 guarantee 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 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 approximately $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 cost 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.
29
<PAGE>
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 net proceeds from issuance of common stock in
connection with the exercise of the over-allotment option by the underwriters
from 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 the 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 the 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.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "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
30
<PAGE>
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.
Management does not believe the implementation of these recent accounting
pronouncements will have a material effect on its consolidated financial
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements referred to in
the Index on page F-1 setting forth the consolidated financial statements of
Play By Play Toys & Novelties, Inc. and Subsidiaries, together with the report
of Coopers & Lybrand L.L.P. dated October 20, 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III (Items 10 through 13) is incorporated by
reference to the captions "Principal Shareholders," "Election of Directors,"
"Management" and "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the Company's fiscal year covered by this
Report.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS. Reference is made to the Index on page F-1 for a
list of all financial statements filed as part of this Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES. Reference is made to the Index on page F-1
for a list of all financial statement schedules filed as part of this
Report.
(a)(3) EXHIBITS. Reference is made to the Exhibit Index on page E-1 for a list
of all exhibits filed as part of this Report.
(b) REPORTS ON FORM 8-K. None.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, this 27th
day of October 1997.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By: /s/ RAYMOND G. BRAUN
Raymond G. Braun
CHIEF FINANCIAL OFFICER
AND TREASURER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
By: /s/ ARTURO G. TORRES Chairman of the Board and Chief October 27, 1997
Arturo G. Torres Executive Officer
(Principal Executive Officer)
By: /s/ MARK A. GAWLIK President, Chief Operating Officer October 27, 1997
Mark A. Gawlik and Director
By: /s/ RAYMOND G. BRAUN Chief Financial Officer, October 27, 1997
Raymond G. Braun Treasurer and Director
(Principal Financial and Accounting
Officer)
By: /s/ SAUL GAMORAN Executive Vice President, General October 27, 1997
Saul Gamoran Counsel, Secretary and Director
By: /s/ FRANCISCO SAEZ MOYA President - Play-by-Play Europe October 27, 1997
Francisco Saez Moya and Director
By: /s/ TOMAS DURAN Director October 27, 1997
Tomas Duran
</TABLE>
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
By: /s/ JAMES F. PLACE Director October 27, 1997
James F. Place
By: /s/ STEVEN K. C. LIAO Director October 27, 1997
Steven K. C. Liao
By: /s/ OTTIS W. BYERS Director October 27, 1997
Ottis W. Byers
By: /s/ BERTO GUERRA, JR. Director October 27, 1997
Berto Guerra, Jr.
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
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
Financial Statement Schedule:
Schedule II- Valuation and Qualifying Accounts ................... S-1
All other schedules are omitted as the required information is not
applicable or the information is presented in the consolidated financial
statements or related notes.
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 consolidated financial statements and financial
statement schedule of Play By Play Toys & Novelties, Inc. and Subsidiaries
listed in the index on page F-1 of this Form 10-K. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibilty is to express an opinion on these
consolidated financial statements and the financial statement schedule 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. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic consolidated 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
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>
COMMON STOCK ADDITIONAL
------------------ PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
--------- ------ ------------ ---------
<S> <C> <C> <C> <C>
Balance, August 1, 1994 ............. 2,514,120 $1,000 $ 9,282,916 --
Net income .......................... -- -- -- --
Stock distributed as compensation ... 26,980 -- 14,915 --
Foreign currency translation
adjustments ....................... -- -- -- --
Stock issued in initial public
offering .......................... 2,000,000 -- 20,873,319 --
--------- ------ ------------ ---------
Balance, July 31, 1995 .............. 4,541,100 1,000 30,171,150 --
Net income .......................... -- -- -- --
Warrants issued ..................... -- -- 245,350 --
Foreign currency translation
adjustments ....................... -- -- -- --
Stock issued for exercise of
over-allotment option of IPO ...... 300,000 -- 3,380,097 --
Retirement of treasury
stock ............................. -- -- (50,000) --
--------- ------ ------------ ---------
Balance, July 31, 1996 .............. 4,841,100 1,000 33,746,597 --
Net income .......................... -- -- -- --
Acquisition of TLC .................. 40,000 -- 345,000 --
Foreign currency translation
adjustments ....................... -- -- -- --
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)
========= ====== ============ =========
<CAPTION>
CUMULATIVE
FOREIGN
CURRENCY TOTAL
TRANSLATION RETAINED TREASURY SHAREHOLDERS'
ADJUSTMENTS EARNINGS STOCK EQUITY
----------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Balance, August 1, 1994 ............. $ (183,868) $ 59,464 $(50,000) $ 9,109,512
Net income .......................... -- 1,639,237 -- 1,639,237
Stock distributed as compensation ... -- -- -- 14,915
Foreign currency translation
adjustments ....................... 389,788 -- -- 389,788
Stock issued in initial public
offering .......................... -- -- -- 20,873,319
----------- ----------- -------- ------------
Balance, July 31, 1995 .............. 205,920 1,698,701 (50,000) 32,026,771
Net income .......................... -- 3,668,077 -- 3,668,077
Warrants issued ..................... -- -- -- 245,350
Foreign currency translation
adjustments ....................... (620,226) -- -- (620,226)
Stock issued for exercise of
over-allotment option of IPO ...... -- -- -- 3,380,097
Retirement of treasury
stock ............................. -- -- 50,000 --
----------- ----------- -------- ------------
Balance, July 31, 1996 .............. (414,306) 5,366,778 -- 38,700,069
Net income .......................... -- 6,215,972 -- 6,215,972
Acquisition of TLC .................. (47,470) -- -- 297,530
Foreign currency translation
adjustments ....................... (1,841,251) -- -- (1,841,251)
Exercise of stock options ........... -- -- -- 214,942
Deferred employee compensation ...... -- -- -- --
Amortization of deferred compensation -- -- -- 81,667
----------- ----------- -------- ------------
Balance, July 31, 1997 .............. $(2,303,027) $11,582,750 $ -- $ 43,668,929
=========== =========== ======== ============
</TABLE>
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
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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
and the COCA-COLA(R) 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.
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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
F-9
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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, "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
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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
Espana, S.A. ("Restaurants Universal"), its European subsidiary that operated
two restaurants in Spain, to an unrelated third party, for 205,000,000 Spanish
pesetas, 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.
F-11
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DISCONTINUED OPERATIONS (CONTINUED)
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)
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.
F-12
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
============ ============
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
F-13
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
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 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
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
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 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
==============
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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' TOTS(TM)" 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
===========
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
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,
F-17
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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' TOTS(TM)" 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.
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
============ ============ ============
F-18
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAX (CONTINUED)
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 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.
F-19
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-20
<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
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
</TABLE>
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 OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------------------- ----------- ------------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$9.49 to $13.00 781,600 9.32 $ 9.96 203,700 $10.35
$13.01 to $15.95 168,200 8.02 14.25 191,000 13.97
----------- -----------
949,800 9.09 10.72 394,700 12.10
=========== ===========
</TABLE>
F-21
<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-22
<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-23
<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.
YEAR ENDED JULY 31,
------------------------------------------------
1997 1996 1995
--------------- --------------- --------------
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
=============== =============== ==============
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.
F-24
<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):
1997
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
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
1996
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
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
F-25
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC.
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-1
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
2.1 Asset Purchase Agreement dated May 1, 1996, by and among Ace Novelty
Acquisition Co., Inc. a Texas corporation ("Buyer"), Play By Play Toys
& Novelties, Inc., a Texas corporation and the parent corporation of
Buyer ("PBYP"), Ace Novelty Co., Inc., a Washington corporation
("ACE"), Specialty Manufacturing Ltd., a British Columbia, Canada
corporation ("Specialty"), ACME Acquisition Corp., a Washington
corporation ("ACME"), and Benjamin H. Mayers and Lois E. Mayers,
husband and wife, Ronald S. Mayers, a married individual, Karen
Gamoran, a married individual, and Beth Weisfield, a married individual
(collectively, "Stockholders") (filed as Exhibit 2.1 to Form 8-K, Date
of Event: May 1, 1996), incorporated herein by reference.
2.2 Amendment No. 1 to Asset Purchase Agreement dated June 20, 1996 by, and
among Buyer, PBYP, ACE, Specialty, ACME and Stockholders. (filed as
Exhibit 2.2 to Form 8-K, Date of Event: May 1, 1996), incorporated
herein by reference.
3.1 Amended Articles of Incorporation of the Company (filed as Exhibit 3.1
to the Registration Statement on Form S-1, File No. 33-92204),
incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to the
Registration Statement on Form S-1, File No. 33-92204), incorporated
herein by reference.
4.1 Specimen of Common Stock Certificate (filed as Exhibit 4.1 to the
Registration Statement on Form S-1, File No. 33-92204), incorporated
herein by reference.
4.2 Form of Warrant Agreement and Form of Warrant (filed as Exhibit 4.2 to
the Registration Statement on Form S-1, File No. 33-92204),
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 the Registration Statement on Form S-1,
File No. 33-92204), incorporated herein by reference.
4.4 Form of Play By Play Toys & Novelties, Inc. Non-qualified Stock Option
Agreement (filed as Exhibit 4.4 to the Registration Statement on Form
S-1, File No. 33-92204), incorporated herein by reference.
4.5 Play By Play Toys & Novelties, Inc. Warrant to Purchase Common Stock
(filed as Exhibit 4 to Form 8-K, Date of Event: May 1, 1996),
incorporated herein by reference.
10.1 Play By Play Toys & Novelties, Inc. 1994 Incentive Plan (filed as
Exhibit 10.1 to the Registration Statement on Form S-1, File No.
33-92204), incorporated herein by reference.
10.2 Credit Agreement dated June 20, 1996, by and among Play By Play Toys &
Novelties, Inc., Ace Novelty Acquisition Co., Inc., Newco Novelty, Inc.
and Chemical Bank, a New York banking corporation as agent for the
lenders (filed as Exhibit 10.1 to Form 8-K, Date of Event: May 1,
1996), incorporated herein by reference.
E-1
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
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), incorporated herein by reference.
10.4 Employment agreement dated November 4, 1996, between the Company and
Raymond G. Braun, as amended by Amendment No.1 to Employment agreement
dated August 29, 1997.
10.5 Non-Qualified Stock Option agreement dated November 4, 1996, between
the Company and Raymond G. Braun, as amended by Amendment No. 1 to
Non-Qualified Stock Option agreement dated August 29, 1997.
10.6 Employment agreement dated May 2, 1996, between the Company and Saul
Gamoran, as amended by Amendment No. 1 dated May 16, 1996.
10.7 Employment agreement dated June 20, 1997, between the Company and James
A. Weisfield.
10.8 Subordinated Convertible Debenture Agreements dated July 3, 1997,
between the Company 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").
10.9 Convertible Loan Agreement dated July 3, 1997, among the Company, the
Convertible Lenders and Renaissance Capital Group, Inc.
10.10 License Agreement dated March 22, 1994 by and between Warner Bros., a
division of Time Warner Entertainment, L.P., and the Company (as
successor by assignment to Ace Novelty, Inc.).
10.11 License Agreement dated March 22, 1996 by and between Warner Bros., a
division of Time Warner Entertainment, L.P., and the Company (as
successor by assignment to Ace Novelty, Inc.).
10.12 License Agreement dated September 10, 1997 by and between Warner Bros.,
a division of Time Warner Entertainment, L.P., and the Company (as
successor by assignment to Ace Novelty, Inc.).
11 Computation of Earnings Per Share.
21 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
E-2
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
This Employment Agreement, dated and effective as of this 4th day of
November, 1996, by and between Play By Play Toys & Novelties, Inc., a Texas
corporation (the "Company"), and Raymond G. Braun, an individual whose primary
residence is located in the state of Texas (the "Employee").
WITNESSETH:
WHEREAS, the Company desires to employ Employee on the terms set forth
below, and Employee is willing to accept such employment on such terms.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the parties hereto do hereby agree:
1. DEFINITIONS. As used in this Agreement, the following terms have
the meanings set forth below:
a. "Board" means the Company's board of directors.
b. "Cause" shall be deemed to exist if, and only if:
i. Employee is convicted in a court of law of any crime (A) that
constitutes a felony relating to the Company or any other
business endeavor or (B) that constitutes a felony which involves
moral turpitude; or
ii. Employee engages in willful misconduct or any breach of or
willful failure to perform his duties and responsibilities
hereunder, which misconduct, breach, or failure shall continue
after the Company, by action of the Board, shall have advised
Employee thereof in writing and shall have afforded Employee a
reasonable opportunity (which shall be at least 30 days from the
date of such written advice or knowledge thereof) to correct the
acts or omissions complained of, and which Employee shall have so
failed to take action to correct within such period.
c. "Disability" means Employee's inability to fully and competently
perform the duties hereunder for a period of at least three (3)
consecutive months by reason of mental or physical illness or other
incapacity.
d. "Notice of Termination" means a notice that sets forth the date
of termination and, in the event of termination for Cause, the facts and
circumstances claimed to provide a basis for termination of Employee's
employment.
2. TERM. Enployee's employment with the Company pursuant to this Agreement
shall commence on January 2, 1997 (the "Commencement Date") and shall continue
until January 2, 2000, unless sooner terminated by Employee or the Company.
3. DUTIES. During the term of his employment as provided in Section 2
above, the Company will employ Employee as its Chief Financial Officer, with
such responsibilities as would typically be associated with such a position and
as the Company may from time to time determine during the term of this
Agreement. Employee will comply with all applicable laws, with all corporate
documents governing the conduct of the Company's business and affairs and
<PAGE>
with all of the Company's written policies. Employee agrees to devote
substantially all of his business time to the performance of his duties
hereunder.
4. COMPENSATION.
a. The Company shall pay Employee for all services to be performed
hereunder during the term of this Agreement an annual salary of $175,000
(the "Salary"), which Salary shall begin to accrue on the Commencement
Date and shall be payable in bi-weekly installments or as otherwise agreed
by Employee and the Company.
b. An annual bonus in the form of cash and/or stock of the Company
may be paid to Employee at the discretion of the Board, based on the
performance of the Company and the Employee as determined by the Board.
c. In addition to the payments and awards set forth in Sections 4(a)
and 4(b) above:
i. During the term of this Agreement, upon submission of a
reasonable accounting, the Company shall reimburse Employee for
all reasonable travel, entertainment, and other business expenses
that are in compliance with Company policy related to his
employment hereunder.
ii. During the term of this Agreement, Employee shall be eligible
for the Company's employee benefit programs on the terms on which
the same are extended to the Company's executive officers
generally.
The Company shall have the right to deduct from all payments to be made
under this Agreement any federal, state, or local taxes required by law to
be withheld from such payments.
5. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.
a. Employee agrees that, during his employment by the Company and
for one year thereafter, he will not use or disclose to others, directly
or indirectly, any confidential information relating to the business,
prospects, or plans of the Company or its subsidiaries. Notwithstanding
the previous sentence, Employee shall not be in violation of this section
in the event of a disclosure pursuant to a court action or governmental
rule, regulation, or proceeding (hereinafter referred to as an "Ordered
Disclosure") provided Employee has notified the Company of such Ordered
Disclosure within five business days of being personally served with such
Ordered Disclosure. Employee agrees to cooperate in good faith with the
Company in responding to such Ordered Disclosure in order to prevent,
limit or impose restrictions on such Ordered Disclosure. In no event,
however, shall this section require Employee to take action or otherwise
cause Employee to be in violation of any law or result in contempt of such
Ordered Disclosure.
b. Upon termination of his employment with the Company, Employee
shall surrender to the Company any and all work papers, reports, manuals,
documents, and the like (including all originals and copies thereof) in
his possession which contain
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<PAGE>
confidential information relating to the business, prospects, or plans of
the Company or its affiliates.
c. The Company may seek the assistance, cooperation or testimony of
Employee following any such termination in connection with any
investigation, litigation or proceeding arising out of matters within the
knowledge of Employee and related to his position as an officer or
employee of the Company, and in any instance, Employee shall provide such
assistance, cooperation or testimony and the Company shall pay Employee's
reasonable costs and expenses in connection therewith. In addition, the
Company will compensate Employee for such time at a per diem rate derived
from Employee's salary from the Company at the time of Employee's
termination.
6. TERMINATION.
a. This Agreement shall automatically terminate upon Employee's
death or Disability. In addition, this Agreement may be terminated by the
Company or Employee at any time for any reason whatsoever. Any termination
of Employee's employment by the Company or by Employee (other than
termination pursuant to the first sentence of this subsection 6(a)) shall
be communicated by written Notice of Termination to the other party hereto
in accordance with Section 14.
b. Upon termination of this Agreement by the Company for Cause or by
the Employee for any reason, Employee shall be entitled to receive, and
the Company shall pay Employee (or, if such termination is caused by
Employee's death, his estate or as may be directed by the legal
representatives of such estate) within 30 days of the termination date,
any unpaid amounts earned by or payable to Employee through the date of
termination under Sections 4(a), 4(b) (if any), 4(c) and that portion of
the Option exercisable pursuant to Section 7.
c. Upon termination of this Agreement by the Company for any reason
other than Cause, Employee shall be entitled to receive, and the Company
shall pay Employee within 30 days of the termination date, (i) any unpaid
amounts earned by or payable to Employee through the date of termination
under Sections 4(a), 4(b) (if any) and 4(c) above and (ii) an amount equal
to the sum of (x) the Salary as then in effect plus (y) the amount of the
annual bonus, if any, paid in cash to the Employee pursuant to Section
4(b) above for the most recent year during the term of this Agreement,
plus (z) that portion of the Option exercisable pursuant to Section 7.
d. The compensation provided in Section 6(b) or 6(c) above, as
applicable, shall be the only compensation payable as a result of the
termination events described in such subsections and, except as may
otherwise be provided in this Agreement or in any other agreement or the
NQSO Agreement, as defined below, Employee shall not be entitled to any
accrued bonuses, acceleration of vesting with respect to any options or
acceleration of any other rights he may have under any employee benefit
plan or arrangement.
7. OPTIONS.
a. Effective as of the date of this Agreement (the "Date of Grant"),
the Company hereby grants to the Employee pursuant to the terms and
conditions of the Play-By-Play Toys & Novelties, Inc. Nonqualified Stock
Option Agreement (the "NQSO Agreement") attached hereto as Exhibit A, an
option (the "Option") to purchase 200,000
-3-
<PAGE>
shares of the Company's Common Stock, no par value ("Common Stock"), at a
price of $8.00 per share (the "Option Price"), the current market price of
the Common Stock. The Option shall be exercisable as set forth in the NQSO
Agreement.
b. The granting of the Option by the Company to the Employee shall
not impose upon the Company any obligation to employ or continue to employ
the Employee; and the right of the Company to terminate the employment of
the Employee with the Company shall not be diminished or affected by
reason of the grant of the Option to the Employee pursuant to the NQSO
Agreement.
8. INDEMNIFICATION. Except to the extent attributable to Employee's
willful misconduct or actions leading to the Company's termination of this
Agreement for Cause, the Company shall indemnify Employee against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by him in connection with any action, suit, or
proceeding to which Employee has been made a party by reason of his capacity as
an employee of the Company if Employee acted in good faith and in a manner
Employee reasonably believed to be in or not opposed to the best interest of the
Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Employee's conduct was unlawful. The termination of
any action, suit, or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that Employee did not act in good faith and in a manner which
Employee reasonably believed to be in or not opposed to the best interest of the
Company, and with respect to any criminal action or proceeding, had reasonable
cause to believe that Employee's conduct was unlawful.
9. ADDITIONAL REMEDIES. In the event of a breach or a threatened breach of
the terms of Section 5 by Employee, the Company shall, in addition to all other
remedies, be entitled to a temporary or permanent injunction or a decree for
specific performance, in accordance with the provisions hereof, without showing
any actual damage or that monetary damages would not provide an adequate remedy
and without any bond or other security being required.
10. NONASSIGNMENT. This Agreement is personal to Employee and shall not be
assigned by him. Employee shall not hypothecate, delegate, encumber, alienate,
transfer, or otherwise dispose of his rights and duties hereunder. The Company
may assign this Agreement without Employee's consent to any other entity who, in
connection with such assignment, acquires all or substantially all of the
Company's assets, or into or with which the Company is merged or consolidated.
11. WAIVER. The waiver by the Company of a breach by Employee of any
provision of this Agreement shall not be construed as a waiver of any subsequent
breach by Employee.
12. SEVERABILITY. If any clause, phrase, provision, or portion of this
Agreement or the application thereof to any person or circumstance shall be
invalid or unenforceable under any applicable law, such event shall not affect
or render invalid or unenforceable the remainder of this Agreement and shall not
affect the application of any clause, provision, or portion hereof to other
persons or circumstances.
13. GOVERNING LAW. This Agreement shall be construed by, subject to, and
governed in accordance with the internal laws of the state of Texas.
14. NOTICES. All notices, requests, demands, and other communications in
connection with this Agreement shall be made in writing and shall be deemed to
have been given when
-4-
<PAGE>
delivered by hand, facsimile, the next business day after depositing for
overnight delivery via a nationally recognized overnight delivery service or 48
hours after mailing at any post office by registered or certified mail, postage
prepaid, addressed as follows, or to such other address as shall have been
designated in writing by the addressee:
a. If to the Company:
Play By Play Toys & Novelties, Inc.
4400 Tejasco
San Antonio, Texas 78218
Attention: President
b. If to Employee:
Raymond G. Braun
668 Irene Drive
Canyon Lake, Texas 78133
15. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding
of the parties and supersedes all prior agreements, arrangements, and
communications, whether oral or written, and this Agreement shall not be
modified or amended except by written agreement of the Company and Employee.
16. CONSTRUCTION. Words used in the masculine apply equally to the
feminine, and wherever the context dictates, the plural should be read as the
singular and the singular as the plural. References to Sections are to Sections
of this Agreement. The headings at the beginning of each section are inserted
for convenience only and are not intended to describe, interpret, define, or
limit the scope, extent, or intent of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
COMPANY:
PLAY BY PLAY TOYS & NOVELTIES, INC.
By_________________________________
Name:______________________________
Title:_____________________________
EMPLOYEE:
___________________________________
Raymond G. Braun
-5-
<PAGE>
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") is made
and entered into as of the 29th day of August, 1997, by and between PLAY BY PLAY
TOYS & NOVELTIES, INC., a Texas corporation (the "Company"), and RAYMOND G.
BRAUN, an individual whose primary residence is located in the state of Texas
(the "Employee").
W I T N E S S E T H :
WHEREAS, the Company and the Employee entered into that certain Employment
Agreement dated as of the 4th day of November, 1996 (the "Employment
Agreement"), a copy of which is attached hereto as Exhibit "A"; and
WHEREAS, the Company and the Employee, in order to carry out the parties'
original intentions, desire to amend the Employment Agreement by modifying the
Date of Grant for the nonqualified stock options.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
parties hereto do hereby agree as follows:
1. Section 7(a) of the Employment Agreement is hereby amended by deleting
the same in its entirety and inserting in lieu thereof the following:
"a. Effective as of the Commencement Date (the "Date of
Grant"), the Company hereby grants to the Employee pursuant to the
terms and conditions of the Play-By-Play Toys & Novelties, Inc.
Nonqualified Stock Option Agreement (the "NQSO Agreement") attached
hereto as Exhibit A, an option (the "Option") to purchase 200,000
shares of the Company's Common Stock, no par value ("Common Stock"),
at a price of $8.00 per share (the "Option Price"). The Option shall
be exercisable as set forth in the NQSO Agreement."
2. This Amendment shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, successors, executors,
administrators, personal representatives and permitted assigns.
3. All defined terms not defined herein shall have the same meaning as set
forth in the Employment Agreement.
1
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment the day and
year first above written.
COMPANY:
PLAY BY PLAY TOYS & NOVELTIES, INC.
By:_________________________________________
Name:_______________________________________
Title:______________________________________
EMPLOYEE:
--------------------------------------------
Raymond G. Braun
2
EXHIBIT 10.5
PLAY-BY-PLAY TOYS & NOVELTIES, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
Date of Grant: November 4, 1996.
This Nonqualified Stock Option Agreement (this "Agreement"), dated as
of the date of grant first stated above (the "Date of Grant"), is delivered
BY PLAY-BY-PLAY TOYS & NOVELTIES, INC.,
a Texas corporation,
hereinafter referred to as
"COMPANY"
TO RAYMOND G. BRAUN,
an individual,
hereinafter referred to as
"GRANTEE"
WHEREAS, Company and Grantee have entered into a certain Employment
Agreement of even date herewith (the "Employment Agreement"), a copy of which is
attached hereto as Exhibit "A;" and
WHEREAS, Company and Grantee agree to enter into this Agreement in
order to provide to Grantee certain employment compensation.
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, the Company and Grantee hereby agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions hereinafter set
forth, Company hereby grants to Grantee, as of the Date of Grant, an option to
purchase up to Two Hundred Thousand (200,000) shares of common stock of the
Company (the "Stock") at a purchase price per share of Eight Dollars ($8.00).
Such option is hereinafter referred to as the "Option" and the shares of stock
purchasable upon exercise of the Option are hereinafter sometimes referred to as
the "Option Shares."
2. VESTING OF EXERCISE RIGHTS. Subject to the other terms of this
Agreement, the Option shall become exercisable in installments, Grantee having
the right hereunder to purchase from Company the following number of Option
Shares upon exercise of the Option, on and after the following dates, in
cumulative fashion:
1
<PAGE>
(a) Immediately upon the commencement of employment by the Grantee
which must occur prior to January 3, 1997, up to one-half
(ignoring fractional shares) of the total number of Option
Shares; and
(b) On and after the first day of each calendar month during the
term of this Agreement, commencing February 1, 1997, through
and including January 1, 1999, up to an additional one
forty-eighth (1/48) (ignoring fractional shares) of the total
number of Option Shares.
3. TERMINATION OF OPTION.
(a) The Option and all rights hereunder with respect thereto, to
the extent such rights shall not have been exercised, shall
terminate and become null and void after the expiration of ten
(10) years from the Date of Grant (the "Option Term").
(b) Upon the occurrence of Grantee ceasing to be employed by
Company for Cause, as defined in the Employment Agreement, or
upon Grantee terminating employment with Company for any
reason, including death, the Option and all rights hereunder
with respect thereto, to the extent such rights shall not have
been exercised, shall terminate and become null and void after
the expiration of six (6) months from the effective date of
such termination of employment. In the event of the death of
Grantee, the Option may be exercised by Grantee's legal
representative.
(c) On the occurrence of Company terminating employment of Grantee
for any reason other than for Cause, the Option and all rights
hereunder with respect thereto, to the extent such rights
shall not have been exercised, shall terminate and become null
and void upon the expiration of the Option Term.
4. EXERCISE OF OPTIONS.
(a) Grantee may exercise the Option with respect to all or any
part of the number of Option Shares then exercisable hereunder
by giving the Secretary of the Company at the Company's
principal executive office written notice delivered in person
or by mail of Grantee's intent to exercise. The notice of the
exercise shall specify the number of Option Shares as to which
the Option is to be exercised and the date of exercise
thereof, which date shall be at least five (5) days after the
giving of the notice unless an earlier time shall have been
mutually agreed upon.
(b) Full payment (in U.S. dollars) by Grantee of the option price
for the Option Shares purchased shall be made on or before the
exercise date specified in the notice of exercise in cash, or,
with the prior written consent of the Company, in whole or in
part, through the surrender of previously acquired shares of
Stock at their Fair Market Value (as defined in Paragraph 12)
on the exercise date. On the exercise date specified in
Grantee's notice or as soon thereafter as is practicable, a
certificate or certificates for the Option Shares then being
purchased shall be issued to Grantee
2
<PAGE>
upon full payment of the exercise price for such Option
Shares. The obligation of Company to deliver Stock shall,
however, be subject to the condition that if at any time the
Company shall determine that the listing, registration or
qualification of the Option or the Option Shares upon any
securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body, is
required as a condition of, or in connection with, the Option
or the issuance or purchase of Stock thereunder, the Option
may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have
been effected or obtained free of any such required
conditions.
5. ADJUSTMENT OF OPTION SHARES AND OPTION PRICE. In the event of any
stock dividend, stock split or subdivision of the shares of common stock of
Company into a greater number of shares, the purchase price hereunder shall be
proportionately reduced and the number of shares subject to the Option shall be
proportionately increased; conversely, in the event of any combination of the
outstanding shares of common stock of Company, the purchase price hereunder
shall be proportionately increased and the number of shares of Stock subject to
the Option shall be proportionately reduced.
6. INVESTMENT REPRESENTATION. Upon demand by the Company, Grantee shall
deliver to Company, at the time of any exercise of the Option or portion
thereof, a written representation that the Stock to be acquired upon such
exercise are to be acquired for investment and not for resale or with a view to
the distribution thereof. Upon such demand by the Company, delivery of such
representation prior to the delivery of any certificate representing the Stock
issuable upon exercise of the Option and prior to the expiration of the Option
Term shall be a condition precedent to the right of Grantee to purchase any
shares of Stock.
7. RIGHTS AS A SHAREHOLDER. Neither Grantee nor any personal
representative shall be, or shall have any of the rights and privileges of, a
shareholder of Company with respect to any shares of Stock purchasable or
issuable upon the exercise of the Option, in whole or in part, prior to the date
of exercise of the Option.
8. NON-TRANSFERABILITY OF OPTION. During Grantee's lifetime, the Option
hereunder shall be exercisable only by Grantee or any guardian or legal
representative of Grantee, and the Option shall not be transferrable otherwise
by will or the laws of descent and distribution (but shall be exercisable by
Grantee's executor or administrator pursuant to Paragraph 3(b) hereof) or
pursuant to a qualified domestic relations order, nor shall the Option be
subject to attachment, execution or other similar process. In the event of (a)
any attempt by Grantee to alienate, assign, pledge, hypothecate or otherwise
dispose of the Option, except as provided for herein, or (b) the levy of any
attachment, execution or similar process upon the rights or interests hereby
conferred, then Company may terminate the Option by notice to Grantee and the
Option shall thereupon become null and void.
9. NO RIGHT TO CONTINUED EMPLOYMENT. Neither the granting of the Option
nor its exercise shall be construed as conferring upon Grantee any right with
respect to continuance of employment by the Company. Except as may otherwise be
limited by a written agreement between Company and Grantee, the right of Company
to terminate at will Grantee's employment with
3
<PAGE>
Company at any time (whether by dismissal, discharge, retirement or otherwise)
is specifically reserved by Company and acknowledged hereto by Grantee.
10. DISPOSITION OF SHARES. Company shall not be required to sell or
issue any shares on the exercise of the Option if the issuance of such shares
shall constitute a violation by Grantee or by Company of any provision of any
law or regulation of any governmental authority. The Option shall be subject to
the requirements that, if at any time the board of directors of the Company
shall determine that the listing, registration or qualification of the shares
subject thereto upon any securities exchange or under any state or federal law
of the United States or of any other country or governmental subdivision
thereof, or the consent or approval of any governmental regulatory body, or
investment or other representations, are required in connection with the
issuance or purchase of shares subject thereto, the Option may not be exercised
in whole or in part unless such listing, registration, qualification, consent,
approval or representation shall have been effected or obtained free of any
conditions so required. If required at any time by the Board of Directors of the
Company for all executive officers or by law, the Option may not be exercised
until Grantee has delivered an investment letter to Company. In addition,
specifically in connection with the Securities Act of 1933 (as now in effect or
hereafter amended), upon exercise of the Option, the Grantee will not transfer
such Shares, except pursuant to a registration statement in effect under such
Act or unless an opinion of counsel satisfactory to the Board of Directors has
been received by the Company to the effect that such registration is not
required. Any determination in this connection by the Board of Directors shall
be final, binding and conclusive. In the event the shares issuable on exercise
of the Option are not registered under the Securities Act of 1933, Company may
imprint on the certificate for such shares the following legend or any other
legend which counsel for the Company considers necessary or advisable to comply
with the Securities Act of 1933:
The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933 or under the securities
laws of any state and may not be sold or transferred except upon
registration or upon receipt by the Corporation of an opinion of
counsel satisfactory to Corporation, in form and substance satisfactory
to Corporation, that registration is not required for such sale or
transfer.
Company shall be obligated to register any securities vested but not exercised
covered hereby pursuant to the Securities Act of 1933 prior to the termination
of the Option such that if Company has not registered the vested securities then
the Option, as to those vested securities, shall not terminate until sixty (60)
days after the effective date of such regisrtration.
11. AMENDMENT OF OPTION. The Option shall be amended by the Board of
Directors of the Company or by a committee appointed by the Board of Directors
(the "Committee") at any time that an amendment is necessary or advisable in the
light of any addition to or change in the Internal Revenue Code of 1986, as
amended, or in the regulations issued thereunder, or any federal or state
securities law or other law or regulation, which change occurs after the Date of
Grant and by its terms applies to the Option; or (b) other than in the
circumstances described in clause (a), with the consent of Grantee.
12. FAIR MARKET VALUE. For purposes of this Agreement, the term "Fair
Market Value" of a share of Stock shall mean the Fair Market Value of the Stock
as determined in good faith by the
4
<PAGE>
Company; provided, however, that (a) if the shares of Stock are admitted to
trading on a national securities exchange, Fair Market Value on any date shall
be the last sale price reported for the shares of Stock on such exchange on such
date or, if no sale was reported on such date, on the last date preceding such
date on which a sale was reported, (b) if the shares of Stock are admitted to
quotation on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") and have been designated as a National Market System ("NMS")
security, Fair Market Value on any date shall be the last sale price reported
for the shares of Stock on such system on such date or on the last day preceding
such date on which a sale was reported, or (c) if the shares of Stock are
admitted to quotation on NASDAQ and have not been designated a NMS security or
are listed on another comparable quotation system, Fair Market Value on any date
shall be the average of the highest bid and lowest asked prices of the shares of
Stock on such system on such date.
13. SUCCESSORS AND ASSIGNS. This Agreement shall bind the parties and
their heirs, legal representatives, successors and permitted assigns, and shall
inure to the benefit of the parties hereto.
14. ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties and supersedes all prior agreements, arrangements and
understandings relating to the subject matter hereof.
15. COUNTERPARTS AND FACSIMILE SIGNATURES. This Agreement may be
executed simultaneously in two (2) or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument. Facsimile signatures of the parties hereto shall be binding.
16. HEADINGS. The headings contained in this Agreement are for
convenience and reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
17. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
IN WITNESS WHEREOF, Company and Grantee have executed this Agreement in
a manner appropriate to each as of the day and year first above written.
PLAY-BY-PLAY TOYS & NOVELTIES, INC.
By
Title
"COMPANY"
RAYMOND G. BRAUN
"GRANTEE"
5
<PAGE>
FIRST AMENDMENT TO
PLAY-BY-PLAY TOYS & NOVELTIES, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS FIRST AMENDMENT TO PLAY-BY-PLAY TOYS & NOVELTIES, INC.
NONQUALIFIED STOCK OPTION AGREEMENT (this "Amendment"), is made as of this 29th
day of August, 1997,
BY AND BETWEEN PLAY-BY-PLAY TOYS & NOVELTIES, INC.,
a Texas corporation,
hereinafter referred to as
"COMPANY"
AND RAYMOND G. BRAUN,
hereinafter referred to as
"GRANTEE"
WHEREAS, Company granted a nonqualified stock option to Grantee pursuant
to that certain Play-By-Play Toys & Novelties, Inc. Nonqualified Stock Option
Agreement dated November 4, 1996 (the "Agreement") whereby Company granted
Grantee the option to purchase up to two hundred thousand (200,000) shares of
common stock of Company at a purchase price per share of $8.00; and
WHEREAS, Company and Grantee, in order to carry out the parties' original
intentions, desire to amend the Agreement as set forth herein.
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, Company and Grantee hereby agree as follows:
1. The "Date of Grant" is hereby amended to January 2, 1997.
2. Paragraph 2 of the Agreement is hereby amended by deleting the same in
its entirety and inserting in lieu thereof the following:
2. VESTING OF EXERCISE RIGHTS. Subject to the terms of this Agreement,
the Option shall become exercisable in installments, Grantee having the
right hereunder to purchase from Company the following number of Option
Shares upon exercise of the Option, on and after the following dates, in
cumulative fashion:
(a) On and after the first day of each calendar month during the
term of this Agreement, commencing February 1, 1997, through and
including January 1, 2002, up to one sixtieth (1/60) (ignoring
fractional shares) of the total number of Option Shares; and
(b) Company may, from time to time, in its sole and absolute discretion,
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accelerate all or any portion of the vesting rights of Grantee in
and to the Option Shares. Within ten (10) business days of the
acceleration by Company of the vesting rights in and to the Option
Shares, written notice shall be provided to Grantee by Company.
3. Paragraph 3 of the Agreement is hereby amended by deleting the same in
its entirety and inserting in lieu thereof the following:
3. TERMINATION OF OPTION.
(a) The Option and all rights hereunder with respect thereto, to the
extent such rights shall not have been exercised, shall terminate
and become null and void after the expiration of twelve (12) years
from the Date of Grant (the "Option Term"); provided, however, in
the event that the employment relationship between Company and
Grantee is terminated for any reason before February 1, 1999, then
such Option Term shall be ten (10) years from the Date of Grant.
(b) Upon the occurrence of Grantee ceasing to be employed by Company
for Cause, as defined in the Employment Agreement, or upon Grantee
terminating employment with Company for any reason, including death,
Grantee shall be entitled to exercise One Hundred Thousand (100,000)
of the total number of Option Shares plus an additional number of
Option Shares equal to one forty-eighth (1/48) of the total number
of Option Shares for each calendar month lapsed during the term of
this Agreement, commencing February 1, 1997, through and including
the month of the termination of employment less the number of Option
Shares previously exercised by Grantee; provided, however, the
number of Option Shares which Grantee is entitled to exercise
pursuant to this subparagraph shall be vested and exercisable in
installments in accordance with the sixty (60) month schedule of
Subparagraph 2(a) hereof, and, also, as to each group of monthly
vesting Option Shares, such vested shares shall become null and void
to the extent such rights shall not have been exercised within the
Option Term.
(c) On the occurrence of Company terminating employment of Grantee
for any reason other than for Cause, Grantee shall be immediately
vested in the total number of unexercised Option Shares; provided,
however, the number of Option Shares which are vested pursuant to
this subparagraph shall be exercisable in installments in accordance
with the sixty (60) month schedule of Subparagraph 2(a) hereof, and
to the extent such rights shall not have been exercised within the
Option Term, such vested Option Shares shall become null and void.
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(d) In the event of the death of Grantee, the Option may be exercised by
Grantee's legal representative, but only to the extent that the
Option would otherwise have been exercisable by Grantee.
(e) A transfer of Grantee's employment between Company and any
subsidiary of Company, or between any subsidiaries of Company, shall
not be deemed to be a termination of Grantee's employment for
purposes of this Option.
4. Paragraph 4 of the Agreement is hereby amended by including the
following paragraph:
(c) Grantee shall be immediately vested in the total number of
unexercised Option Shares and shall have the right to immediately
exercise the Option in the event either (1) Arturo G. Torres is no
longer serving Company in capacity as either Chairman of the Board
or Chief Executive Officer, or (2) Company is a party to a merger,
consolidation or other business combination whereby Company is not
the surviving entity.
5. Paragraph 8 of the Agreement is hereby amended by deleting the words
"Paragraph 3(b)" on line four of Paragraph 8 and inserting in lieu thereof
"Paragraph 3(d)."
6. All defined terms not defined herein shall have the same meaning as set
forth in the Agreement.
IN WITNESS WHEREOF, Company and Grantee have executed this Amendment in a
manner appropriate to each as of the day and year first above written.
PLAY-BY-PLAY TOYS & NOVELTIES, INC.
By:_________________________________________
Name:_______________________________________
Title:______________________________________
"COMPANY"
____________________________________________
RAYMOND G. BRAUN
"GRANTEE"
3
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as
of this 2nd day of May, 1996, by and between PLAY BY PLAY TOYS & NOVELTIES,
INC., a Texas corporation (the "Company"), and SAUL GAMORAN, an individual
("Employee").
WITNESSETH:
WHEREAS, the Company agrees to employ Employee and Employee agrees to be
employed by the Company pursuant to the terms of this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
accepts employment, upon the terms and conditions hereafter set forth.
2. TERM OF EMPLOYMENT.
(a) EFFECTIVE DATE OF TERMINATION. The Effective Date of this
Agreement shall commence on the Closing Date of the Asset Purchase Agreement
between Ace Novelty Acquisition Co., Inc. and others and Ace Novelty Co., Inc.
and others and this Agreement shall automatically expire three (3) years
thereafter, unless it is terminated earlier by the Company or Employee. In the
event the Closing referenced herein does not occur by July 31, 1996, this
Agreement shall be null and void and of no further force and effect and there
shall be no liability of the parties one to the other.
(b) TERMINATION BY THE COMPANY. Notwithstanding the term of
employment, the Company may terminate Employee upon twenty (20) days' written
notice for Cause or without Cause. For the purpose of this Agreement, "Cause"
shall be defined as conduct that is reasonably
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deemed by the Company to be injurious to the Company and involves (i) gross
misconduct in the performance of the Employee's duties, (ii) dishonest or
illegal conduct, or (iii) material breach by Employee of this Agreement. Upon
termination by the Company without Cause within the first nine months of the
term of employment, severance shall be $175,000.00. Upon termination by the
Company without Cause within the second nine months of the term of employment
severance shall be $131,250.00. Upon termination by the Company without Cause
within the second half of the term of employment, severance shall be $87,500.00.
Upon termination by the Company, whether or not for Cause, all Options become
immediately vested and shall be exercisable within six months after termination
of employment.
(c) TERMINATION BY EMPLOYEE. Notwithstanding the term of employment,
Employee may terminate this Agreement upon 30 days' written notice of
termination. Upon termination by Employee, all vested Options shall be
exercisable within six months after termination of employment.
3. DUTIES. Employee shall hold the title of Executive Vice President of
the Company and shall perform such duties as shall be assigned to him by the
Company's Board of Directors from time to time. Employee shall perform all
duties in a reasonable and proper manner and devote his full time and talents to
the performance of such duties. Employee shall comply with all rules,
regulations, orders and directions of the Board of Directors of the Company or
the Chief Executive Officer of the Company as may be issued from time to time.
4. COMPENSATION.
(a) SALARY. During the first year of Employee's employment under
this Agreement, the Company shall pay to Employee for his services under this
Agreement an annual base
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salary of One Hundred Fifty Thousand and no/100 Dollars ($150,000.00), which sum
shall be payable in accordance with the regular payroll practices of the
Company. After the first year, the annual base salary shall not be less than
$175,000.00.
(b) BONUS. In addition to the salary set forth in Subsection 4(a)
above, Employee shall be entitled to receive, as additional compensation, an
annual bonus, which shall be in the form of cash and stock. The amount of the
bonus shall be determined solely by the Board of Directors, and shall be based
on the performance of the Company and the performance of Employee.
(c) CONSIDERATION PURSUANT TO SECTIONS 7 AND 18. As additional
consideration, Employee shall receive a one-time payment of $25,000 on the
Effective Date of this Agreement as consideration for Sections 7 and 18 herein.
(d) OPTIONS. Employee shall be granted 100,000 options to purchase
stock in the Company at 100 percent of the close price quoted in the Southwest
edition of the WALL STREET JOURNAL for the Effective Date. 20,000 of said
options shall vest immediately, and Employee may exercise these options for a
period of five years. The remaining 80,000 options shall vest at a rate of
26,667 per year, for each 12 months thereafter. Employee shall have a period of
five years from the date of each vesting in which to exercise these options.
(e) BENEFITS. In addition, Employee shall be granted the same
benefits provided to the President of the Company, including but not limited to
health insurance ,car allowance, cellular phone, vacation, sick leave.
5. MOVING, TRANSPORTATION AND LODGING EXPENSES. Direct expenses incurred
in moving, transportation between Seattle and San Antonio, and lodging and
transportation in San Antonio shall be reimbursed by the Company. All such
expenses shall be reviewed and approved by
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the Company in advance. The schedule of flights, type of lodging, time spent in
both cities and other such matters shall be mutually agreed upon at a later
time. Employee shall move to San Antonio no later than August 31, 1997.
6. BOARD OF DIRECTORS. Employee shall serve as a Director of the Company
from the date first elected, which shall be the first meeting of the Board of
Directors following the Effective Date, until termination or expiration of this
Agreement.
7. RESTRICTIVE COVENANTS.
(a) NONDISCLOSURE OF CONFIDENTIAL INFORMATION. During the term of
Employee's employment and for a period of two (2) years thereafter, unless
authorized in writing by the Company, Employee will not disclose any
confidential information of the Company, and subsidiaries of the Company, to any
person or entity nor shall Employee use the same for any purpose at any time,
except for the purpose of performing Employee's employment duties on behalf of
or as directed by the Company. All confidential information which comes into
Employee's possession or is generated by Employee during the term of this
Agreement shall be and remain the exclusive property of the Company, and
Employee agrees to return all such documents and tangible property of the
company upon termination or expiration of Employees' employment or at such
earlier times as the Company may request. Some information received by Employee
shall not be considered Confidential Information to the extent that the
information is or becomes, through no fault of Employee, general knowledge in
the public domain. The term "confidential information" for purposes of this
Agreement shall mean work sheets, business plans, financial information,
customer lists, sources of products, licenses existing and in negotiation and
their terms, operations manuals and suppliers, all of which are valuable trade
secrets which the Company is entitled to protect.
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(b) NONSOLICITATION. During the term hereof and for a period of two
(2) years after any termination of employment hereunder or expiration of this
Agreement, Employee shall not contact any employee or executive of the Company
for the purpose of offering him or her employment with any person other than the
Company.
8. INJUNCTION. Employee agrees that any breach of the covenants or
agreements contained in Section 7 will cause a irreparable injury to the Company
and the Company's subsidiaries for which there is and shall be no adequate
remedy at law. Accordingly, Employee hereby consents to the jurisdiction of any
court reasonably selected by the Company for the purpose of requesting
injunctions, both temporary and permanent, in favor of the Company enjoining
Employee concerning any such breach or violation of the covenants or agreements
contained herein; provided, that no request for or receipt of any such
injunction by the Company shall be considered an election of remedies or a
waiver of any right to assert any other remedies the Company may have against
Employee, either at law or in equity.
9. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and deemed to have been duly given
and received, if delivered by hand or telecopy on the date of such delivery, or
if mailed by registered or certified mail with postage prepaid to his residence
address in the case of Employee or to its principal office in the case of the
Company, three (3) business days following its deposit in the United States
mail.
10. SURVIVAL. All representations, covenants, promises and warranties made
herein by the parties shall survive for so long as any obligation of payment or
performance under this Agreement remains unpaid or unperformed and in regard to
Section 7, for two (2) years after termination. This
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<PAGE>
Agreement shall be binding upon and inure to the benefit of the parties'
successors and the estate of Employee.
11. AMENDMENT. This Agreement may be amended or modified in whole or in
part only by an agreement in writing executed in the same manner as this
Agreement and making specific reference hereto.
12. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
13. SEVERABILITY. In the event that any one or more of the provisions
contained in this Agreement or any application thereof shall be invalid, illegal
or unenforceable in any respect, the validity, legality or enforceability of the
remaining provisions of this Agreement and any other application thereof shall
not in any way be affected or impaired thereby; provided, however, that to the
extent permitted by applicable law, any invalid, illegal or unenforceable
provision may be considered for the purpose of determining the intent of the
parties in connection with the other provisions of this Agreement, and such
latter provision as determined to be valid, legal or enforceable shall bind the
parties hereto.
14. WAIVERS. The parties may, by written agreement executed by both
parties, (i) extend the time for the performance of any of the obligations or
other acts of the parties hereof, (ii) waive any inaccuracies in the
representations contained in this Agreement, (iii) waive compliance with, or
modify, any of the provisions, covenants or conditions contained in this
Agreement, and (iv) waive or modify the performance of any of the obligations of
any of the parties hereto; provided, that no such waiver or failure to insist
upon strict compliance with such provision, obligation, covenant,
6
<PAGE>
agreement or condition shall operate as a waiver of, or an estoppel with respect
to, any subsequent provision, obligation, covenant, agreement, condition or
other failure.
15. ADDITIONAL INSTRUMENTS. Company and Employee agree and covenant that,
without additional consideration of any kind, each shall execute any and all
paper, documents, stock option agreements or other instruments which may be
necessary to completely and effectually carry out the terms of this Agreement.
16. HEADINGS AND DEFINITIONS. The headings of the sections of this
Agreement are inserted for convenience only and in no way alter, amend, modify,
limit or restrict the contractual obligation of the parties.
17. ENTIRE AGREEMENT; GOVERNING LAW. All prior negotiations and agreements
between the parties hereto are superseded by this Agreement, and there are no
representations, warranties, understandings or agreements other than those
expressly set forth herein, except as modified in writing by both parties
subsequent hereto. This Agreement shall be governed by and construed and
interpreted according to the laws of the State of Texas.
18. NON-COMPETE. Should the Company terminate the Employee for Cause
pursuant to Section 2(b) herein, or should Employee terminate employment with
the Company pursuant to Section 2(c) herein, then for a period of two (2) years
following such termination Employee shall not act, either individually or in
partnership, or jointly or in conjunction with, any other person or business
entity as a principal, agent, stockholder, officer, director, employee,
consultant, independent contractor, owner, member, partner, holder, advisor, or
in any other matter whatsoever, directly or indirectly, carry on or be engaged
in or be concerned with or interested in, or advise, manage, own, participate
in, encourage, support, obtain licenses for, lend money to, guarantee the debts
of or
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obligations of or permit Employee's name to be used or employed by any person
engaged in or concerned with or interested in, the wholesale toy or novelty
business, or any product which the Company is producing or does produce within
the two year non-compete period, at the time of termination in the United States
of America, Europe, South America, Mexico, Canada, or any other country in the
world where the Company or any of its subsidiaries are doing business at the
time of termination. This Section 18 supercedes in all respects the Restrictive
Covenants Agreement signed by the parties on or about May 1, 1996.
19. COUNSEL REVIEW; ATTORNEYS' FEES. Both parties to this Agreement have
been given full opportunity to review and negotiate this Agreement and consult
with counsel of their choice. In the event suit is brought by either Company or
Employee to enforce any provision of this Agreement, the prevailing party shall
be entitled to reimbursement for all reasonable costs and attorneys' fees
incurred.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By /s/ ARTURO TORRES
Arturo Torres, Chief Executive Officer
"Company"
/s/ SAUL GAMORAN
Saul Gamoran
"Employee"
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<PAGE>
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (this
"Agreement") is made and entered into this 16th day of May, 1996.
BY AND BETWEEN
PLAY BY PLAY TOYS & NOVELTIES, INC.,
a Texas corporation,
hereinafter referred to as
"COMPANY"
AND
SAUL GAMORAN,
an individual,
hereinafter referred to as
"EMPLOYEE"
WITNESSETH:
WHEREAS, Company and Employee wish to amend that certain Employment
Agreement dated May 2, 1996 ("Employment Agreement").
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be bound, hereby agree as follows.
Subparagraph 2(a) of the Employment Agreement shall be amended and
superseded in all respects as follows:
(a) EFFECTIVE DATE AND TERMINATION. The Effective Date of this
Agreement shall commence on May 16, 1996 and this Agreement
shall automatically expire three (3) years thereafter, unless
it is terminated earlier by the Company or Employee.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
on the day, month and year first written above.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By___________________________________
Arturo G. Torres, Chief Executive Officer
"COMPANY"
___________________________________
Saul Gamoran
"EMPLOYEE"
EXHIBIT 10.7
JAMES A. WEISFIELD
SUMMARY OF EMPLOYMENT TERMS
DATED JUNE 20, 1997
The following is a summary of terms of employment with Play By Play Toys &
Novelties, Inc. following the expiration of the Employment Agreement dated June
20,1996.
Position: Vice President, Premiums and Promotions.
Reports To: Mark Gawlik, President
Salary: $150,000 per year effective as of June 20,1997.
Vacation: Three weeks per year.
Sick Pay: As per Company Policy.
Medical Benefits: Continued coverage as presently provided under Company's
medical plan(s).
Car Allowance: As presently provided at $750 per month.
Stock Option Plan: Employee is eligible for participation in the Company's
Play by Play Toys & Novelties, Inc. 1994 Incentive Plan.
Other Benefits: As presently provided, Employee is eligible for such
other benefits as are available to the Company's
President, except for the President's Bonus Plan.
Employee would be considered eligible for participation
in such future incentive plans as the Company may see
fit to provide for its other Vice Presidents (such as
401(k) plan, employee stock purchase plan, or similar
benefits which are not presently available).
Bonus Plan: For the 1997 calendar year, Employee will receive a
bonus equal to 2% of all sales made by the Premiums and
Promotions Division during the 1997 calendar year which
are over and above Two Million Dollars. This Bonus , if
any, will be paid on or before January 30,1998.
For the 1998 calendar year, Employee will receive
incentive pay as follows:
o If sales are $5 million , the bonus is $35,000
o If sales are greater than $5 million, then an
additional incentive would be paid on sales above $5
million as follows depending on the type of sales and
the gross margins of each type:
Percent of excess sales Combined Sales
paid as added bonus Gross Margin Range
1% 22%-23.5%
1.25% 23.6%-25.9%
1.6% 26% and up
Once the incentive compensation is due, Company will pay
it on a quarterly basis with the last amounts being paid
by January 30, 1999.
Termination: Employee may be terminated without cause upon 3 months
written notice. Company reserves the right to pay
Employee in lieu of notice. Employee may be terminated
for cause at any time and without notice.
<PAGE>
In the event of termination, Company will pay all
amounts due per the above terms.
/s/ JAMES A. WEISFIELD
/s/ MARK A. GAWLIK
EXHIBIT 10.8
The Securities represented by this Debenture have not been registered under the
Securities Act of 1933, as amended ("Act"), or applicable state securities laws
("State Acts") and shall not be sold, hypothecated, donated or otherwise
transferred unless the Company shall have received an opinion of Legal Counsel
for the Company, or such other evidence as may be satisfactory to Legal Counsel
for the Company, to the effect that any such transfer shall not require
registration under the Act and the State Acts.
PLAY BY PLAY TOYS & NOVELTIES, INC.
8.00% CONVERTIBLE DEBENTURE
$2,500,000 NO. 1
Date of Issue: JULY 3, 1997
PLAY BY PLAY TOYS & NOVELTIES, INC., a Texas corporation (the "Company"
or "Borrower"), for value received, promises to pay to:
Compass Bank, Custodian FBO
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
or to its order, (together with any assignee, jointly or severally, the "Holder"
or "Lender") on or before June 30, 2004 (the "Due Date") (unless this Debenture
shall have been sooner called for redemption or presented for conversion as
herein provided), the sum of TWO MILLION FIVE HUNDRED THOUSAND DOLLARS
($2,500,000) (the "Principal Amount") and to pay interest on the Principal
Amount at the rate of eight percent (8.00%) per annum as provided herein. The
Principal Amount shall be payable in equal monthly payments commencing on June
30, 2000 and continuing through June 30, 2004. All payments of both principal
and interest shall be made at the address of the Holder hereof as it appears in
the books and records of the Borrower, or at such other place as may be
designated by the Holder hereof. This Debenture shall rank PARI PASSU with all
Indebtedness of the Borrower, other than the Senior Obligations and the
Subordinated Debt.
1. INTEREST: Interest on the Principal Amount outstanding from time to
time shall accrue at the rate of 8.00% per annum and shall be payable in monthly
installments commencing July 31, 1997, and subsequent payments shall be made on
the last day of each month thereafter until the Principal Amount and all accrued
and unpaid interest shall have been paid in full. Subject to Section 17 hereof,
overdue principal and interest on the Debenture shall bear interest at the rate
of 15% per annum.
2. MATURITY: If not sooner paid, redeemed or converted, this Debenture
shall mature on June 30, 2004 at which time all then remaining unpaid principal
and all accrued and unpaid interest and any other charges then due under the
Loan Agreement shall be due and payable in full. Upon the request of the Holder,
this Debenture shall be prepaid (without premium or penalty) on a PRO RATA basis
together with any prepayments of Indebtedness (other than Senior Obligations)
which is PARI PASSU with or subordinated to the Debenture, except for payments
of subordinated debt to the principal shareholder of the Company pursuant to
Section 2.02 of the Loan Agreement and former stockholders of Ace Novelty Co.,
Inc., but only if on the date of such prepayment the Borrower is not in
compliance with Section 7.01 of the Loan Agreement.
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Issuers Initial __________
<PAGE>
3. MANDATORY PRINCIPAL INSTALLMENTS: If this Debenture is not sooner
redeemed or converted as provided hereunder, Borrower shall pay to Holder,
commencing on June 30, 2000, and the last day of each successive month
thereafter prior to maturity, mandatory principal redemption installments, each
of such installments to be in the amount of Ten Dollars ($10) per Thousand
Dollars ($1,000) of the then remaining principal amount of the Debenture and
further, at maturity, shall make a final installment of all of the remaining
unpaid Principal Amount balance due plus the amount of any unpaid interest and
other charges then due. Each of such installments shall be applied in partial
redemption of the Debenture when received by Holder.
4. REDEMPTION BY HOLDER: (a) If at any time after the date hereof (i)
the Company's Common Stock, no par value ("Common Stock"), is not listed for
exchange on the NASDAQ National Market System ("National Market"), the New York
Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX"), or quoted on the
NASDAQ Small Cap System ("Small Cap System"), (ii) any Person acquires more than
a majority of the Common Stock, without the Required Lender's consent, or (iii)
there is a change during any twelve-month period of at least two-thirds of the
members of the Company's Board of Directors, without the Required Lender's
consent, the Holder shall have the right for a period of sixty (60) days after
the earlier of (y) the receipt of notice of any such event by the Company, or
(z) the occurrence of an event described in this paragraph, if no notice by the
Company is given, to require this Debenture to be redeemed by the Company, upon
thirty (30) days' notice by the Holder, at the sum equal to the Principal
Amount, together with, subject to Section 17 hereof, an amount equal to an 18%
annual yield on the Principal Amount through the date of redemption, but not in
excess of the maximum amount permitted by applicable law.
(b) In the event that the Company refunds, refinances or extends the
maturity of the Indebtedness evidenced by the Senior Documents in an aggregate
principal amount not in excess of $45.8 million and the Company is not in
compliance with the agreed minimum financial ratios or standards set forth in
Section 7.01 of the Loan Agreement or would not be in compliance after giving
effect thereto, the Holder shall have the right for a period of sixty (60) days
after the earlier of (i) the receipt of the notice by the Company provided for
in clause (i) of Section 6.01 of the Loan Agreement, or (ii) the occurrence of
an event described in this paragraph, if no notice by the Company is given, to
require this Debenture to be redeemed by the Company upon thirty (30) days'
notice by the Holder, at 101% of par, together with all accrued and unpaid
interest through the redemption date.
(c) In the event that the Company incurs Senior Obligations in an
aggregate principal amount not in excess of $45.8 million and the Company is not
in compliance with the agreed minimum financial ratios or standards set forth in
Section 7.01 of the Loan Agreement or would not be in compliance after giving
effect thereto, the Holder shall have the right for a period of sixty (60) days
after the earlier of (i) the receipt of the notice by the Company provided for
in clause (i) of Section 6.01 of the Loan Agreement, or (ii) the occurrence of
an event described in this paragraph, if no notice by the Company is given, to
require this Debenture to be redeemed by the Company upon thirty (30) days'
notice by the Holder at 101% of par, together with all accrued and unpaid
interest through the redemption date.
5. OPTIONAL REDEMPTION BY COMPANY: (a) On any interest payment date,
and after prior irrevocable notice as provided for below, this Debenture is
redeemable, in whole but not in part, at 101% of par, together with accrued and
unpaid interest, by the Company until June 30, 2000, if the closing bid price
for the Common Stock averages at least $ 34.00 per share for the 20 consecutive
trading days prior to the irrevocable notice and the Common Stock is listed or
quoted on the National Market, the Small Cap System, AMEX or NYSE, and after
June 30, 2000, if the following conditions are satisfied: (i) the closing bid
price for the Common Stock averages at least $ 25.50 per share for the 20
consecutive trading days prior to the irrevocable notice and the Common Stock is
listed or quoted on the National Market, the Small Cap System, AMEX or NYSE;
(ii) the market price at the date of irrevocable notice is supported by a price
to earnings ratio of no greater than 30 times fully diluted net earnings per
share of Common Stock, determined in accordance with generally accepted
accounting principles, excluding any extraordinary gains or losses of the
Borrower; (iii) the average (20 days) daily trading volume shall be no less than
25,000 shares; and (iv) the Borrower shall have filed a registration statement
covering the shares of Common Stock issuable upon conversion of the Debenture,
which shall have become effective. The foregoing
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Issuers Initial __________
<PAGE>
earnings per share and bid price tests shall be duly adjusted for share splits,
stock dividends, mergers, consolidations, and other recapitalizations.
Redemption is subject to the Holder's prior right to conversion of the
Debenture.
(b) The Company may exercise its right to redeem the Debenture prior to
maturity by giving notice (the "Redemption Notice") thereof to the Holder of
this Debenture as such name appears on the books of the Borrower, which notice
shall specify the terms of redemption (including the place at which the Holder
may obtain payment), the total principal amount to be redeemed (such principal
amount plus the premium thereon herein called the "Redemption Amount") and the
date for redemption (the "Redemption Date"), which date shall not be less than
30 days nor more than 60 days after the date of the notice. On the Redemption
Date, the Borrower shall pay all accrued unpaid interest on the Debenture up to
and including the Redemption Date and shall pay to the holder a dollar amount
equal to the Redemption Amount.
6. CONVERSION RIGHT: The Holder of this Debenture shall have the right,
at holder's option, at any time, to convert all, or, in multiples of $10,000,
any part of this Debenture into such number of fully paid and nonassessable
shares of Common Stock as provided herein. The Holder of this Debenture may
exercise the conversion right by giving written notice (the "Conversion Notice")
to Borrower of the exercise of such right and stating the name or names in which
the stock certificate or stock certificates for the shares of Common Stock are
to be issued and the address to which such certificates shall be delivered. The
Conversion Notice shall be accompanied by the Debenture. The number of shares of
Common Stock that shall be issuable upon conversion of the Debenture shall equal
the face amount of the Debenture divided by the Conversion Price as defined
below and in effect on the date the Conversion Notice is given; provided,
however, that in the event that this Debenture shall have been partially
redeemed, shares of Common Stock shall be issued pro rata, rounded to the
nearest whole share. Conversion shall be deemed to have been effected on the
date the Conversion Notice is received (the "Conversion Date"). In the case of
any Debenture called for redemption, the conversion rights will expire at the
close of business on the Redemption Date. Within 20 business days after receipt
of the Conversion Notice, Borrower shall issue and deliver by hand against a
signed receipt therefor or by United States registered mail, return receipt
requested, to the address designated in the Conversion Notice, a stock
certificate or stock certificates of Borrower representing the number of shares
of Common Stock to which Holder is entitled and a check or cash in payment of
all interest accrued and unpaid on the Debenture up to and including the
Conversion Date. The conversion rights will be governed by the following
provisions:
(a) CONVERSION PRICE. On the issue date hereof and until such time as
an adjustment shall occur, the Conversion Price shall be $ 17.00 PER SHARE;
provided, however, that the Conversion Price shall be subject to adjustment at
the times and in accordance with the provisions set forth below.
(i) ADJUSTMENT FOR ISSUANCE OF SHARES AT LESS THAN THE CONVERSION
PRICE. If and whenever any Additional Common Stock shall be issued by Borrower
(the "Stock Issue Date") for a consideration per share less than the Conversion
Price, then in each such case the initial Conversion Price shall be reduced to a
new Conversion Price in an amount equal to the price per share for the
Additional Common Stock then issued, if issued in connection with a sale of
shares, or the value of the Additional Common Stock then issued, as determined
in accordance with generally accepted accounting principles, if issued other
than for cash, and the number of shares issuable to Holder upon conversion shall
be proportionately increased; and, in the case of Additional Common Stock issued
without consideration, the initial Conversion Price shall be reduced in amount
and the number of shares issued upon conversion shall be increased in an amount
so as to maintain for the Holder the right to convert the Debenture into shares
equal in amount to the same percentage interest in the Common Stock of the
Company as existed for the Holder immediately preceding the Stock Issue Date.
(ii) SALE OF SHARES. In case of the issuance of Additional Common Stock
for a consideration part or all of which shall be cash, the amount of the cash
consideration therefor shall be deemed to be the gross amount of the cash paid
to Borrower for such shares, before deducting any underwriting compensation or
discount in the sale, underwriting or purchase thereof by underwriters or
dealers or others performing similar services or for any expenses incurred in
connection therewith. In case of the issuance of any shares of Additional Common
Stock for a consideration part or all of which shall
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Issuers Initial __________
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be other than cash, the amount of the consideration therefor, other than cash,
shall be deemed to be the then fair market value of the property received.
(iii) RECLASSIFICATION OF SHARES. In case of the reclassification of
securities into shares of Common Stock, the shares of Common Stock issued in
such reclassification shall be deemed to have been issued for a consideration
other than cash. Shares of Additional Common Stock issued by way of dividend or
other distribution on any class of stock of Borrower shall be deemed to have
been issued without consideration.
(iv) SPLIT UP OR COMBINATION OF SHARES. In case issued and outstanding
shares of Common Stock shall be subdivided or split up into a greater number of
shares of the Common Stock, the Conversion Price shall be proportionately
decreased, and in case issued and outstanding shares of Common Stock shall be
combined into a smaller number of shares of Common Stock, the Conversion Price
shall be proportionately increased, such increase or decrease, as the case may
be, becoming effective at the time of record of the split-up or combination, as
the case may be.
(v) EXCEPTIONS. The term "Additional Common Stock" herein shall mean
all shares of Common Stock hereafter issued by Borrower (including Common Stock
held in the treasury of Borrower), except (A) Common Stock issued upon the
conversion of any of the Debentures; (B) Common Stock issued upon exercise of
any outstanding warrants or options; (C) Common Stock issued upon exercise of
outstanding employee stock options; and (D) up to 200,000 shares of Common Stock
in addition to Common Stock described in the immediately preceding clauses (A),
(B) and (C).
(b) ADJUSTMENT FOR MERGERS AND CONSOLIDATIONS.
(i) In the event of distribution to all Common Stock holders of any
stock, indebtedness of Borrower or assets (excluding cash dividends or
distributions from retained earnings) or other rights to purchase securities or
assets, then, after such event, the Debenture will be convertible into the kind
and amount of securities, cash and other property which the holder of the
Debenture would have been entitled to receive if the holder owned the Common
Stock issuable upon conversion of the Debenture immediately prior to the
occurrence of such event.
(ii) In case of any capital reorganization, reclassification of the
stock of Borrower (other than a change in par value or as a result of a stock
dividend, subdivision, split up or combination of shares), this Debenture shall
be convertible into the kind and number of shares of stock or other securities
or property of Borrower to which the holder of the Debenture would have been
entitled to receive if the holder owned the Common Stock issuable upon
conversion of the Debenture immediately prior to the occurrence of such event.
The provisions of the immediately foregoing sentence shall similarly apply to
successive reorganizations, reclassifications, consolidations, exchanges,
leases, transfers or other dispositions or other share exchanges.
(iii) The term "Fair Market Value," as used herein, is the value
ascribed to consideration other than cash as determined by the Board of
Directors of Borrower in good faith, which determination shall be final,
conclusive and binding. If the Board of Directors shall be unable to agree as to
such fair market value, then the issue of fair market value shall be submitted
to arbitration under and pursuant to the rules and regulations of the American
Arbitration Association, and the decision of the arbitrators shall be final,
conclusive and binding, and a final judgment may be entered thereon; provided,
however, that such arbitration shall be limited to determination of the fair
market value of assets tendered in consideration for the issue of Common Stock.
(iv) In the event Borrower shall propose to take any action which shall
result in an adjustment in the Conversion Price, Borrower shall give notice to
the Holder of this Debenture, which notice shall specify the record date, if
any, with respect to such action and the date on which such action is to take
place. Such notice shall be given on or before the earlier of 10 days before the
record date or the date which such action shall be taken. Such notice shall also
set forth all facts (to the extent known) material to the effect of such action
on the Conversion Price and the number, kind or class of shares or
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Issuers Initial __________
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other securities or property which shall be deliverable or purchasable upon the
occurrence of such action or deliverable upon conversion of this Debenture.
(v) Following completion of an event wherein the Conversion Price shall
be adjusted, Borrower shall furnish to the holder of this Debenture a statement,
signed by the Chief Executive Officer and the Secretary of the Borrower, of the
facts creating such adjustment and specifying the resultant adjusted Conversion
Price then in effect which statement shall constitute an amendment to this
Debenture.
7. ONE-TIME ADJUSTMENT TO CONVERSION PRICE. (a) If the volume-weighted
average closing bid price of the Common Stock, as determined by Bloomberg, for
the 21 consecutive trading days following Borrower's public press release of its
1998 fiscal year-end financial results (such volume-weighted average closing bid
price herein referred to as the "1998 Conversion Price Adjustment Bid Price") is
a price less than the existing Conversion Price, then the Conversion Price shall
be adjusted downward to an amount equal to the greater of (i) ninety percent
(90%) of the 1998 Conversion Price Adjustment Bid Price, or (ii) five (5) times
the Company's earnings before interest, taxes, depreciation and amortization
(excluding extraordinary gains or losses) per share on a fully diluted basis
(excluding shares issued or issuable upon conversion of the Debentures),
calculated in accordance with generally accepted accounting principles, for the
1998 fiscal year. The adjustment shall only be utilized to adjust the Conversion
Price to a lesser amount than the existing Conversion Price, and no adjustment
shall be made if the Company's earnings before interest, taxes, depreciation and
amortization (excluding extraordinary gains or losses) for the fiscal year ended
July 31, 1998 exceed $17,900,000, excluding extraordinary gains or losses. If an
adjustment is required pursuant to Section 7, then the Borrower shall furnish to
the holder of this Debenture a statement, signed by the Chief Financial Officer
and the Secretary of Borrower, of the facts creating such adjustment and
specifying the resultant adjusted Conversion Price then in effect, which
statement shall constitute an amendment to the Debenture.
(b) Notwithstanding anything herein or in the Loan Agreement to the
contrary, at no time may the aggregate number of shares of Common Stock into
which the Indebtedness represented by the Debentures may be converted, together
with the number of shares of Common Stock into which any Debentures have
previously been converted (the aggregate being referred to herein as the
"Conversion Shares"), exceed 976,219 without the prior approval of the holders
of a majority of the shares of Common Stock (excluding shares, if any, held by
holders of the Debentures and their Affiliates and acquired as a result of the
conversion of any Debenture) voting on such proposal at a duly called meeting of
the shareholders of the Company at which a quorum is present in person or by
proxy (the "Shareholder Approval").
(c) If, but for paragraph (b) above, the Conversion Price would be
adjusted (the "Conversion Adjustment") as provided by paragraph (a) above such
that the number of Conversion Shares exceeds 976,219, then the Conversion Price
shall be adjusted as provided by paragraph (a) above, effective as of the
adjustment date provided for in paragraph (a) above, ONLY as to the Maximum
Convertible Amount. The "Maximum Convertible Amount" shall be the maximum
outstanding aggregate principal amount of all of the Debentures which may be
converted at the Conversion Price as adjusted by paragraph (a) above such that
the number of Conversion Shares would not exceed 976,219, as follows:
MCA = CP * (976,219 - SC)
where MCA = Maximum Convertible Amount;
CP = Conversion Price as adjusted by paragraph (a) above, without giving effect
to paragraph (b) above; and SC = the number of shares, if any, into which any of
the Debentures have been previously converted before effecting the adjustment to
the Conversion Price provided by paragraph (a) above
PROVIDED THAT the Maximum Convertible Amount shall be applied PRO RATA among the
principal amount of the Debentures outstanding at the time of the Conversion
Adjustment. The balance, if any, of the aggregate principal amount outstanding
at the time the Conversion Adjustment, after subtracting the Maximum Convertible
Amount, shall be the "Remaining
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Issuers Initial __________
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Principal Amount." The conversion rights provided for herein shall not be
applicable to the Remaining Principal Amount without the Shareholder Approval
being obtained.
(d) Upon the Shareholder Approval being obtained, the Remaining
Principal Amount, if any, shall again be convertible in accordance with the
terms of this Debenture at the Conversion Price as adjusted by paragraph (a)
above. If, but only if, the Shareholder Approval is not obtained by December 31,
1998, then each holder of a Debenture shall have the right, until February 28,
1999, to require the Company, upon ten business days notice to the Company, to
redeem the amount of the Remaining Principal Amount, if any, represented by its
Debenture at the sum equal to the Remaining Principal Amount, together with
(subject to Section 17 hereof) an amount equal to an 18% annual yield on the
Remaining Principal Amount of this Debenture, but not in excess of the maximum
amount permitted by applicable law.
8. RESERVATION OF SHARES: Borrower warrants and agrees that it shall at
all times reserve and keep available, free from preemptive rights, sufficient
authorized and unissued shares of Common Stock or treasury shares of Common
Stock necessary to effect conversion of this Debenture.
9. REGISTRATION RIGHTS: Shares issued upon conversion of this Debenture
shall be restricted from transfer by the holder except if and unless the shares
are duly registered for sale pursuant to the Securities Act of 1933, as amended,
or the transfer is exempt from registration. The Holder has certain rights with
respect to the registration of shares of Common Stock issued upon the conversion
of this Debenture pursuant to the terms of the Loan Agreement. Borrower agrees
that a copy of the Loan Agreement with all amendments, additions or
substitutions therefor shall be available to the Holder at the offices of
Borrower.
10. TAXES: Subject to Section 2.09 of the Loan Agreement, the Borrower
shall pay any documentary or other transactional taxes attributable to the
issuance or delivery of this Debenture or the shares of Common Stock issued upon
conversion by the Holder (excluding any federal, state or local income taxes and
any franchise taxes or taxes imposed upon the Holder by the jurisdiction, or any
political subdivision thereof, under which such Holder is organized or is
qualified to do business.)
11. DEFAULT:
(a) EVENT OF DEFAULT: An "Event of Default" shall exist if an "Event of
Default" (as defined in the Loan Agreement) shall occur and be continuing.
(b) REMEDIES UPON EVENT OF DEFAULT: If an Event of Default shall have
occurred and be continuing, then Lender may exercise any one or more of the
rights and remedies provided in the Loan Agreement, as Lender in its sole
discretion, may deem necessary or appropriate.
(c) REMEDIES NONEXCLUSIVE: Each right, power or remedy of the holder
hereof upon the occurrence of any Event of Default as provided for in this
Debenture or now or hereafter existing at law or in equity or by statute shall
be cumulative and concurrent and shall be in addition to every other right,
power or remedy provided for in this Debenture or now or hereafter existing at
law or in equity or by statute, and the exercise or beginning of the exercise by
the holder or transferee hereof of any one or more of such rights, powers or
remedies shall not preclude the simultaneous or later exercise by the holder of
any or all such other rights, powers or remedies.
(d) EXPENSES: Upon the occurrence of a Default or an Event of Default,
which occurrence is not cured within the notice provisions, if any provided
therefore, Borrower agrees to pay and shall pay all costs and expenses
(including attorneys' fees and expenses) incurred by Lender or Agent in
connection with the preservation and enforcement of Lender's
rights under the Loan Agreement, the Debenture, or any other Loan Document. 12.
FAILURE TO ACT AND WAIVER: No failure or delay by the holder hereof to require
the performance of any term or terms of this Debenture or not to exercise any
right or any remedy shall constitute a waiver of any such term or of any right
or of any default, nor shall such delay or failure preclude the holder hereof
from exercising any such right, power or remedy at any later time or times. By
accepting payment after the due date of any amount payable under this Debenture,
the holder hereof shall not be deemed to waive the right either to require
payment when due of all other amounts payable, or to later declare a default for
failure to effect such payment of any such other amount. The failure of the
holder of this Debenture to give notice of any failure or breach of the Borrower
under this Debenture shall not constitute a waiver of any right or remedy in
respect of such continuing failure or breach or any subsequent failure or
breach.
13. CONSENT TO JURISDICTION: The Borrower hereby agrees and consents
that any action, suit or proceeding arising out of this Debenture may be brought
in any appropriate court in the State of Texas including the United States
District Court for the Northern District of Texas, or in any other court having
jurisdiction over the subject matter, all at the sole election of the Holder
hereof, and by the issuance and execution of this Debenture the Borrower
irrevocably consents to the jurisdiction of each such court. The Borrower hereby
irrevocably appoints CT Corporation System, Dallas, Texas, as agent for the
Borrower to accept service of process for and on behalf of the Borrower in any
action, suit or proceeding arising out of this Debenture. Except for default in
payment of interest or principal when and as they become due, and except as
otherwise specifically set forth herein or otherwise agreed to in writing by the
parties, any action dispute, claim or controversy (all such herein called
"Dispute") between or among the parties as to the facts or the interpretation of
the Debenture shall be resolved by arbitration as set forth in Section 12.05 of
the Loan Agreement.
14. HOLDERS RIGHT TO REQUEST MULTIPLE DEBENTURES: The Holder shall,
upon written request and presentation of the Debenture, have the right, at any
interest payment date, to request division of this Debenture into two or more
units, each of such to be in such amounts as shall be requested; provided
however that no Debenture shall be issued in denominations of face amount less
than $10,000.00.
15. TRANSFER: Subject to Section 12.08 of the Loan Agreement, this
Debenture may be transferred on the books of the Borrower by the registered
Holder hereof, or by Holder's attorney duly authorized in writing, only upon (i)
delivery to the Borrower of a duly executed assignment of the Debenture, or part
thereof, to the proposed new Holder, along with a current notation of the amount
of payments received and net Principal Amount yet unfunded, and presentment of
such Debenture to the Borrower for issue of a replacement Debenture, or
Debentures, in the name of the new Holder, (ii) the designation by the new
Holder of the Lender's agent for notice, such agent to be the sole party to whom
Borrower shall be required to provide notice when notice to Lender is required
hereunder and who shall be the sole party authorized to represent Lender in
regard to modification or waivers under the Debenture, the Loan Agreement, or
other Loan Documents; and any action, consent or waiver, (other than a
compromise of principal and interest), when given or taken by Lender's agent for
notice, shall be deemed to be the action of the holders of a majority in amount
of the Principal Amount of the Debenture, as such holders are recorded on the
books of the Borrower, and (iii) in compliance with the legend to read as
follows:
The Securities represented by this Debenture have not been registered
under the Securities Act of 1933, as amended ("Act"), or applicable
state securities laws ("State Acts") and shall not be sold,
hypothecated, donated or otherwise transferred unless the Company shall
have received an opinion of Legal Counsel for the Company, or such
other evidence as may be satisfactory to Legal Counsel for the Company,
to the effect that any such transfer shall not require registration
under the Act and the State Acts.
The Borrower shall be entitled to treat any holder of record of the
Debenture as the Holder in fact thereof and of the Debenture and shall not be
bound to recognize any equitable or other claim to or interest in this Debenture
in the name of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by applicable law.
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Issuers Initial __________
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16. NOTICES: All notices and communications under this Debenture shall
be in writing and shall be either delivered in person or by overnight service
such as FedEx and accompanied by a signed receipt therefor; or mailed
first-class United States certified mail, return receipt requested, postage
prepaid, and addressed as follows: (i) if to the Borrower at its address for
notice as stated in the Loan Agreement; and, (ii) if to the Holder of this
Debenture, to the address (a) of such Holder as it appears on the books of the
Borrower, or (b) in the case of a partial assignment to one or more Holders, to
the Lender's agent for notice, as the case may be. Any notice of communication
shall be deemed given and received as of the date of such delivery if delivered;
or if mailed, then three days after the date of mailing.
17. MAXIMUM INTEREST RATE: (a) Regardless of any provision contained in
this Debenture, Lender shall never be entitled to receive, collect or apply as
interest on the Debenture any amount in excess of interest calculated at the
Maximum Rate, and, in the event that Lender ever receives, collects or applies
as interest any such excess, the amount which would be excessive interest shall
be deemed to be a partial prepayment of principal and treated hereunder as such;
and, if the principal amount of the Debenture is paid in full, any remaining
excess shall forthwith be paid to Borrower. In determining whether or not the
interest paid or payable under any specific contingency exceeds interest
calculated at the Maximum Rate, Borrower and Lender shall, to the maximum extent
permitted under applicable law, (i) characterize any non principal payment as an
expense, fee or premium rather than as interest; (ii) exclude voluntary
prepayments and the effects thereof, and (iii) amortize, pro rate, allocate and
spread, in equal parts, the total amount of interest throughout the entire
contemplated term of the Debenture; provided that, if the Debenture is paid and
performed in full prior to the end of the full contemplated term thereof, and if
the interest received for the actual period of existence thereof exceeds
interest calculated at the Maximum Rate, Lender shall refund to Borrower the
amount of such excess or credit the amount of such excess against the principal
amount of the Debenture and, in such event, Lender shall not be subject to any
penalties provided by any laws for contracting for, charging, taking, reserving
or receiving interest in excess of interest calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate
of interest (if any) permitted by applicable law on such day that at any time,
or from time to time, may be contracted for, taken, reserved, charged or
received on the Indebtedness evidenced by the Debenture under the laws which are
presently in effect of the United States of America or by the laws of any other
jurisdiction which are or may be applicable to the holders of the Debenture and
such Indebtedness or, to the extent permitted by law, under such applicable laws
of the United States of America or by the laws of any other jurisdiction which
are or may be applicable to the holder of the Debenture and which may hereafter
be in effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
18. RIGHTS UNDER LOAN AGREEMENT: This Debenture is issued pursuant to
the Convertible Loan Agreement, dated July 3, 1997, by and among the Company,
Renaissance III, Renaissance PLC and BOCPII, as Lenders, and Agent and the
holders hereof are entitled to all the rights and benefits, and are subject to
all the obligations of Lender under said agreement, including the maximum
interest rates limitations as specified therein. Both Borrower and Lenders have
participated in the negotiation and preparation of the Loan Agreement and of
this Debenture. Borrower agrees that a copy of the Loan Agreement with all
amendments, additions and substitutions therefor shall be available to the
Holders at the offices of Borrower.
19. DEFINED TERMS: Capitalized Terms used but not defined herein shall
have the meaning given them in the Loan Agreement.
20. STANDBY AGREEMENT: This Agreement and the Debentures, and the
indebtedness and obligations evidenced thereby, are subject to (i) the
provisions of the Standby Agreement by and among Play By Play Toys & Novelties,
Inc., the Chase Manhattan Bank, agent, and Renaissance III, Renaissance PLC,
BOCPII, as Lenders, and Agent, dated as of July 3, 1997, which is incorporated
herein by reference, (ii) the terms of the form of the Standby Agreement
attached as Exhibit A to the Loan Agreement (which terms are hereby incorporated
by reference and which terms shall apply with respect to any Senior Obligations
hereafter arising without regard to any failure by a holder of a Debenture to
enter into a Standby Agreement in accordance with the terms hereof and of
Section 5.18 of the Loan Agreement), and (iii) the terms
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Issuers Initial __________
<PAGE>
of any other Standby Agreement hereinafter executed by the holders of Debentures
pursuant hereto and pursuant to Section 5.18 of the Loan Agreement. Each holder
of a Debenture hereby agrees, upon the request of Borrower, to enter into a
Standby Agreement in the form of Exhibit A to the Loan Agreement with any holder
of Senior Obligations.
21. GOVERNING LAW: This Debenture shall be governed by and construed
and enforced in accordance with the substantive laws of the State of Texas,
without regard to the conflicts of laws provisions thereof, and the applicable
laws of the United States.
IN WITNESS WHEREOF, the undersigned Borrower has caused this Debenture
to be duly issued, executed and delivered on the date and year above stated.
BORROWER
PLAY BY PLAY TOYS & NOVELTIES, INC.
By:___________________________________
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Issuers Initial __________
<PAGE>
The Securities represented by this Debenture have not been registered under the
Securities Act of 1933, as amended ("Act"), or applicable state securities laws
("State Acts") and shall not be sold, hypothecated, donated or otherwise
transferred unless the Company shall have received an opinion of Legal Counsel
for the Company, or such other evidence as may be satisfactory to Legal Counsel
for the Company, to the effect that any such transfer shall not require
registration under the Act and the State Acts.
PLAY BY PLAY TOYS & NOVELTIES, INC.
8.00% CONVERTIBLE DEBENTURE
$2,500,000 NO. 2
Date of Issue: JULY 3, 1997
PLAY BY PLAY TOYS & NOVELTIES, INC., a Texas corporation (the "Company"
or "Borrower"), for value received, promises to pay to:
Compass Bank, Custodian FBO
RENAISSANCE US GROWTH & INCOME TRUST PLC
or to its order, (together with any assignee, jointly or severally, the "Holder"
or "Lender") on or before June 30, 2004 (the "Due Date") (unless this Debenture
shall have been sooner called for redemption or presented for conversion as
herein provided), the sum of TWO MILLION FIVE HUNDRED THOUSAND DOLLARS
($2,500,000) (the "Principal Amount") and to pay interest on the Principal
Amount at the rate of eight percent (8.00%) per annum as provided herein. The
Principal Amount shall be payable in equal monthly payments commencing on June
30, 2000 and continuing through June 30, 2004. All payments of both principal
and interest shall be made at the address of the Holder hereof as it appears in
the books and records of the Borrower, or at such other place as may be
designated by the Holder hereof. This Debenture shall rank PARI PASSU with all
Indebtedness of the Borrower, other than the Senior Obligations and the
Subordinated Debt.
1. INTEREST: Interest on the Principal Amount outstanding from time to
time shall accrue at the rate of 8.00% per annum and shall be payable in monthly
installments commencing July 31, 1997, and subsequent payments shall be made on
the last day of each month thereafter until the Principal Amount and all accrued
and unpaid interest shall have been paid in full. Subject to Section 17 hereof,
overdue principal and interest on the Debenture shall bear interest at the rate
of 15% per annum.
2. MATURITY: If not sooner paid, redeemed or converted, this Debenture
shall mature on June 30, 2004 at which time all then remaining unpaid principal
and all accrued and unpaid interest and any other charges then due under the
Loan Agreement shall be due and payable in full. Upon the request of the Holder,
this Debenture shall be prepaid (without premium or penalty) on a PRO RATA basis
together with any prepayments of Indebtedness (other than Senior Obligations)
which is PARI PASSU with or subordinated to the Debenture, except for payments
of subordinated debt to the principal shareholder of the Company pursuant to
Section 2.02 of the Loan Agreement and former stockholders of Ace Novelty Co.,
Inc., but only if on the date of such prepayment the Borrower is not in
compliance with Section 7.01 of the Loan Agreement.
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3. MANDATORY PRINCIPAL INSTALLMENTS: If this Debenture is not sooner
redeemed or converted as provided hereunder, Borrower shall pay to Holder,
commencing on June 30, 2000, and the last day of each successive month
thereafter prior to maturity, mandatory principal redemption installments, each
of such installments to be in the amount of Ten Dollars ($10) per Thousand
Dollars ($1,000) of the then remaining principal amount of the Debenture and
further, at maturity, shall make a final installment of all of the remaining
unpaid Principal Amount balance due plus the amount of any unpaid interest and
other charges then due. Each of such installments shall be applied in partial
redemption of the Debenture when received by Holder.
4. REDEMPTION BY HOLDER: (a) If at any time after the date hereof (i)
the Company's Common Stock, no par value ("Common Stock"), is not listed for
exchange on the NASDAQ National Market System ("National Market"), the New York
Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX"), or quoted on the
NASDAQ Small Cap System ("Small Cap System"), (ii) any Person acquires more than
a majority of the Common Stock, without the Required Lender's consent, or (iii)
there is a change during any twelve-month period of at least two-thirds of the
members of the Company's Board of Directors, without the Required Lender's
consent, the Holder shall have the right for a period of sixty (60) days after
the earlier of (y) the receipt of notice of any such event by the Company, or
(z) the occurrence of an event described in this paragraph, if no notice by the
Company is given, to require this Debenture to be redeemed by the Company, upon
thirty (30) days' notice by the Holder, at the sum equal to the Principal
Amount, together with, subject to Section 17 hereof, an amount equal to an 18%
annual yield on Principal Amount through the date of redemption, but not in
excess of the maximum amount permitted by applicable law.
(b) In the event that the Company refunds, refinances or extends the
maturity of the Indebtedness evidenced by the Senior Documents in an aggregate
principal amount not in excess of $45.8 million and the Company is not in
compliance with the agreed minimum financial ratios or standards set forth in
Section 7.01 of the Loan Agreement or would not be in compliance after giving
effect thereto, the Holder shall have the right for a period of sixty (60) days
after the earlier of (i) the receipt of the notice by the Company provided for
in clause (i) of Section 6.01 of the Loan Agreement, or (ii) the occurrence of
an event described in this paragraph, if no notice by the Company is given, to
require this Debenture to be redeemed by the Company upon thirty (30) days'
notice by the Holder, at 101% of par, together with all accrued and unpaid
interest through the redemption date.
(c) In the event that the Company incurs Senior Obligations in an
aggregate principal amount not in excess of $45.8 million and the Company is not
in compliance with the agreed minimum financial ratios or standards set forth in
Section 7.01 of the Loan Agreement or would not be in compliance after giving
effect thereto, the Holder shall have the right for a period of sixty (60) days
after the earlier of (i) the receipt of the notice by the Company provided for
in clause (i) of Section 6.01 of the Loan Agreement, or (ii) the occurrence of
an event described in this paragraph, if no notice by the Company is given, to
require this Debenture to be redeemed by the Company upon thirty (30) days'
notice by the Holder at 101% of par, together with all accrued and unpaid
interest through the redemption date.
5. OPTIONAL REDEMPTION BY COMPANY: (a) On any interest payment date,
and after prior irrevocable notice as provided for below, this Debenture is
redeemable, in whole but not in part, at 101% of par, together with accrued and
unpaid interest, by the Company until June 30, 2000, if the closing bid price
for the Common Stock averages at least $ 34.00 per share for the 20 consecutive
trading days prior to the irrevocable notice and the Common Stock is listed or
quoted on the National Market, the Small Cap System, AMEX or NYSE, and after
June 30, 2000, if the following conditions are satisfied: (i) the closing bid
price for the Common Stock averages at least $ 25.50 per share for the 20
consecutive trading days prior to the irrevocable notice and the Common Stock is
listed or quoted on the National Market, the Small Cap System, AMEX or NYSE;
(ii) the market price at the date of irrevocable notice is supported by a price
to earnings ratio of no greater than 30 times fully diluted net earnings per
share of Common Stock, determined in accordance with generally accepted
accounting principles, excluding any extraordinary gains or losses of the
Borrower; (iii) the average (20 days) daily trading volume shall be no less than
25,000 shares; and (iv) the Borrower shall have filed a registration statement
covering the shares of Common Stock issuable upon conversion of the Debenture,
which shall have become effective. The foregoing
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Issuers Initial __________
<PAGE>
earnings per share and bid price tests shall be duly adjusted for share splits,
stock dividends, mergers, consolidations, and other recapitalizations.
Redemption is subject to the Holder's prior right to conversion of the
Debenture.
(b) The Company may exercise its right to redeem the Debenture prior to
maturity by giving notice (the "Redemption Notice") thereof to the Holder of
this Debenture as such name appears on the books of the Borrower, which notice
shall specify the terms of redemption (including the place at which the Holder
may obtain payment), the total principal amount to be redeemed (such principal
amount plus the premium thereon herein called the "Redemption Amount") and the
date for redemption (the "Redemption Date"), which date shall not be less than
30 days nor more than 60 days after the date of the notice. On the Redemption
Date, the Borrower shall pay all accrued unpaid interest on the Debenture up to
and including the Redemption Date and shall pay to the holder a dollar amount
equal to the Redemption Amount.
6. CONVERSION RIGHT: The Holder of this Debenture shall have the right,
at holder's option, at any time, to convert all, or, in multiples of $10,000,
any part of this Debenture into such number of fully paid and nonassessable
shares of Common Stock as provided herein. The Holder of this Debenture may
exercise the conversion right by giving written notice (the "Conversion Notice")
to Borrower of the exercise of such right and stating the name or names in which
the stock certificate or stock certificates for the shares of Common Stock are
to be issued and the address to which such certificates shall be delivered. The
Conversion Notice shall be accompanied by the Debenture. The number of shares of
Common Stock that shall be issuable upon conversion of the Debenture shall equal
the face amount of the Debenture divided by the Conversion Price as defined
below and in effect on the date the Conversion Notice is given; provided,
however, that in the event that this Debenture shall have been partially
redeemed, shares of Common Stock shall be issued pro rata, rounded to the
nearest whole share. Conversion shall be deemed to have been effected on the
date the Conversion Notice is received (the "Conversion Date"). In the case of
any Debenture called for redemption, the conversion rights will expire at the
close of business on the Redemption Date. Within 20 business days after receipt
of the Conversion Notice, Borrower shall issue and deliver by hand against a
signed receipt therefor or by United States registered mail, return receipt
requested, to the address designated in the Conversion Notice, a stock
certificate or stock certificates of Borrower representing the number of shares
of Common Stock to which Holder is entitled and a check or cash in payment of
all interest accrued and unpaid on the Debenture up to and including the
Conversion Date. The conversion rights will be governed by the following
provisions:
(a) CONVERSION PRICE. On the issue date hereof and until such time as
an adjustment shall occur, the Conversion Price shall be $ 17.00 PER SHARE;
provided, however, that the Conversion Price shall be subject to adjustment at
the times and in accordance with the provisions set forth below.
(i) ADJUSTMENT FOR ISSUANCE OF SHARES AT LESS THAN THE CONVERSION
PRICE. If and whenever any Additional Common Stock shall be issued by Borrower
(the "Stock Issue Date") for a consideration per share less than the Conversion
Price, then in each such case the initial Conversion Price shall be reduced to a
new Conversion Price in an amount equal to the price per share for the
Additional Common Stock then issued, if issued in connection with a sale of
shares, or the value of the Additional Common Stock then issued, as determined
in accordance with generally accepted accounting principles, if issued other
than for cash, and the number of shares issuable to Holder upon conversion shall
be proportionately increased; and, in the case of Additional Common Stock issued
without consideration, the initial Conversion Price shall be reduced in amount
and the number of shares issued upon conversion shall be increased in an amount
so as to maintain for the Holder the right to convert the Debenture into shares
equal in amount to the same percentage interest in the Common Stock of the
Company as existed for the Holder immediately preceding the Stock Issue Date.
(ii) SALE OF SHARES. In case of the issuance of Additional Common Stock
for a consideration part or all of which shall be cash, the amount of the cash
consideration therefor shall be deemed to be the gross amount of the cash paid
to Borrower for such shares, before deducting any underwriting compensation or
discount in the sale, underwriting or purchase thereof by underwriters or
dealers or others performing similar services or for any expenses incurred in
connection therewith. In case of the issuance of any shares of Additional Common
Stock for a consideration part or all of which shall
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Issuers Initial __________
<PAGE>
be other than cash, the amount of the consideration therefor, other than cash,
shall be deemed to be the then fair market value of the property received.
(iii) RECLASSIFICATION OF SHARES. In case of the reclassification of
securities into shares of Common Stock, the shares of Common Stock issued in
such reclassification shall be deemed to have been issued for a consideration
other than cash. Shares of Additional Common Stock issued by way of dividend or
other distribution on any class of stock of Borrower shall be deemed to have
been issued without consideration.
(iv) SPLIT UP OR COMBINATION OF SHARES. In case issued and outstanding
shares of Common Stock shall be subdivided or split up into a greater number of
shares of the Common Stock, the Conversion Price shall be proportionately
decreased, and in case issued and outstanding shares of Common Stock shall be
combined into a smaller number of shares of Common Stock, the Conversion Price
shall be proportionately increased, such increase or decrease, as the case may
be, becoming effective at the time of record of the split-up or combination, as
the case may be.
(v) EXCEPTIONS. The term "Additional Common Stock" herein shall mean
all shares of Common Stock hereafter issued by Borrower (including Common Stock
held in the treasury of Borrower), except (A) Common Stock issued upon the
conversion of any of the Debentures; (B) Common Stock issued upon exercise of
any outstanding warrants or options; (C) Common Stock issued upon exercise of
outstanding employee stock options; and (D) up to 200,000 shares of Common Stock
in addition to Common Stock described in the immediately preceding clauses (A),
(B) and (C).
(b) ADJUSTMENT FOR MERGERS AND CONSOLIDATIONS.
(i) In the event of distribution to all Common Stock holders of any
stock, indebtedness of Borrower or assets (excluding cash dividends or
distributions from retained earnings) or other rights to purchase securities or
assets, then, after such event, the Debenture will be convertible into the kind
and amount of securities, cash and other property which the holder of the
Debenture would have been entitled to receive if the holder owned the Common
Stock issuable upon conversion of the Debenture immediately prior to the
occurrence of such event.
(ii) In case of any capital reorganization, reclassification of the
stock of Borrower (other than a change in par value or as a result of a stock
dividend, subdivision, split up or combination of shares), this Debenture shall
be convertible into the kind and number of shares of stock or other securities
or property of Borrower to which the holder of the Debenture would have been
entitled to receive if the holder owned the Common Stock issuable upon
conversion of the Debenture immediately prior to the occurrence of such event.
The provisions of the immediately foregoing sentence shall similarly apply to
successive reorganizations, reclassifications, consolidations, exchanges,
leases, transfers or other dispositions or other share exchanges.
(iii) The term "Fair Market Value," as used herein, is the value
ascribed to consideration other than cash as determined by the Board of
Directors of Borrower in good faith, which determination shall be final,
conclusive and binding. If the Board of Directors shall be unable to agree as to
such fair market value, then the issue of fair market value shall be submitted
to arbitration under and pursuant to the rules and regulations of the American
Arbitration Association, and the decision of the arbitrators shall be final,
conclusive and binding, and a final judgment may be entered thereon; provided,
however, that such arbitration shall be limited to determination of the fair
market value of assets tendered in consideration for the issue of Common Stock.
(iv) In the event Borrower shall propose to take any action which shall
result in an adjustment in the Conversion Price, Borrower shall give notice to
the Holder of this Debenture, which notice shall specify the record date, if
any, with respect to such action and the date on which such action is to take
place. Such notice shall be given on or before the earlier of 10 days before the
record date or the date which such action shall be taken. Such notice shall also
set forth all facts (to the extent known) material to the effect of such action
on the Conversion Price and the number, kind or class of shares or
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Issuers Initial __________
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other securities or property which shall be deliverable or purchasable upon the
occurrence of such action or deliverable upon conversion of this Debenture.
(v) Following completion of an event wherein the Conversion Price shall
be adjusted, Borrower shall furnish to the holder of this Debenture a statement,
signed by the Chief Executive Officer and the Secretary of the Borrower, of the
facts creating such adjustment and specifying the resultant adjusted Conversion
Price then in effect which statement shall constitute an amendment to this
Debenture.
7. ONE-TIME ADJUSTMENT TO CONVERSION PRICE. (a) If the volume-weighted
average closing bid price of the Common Stock, as determined by Bloomberg, for
the 21 consecutive trading days following Borrower's public press release of its
1998 fiscal year-end financial results (such volume-weighted average closing bid
price herein referred to as the "1998 Conversion Price Adjustment Bid Price") is
a price less than the existing Conversion Price, then the Conversion Price shall
be adjusted downward to an amount equal to the greater of (i) ninety percent
(90%) of the 1998 Conversion Price Adjustment Bid Price, or (ii) five (5) times
the Company's earnings before interest, taxes, depreciation and amortization
(excluding extraordinary gains or losses) per share on a fully diluted basis
(excluding shares issued or issuable upon conversion of the Debentures),
calculated in accordance with generally accepted accounting principles, for the
1998 fiscal year. The adjustment shall only be utilized to adjust the Conversion
Price to a lesser amount than the existing Conversion Price, and no adjustment
shall be made if the Company's earnings before interest, taxes, depreciation and
amortization (excluding extraordinary gains or losses) for the fiscal year ended
July 31, 1998 exceed $17,900,000, excluding extraordinary gains or losses. If an
adjustment is required pursuant to Section 7, then the Borrower shall furnish to
the holder of this Debenture a statement, signed by the Chief Financial Officer
and the Secretary of Borrower, of the facts creating such adjustment and
specifying the resultant adjusted Conversion Price then in effect, which
statement shall constitute an amendment to the Debenture.
(b) Notwithstanding anything herein or in the Loan Agreement to the
contrary, at no time may the aggregate number of shares of Common Stock into
which the Indebtedness represented by the Debentures may be converted, together
with the number of shares of Common Stock into which any Debentures have
previously been converted (the aggregate being referred to herein as the
"Conversion Shares"), exceed 976,219 without the prior approval of the holders
of a majority of the shares of Common Stock (excluding shares, if any, held by
holders of the Debentures and their Affiliates and acquired as a result of the
conversion of any Debenture) voting on such proposal at a duly called meeting of
the shareholders of the Company at which a quorum is present in person or by
proxy (the "Shareholder Approval").
(c) If, but for paragraph (b) above, the Conversion Price would be
adjusted (the "Conversion Adjustment") as provided by paragraph (a) above such
that the number of Conversion Shares exceeds 976,219, then the Conversion Price
shall be adjusted as provided by paragraph (a) above, effective as of the
adjustment date provided for in paragraph (a) above, ONLY as to the Maximum
Convertible Amount. The "Maximum Convertible Amount" shall be the maximum
outstanding aggregate principal amount of all of the Debentures which may be
converted at the Conversion Price as adjusted by paragraph (a) above such that
the number of Conversion Shares would not exceed 976,219, as follows:
MCA = CP * (976,219 - SC)
where MCA = Maximum Convertible Amount;
CP = Conversion Price as adjusted by paragraph (a) above, without giving effect
to paragraph (b) above; and SC = the number of shares, if any, into which any of
the Debentures have been previously converted before effecting the adjustment to
the Conversion Price provided by paragraph (a) above
PROVIDED THAT the Maximum Convertible Amount shall be applied PRO RATA among the
principal amount of the Debentures outstanding at the time of the Conversion
Adjustment. The balance, if any, of the aggregate principal amount outstanding
at the time the Conversion Adjustment, after subtracting the Maximum Convertible
Amount, shall be the "Remaining
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Issuers Initial __________
<PAGE>
Principal Amount." The conversion rights provided for herein shall not be
applicable to the Remaining Principal Amount without the Shareholder Approval
being obtained.
(d) Upon the Shareholder Approval being obtained, the Remaining
Principal Amount, if any, shall again be convertible in accordance with the
terms of this Debenture at the Conversion Price as adjusted by paragraph (a)
above. If, but only if, the Shareholder Approval is not obtained by December 31,
1998, then each holder of a Debenture shall have the right, until February 28,
1999, to require the Company, upon ten business days notice to the Company, to
redeem the amount of the Remaining Principal Amount, if any, represented by its
Debenture at the sum equal to the Remaining Principal Amount, together with
(subject to Section 17 hereof) an amount equal to an 18% annual yield on the
Remaining Principal Amount of this Debenture, but not in excess of the maximum
amount permitted by applicable law.
8. RESERVATION OF SHARES: Borrower warrants and agrees that it shall at
all times reserve and keep available, free from preemptive rights, sufficient
authorized and unissued shares of Common Stock or treasury shares of Common
Stock necessary to effect conversion of this Debenture.
9. REGISTRATION RIGHTS: Shares issued upon conversion of this Debenture
shall be restricted from transfer by the holder except if and unless the shares
are duly registered for sale pursuant to the Securities Act of 1933, as amended,
or the transfer is exempt from registration. The Holder has certain rights with
respect to the registration of shares of Common Stock issued upon the conversion
of this Debenture pursuant to the terms of the Loan Agreement. Borrower agrees
that a copy of the Loan Agreement with all amendments, additions or
substitutions therefor shall be available to the Holder at the offices of
Borrower.
10. TAXES: Subject to Section 2.09 of the Loan Agreement, the Borrower
shall pay any documentary or other transactional taxes attributable to the
issuance or delivery of this Debenture or the shares of Common Stock issued upon
conversion by the Holder (excluding any federal, state or local income taxes and
any franchise taxes or taxes imposed upon the Holder by the jurisdiction, or any
political subdivision thereof, under which such Holder is organized or is
qualified to do business.)
11. DEFAULT:
(a) EVENT OF DEFAULT: An "Event of Default" shall exist if an "Event of
Default" (as defined in the Loan Agreement) shall occur and be continuing.
(b) REMEDIES UPON EVENT OF DEFAULT: If an Event of Default shall have
occurred and be continuing, then Lender may exercise any one or more of the
rights and remedies provided in the Loan Agreement, as Lender in its sole
discretion, may deem necessary or appropriate.
(c) REMEDIES NONEXCLUSIVE: Each right, power or remedy of the holder
hereof upon the occurrence of any Event of Default as provided for in this
Debenture or now or hereafter existing at law or in equity or by statute shall
be cumulative and concurrent and shall be in addition to every other right,
power or remedy provided for in this Debenture or now or hereafter existing at
law or in equity or by statute, and the exercise or beginning of the exercise by
the holder or transferee hereof of any one or more of such rights, powers or
remedies shall not preclude the simultaneous or later exercise by the holder of
any or all such other rights, powers or remedies.
(d) EXPENSES: Upon the occurrence of a Default or an Event of Default,
which occurrence is not cured within the notice provisions, if any provided
therefore, Borrower agrees to pay and shall pay all costs and expenses
(including attorneys' fees and expenses) incurred by Lender or Agent in
connection with the preservation and enforcement of Lender's
rights under the Loan Agreement, the Debenture, or any other Loan Document. 12.
FAILURE TO ACT AND WAIVER: No failure or delay by the holder hereof to require
the performance of any term or terms of this Debenture or not to exercise any
right or any remedy shall constitute a waiver of any such term or of any right
or of any default, nor shall such delay or failure preclude the holder hereof
from exercising any such right, power or remedy at any later time or times. By
accepting payment after the due date of any amount payable under this Debenture,
the holder hereof shall not be deemed to waive the right either to require
payment when due of all other amounts payable, or to later declare a default for
failure to effect such payment of any such other amount. The failure of the
holder of this Debenture to give notice of any failure or breach of the Borrower
under this Debenture shall not constitute a waiver of any right or remedy in
respect of such continuing failure or breach or any subsequent failure or
breach.
13. CONSENT TO JURISDICTION: The Borrower hereby agrees and consents
that any action, suit or proceeding arising out of this Debenture may be brought
in any appropriate court in the State of Texas including the United States
District Court for the Northern District of Texas, or in any other court having
jurisdiction over the subject matter, all at the sole election of the Holder
hereof, and by the issuance and execution of this Debenture the Borrower
irrevocably consents to the jurisdiction of each such court. The Borrower hereby
irrevocably appoints CT Corporation System, Dallas, Texas, as agent for the
Borrower to accept service of process for and on behalf of the Borrower in any
action, suit or proceeding arising out of this Debenture. Except for default in
payment of interest or principal when and as they become due, and except as
otherwise specifically set forth herein or otherwise agreed to in writing by the
parties, any action dispute, claim or controversy (all such herein called
"Dispute") between or among the parties as to the facts or the interpretation of
the Debenture shall be resolved by arbitration as set forth in Section 12.05 of
the Loan Agreement.
14. HOLDERS RIGHT TO REQUEST MULTIPLE DEBENTURES: The Holder shall,
upon written request and presentation of the Debenture, have the right, at any
interest payment date, to request division of this Debenture into two or more
units, each of such to be in such amounts as shall be requested; provided
however that no Debenture shall be issued in denominations of face amount less
than $10,000.00.
15. TRANSFER: Subject to Section 12.08 of the Loan Agreement, this
Debenture may be transferred on the books of the Borrower by the registered
Holder hereof, or by Holder's attorney duly authorized in writing, only upon (i)
delivery to the Borrower of a duly executed assignment of the Debenture, or part
thereof, to the proposed new Holder, along with a current notation of the amount
of payments received and net Principal Amount yet unfunded, and presentment of
such Debenture to the Borrower for issue of a replacement Debenture, or
Debentures, in the name of the new Holder, (ii) the designation by the new
Holder of the Lender's agent for notice, such agent to be the sole party to whom
Borrower shall be required to provide notice when notice to Lender is required
hereunder and who shall be the sole party authorized to represent Lender in
regard to modification or waivers under the Debenture, the Loan Agreement, or
other Loan Documents; and any action, consent or waiver (other than a compromise
of principal and interest), when given or taken by Lender's agent for notice,
shall be deemed to be the action of the holders of a majority in amount of the
Principal Amount of the Debenture, as such holders are recorded on the books of
the Borrower, and (iii) in compliance with the legend to read as follows:
The Securities represented by this Debenture have not been registered
under the Securities Act of 1933, as amended ("Act"), or applicable
state securities laws ("State Acts") and shall not be sold,
hypothecated, donated or otherwise transferred unless the Company shall
have received an opinion of Legal Counsel for the Company, or such
other evidence as may be satisfactory to Legal Counsel for the Company,
to the effect that any such transfer shall not require registration
under the Act and the State Acts.
The Borrower shall be entitled to treat any holder of record of the
Debenture as the Holder in fact thereof and of the Debenture and shall not be
bound to recognize any equitable or other claim to or interest in this Debenture
in the name of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by applicable law.
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Issuers Initial __________
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16. NOTICES: All notices and communications under this Debenture shall
be in writing and shall be either delivered in person or by overnight service
such as FedEx and accompanied by a signed receipt therefor; or mailed
first-class United States certified mail, return receipt requested, postage
prepaid, and addressed as follows: (i) if to the Borrower at its address for
notice as stated in the Loan Agreement; and, (ii) if to the Holder of this
Debenture, to the address (a) of such Holder as it appears on the books of the
Borrower, or (b) in the case of a partial assignment to one or more Holders, to
the Lender's agent for notice, as the case may be. Any notice of communication
shall be deemed given and received as of the date of such delivery if delivered;
or if mailed, then three days after the date of mailing.
17. MAXIMUM INTEREST RATE: (a) Regardless of any provision contained in
this Debenture, Lender shall never be entitled to receive, collect or apply as
interest on the Debenture any amount in excess of interest calculated at the
Maximum Rate, and, in the event that Lender ever receives, collects or applies
as interest any such excess, the amount which would be excessive interest shall
be deemed to be a partial prepayment of principal and treated hereunder as such;
and, if the principal amount of the Debenture is paid in full, any remaining
excess shall forthwith be paid to Borrower. In determining whether or not the
interest paid or payable under any specific contingency exceeds interest
calculated at the Maximum Rate, Borrower and Lender shall, to the maximum extent
permitted under applicable law, (i) characterize any non principal payment as an
expense, fee or premium rather than as interest; (ii) exclude voluntary
prepayments and the effects thereof, and (iii) amortize, pro rate, allocate and
spread, in equal parts, the total amount of interest throughout the entire
contemplated term of the Debenture; provided that, if the Debenture is paid and
performed in full prior to the end of the full contemplated term thereof, and if
the interest received for the actual period of existence thereof exceeds
interest calculated at the Maximum Rate, Lender shall refund to Borrower the
amount of such excess or credit the amount of such excess against the principal
amount of the Debenture and, in such event, Lender shall not be subject to any
penalties provided by any laws for contracting for, charging, taking, reserving
or receiving interest in excess of interest calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate
of interest (if any) permitted by applicable law on such day that at any time,
or from time to time, may be contracted for, taken, reserved, charged or
received on the Indebtedness evidenced by the Debenture under the laws which are
presently in effect of the United States of America or by the laws of any other
jurisdiction which are or may be applicable to the holders of the Debenture and
such Indebtedness or, to the extent permitted by law, under such applicable laws
of the United States of America or by the laws of any other jurisdiction which
are or may be applicable to the holder of the Debenture and which may hereafter
be in effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
18. RIGHTS UNDER LOAN AGREEMENT: This Debenture is issued pursuant to
the Convertible Loan Agreement, dated July 3, 1997, by and among the Company,
Renaissance III, Renaissance PLC and BOCPII, as Lenders, and Agent and the
holders hereof are entitled to all the rights and benefits, and are subject to
all the obligations of Lender under said agreement, including the maximum
interest rates limitations as specified therein. Both Borrower and Lenders have
participated in the negotiation and preparation of the Loan Agreement and of
this Debenture. Borrower agrees that a copy of the Loan Agreement with all
amendments, additions and substitutions therefor shall be available to the
Holders at the offices of Borrower.
19. DEFINED TERMS: Capitalized Terms used but not defined herein shall
have the meaning given them in the Loan Agreement.
20. STANDBY AGREEMENT: This Agreement and the Debentures, and the
indebtedness and obligations evidenced thereby, are subject to (i) the
provisions of the Standby Agreement by and among Play By Play Toys & Novelties,
Inc., the Chase Manhattan Bank, agent, and Renaissance III, Renaissance PLC,
BOCPII, as Lenders, and Agent, dated as of July 3, 1997, which is incorporated
herein by reference, (ii) the terms of the form of the Standby Agreement
attached as Exhibit A to the Loan Agreement (which terms are hereby incorporated
by reference and which terms shall apply with respect to any Senior Obligations
hereafter arising without regard to any failure by a holder of a Debenture to
enter into a Standby Agreement in accordance with the terms hereof and of
Section 5.18 of the Loan Agreement), and (iii) the terms
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Issuers Initial __________
<PAGE>
of any other Standby Agreement hereinafter executed by the holders of Debentures
pursuant hereto and pursuant to Section 5.18 of the Loan Agreement. Each holder
of a Debenture hereby agrees, upon the request of Borrower, to enter into a
Standby Agreement in the form of Exhibit A to the Loan Agreement with any holder
of Senior Obligations.
21. GOVERNING LAW: This Debenture shall be governed by and construed
and enforced in accordance with the substantive laws of the State of Texas,
without regard to the conflicts of laws provisions thereof, and the applicable
laws of the United States.
IN WITNESS WHEREOF, the undersigned Borrower has caused this Debenture
to be duly issued, executed and delivered on the date and year above stated.
BORROWER
PLAY BY PLAY TOYS & NOVELTIES, INC.
By:___________________________________
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Issuers Initial __________
<PAGE>
The Securities represented by this Debenture have not been registered under the
Securities Act of 1933, as amended ("Act"), or applicable state securities laws
("State Acts") and shall not be sold, hypothecated, donated or otherwise
transferred unless the Company shall have received an opinion of Legal Counsel
for the Company, or such other evidence as may be satisfactory to Legal Counsel
for the Company, to the effect that any such transfer shall not require
registration under the Act and the State Acts.
PLAY BY PLAY TOYS & NOVELTIES, INC.
8.00% CONVERTIBLE DEBENTURE
$10,000,000 NO. 3
Date of Issue: JULY 3, 1997
PLAY BY PLAY TOYS & NOVELTIES, INC., a Texas corporation (the "Company"
or "Borrower"), for value received, promises to pay to:
BANC ONE CAPITAL PARTNERS II, LTD.
or to its order, (together with any assignee, jointly or severally, the "Holder"
or "Lender") on or before June 30, 2004 (the "Due Date") (unless this Debenture
shall have been sooner called for redemption or presented for conversion as
herein provided), the sum of TEN MILLION DOLLARS ($10,000,000) (the "Principal
Amount") and to pay interest on the Principal Amount at the rate of eight
percent (8.00%) per annum as provided herein. The Principal Amount shall be
payable in equal monthly payments commencing on June 30, 2000 and continuing
through June 30, 2004. All payments of both principal and interest shall be made
at the address of the Holder hereof as it appears in the books and records of
the Borrower, or at such other place as may be designated by the Holder hereof.
This Debenture shall rank PARI PASSU with all Indebtedness of the Borrower,
other than the Senior Obligations and the Subordinated Debt.
1. INTEREST: Interest on the Principal Amount outstanding from time to
time shall accrue at the rate of 8.00% per annum and shall be payable in monthly
installments commencing July 31, 1997, and subsequent payments shall be made on
the last day of each month thereafter until the Principal Amount and all accrued
and unpaid interest shall have been paid in full. Subject to Section 16 hereof,
overdue principal and interest on the Debenture shall bear interest at the rate
of 15% per annum.
2. MATURITY: If not sooner paid, redeemed or converted, this Debenture
shall mature on June 30, 2004 at which time all then remaining unpaid principal
and all accrued and unpaid interest and any other charges then due under the
Loan Agreement shall be due and payable in full. Upon the request of the Holder,
this Debenture shall be prepaid (without premium or penalty) on a PRO RATA basis
together with any prepayments of Indebtedness (other than Senior Obligations)
which is PARI PASSU with or subordinated to the Debenture, except for payments
of subordinated debt to the principal shareholder of the Company pursuant to
Section 2.02 of the Loan Agreement and former stockholders of Ace Novelty Co.,
Inc., but only if on the date of such prepayment the Borrower is not in
compliance with Section 7.01 of the Loan Agreement.
3. MANDATORY PRINCIPAL INSTALLMENTS: If this Debenture is not sooner
redeemed or converted as provided hereunder, Borrower shall pay to Holder,
commencing on June 30, 2000, and the last day of each successive month
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thereafter prior to maturity, mandatory principal redemption installments, each
of such installments to be in the amount of Ten Dollars ($10) per Thousand
Dollars ($1,000) of the then remaining principal amount of the Debenture and
further, at maturity, shall make a final installment of all of the remaining
unpaid Principal Amount balance due plus the amount of any unpaid interest and
other charges then due. Each of such installments shall be applied in partial
redemption of the Debenture when received by Holder.
4. REDEMPTION BY HOLDER: (a) If at any time after the date hereof (i)
the Company's Common Stock, no par value ("Common Stock"), is not listed for
exchange on the NASDAQ National Market System ("National Market"), the New York
Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX"), or quoted on the
NASDAQ Small Cap System ("Small Cap System"), (ii) any Person acquires more than
a majority of the Common Stock, without the Required Lender's consent, or (iii)
there is a change during any twelve-month period of at least two-thirds of the
members of the Company's Board of Directors, without the Required Lender's
consent, the Holder shall have the right for a period of sixty (60) days after
the earlier of (y) the receipt of notice of any such event by the Company, or
(z) the occurrence of an event described in this paragraph, if no notice by the
Company is given, to require this Debenture to be redeemed by the Company, upon
thirty (30) days' notice by the Holder, at the sum equal to the Principal
Amount, together with, subject to Section 16 hereof, an amount equal to a 20%
compounded annual rate of return through the date of redemption, but not in
excess of the maximum amount permitted by applicable law.
(b) In the event that the Company refunds, refinances or extends the
maturity of the Indebtedness evidenced by the Senior Documents in an aggregate
principal amount not in excess of $45.8 million and the Company is not in
compliance with the agreed minimum financial ratios or standards set forth in
Section 7.01 of the Loan Agreement or would not be in compliance after giving
effect thereto, the Holder shall have the right for a period of sixty (60) days
after the earlier of (i) the receipt of the notice by the Company provided for
in clause (i) of Section 6.01 of the Loan Agreement, or (ii) the occurrence of
an event described in this paragraph, if no notice by the Company is given, to
require this Debenture to be redeemed by the Company upon thirty (30) days'
notice by the Holder, at 101% of par, together with all accrued and unpaid
interest through the redemption date.
(c) In the event that the Company incurs Senior Obligations in an
aggregate principal amount not in excess of $45.8 million and the Company is not
in compliance with the agreed minimum financial ratios or standards set forth in
Section 7.01 of the Loan Agreement or would not be in compliance after giving
effect thereto, the Holder shall have the right for a period of sixty (60) days
after the earlier of (i) the receipt of the notice by the Company provided for
in clause (i) of Section 6.01 of the Loan Agreement, or (ii) the occurrence of
an event described in this paragraph, if no notice by the Company is given, to
require this Debenture to be redeemed by the Company upon thirty (30) days'
notice by the Holder at 101% of par, together with all accrued and unpaid
interest through the redemption date.
5. OPTIONAL REDEMPTION BY COMPANY: (a) On any interest payment date,
and after prior irrevocable notice as provided for below, this Debenture is
redeemable, in whole but not in part, at 101% of par, together with accrued and
unpaid interest, by the Company until June 30, 2000, if the closing bid price
for the Common Stock averages at least $ 34.00 per share for the 20 consecutive
trading days prior to the irrevocable notice and the Common Stock is listed or
quoted on the National Market, the Small Cap System, AMEX or NYSE, and after
June 30, 2000, if the following conditions are satisfied: (i) the closing bid
price for the Common Stock averages at least $ 25.50 per share for the 20
consecutive trading days prior to the irrevocable notice and the Common Stock is
listed or quoted on the National Market, the Small Cap System, AMEX or NYSE;
(ii) the market price at the date of irrevocable notice is supported by a price
to earnings ratio of no greater than 30 times fully diluted net earnings per
share of Common Stock, determined in accordance with generally accepted
accounting principles, excluding any extraordinary gains or losses of the
Borrower; (iii) the average (20 days) daily trading volume shall be no less than
25,000 shares; and (iv) the Borrower shall have filed a registration statement
covering the shares of Common Stock issuable upon conversion of the Debenture,
which shall have become effective. The foregoing earnings per share and bid
price tests shall be duly adjusted for share splits, stock dividends, mergers,
consolidations, and other recapitalizations. Redemption is subject to the
Holder's prior right to conversion of the Debenture.
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Issuers Initial __________
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(b) The Company may exercise its right to redeem the Debenture prior to
maturity by giving notice (the "Redemption Notice") thereof to the Holder of
this Debenture as such name appears on the books of the Borrower, which notice
shall specify the terms of redemption (including the place at which the Holder
may obtain payment), the total principal amount to be redeemed (such principal
amount plus the premium thereon herein called the "Redemption Amount") and the
date for redemption (the "Redemption Date"), which date shall not be less than
30 days nor more than 60 days after the date of the notice. On the Redemption
Date, the Borrower shall pay all accrued unpaid interest on the Debenture up to
and including the Redemption Date and shall pay to the holder a dollar amount
equal to the Redemption Amount.
6. CONVERSION RIGHT: The Holder of this Debenture shall have the right,
at holder's option, at any time, to convert all, or, in multiples of $10,000,
any part of this Debenture into such number of fully paid and nonassessable
shares of Common Stock as provided herein. The Holder of this Debenture may
exercise the conversion right by giving written notice (the "Conversion Notice")
to Borrower of the exercise of such right and stating the name or names in which
the stock certificate or stock certificates for the shares of Common Stock are
to be issued and the address to which such certificates shall be delivered. The
Conversion Notice shall be accompanied by the Debenture. The number of shares of
Common Stock that shall be issuable upon conversion of the Debenture shall equal
the face amount of the Debenture divided by the Conversion Price as defined
below and in effect on the date the Conversion Notice is given; provided,
however, that in the event that this Debenture shall have been partially
redeemed, shares of Common Stock shall be issued pro rata, rounded to the
nearest whole share. Conversion shall be deemed to have been effected on the
date the Conversion Notice is received (the "Conversion Date"). In the case of
any Debenture called for redemption, the conversion rights will expire at the
close of business on the Redemption Date. Within 20 business days after receipt
of the Conversion Notice, Borrower shall issue and deliver by hand against a
signed receipt therefor or by United States registered mail, return receipt
requested, to the address designated in the Conversion Notice, a stock
certificate or stock certificates of Borrower representing the number of shares
of Common Stock to which Holder is entitled and a check or cash in payment of
all interest accrued and unpaid on the Debenture up to and including the
Conversion Date. The conversion rights will be governed by the following
provisions:
(a) CONVERSION PRICE. On the issue date hereof and until such time as
an adjustment shall occur, the Conversion Price shall be $ 17.00 PER SHARE;
provided, however, that the Conversion Price shall be subject to adjustment at
the times and in accordance with the provisions set forth below.
(i) ADJUSTMENT FOR ISSUANCE OF SHARES AT LESS THAN THE CONVERSION
PRICE. If and whenever any Additional Common Stock shall be issued by Borrower
(the "Stock Issue Date") for a consideration per share less than the Conversion
Price, then in each such case the initial Conversion Price shall be reduced to a
new Conversion Price in an amount equal to the price per share for the
Additional Common Stock then issued, if issued in connection with a sale of
shares, or the value of the Additional Common Stock then issued, as determined
in accordance with generally accepted accounting principles, if issued other
than for cash, and the number of shares issuable to Holder upon conversion shall
be proportionately increased; and, in the case of Additional Common Stock issued
without consideration, the initial Conversion Price shall be reduced in amount
and the number of shares issued upon conversion shall be increased in an amount
so as to maintain for the Holder the right to convert the Debenture into shares
equal in amount to the same percentage interest in the Common Stock of the
Company as existed for the Holder immediately preceding the Stock Issue Date.
(ii) SALE OF SHARES. In case of the issuance of Additional Common Stock
for a consideration part or all of which shall be cash, the amount of the cash
consideration therefor shall be deemed to be the gross amount of the cash paid
to Borrower for such shares, before deducting any underwriting compensation or
discount in the sale, underwriting or purchase thereof by underwriters or
dealers or others performing similar services or for any expenses incurred in
connection therewith. In case of the issuance of any shares of Additional Common
Stock for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor, other than cash, shall be deemed to be the
then fair market value of the property received.
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Issuers Initial __________
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(iii) RECLASSIFICATION OF SHARES. In case of the reclassification of
securities into shares of Common Stock, the shares of Common Stock issued in
such reclassification shall be deemed to have been issued for a consideration
other than cash. Shares of Additional Common Stock issued by way of dividend or
other distribution on any class of stock of Borrower shall be deemed to have
been issued without consideration.
(iv) SPLIT UP OR COMBINATION OF SHARES. In case issued and outstanding
shares of Common Stock shall be subdivided or split up into a greater number of
shares of the Common Stock, the Conversion Price shall be proportionately
decreased, and in case issued and outstanding shares of Common Stock shall be
combined into a smaller number of shares of Common Stock, the Conversion Price
shall be proportionately increased, such increase or decrease, as the case may
be, becoming effective at the time of record of the split-up or combination, as
the case may be.
(v) EXCEPTIONS. The term "Additional Common Stock" herein shall mean
all shares of Common Stock hereafter issued by Borrower (including Common Stock
held in the treasury of Borrower), except (A) Common Stock issued upon the
conversion of any of the Debentures; (B) Common Stock issued upon exercise of
any outstanding warrants or options; (C) Common Stock issued upon exercise of
outstanding employee stock options; and (D) up to 200,000 shares of Common Stock
in addition to Common Stock described in the immediately preceding clauses (A),
(B) and (C).
(b) ADJUSTMENT FOR MERGERS AND CONSOLIDATIONS.
(i) In the event of distribution to all Common Stock holders of any
stock, indebtedness of Borrower or assets (excluding cash dividends or
distributions from retained earnings) or other rights to purchase securities or
assets, then, after such event, the Debenture will be convertible into the kind
and amount of securities, cash and other property which the holder of the
Debenture would have been entitled to receive if the holder owned the Common
Stock issuable upon conversion of the Debenture immediately prior to the
occurrence of such event.
(ii) In case of any capital reorganization, reclassification of the
stock of Borrower (other than a change in par value or as a result of a stock
dividend, subdivision, split up or combination of shares), this Debenture shall
be convertible into the kind and number of shares of stock or other securities
or property of Borrower to which the holder of the Debenture would have been
entitled to receive if the holder owned the Common Stock issuable upon
conversion of the Debenture immediately prior to the occurrence of such event.
The provisions of the immediately foregoing sentence shall similarly apply to
successive reorganizations, reclassifications, consolidations, exchanges,
leases, transfers or other dispositions or other share exchanges.
(iii) The term "Fair Market Value," as used herein, is the value
ascribed to consideration other than cash as determined by the Board of
Directors of Borrower in good faith, which determination shall be final,
conclusive and binding. If the Board of Directors shall be unable to agree as to
such fair market value, then the issue of fair market value shall be submitted
to arbitration under and pursuant to the rules and regulations of the American
Arbitration Association, and the decision of the arbitrators shall be final,
conclusive and binding, and a final judgment may be entered thereon; provided,
however, that such arbitration shall be limited to determination of the fair
market value of assets tendered in consideration for the issue of Common Stock.
(iv) In the event Borrower shall propose to take any action which shall
result in an adjustment in the Conversion Price, Borrower shall give notice to
the Holder of this Debenture, which notice shall specify the record date, if
any, with respect to such action and the date on which such action is to take
place. Such notice shall be given on or before the earlier of 10 days before the
record date or the date which such action shall be taken. Such notice shall also
set forth all facts (to the extent known) material to the effect of such action
on the Conversion Price and the number, kind or class of shares or other
securities or property which shall be deliverable or purchasable upon the
occurrence of such action or deliverable upon conversion of this Debenture.
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Issuers Initial __________
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(v) Following completion of an event wherein the Conversion Price shall
be adjusted, Borrower shall furnish to the holder of this Debenture a statement,
signed by the Chief Executive Officer and the Secretary of the Borrower, of the
facts creating such adjustment and specifying the resultant adjusted Conversion
Price then in effect which statement shall constitute an amendment to this
Debenture.
7. ONE-TIME ADJUSTMENT TO CONVERSION PRICE. (a) If the volume-weighted
average closing bid price of the Common Stock, as determined by Bloomberg, for
the 21 consecutive trading days following Borrower's public press release of its
1998 fiscal year-end financial results (such volume-weighted average closing bid
price herein referred to as the "1998 Conversion Price Adjustment Bid Price") is
a price less than the existing Conversion Price, then the Conversion Price shall
be adjusted downward to an amount equal to the greater of (i) ninety percent
(90%) of the 1998 Conversion Price Adjustment Bid Price, or (ii) five (5) times
the Company's earnings before interest, taxes, depreciation and amortization
(excluding extraordinary gains or losses) per share on a fully diluted basis
(excluding shares issued or issuable upon conversion of the Debentures),
calculated in accordance with generally accepted accounting principles, for the
1998 fiscal year. The adjustment shall only be utilized to adjust the Conversion
Price to a lesser amount than the existing Conversion Price, and no adjustment
shall be made if the Company's earnings before interest, taxes, depreciation and
amortization (excluding extraordinary gains or losses) for the fiscal year ended
July 31, 1998 exceed $17,900,000, excluding extraordinary gains or losses. If an
adjustment is required pursuant to Section 7, then the Borrower shall furnish to
the holder of this Debenture a statement, signed by the Chief Financial Officer
and the Secretary of Borrower, of the facts creating such adjustment and
specifying the resultant adjusted Conversion Price then in effect, which
statement shall constitute an amendment to the Debenture.
(b) Notwithstanding anything herein or in the Loan Agreement to the
contrary, at no time may the aggregate number of shares of Common Stock into
which the Indebtedness represented by the Debentures may be converted, together
with the number of shares of Common Stock into which any Debentures have
previously been converted (the aggregate being referred to herein as the
"Conversion Shares"), exceed 976,219 without the prior approval of the holders
of a majority of the shares of Common Stock (excluding shares, if any, held by
holders of the Debentures and their Affiliates and acquired as a result of the
conversion of any Debenture) voting on such proposal at a duly called meeting of
the shareholders of the Company at which a quorum is present in person or by
proxy (the "Shareholder Approval").
(c) If, but for paragraph (b) above, the Conversion Price would be
adjusted (the "Conversion Adjustment") as provided by paragraph (a) above such
that the number of Conversion Shares exceeds 976,219, then the Conversion Price
shall be adjusted as provided by paragraph (a) above, effective as of the
adjustment date provided for in paragraph (a) above, ONLY as to the Maximum
Convertible Amount. The "Maximum Convertible Amount" shall be the maximum
outstanding aggregate principal amount of all of the Debentures which may be
converted at the Conversion Price as adjusted by paragraph (a) above such that
the number of Conversion Shares would not exceed 976,219, as follows:
MCA = CP * (976,219 - SC)
where MCA = Maximum Convertible Amount;
CP = Conversion Price as adjusted by paragraph (a) above, without giving effect
to paragraph (b) above; and SC = the number of shares, if any, into which any of
the Debentures have been previously converted before effecting the adjustment to
the Conversion Price provided by paragraph (a) above
PROVIDED THAT the Maximum Convertible Amount shall be applied PRO RATA among the
principal amount of the Debentures outstanding at the time of the Conversion
Adjustment. The balance, if any, of the aggregate principal amount outstanding
at the time the Conversion Adjustment, after subtracting the Maximum Convertible
Amount, shall be the "Remaining Principal Amount." The conversion rights
provided for herein shall not be applicable to the Remaining Principal Amount
without the Shareholder Approval being obtained.
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Issuers Initial __________
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(d) Upon the Shareholder Approval being obtained, the Remaining
Principal Amount, if any, shall again be convertible in accordance with the
terms of this Debenture at the Conversion Price as adjusted by paragraph (a)
above. If, but only if, the Shareholder Approval is not obtained by December 31,
1998, then each holder of a Debenture shall have the right, until February 28,
1999, to require the Company, upon ten business days notice to the Company, to
redeem the amount of the Remaining Principal Amount, if any, represented by its
Debenture at the sum equal to the Remaining Principal Amount, together with
(subject to Section 17 hereof) an amount equal to a 20% compounded annual rate
of return on the Remaining Principal Amount, but not in excess of the maximum
amount permitted by applicable law.
8. RESERVATION OF SHARES: Borrower warrants and agrees that it shall at
all times reserve and keep available, free from preemptive rights, sufficient
authorized and unissued shares of Common Stock or treasury shares of Common
Stock necessary to effect conversion of this Debenture.
9. REGISTRATION RIGHTS: Shares issued upon conversion of this Debenture
shall be restricted from transfer by the holder except if and unless the shares
are duly registered for sale pursuant to the Securities Act of 1933, as amended,
or the transfer is exempt from registration. The Holder has certain rights with
respect to the registration of shares of Common Stock issued upon the conversion
of this Debenture pursuant to the terms of the Loan Agreement. Borrower agrees
that a copy of the Loan Agreement with all amendments, additions or
substitutions therefor shall be available to the Holder at the offices of
Borrower.
10. TAXES: Subject to Section 2.09 of the Loan Agreement, the Borrower
shall pay any documentary or other transactional taxes attributable to the
issuance or delivery of this Debenture or the shares of Common Stock issued upon
conversion by the Holder (excluding any federal, state or local income taxes and
any franchise taxes or taxes imposed upon the Holder by the jurisdiction, or any
political subdivision thereof, under which such Holder is organized or is
qualified to do business.)
11. DEFAULT:
(a) EVENT OF DEFAULT: An "Event of Default" shall exist if an "Event of
Default" (as defined in the Loan Agreement) shall occur and be continuing.
(b) REMEDIES UPON EVENT OF DEFAULT: If an Event of Default shall have
occurred and be continuing, then Lender may exercise any one or more of the
rights and remedies provided in the Loan Agreement, as Lender in its sole
discretion, may deem necessary or appropriate.
(c) REMEDIES NONEXCLUSIVE: Each right, power or remedy of the holder
hereof upon the occurrence of any Event of Default as provided for in this
Debenture or now or hereafter existing at law or in equity or by statute shall
be cumulative and concurrent and shall be in addition to every other right,
power or remedy provided for in this Debenture or now or hereafter existing at
law or in equity or by statute, and the exercise or beginning of the exercise by
the holder or transferee hereof of any one or more of such rights, powers or
remedies shall not preclude the simultaneous or later exercise by the holder of
any or all such other rights, powers or remedies.
(d) EXPENSES: Upon the occurrence of a Default or an Event of Default,
which occurrence is not cured within the notice provisions, if any provided
therefore, Borrower agrees to pay and shall pay all costs and expenses
(including attorneys' fees and expenses) incurred by Lender or Agent in
connection with the preservation and enforcement of Lender's
rights under the Loan Agreement, the Debenture, or any other Loan Document. 12.
FAILURE TO ACT AND WAIVER: No failure or delay by the holder hereof to require
the performance of any term or terms of this Debenture or not to exercise any
right or any remedy shall constitute a waiver of any such term or of any right
or of any default, nor shall such delay or failure preclude the holder hereof
from exercising any such right, power or remedy at any later time or times. By
accepting payment after the due date of any amount payable under this Debenture,
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Issuers Initial __________
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the holder hereof shall not be deemed to waive the right either to require
payment when due of all other amounts payable, or to later declare a default for
failure to effect such payment of any such other amount. The failure of the
holder of this Debenture to give notice of any failure or breach of the Borrower
under this Debenture shall not constitute a waiver of any right or remedy in
respect of such continuing failure or breach or any subsequent failure or
breach.
13. HOLDERS RIGHT TO REQUEST MULTIPLE DEBENTURES: The Holder shall,
upon written request and presentation of the Debenture, have the right, at any
interest payment date, to request division of this Debenture into two or more
units, each of such to be in such amounts as shall be requested; provided
however that no Debenture shall be issued in denominations of face amount less
than $10,000.00.
14. TRANSFER: Subject to Section 12.08 of the Loan Agreement, this
Debenture may be transferred on the books of the Borrower by the registered
Holder hereof, or by Holder's attorney duly authorized in writing, only upon (i)
delivery to the Borrower of a duly executed assignment of the Debenture, or part
thereof, to the proposed new Holder, along with a current notation of the amount
of payments received and net Principal Amount yet unfunded, and presentment of
such Debenture to the Borrower for issue of a replacement Debenture, or
Debentures, in the name of the new Holder, (ii) the designation by the new
Holder of the Lender's agent for notice, such agent to be the sole party to whom
Borrower shall be required to provide notice when notice to Lender is required
hereunder and who shall be the sole party authorized to represent Lender in
regard to modification or waivers under the Debenture, the Loan Agreement, or
other Loan Documents; and any action, consent or waiver, (other than a
compromise of principal and interest), when given or taken by Lender's agent for
notice, shall be deemed to be the action of the holders of a majority in amount
of the Principal Amount of the Debenture, as such holders are recorded on the
books of the Borrower, and (iii) in compliance with the legend to read as
follows:
The Securities represented by this Debenture have not been registered
under the Securities Act of 1933, as amended ("Act"), or applicable
state securities laws ("State Acts") and shall not be sold,
hypothecated, donated or otherwise transferred unless the Company shall
have received an opinion of Legal Counsel for the Company, or such
other evidence as may be satisfactory to Legal Counsel for the Company,
to the effect that any such transfer shall not require registration
under the Act and the State Acts.
The Borrower shall be entitled to treat any holder of record of the
Debenture as the Holder in fact thereof and of the Debenture and shall not be
bound to recognize any equitable or other claim to or interest in this Debenture
in the name of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by applicable law.
15. NOTICES: All notices and communications under this Debenture shall
be in writing and shall be either delivered in person or by overnight service
such as FedEx and accompanied by a signed receipt therefor; or mailed
first-class United States certified mail, return receipt requested, postage
prepaid, and addressed as follows: (i) if to the Borrower at its address for
notice as stated in the Loan Agreement; and, (ii) if to the Holder of this
Debenture, to the address (a) of such Holder as it appears on the books of the
Borrower, or (b) in the case of a partial assignment to one or more Holders, to
the Lender's agent for notice, as the case may be. Any notice of communication
shall be deemed given and received as of the date of such delivery if delivered;
or if mailed, then three days after the date of mailing.
16. MAXIMUM INTEREST RATE: (a) Regardless of any provision contained in
this Debenture, Lender shall never be entitled to receive, collect or apply as
interest on the Debenture any amount in excess of interest calculated at the
Maximum Rate, and, in the event that Lender ever receives, collects or applies
as interest any such excess, the amount which would be excessive interest shall
be deemed to be a partial prepayment of principal and treated hereunder as such;
and, if the principal amount of the Debenture is paid in full, any remaining
excess shall forthwith be paid to Borrower. In determining whether or not the
interest paid or payable under any specific contingency exceeds interest
calculated at the Maximum Rate, Borrower and Lender shall, to the maximum extent
permitted under applicable law, (i) characterize any non principal payment as an
expense, fee or premium rather than as interest; (ii) exclude voluntary
prepayments and the
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Issuers Initial __________
<PAGE>
effects thereof, and (iii) amortize, pro rate, allocate and spread, in equal
parts, the total amount of interest throughout the entire contemplated term of
the Debenture; provided that, if the Debenture is paid and performed in full
prior to the end of the full contemplated term thereof, and if the interest
received for the actual period of existence thereof exceeds interest calculated
at the Maximum Rate, Lender shall refund to Borrower the amount of such excess
or credit the amount of such excess against the principal amount of the
Debenture and, in such event, Lender shall not be subject to any penalties
provided by any laws for contracting for, charging, taking, reserving or
receiving interest in excess of interest calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate
of interest (if any) permitted by applicable law on such day that at any time,
or from time to time, may be contracted for, taken, reserved, charged or
received on the Indebtedness evidenced by the Debenture under the laws which are
presently in effect of the United States of America or by the laws of any other
jurisdiction which are or may be applicable to the holders of the Debenture and
such Indebtedness or, to the extent permitted by law, under such applicable laws
of the United States of America or by the laws of any other jurisdiction which
are or may be applicable to the holder of the Debenture and which may hereafter
be in effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
17. RIGHTS UNDER LOAN AGREEMENT: This Debenture is issued pursuant to
the Convertible Loan Agreement, dated July 3, 1997, by and among the Company,
Renaissance III, Renaissance PLC and BOCPII, as Lenders, and Agent and the
holders hereof are entitled to all the rights and benefits, and are subject to
all the obligations of Lender under said agreement, including the maximum
interest rates limitations as specified therein. Both Borrower and Lenders have
participated in the negotiation and preparation of the Loan Agreement and of
this Debenture. Borrower agrees that a copy of the Loan Agreement with all
amendments, additions and substitutions therefor shall be available to the
Holders at the offices of Borrower.
18. DEFINED TERMS: Capitalized Terms used but not defined herein shall
have the meaning given them in the Loan Agreement.
19. STANDBY AGREEMENT: This Agreement and the Debentures, and the
indebtedness and obligations evidenced thereby, are subject to (i) the
provisions of the Standby Agreement by and among Play By Play Toys & Novelties,
Inc., the Chase Manhattan Bank, agent, and Renaissance III, Renaissance PLC,
BOCPII, as Lenders, and Agent, dated as of July 3, 1997, which is incorporated
herein by reference, (ii) the terms of the form of the Standby Agreement
attached as Exhibit A to the Loan Agreement (which terms are hereby incorporated
by reference and which terms shall apply with respect to any Senior Obligations
hereafter arising without regard to any failure by a holder of a Debenture to
enter into a Standby Agreement in accordance with the terms hereof and of
Section 5.18 of the Loan Agreement), and (iii) the terms of any other Standby
Agreement hereinafter executed by the holders of Debentures pursuant hereto and
pursuant to Section 5.18 of the Loan Agreement. Each holder of a Debenture
hereby agrees, upon the request of Borrower, to enter into a Standby Agreement
in the form of Exhibit A to the Loan Agreement with any holder of Senior
Obligations.
20. GOVERNING LAW: This Debenture is payable in the State of Ohio, and
the principal executive offices of the Holder are located in the State of Ohio.
The laws of the State of Ohio (other than its conflict-of-laws principles) and
the laws of the United States of America shall govern the validity or
enforceability and the interpretation or construction of all of the provisions
of this Debenture and all issues thereunder, including, without limitation, the
maximum lawful rate, and any questions or issues with respect to whether
interest, fees, and other consideration charged, contracted for or received by
the Holder under this Debenture or any other Loan Documents exceed the maximum
lawful rate.
21. SUBMISSION TO JURISDICTION: WAIVER OF SERVICE AND VENUE: Borrower
agrees to the jurisdiction of any state court sitting in the County of Franklin,
State of Ohio, and to the jurisdiction of any federal court sitting in the
Southern District, Eastern Division of Ohio, and waives any objection based on
venue or FORUM NON CONVENIENS with respect to any action instituted therein, and
agrees that any dispute concerning this Debenture shall be heard only in the
courts described above.
Page 8
Issuers Initial __________
<PAGE>
IN WITNESS WHEREOF, the undersigned Borrower has caused this Debenture
to be duly issued, executed and delivered on the date and year above stated.
BORROWER
PLAY BY PLAY TOYS & NOVELTIES, INC.
By:___________________________________
Page 9
Issuers Initial __________
EXHIBIT 10.9
CONVERTIBLE LOAN AGREEMENT
BY AND AMONG
PLAY BY PLAY TOYS & NOVELTIES, INC.
AS BORROWER
AND
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.,
RENAISSANCE US GROWTH & INCOME TRUST PLC
AND
BANC ONE CAPITAL PARTNERS II, LTD.
AS LENDERS
AND
RENAISSANCE CAPITAL GROUP, INC.,
AS AGENT FOR CERTAIN LENDERS
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ARTICLE I - DEFINITION OF TERMS...................................................................................1
<S> <C> <C>
Section 1.01. Definitions................................................................................1
Section 1.02. Other Definition Provisions................................................................9
ARTICLE II - LOAN PROVISIONS......................................................................................9
Section 2.01. The Loan...................................................................................9
Section 2.02. Use of Proceeds...........................................................................10
Section 2.03. Interest Rate and Interest Payments.......................................................10
Section 2.04. Maturity..................................................................................10
Section 2.05. Mandatory Principal Installments..........................................................10
Section 2.06. Redemption................................................................................11
Section 2.07. Fees and Expenses.........................................................................11
Section 2.08. Placement Fees............................................................................11
Section 2.09. Taxes.....................................................................................11
Section 2.10 Conversion Rights..........................................................................12
ARTICLE III - CONDITIONS PRECEDENT...............................................................................12
Section 3.01. Document Requirements.....................................................................12
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BORROWER..........................................................14
Section 4.01. Organization and Good Standing............................................................14
Section 4.02. Authorization and Power...................................................................14
Section 4.03. No Conflicts or Consents..................................................................14
Section 4.04. Enforceable Obligations...................................................................15
Section 4.05. No Liens..................................................................................15
Section 4.06. Financial Condition.......................................................................15
Section 4.07. No Default................................................................................15
Section 4.08. Material Agreements.......................................................................15
Section 4.09. No Litigation.............................................................................16
Section 4.10. Taxes.....................................................................................16
Section 4.11. Capitalization............................................................................16
Section 4.12. Use of Proceeds...........................................................................16
Section 4.13. Employee Benefit and Incentive Plans; ERISA...............................................17
Section 4.14. Compliance with Law.......................................................................17
Section 4.15. Compliance with Environmental Requirements................................................17
Section 4.16. Shares Issuable Upon Conversion...........................................................17
Section 4.17. Insider...................................................................................17
Section 4.18. Subsidiaries..............................................................................18
Section 4.19. Casualties................................................................................18
Section 4.20. Investment Company Act....................................................................18
Section 4.21. Sufficiency of Capital....................................................................18
Section 4.22. Corporate Names...........................................................................18
Section 4.23. Insurance.................................................................................19
Section 4.24. Licenses, Trademarks, Service Marks and Copyrights.......................................19
Section 4.25. Survival of Representations and Warranties................................................19
Section 4.26. Full Disclosure...........................................................................19
ii
<PAGE>
ARTICLE V - AFFIRMATIVE COVENANTS OF BORROWER....................................................................20
Section 5.01. Financial Statements, Reports and Documents...............................................20
Section 5.02. Preparation of Budget.....................................................................21
Section 5.03. Payment of Taxes and Other Indebtedness...................................................21
Section 5.04. Maintenance of Existence and Rights; Conduct of Business..................................21
Section 5.05. SEC Filings...............................................................................22
Section 5.06. Notice....................................................................................22
Section 5.07. Compliance with Loan Documents............................................................22
Section 5.08. Compliance with Material Agreements.......................................................22
Section 5.09. Operations and Properties.................................................................22
Section 5.10. Books and Records; Access.................................................................22
Section 5.11. Compliance with Law.......................................................................23
Section 5.12. Insurance.................................................................................23
Section 5.13. Authorizations and Approvals..............................................................23
Section 5.14. ERISA Compliance..........................................................................23
Section 5.15. Further Assurances........................................................................23
Section 5.16. Indemnity by Borrower.....................................................................24
Section 5.17. Reservation of Shares.....................................................................25
Section 5.18. Standby Agreement........................................................................25
Section 5.19. Shareholders' Meeting or Consent.........................................................25
ARTICLE VI - NEGATIVE COVENANTS OF BORROWER......................................................................25
Section 6.01. Limitation on Indebtedness................................................................26
Section 6.02. Limitation on Liens.......................................................................26
Section 6.03. Limitation on Investments.................................................................26
Section 6.04. Alteration of Material Agreements.........................................................26
Section 6.05. Certain Transactions......................................................................26
Section 6.06. Limitations on Acquisition of Nonrelated Business.........................................27
Section 6.07. Limitation on Sale of Properties..........................................................27
Section 6.08. Fiscal Year and Accounting Method.........................................................27
Section 6.09. Liquidation...............................................................................27
Section 6.10. No Amendments to Articles of Incorporation or Bylaws......................................27
Section 6.11. Executive Compensation....................................................................27
Section 6.12. Restricted Payments.......................................................................28
Section 6.13. Consolidation or Merger..................................................................28
Section 6.14. Ownership of Subsidiaries................................................................28
ARTICLE VII - COVENANTS OF MAINTENANCE OF FINANCIAL STANDARDS....................................................28
Section 7.01. Financial Ratios..........................................................................28
ARTICLE VIII - EVENTS OF DEFAULT.................................................................................29
Section 8.01. Events of Default.........................................................................29
Section 8.02. Remedies Upon Event of Default............................................................30
Section 8.03. Performance by the Lenders................................................................30
Section 8.04. Payment of Expenses Incurred by the Lenders...............................................31
iii
<PAGE>
ARTICLE IX - REGISTRATION RIGHTS.................................................................................31
Section 9.01. Demand Registration......................................................................31
Section 9.02. "Piggy-Back" Registration................................................................32
Section 9.03. Obligations of the Borrower..............................................................33
Section 9.04. Furnish Information......................................................................34
Section 9.05. Expenses of Registration.................................................................35
Section 9.06. Indemnification Regarding Registration Rights............................................35
Section 9.07. Reports Under the 1934 Act...............................................................37
Section 9.08. Assignment of Registration Rights........................................................38
Section 9.09. Other Matters............................................................................38
Section 9.10. Termination of Rights....................................................................39
ARTICLE X - INFORMATION; MEETINGS WITH MANAGEMENT................................................................39
Section 10.01. Information.............................................................................39
Section 10.02. Meetings with Management.................................................................39
Section 10.03. Nonliability of the Lenders..............................................................39
ARTICLE XI - AGENCY AND INTER-LENDER PROVISIONS..................................................................39
Section 11.01. The Lenders' Representations and Warranties to Other Lenders.............................39
Section 11.02. Waiver of Loan Provisions or Interest or Principal Payments..............................40
Section 11.03. Agency..................................................................................40
ARTICLE XII - MISCELLANEOUS......................................................................................42
Section 12.01. Strict Compliance........................................................................42
Section 12.02. Waivers and Modifications................................................................42
Section 12.03. Limitation on Liability..................................................................42
Section 12.04. Choice of Forum; Consent to Service of Process and Jurisdiction..........................42
Section 12.05. Arbitration..............................................................................43
Section 12.06. Invalid Provisions.......................................................................44
Section 12.07. Maximum Interest Rate....................................................................45
Section 12.08. Participations and Assignments of the Debentures.........................................45
Section 12.09. Confidentiality..........................................................................46
Section 12.10. Binding Effect...........................................................................46
Section 12.11. No Third Party Beneficiary...............................................................46
Section 12.12. Entirety.................................................................................47
Section 12.13. Headings.................................................................................47
Section 12.14. Survival.................................................................................47
Section 12.15. Multiple Counterparts....................................................................47
Section 12.16. Notices..................................................................................47
Section 12.17. Governing Law............................................................................49
</TABLE>
iv
<PAGE>
AGREEMENT
THIS AGREEMENT, dated as of JULY 3, 1997, by and among PLAY BY PLAY
TOYS & NOVELTIES, INC., a Texas corporation, as borrower (the "BORROWER"),
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC., a Texas corporation,
RENAISSANCE US GROWTH & INCOME TRUST PLC, a public limited company registered in
England and Wales, and BANC ONE CAPITAL PARTNERS II, LTD., an Ohio limited
liability company (individually referred to as Renaissance III, Renaissance PLC,
and BOCPII, respectively, and together with any permitted assignees or
successors in interest individually referred to as each or any "LENDER" and
collectively referred to as the "LENDERS"), and RENAISSANCE CAPITAL GROUP, INC.,
a Texas corporation, as agent (the "AGENT") for Renaissance Capital Growth &
Income Fund III and Renaissance US Growth & Income Trust PLC).
WITNESSETH:
WHEREAS, Borrower seeks to obtain FIFTEEN MILLION DOLLARS ($15,000,000)
from the Lenders through the issuance of Debentures to be used for the payment
debt and for working capital and general corporate purposes in accordance with
Section 2.02 hereof; and
WHEREAS, Borrower has requested that the Lenders provide such loan as
herein provided, and that the Lenders are willing to furnish such to Borrower
upon the terms and subject to the conditions and for the considerations
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises herein
contained and for other valuable consideration, receipt and sufficiency of which
is acknowledged, the parties hereto agree as follows:
ARTICLE I - DEFINITION OF TERMS
SECTION 1.01. DEFINITIONS.
(a) For the purposes of this Agreement, the following terms shall have
the respective meanings assigned to them in this Article I or in the section or
recital referred to below:
"ACQUISITION INDEBTEDNESS" shall mean Indebtedness or preferred stock
of a Subsidiary incurred in connection with, or to provide all or any portion of
the funds or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Subsidiary became a Subsidiary or
was acquired by the Borrower.
"AFFILIATE" with respect to any Person shall mean a person that
directly or indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with, such Person.
"BOCPII" shall mean Banc One Capital Partners II, Ltd., an Ohio limited
liability company.
"CAPITAL EXPENDITURE" shall mean an expenditure for assets that is
properly classifiable as a capital expenditure in accordance with generally
accepted accounting principles.
1
<PAGE>
AGREEMENT (CONTINUED)
"CAPITAL LEASE" shall mean any lease of property, real or personal,
which would be properly classifiable as a capital lease in accordance with
generally accepted accounting principles.
"COMMON STOCK" shall mean Borrower's common stock, no par value.
"CONSOLIDATED CURRENT ASSETS" shall mean, for any Person as of any
date, the assets of such Person and its Consolidated Subsidiaries which would be
reflected as current assets on a consolidated balance sheet for such Person and
its Subsidiaries prepared as of such date in accordance with GAAP.
"CONSOLIDATED CURRENT LIABILITIES" shall mean, for any Person as of any
date, the liabilities of such Person and its Consolidated Subsidiaries which
would be reflected as current liabilities on a consolidated balance sheet for
such Person and its Subsidiaries prepared as of such date in accordance with
GAAP. For purposes of calculating compliance with any covenant contained in this
Agreement or any other Loan Document, the principal amount of Consolidated
Current Liabilities shall include any balance under any revolving credit
facility of the Borrower, regardless of whether such revolving credit facility
would be reflected as a current liability in accordance with GAAP.
"CONSOLIDATED NET INCOME" shall mean, for any Person for any period,
consolidated net income of such Person and its Consolidated Subsidiaries for
such period which would be reflected in accordance with GAAP, but excluding (a)
any gain or loss arising from the sale of capital assets, (b) any gain or loss
arising from any write-up or write-down of assets, (c) income or loss of any
other Person, substantially all of the assets of which have been acquired by
such Person in any manner, to the extent that such earnings or losses were
realized by such other Person prior to the date of such acquisition, (d) income
or loss of any Person in which the Person has any ownership interest (other than
Consolidated Subsidiaries of such Person), unless such earnings have actually
been received or paid by the Person or its Consolidated Subsidiaries in the form
of cash distributions or additional cash calls, (e) income or loss of any other
Person to which assets of the Person or its Consolidated Subsidiaries shall have
been sold, transferred or disposed of, or into which the Person shall have
merged, to the extent that such earnings or losses of any other Person arise
prior to the date of such transaction, (f) any gain or loss arising from the
acquisition of any securities of the Person or any of its Consolidated
Subsidiaries, and (g) any extraordinary gain or loss realized by such Person or
any of its Consolidated Subsidiaries during such period.
"CONSOLIDATED SUBSIDIARIES" shall mean those entities whose assets,
liabilities and operations are consolidated with those of the Borrower for
purposes of Borrower's consolidated financial statements.
"CONSOLIDATED TRAILING TWELVE MONTHS EBITDA" shall mean for any Person,
for the immediately preceding twelve-month period ended on such date,
Consolidated Net Income of such Person for such twelve-month period, plus (a)
all income tax expense of such Person and its Consolidated Subsidiaries for such
twelve-month period, (b) all interest expense of such Person and its
Consolidated Subsidiaries for such twelve-month period, (c) all depreciation
expense of such Person and its Consolidated Subsidiaries for such twelve-month
period, and (d) all amortization expense of such Person and its Consolidated
Subsidiaries for such twelve-month period.
2
<PAGE>
AGREEMENT (CONTINUED)
"CONSOLIDATED TRAILING TWELVE MONTHS FREE CASH FLOW" shall mean for any
Person, for the immediately preceding twelve-month period ended on such date,
Consolidated Net Income of such Person for such twelve-month period, plus (a)
all deferred income tax expense of such Person and its Consolidated Subsidiaries
for such twelve-month period, (b) all depreciation expense of such Person and
its Consolidated Subsidiaries for such twelve-month period, and (c) all
amortization expense of such Person and its Consolidated Subsidiaries for such
twelve-month period, less Capital Expenditures of such Person and its
Consolidated Subsidiaries for such twelve-month period.
"CONVERSION " or "CONVERSION RIGHTS" shall mean exchange of, or the
rights to exchange, the Principal Amount of the Loan, or any part thereof, for
fully paid and nonassessable Common Stock on the terms and conditions provided
in the Debenture.
"CURRENT LIABILITIES" shall mean all liabilities classified in
accordance with GAAP as current liabilities, but specifically including all
amounts outstanding under the Borrower's revolving credit loans.
"CURRENT RATIO" shall mean, for any Person as of any date, the ratio of
such Person's Consolidated Current Assets to Consolidated Current Liabilities as
of such date.
"DEBENTURES" shall mean the Debentures executed by Borrower and
delivered pursuant to the terms of this Agreement, together with any renewals,
extensions or modifications thereof.
"DEBTOR LAWS" shall mean all applicable liquidation, conservatorship,
bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization or
similar laws from time to time in effect affecting the rights of creditors or
debtors generally.
"DEFAULT" or "EVENT OF DEFAULT" shall mean any of the events specified
in Article VIII.
"DIVIDENDS," in respect of any corporation, shall mean (i) cash
distributions or any other distributions on, or in respect of, any class of
capital stock of such corporation, except for distributions made solely in
shares of stock of the same class, and (ii) any and all funds, cash and other
payments made in respect of the redemption, repurchase or acquisition of such
stock, unless such stock shall be redeemed or acquired through the exchange of
such stock with stock of the same class.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, together with all rules and regulations issued pursuant thereto.
"FIXED CHARGE COVERAGE RATIO" shall mean for the Borrower for the
immediately preceding twelve-month period ended on such date, the ratio of (a)
Consolidated Trailing Twelve Months Free Cash Flow, to (b) the Borrower's total
scheduled payments of principal on Indebtedness for the same twelve-month
period, excluding Indebtedness under the Borrower's revolving credit loans and
mandatory redemption payments as set forth herein.
3
<PAGE>
AGREEMENT (CONTINUED)
"GAAP" shall mean United States generally accepted accounting
principles applied on a consistent basis, set forth in the Opinions of the
Accounting Principles Board of the American Institute of Certified Public
Accountants or the Financial Accounting Standards Board or their successors,
which are applicable in the circumstances as of the date in question. The
requirement that such principles be applied on a consistent basis shall mean
that the accounting principles observed in a current period are comparable in
all material respects to those applied in a preceding period.
"GOVERNMENTAL AUTHORITY" shall mean any government (or any political
subdivision or jurisdiction thereof), court, bureau, agency or other
governmental authority having jurisdiction over Borrower or a Subsidiary or any
of its or their businesses, operations or properties.
"GUARANTY" of any Person shall mean any contract, agreement or
understanding of such Person pursuant to which such Person in effect guarantees
the payment of any Indebtedness of any other Person (the "Primary Obligor") in
any manner, whether directly or indirectly, including without limitation
agreements: (i) to purchase such Indebtedness or any property constituting
security therefor; (ii) to advance or supply funds primarily for the purpose of
assuring the holder of such Indebtedness of the ability of the Primary Obligor
to make payment; or (iii) otherwise to assure the holder of the Indebtedness of
the Primary Obligor against loss in respect thereof, except that "Guaranty"
shall not include the endorsement by Borrower or a Subsidiary in the ordinary
course of business of negotiable instruments or documents for deposit or
collection.
"HOLDER" shall mean the owner of Registrable Securities.
"INDEBTEDNESS" shall mean, with respect to any Person, without
duplication, the following indebtedness, obligations and liabilities of such
Person: (i) indebtedness for borrowed money; (ii) all obligations of such Person
in respect of any Guaranty; (iii) all obligations of such Person in respect of
any Capital Lease, (iv) all obligations, indebtedness and liabilities secured by
any lien or any security interest on any property or assets of such Person, but
only to the extent so secured; and (v) all preferred stock of such Person which
is subject, at the time of calculation of Indebtedness, to a mandatory
redemption requirement, valued at the greater of its involuntary redemption
price or liquidation preference plus accrued and unpaid dividends.
"INVESTMENT" in any Person shall mean any investment, whether by means
of share purchase, loan, advance, capital contribution or otherwise, in or to
such Person, the Guaranty of any Indebtedness of such Person, or the
subordination of any claim against such Person to other Indebtedness of such
Person; provided however, that "Investment" shall not include (i) any demand
deposits in a duly chartered state or national bank or other cash equivalent
investments (ii) any loans permitted by Section 6.12, or (iii) any acquisitions
of equity in any other Person.
"IRS CODE" shall mean the Internal Revenue Code of 1986, as amended,
together with all rules and regulations issued thereunder.
4
<PAGE>
AGREEMENT (CONTINUED)
"LIEN" shall mean any lien, mortgage, security interest, tax lien,
pledge, encumbrance, conditional sale or title retention arrangement, or any
other interest in property designed to secure the repayment of Indebtedness,
whether arising by agreement or under any statute or law, or otherwise.
"LOAN" shall mean the money lent to Borrower pursuant to this
Agreement, along with any accrued, unpaid interest thereon.
"LOAN CLOSING" or "LOAN CLOSING DATE" shall mean the initial
disbursement of Loan funds, which shall occur on a date 30 days from the date
hereof or such earlier date on which Borrower requests, and the Lenders approve,
as the date at which the initial advance of the Loan funds shall be consummated,
provided that such date may be mutually extended beyond 30 days, but only by
written agreement of the parties hereto.
"LOAN DOCUMENTS" shall mean this Agreement, the Debentures and any
other agreements or documents required to be executed or delivered by Borrower
pursuant to the terms of this Agreement (and any amendments or supplements
hereto or modifications hereof).
"MATERIAL ADVERSE EFFECT" or "Material Adverse Change" shall mean any
change, factor or event that shall (i) have a material adverse effect upon the
validity or enforceability of any Loan Documents, (ii) have a material adverse
effect upon the financial condition, results of operations, business,
properties, operations or assets of Borrower or its Subsidiaries taken as a
whole, or, (iii) have a material adverse effect upon the ability of the Borrower
to fulfill its obligations under the Loan Documents, or (iv) any event that
causes an Event of Default or which, with notice or lapse of time or both, could
become an Event of Default.
"MATERIAL INDEBTEDNESS" shall mean any debt incurred by Borrower that
shall (i) have a Material Adverse Effect upon the ability of Borrower to fulfill
its obligations under the Loan Documents, or (ii) have a Material Adverse Effect
upon the financial conditions or business operations of Borrower and its
Subsidiaries taken as a whole, or (iii) cause an Event of Default or which, with
notice or lapse of time or both, could become an Event of Default.
"OBLIGATION" shall mean: (i) all present and future indebtedness,
obligations and liabilities of Borrower to the Lenders arising pursuant to this
Agreement, regardless of whether such indebtedness, obligations and liabilities
are direct, indirect, fixed, contingent, joint, several, or joint and several;
(ii) all present and future indebtedness, obligations and liabilities of
Borrower to the Lenders arising pursuant to or represented by the Debentures and
all interest accruing thereon, and reasonable attorneys' fees incurred in the
enforcement or collection thereof; (iii) all present and future indebtedness,
obligations and liabilities of Borrower and any Subsidiary evidenced by or
arising pursuant to any of the Loan Documents; (iv) all costs incurred by the
Lenders or Agent, including but not limited to reasonable attorneys' fees and
legal expenses related to this transaction and (v) all renewals, extensions and
modifications of the indebtedness referred to in the foregoing clauses, or any
part thereof.
"PERMITTED INDEBTEDNESS" shall mean Indebtedness outstanding as of the
date hereof or incurred in compliance with Section 6.01 and the other terms of
this Agreement that constitutes (i) Senior Obligations, (ii) obligations under
capital leases, (iii) letters of credit, (iv) subordinated notes payable to the
principal
5
<PAGE>
AGREEMENT (CONTINUED)
shareholder of the Borrower and to be paid pursuant to Section 2.02 and to
former shareholders of Ace Novelty Co., (v) Current Liabilities, (vi) debt
associated with Permitted Liens, (vii) any other Subordinated Debt, (viii)
Acquisition Indebtedness, (ix) purchase money Indebtedness, (x) Indebtedness of
foreign Subsidiaries, (xi) intercompany Indebtedness, (xii) Indebtedness under
this Agreement or the Debentures, and (xii) any refunding, refinancing or
extension of any of the above.
"PERMITTED LIENS" shall mean: (i) Liens (if any) granted for the
benefit of the Lenders; (ii) Liens to secure the Permitted Indebtedness; (iii)
pledges or deposits made to secure payment of worker's compensation insurance
(or to participate in any fund in connection with worker's compensation
insurance), unemployment insurance, pensions or social security programs; (iv)
Liens imposed by mandatory provisions of law such as for carriers', landlord's,
materialmen's, mechanics', warehousemen's, vendors' and other like Liens arising
in the ordinary course of business, securing Indebtedness whose payment is made
within 30 days of the date such Lien arises, or that are being contested in good
faith by appropriate proceedings as to which adequate reserves have been
established to the extent required by GAAP; (v) Liens for taxes, assessments and
governmental charges or levies imposed upon a Person or upon such Person's
income or profits or property, if the same are not yet due and payable or if the
same are being contested in good faith and as to which adequate cash reserves
have been provided or if an extension is obtained with respect thereto; (vi)
Liens arising from good faith deposits in connection with tenders, leases, bids
or contracts (other than contracts involving the borrowing of money), pledges or
deposits to secure public or statutory obligations and deposits to secure (or in
lieu of) surety, stay, appeal or customs bonds and deposits to secure the
payment of taxes, assessments, customs duties or other similar charges; (vii)
encumbrances consisting of zoning restrictions, easements, reservations,
licenses, covenants and other minor irregularities of title or other
restrictions on the use of real property (whether owned or leased) provided that
such items do not materially impair the intended use of such property, and none
of which is violated by Borrower's existing structures or land use; (viii)
mortgages, financing statements, equipment leases or other encumbrances incurred
in connection with the acquisition of property or equipment or the replacement
of existing property or equipment, provided that such liens shall be limited to
the property or equipment then being acquired; and (ix) Liens listed in Schedule
4.05.
"PERSON" shall include an individual, a corporation, a joint venture, a
general or limited partnership, a trust, an unincorporated organization or a
government or any agency or political subdivision thereof.
"PLAN" shall mean an employee benefit plan or other plan maintained by
Borrower for employees of Borrower and/or any Subsidiaries and covered by Title
IV of ERISA, or subject to the minimum funding standards under Section 412 of
the Internal Revenue Code of 1986, as amended.
"PRINCIPAL AMOUNT" shall mean, as of any time, the then aggregate
outstanding face amount of the Debentures after any conversions or redemptions
and after giving effect to any installment payments received by the Lenders.
"REGISTRABLE SECURITIES" shall mean (i) the Common Stock issuable upon
Conversion of the Debentures, and (ii) any Common Stock issued upon Conversion
of the Debentures or exercise of any warrant, right or other security that is
issued with respect to the Common Stock referred to in clause (i) and (ii) above
by way of (a) stock dividend; (b) any other distribution with respect to or in
exchange for, or in replacement
6
<PAGE>
AGREEMENT (CONTINUED)
of Common Stock; (c) stock split; or (d) in connection with a combination of
shares, recapitalization, merger, or consolidation excluding in all cases,
however, any Common Stock that is not a Restricted Security and any Registrable
Securities sold or transferred by a Person in a transaction in which the rights
under this Agreement are not assigned.
"REGISTRABLE SECURITIES THEN OUTSTANDING" shall mean an amount equal to
the number of Registrable Securities outstanding which have been issued pursuant
to the Conversion of the Debentures.
"RENAISSANCE III" shall mean Renaissance Capital Growth & Income Fund
III, Inc., a Texas corporation.
"RENAISSANCE PLC" shall mean Renaissance US Growth & Income Trust PLC,
a public limited company registered in England and Wales.
"RENAISSANCE GROUP" shall mean Renaissance Capital Group, Inc., a Texas
corporation.
"REQUIRED LENDERS" shall mean at any time a determination thereof is
required, the Lenders holding, in the aggregate, 75% of the outstanding
principal amount of the Loan at such time.
"RESTRICTED SECURITY" shall mean a security that has not been (i)
registered under the 1933 Act or (ii) distributed to the public pursuant to Rule
144 (or any similar provisions that are in force) under the 1933 Act.
"SEC" shall mean the Securities and Exchange Commission.
"1933 ACT" shall refer to the Securities Act of 1933, as amended.
"1934 ACT" shall refer to the Securities Exchange Act of 1934, as
amended.
"1940 ACT" shall refer to the Investment Company Act of 1940, as
amended.
"SENIOR DOCUMENTS" means that certain Credit Agreement dated as of June
20, 1996 (the "Credit Agreement"), by and among Borrower, Ace Novelty
Acquisition Co, Inc., a Texas corporation, Newco Novelty, Inc., a Texas
corporation, Chemical Bank, a New York Banking Corporation ("Chemical"), Heller
Financial, Inc., a Delaware corporation, and Texas Commerce Bank National
Association, together with the loan documents and related security agreement
evidencing the loans under the Credit Agreement loans thereto, together with all
other documents, instruments, agreements executed in connection therewith, as
each may now or hereafter be amended, modified, supplemented, renewed or
extended from time to time.
"SENIOR LENDERS" means the "Lenders" (as defined in the Credit
Agreement) from time to time and their successors and assigns.
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AGREEMENT (CONTINUED)
"SENIOR OBLIGATIONS" means one or more senior debt facilities
(including loans and other extensions of credit under the Senior Documents) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, capital expenditure loans, receivables
financings (including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time
in compliance with Section 6.01 and the other terms of this Agreement.
"SOLVENT" shall mean, with respect to any Person on a particular date,
that on such date: (i) the fair value of the assets of such Person is greater
than the total amount of liabilities, of such Person; (ii) the estimated present
fair salable value, in the ordinary course of business, of the assets of such
Person is not less than the amount that will be required to pay the probable
liability of such Person on its debts as they become absolute and matured; (iii)
such Person is able to realize upon its assets and pay its debts and other
liabilities, contingent obligations and other commitments as they mature in the
normal course of business; (iv) such Person does not intend to, and does not
believe that it will, incur debts or liabilities beyond such Person's ability to
pay as such debts and liabilities mature; and (v) such Person is not engaged in
business or a transaction, and is not about to engage in business or a
transaction, for which such Person's assets would constitute unreasonably small
capital after giving due consideration to the prevailing practice in the
industry in which such Person is engaged. In computing the amount of contingent
liabilities at any time, it is intended that such liabilities will be computed
at the amount which, in light of all the facts and circumstances existing at
such time, represents the amount that can reasonably be expected to become an
actual or matured liability.
"SUBORDINATED DEBT" shall mean any indebtedness of the Borrower or any
Subsidiaries, now existing or hereafter incurred in compliance with Section 6.01
and the other terms of this Agreement, which indebtedness is, by its terms,
junior in right of repayment to the payment of the Debentures.
"SUBSIDIARY" or "SUBSIDIARIES" shall mean any or all corporations or
entities whether now existing or hereafter acquired of which over 50% the Voting
Shares or equity interests are owned, directly or indirectly, by Borrower.
"TOTAL CAPITALIZATION" shall mean for any Person, total Indebtedness
plus shareholders' equity as defined in accordance with GAAP.
"VOTING AGREEMENT" shall mean the Voting Agreements to be executed by
the principal shareholders and executive officers of the Borrower, in the form
of Exhibit B.
"VOTING SHARES" of any corporation shall mean shares of any class or
classes (however designated) having ordinary voting power for the election of at
least a majority of the members of the Board of Directors (or other governing
bodies) of such corporation, other than shares having such power only by reason
of the happening of a contingency.
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AGREEMENT (CONTINUED)
SECTION 1.02. OTHER DEFINITION PROVISIONS.
(a) All terms defined in this Agreement shall have the above-defined
meanings when used in the Debentures or any other Loan Documents, certificate,
report or other document made or delivered pursuant to this Agreement, unless
the context therein shall otherwise require.
(b) Defined terms used herein in the singular shall import the plural
and vice versa.
(c) The words "hereof," "herein," "hereunder" and similar terms when
used in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement.
(d) References to financial statements and reports shall be deemed to
be a reference to such statements and reports prepared in accordance with GAAP.
(e) Accounting terms not specifically defined above in this Agreement
shall be construed in accordance with GAAP.
ARTICLE II - LOAN PROVISIONS
SECTION 2.01. THE LOAN.
(a) Subject to the terms and conditions of this Agreement, and the
compliance with such terms and conditions by all parties, each Lender agrees to
lend to Borrower, and Borrower agrees to borrow from the Lenders, the aggregate
sum of FIFTEEN MILLION DOLLARS ($15,000,000) as follows:
RENAISSANCE CAPITAL GROWTH & INCOME III, INC $ 2,500,000
RENAISSANCE US GROWTH & INCOME TRUST PLC .... 2,500,000
BANC ONE CAPITAL PARTNERS II, LTD ........... 10,000,000
(b) The Loan shall be disbursed at Loan Closing, subject to the
conditions provided hereunder, and shall be evidenced by Borrower's Debentures,
dated July 3, 1997, in the Principal Amounts specified above. The Principal
Amount shall be payable as provided for in the Debentures. The Debentures shall
rank PARI PASSU with all Indebtedness of the Borrower, other than the Senior
Obligations and the Subordinated Debt.
(c) Unless otherwise mutually agreed, the Loan Closing shall be at the
offices of Renaissance Capital Group, Inc., 8080 North Central Expressway, Suite
210, Dallas, Texas.
(d) If, within 30 days of the date of this Agreement (i) Borrower has
failed to comply with the conditions precedent to the Loan Closing as specified
in Article III hereof (unless compliance with such conditions in whole or in
part has been waived or modified by the Lenders in their sole discretion) or
(ii) the
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AGREEMENT (CONTINUED)
Loan Closing has not occurred (unless the date of such Loan Closing has been
mutually extended) then, in either such case, the obligations of the Lenders
under this Agreement shall terminate, provided however that Borrower shall be
obligated for payment of the fees and expenses provided in Section 2.07 due and
payable as of such date of termination.
SECTION 2.02. USE OF PROCEEDS.
(a) Borrower intends to use the Loan proceeds for the payment of
approximately $3 million of subordinated debt to the principal shareholder of
the Company and for working capital and general corporate purposes.
(b) Borrower hereby acknowledges that the proceeds from the Loan shall
be of benefit to Borrower for the growth of its business by providing capital
which will provide additional opportunities for Borrower.
SECTION 2.03. INTEREST RATE AND INTEREST PAYMENTS.
Interest on the Principal Amount outstanding from time to time shall
accrue at the rate of 8.00% per annum, with the first installment of accrued,
unpaid interest being due and payable on JULY 31, 1997 and subsequent payments
of accrued, unpaid interest being due and payable on the last day of each month
thereafter. Subject to Section 12.07, overdue principal and interest on the
Debentures shall bear interest at the rate of 15% per annum. Interest on the
Principal Amount of each Debenture shall be calculated, from time to time, on
the basis of the actual days elapsed in a year consisting of 365 days.
SECTION 2.04. MATURITY.
If not sooner redeemed or converted, the Debentures shall mature on
JUNE 30, 2004, at which time all the remaining unpaid principal, interest and
any other charges then due under this Agreement shall be due and payable in
full. Upon the request of each holder, the Debentures shall be prepaid (without
premium or penalty) on a PRO RATA basis together with any prepayments of
Indebtedness (other than Senior Obligations) which is PARI PASSU with or
subordinated to the Debentures (except for payments of subordinated debt to the
principal shareholder of Borrower in accordance with Section 2.02 hereof and the
former stockholders of Ace Novelty Co., Inc.) but only if on the date of such
prepayments the Borrower is not in compliance with Section 7.01.
SECTION 2.05. MANDATORY PRINCIPAL INSTALLMENTS.
Mandatory principal redemption installments on each Debenture shall be
as provided for in the Debentures.
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AGREEMENT (CONTINUED)
SECTION 2.06. REDEMPTION.
The Debentures shall be subject to redemption as provided in the
Debentures.
SECTION 2.07. FEES AND EXPENSES.
Subject to Section 12.07 hereof:
(a) Subject in all events to Section 12.07, Borrower agrees to pay to
the Agent at Loan Closing a Loan commitment fee of 0.50% of the amount of the
Loan from Renaissance III and Renaissance PLC.
(b) Subject in all events to Section 12.07, Borrower agrees to pay to
Agent at Loan Closing a Loan closing fee of 0.50% of the amount of the Loan from
Renaissance III and Renaissance PLC. Borrower agrees to pay to Banc One Capital
Corporation at Loan Closing a Loan Closing fee of $125,000.
(c) Subject in all events to Section 12.07, Borrower agrees to pay to
Agent at Loan Closing a due diligence fee of 0.50% of the amount of the Loan
from Renaissance III and Renaissance PLC, less $25,000, which shall have been
previously paid.
(d) Subject in all events to Section 12.07, Borrower agrees to pay on
behalf of Renaissance III and Renaissance PLC to legal counsel 0.50% of the
amount of the Loan from Renaissance III and Renaissance PLC to cover their legal
fees and expenses, and to pay on behalf of BOCPII its fees and expenses to legal
counsel, in connection with the negotiation, preparation, execution and delivery
of this Agreement, the Debentures, the other Loan Documents, and in connection
with the Loan Closing.
SECTION 2.08. PLACEMENT FEES.
The Borrower shall be responsible for payment of the placement fees and
expenses of Rauscher Pierce Refsnes, Inc. and all other commissions, brokerage
or finder's fees incurred by Borrower in connection with this Agreement.
SECTION 2.09. TAXES.
(a) Each Debenture shall be convertible into shares of Common Stock and
on such terms as are stated in the Debentures. Such conversion shall be made
without deduction for any present or future taxes, duties, charges or
withholdings, (excluding, in the case of the Lenders, any foreign taxes, any
federal, state or local income taxes and any franchise taxes or taxes imposed
upon them by the jurisdiction, or any political subdivision thereof, under which
the Lenders are organized or are qualified to do business), and all liabilities
with respect thereto (herein "Taxes") shall be paid by Borrower. If Borrower
shall be required by law to deduct any Taxes for which Borrower is responsible
under the preceding sentence from any sum payable hereunder to the Lenders: (i)
the sum payable shall be increased so that after making all required deductions,
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AGREEMENT (CONTINUED)
the Lenders shall receive an amount equal to the sum it would have received had
no such deductions been made; (ii) Borrower shall make such deductions; and
(iii) Borrower shall pay the full amount deducted to the relevant taxing
authority or other authority in accordance with applicable law. Borrower shall
be entitled to any refunds or returns from any such taxing authority.
(b) Except as otherwise set forth in this Agreement or the other Loan
Documents, Borrower shall pay any present or future stamp or documentary taxes
or any other excise or property taxes, charges or similar levies which arise
from any payment made hereunder or under the Loan Documents or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement or the other Loan Documents (hereinafter referred to as "Other
Taxes").
(c) Borrower shall indemnify the Lenders for the full amount of Taxes
and Other Taxes reasonably paid by the Lenders or any liability (including any
penalties or interest assessed because of Borrower's defaults) arising therefrom
or with respect thereto, whether or not such Taxes or Other Taxes were correctly
or legally asserted. This indemnification shall be made within thirty (30) days
from the date the Lenders make written demand therefor. The Lenders shall
subrogate any and all rights and claims relating to such Taxes and Other Taxes
to Borrower upon payment of said indemnification.
(d) Without prejudice to the survival of any other agreement of
Borrower hereunder, the agreements and obligations of Borrower in this Section
2.09 shall survive the payment in full of the Obligation.
SECTION 2.10 CONVERSION RIGHTS.
Each Debenture shall be convertible into shares of Common Stock on such
terms and in such amounts as are stated in the Debenture. The holders of the
shares issued upon exercise of the right of conversion as provided in said
Debenture shall be entitled to all the rights of the Lenders as stated in this
Agreement or the other Loan Documents, to the extent such rights are
specifically stated to survive the surrender of the Debenture for conversion as
therein provided.
ARTICLE III - CONDITIONS PRECEDENT
SECTION 3.01. DOCUMENT REQUIREMENTS.
The obligation of the Lenders to advance funds at the Loan Closing Date
hereof is subject to the condition precedent that, on or before the date of such
advance, the Lenders shall have received the following:
(i) Duly executed Debentures aggregating the Principal Amount of Loan
funds then advanced, each in amounts as requested by the Lenders, which shall be
styled "River Oaks Trust Company, FBO, Renaissance Capital Growth and Income
Fund III, Inc.," "River Oaks Trust Company, FBO, Renaissance U.S. Growth and
Income Trust PLC," and "Banc One Capital Partners II, Ltd.," which shall be in
form and substance acceptable to the Lenders and its counsel.
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AGREEMENT (CONTINUED)
(ii) A true and correct certificate signed by a duly authorized officer
of the Borrower and dated as of the Loan Closing Date stating that, to the best
knowledge and belief of such officer, after reasonable and due investigation and
review of matters pertinent to the subject matter of such certificate: (A) all
of the representations and warranties contained in Article IV hereof and the
other Loan Documents are true and correct in all material respects as of the
Loan Closing Date and (B) no event has occurred and is continuing, or would
result from the Loan, which constitutes a Default or an Event of Default.
(iii) Copies of resolutions, as adopted by the Borrower's Board of
Directors, approving the execution, delivery and performance of this Agreement,
the Debentures, and the other Loan Documents, including the transactions
contemplated herein and accompanied by a certificate of the Secretary or
Assistant Secretary of Borrower stating that such resolutions have been duly
adopted, are true and correct, have not been altered or repealed and are in full
force and effect.
(iv) A signed certificate of the Secretary or Assistant Secretary of
the Borrower which shall certify the names of the officers of Borrower
authorized to sign each of the Loan Documents to be executed by such officer,
together with the true signatures of each of such officers. It is herewith
stipulated and agreed that the Lenders may thereafter rely conclusively on the
validity of this certificate as a representation of the officers of Borrower
duly authorized to act with respect to the Loan Documents until such time as the
Lenders shall receive a further certificate of the Secretary or Assistant
Secretary of Borrower canceling or amending the prior certificate and submitting
the signatures of the officers thereupon authorized in such further certificate.
(v) Certificates of good standing (or other similar instrument) for the
Borrower issued by the Secretary of State of the state of incorporation of
Borrower, and certificates of qualification and good standing for Borrower
issued by the Secretary of State of each of the states wherein such Borrower has
operating facilities of such nature so as to be required to be qualified to do
business as a foreign corporation, dated within ten (10) days prior to Loan
Closing.
(vi) A copy of the Articles of Incorporation of the Borrower and all
amendments thereto, certified by the Secretary of State of the state of
incorporation and dated within ten (10) days prior to Loan Closing and a copy of
the bylaws of Borrower and all amendments thereto, certified by the Secretary or
Assistant Secretary of Borrower, as being true, correct and complete as of the
date of such certification.
(vii) Copies of all registration statements, reports and proxy
statements filed with the SEC during or for the three fiscal years ended July
31, 1996 and the nine months ended April 30, 1997.
(viii) A Standby Agreement executed by the Agent, Renaissance III,
Renaissance PLC, BOCPII and Chase Manhattan Bank, as agent.
(ix) A legal opinion from counsel to Borrower, in form and substance
satisfactory to the Lenders and their counsel.
(x) Lock-up Agreements executed by the principal shareholders and
executive officers of Borrower, in form and substance satisfactory to the
Lenders and their counsel.
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AGREEMENT (CONTINUED)
(xi) Voting Agreement executed by the principal shareholders and
executive officers of Borrower, in form and substance satisfactory to the
Lenders and their counsel.
(xii) Such other information, documents and agreements as may
reasonably be required by the Lenders and the Lenders' counsel to substantiate
Borrower's compliance with the requirements of this Agreement and the Lenders'
compliance with the 1940 Act.
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BORROWER
To induce the Lenders to make the Loan hereunder, Borrower represents
and warrants to the Lenders that:
SECTION 4.01. ORGANIZATION AND GOOD STANDING.
Borrower is duly organized and existing in good standing under the laws
of the state of its incorporation, is duly qualified as a foreign corporation
and in good standing in all states in which failure to qualify would have a
Material Adverse Effect, and has the corporate power and authority to own its
properties and assets and to transact the business in which it is engaged and is
or will be qualified in those states wherein it proposes to transact material
business operations in the future.
SECTION 4.02. AUTHORIZATION AND POWER.
Borrower has the corporate power and requisite authority to execute,
deliver and perform the Loan Documents to be executed by Borrower. The Borrower
is duly authorized to, and has taken all corporate action necessary to
authorize, execute, deliver and perform the Loan Documents executed by Borrower.
The Borrower is and will continue to be duly authorized to perform the Loan
Documents executed by Borrower.
SECTION 4.03. NO CONFLICTS OR CONSENTS.
Except as disclosed on Schedule 4.03, neither the execution and
delivery of the Loan Documents, nor the consummation of any of the transactions
therein contemplated, nor compliance with the terms and provisions thereof, will
contravene or materially conflict with any judgment, license, order or permit
applicable to Borrower, or any indenture, loan agreement, mortgage, deed of
trust, or other agreement or instrument to which Borrower is a party or by which
Borrower is or becomes bound, or to which Borrower is or becomes subject, or
violate any provision of the charter or bylaws of Borrower. No consent,
approval, authorization or order of any court or governmental authority or third
party is required in connection with the execution and delivery by Borrower of
the Loan Documents or to consummate the transactions contemplated hereby or
thereby except those that have been obtained.
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AGREEMENT (CONTINUED)
SECTION 4.04. ENFORCEABLE OBLIGATIONS.
The Loan Documents have been duly executed and delivered by the
Borrower and are the legal, valid and binding obligations of the Borrower,
enforceable in accordance with their respective terms.
SECTION 4.05. NO LIENS.
Except for Permitted Liens, all of the properties and assets owned by
the Borrower are free and clear of all Liens and other adverse claims of any
nature, and Borrower has good and marketable title to such properties and
assets. A true and complete list of all known or recorded liens for borrowed
money is disclosed on Schedule 4.05, which Lenders agree will be delivered by
Borrower within 30 days after the Loan Closing Date.
SECTION 4.06. FINANCIAL CONDITION.
Borrower has delivered to the Lenders copies of the balance sheets of
Borrower as of July 31, 1996, and the related statements of income,
stockholders' equity and statement of cash flow for the year then ended, audited
by its independent certified public accountant. Borrower has also delivered to
the Lenders copies of the balance sheet of Borrower as of April 30, 1997, and
the related statements of income, stockholders' equity and statement of cash
flow for the period ended such date, which financial statements have not been
audited by its independent certified public accountant. Such financial
statements are true and correct in all material respects, fairly represent the
financial condition of Borrower as of such dates and have been prepared in
accordance with GAAP (except unaudited financial statements omit certain
footnotes); and as of the date hereof, there are no obligations, liabilities or
Indebtedness (including contingent and indirect liabilities and obligations) of
Borrower which are (separately or in the aggregate) material and are not
reflected in such financial statements or otherwise disclosed herein. Since the
date of the above-referenced year end financial statements and quarterly
financial statements, there have not been, except as disclosed in Schedule 4.06:
(i) any Material Adverse Change; (ii) any dividend declared or paid or
distribution made on the capital stock of the Borrower or any capital stock
thereof redeemed or repurchased; (iii) any incurrence of long-term debt by the
Borrower; (iv) any salary, bonus or compensation increases to any officers, key
employees or agents of the Borrower or; (v) any other material transaction
entered into by the Borrower except in the ordinary course of business and
consistent with past practice.
SECTION 4.07. NO DEFAULT.
No event has occurred and is continuing which constitutes, or with
notice and passage of time or both, would constitute, a Default or an Event of
Default under this Agreement.
SECTION 4.08. MATERIAL AGREEMENTS.
Neither the Borrower nor any other party is in default, and no event
has occurred and is continuing which, with notice or lapse of time or both,
would constitute, a default, under any material contract, lease, loan
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AGREEMENT (CONTINUED)
agreement, indenture, mortgage, security agreement, license agreement or other
agreement or obligation to which it is a party or by which any of its properties
is subject, except as described on Schedule 4.08.
SECTION 4.09. NO LITIGATION.
Except as disclosed on Schedule 4.09, there are no actions, suits,
investigations, arbitrations or administrative proceedings pending, or to the
knowledge of Borrower threatened, against Borrower, and there has been no change
in the status of any of the actions, suits, investigations, litigation or
proceedings disclosed to the Lenders which could reasonably be expected have a
Material Adverse Effect on Borrower or on any transactions contemplated by any
Loan Document.
SECTION 4.10. TAXES.
All tax returns required to be filed by Borrower in any jurisdiction
have been filed and all taxes (including mortgage recording taxes), assessments,
fees and other governmental charges upon Borrower or upon any of its properties,
income or franchises now due have been paid, in each case, except where the same
are being contested in good faith by appropriate proceedings, as disclosed on
Schedule 4.10.
Except as disclosed on Schedule 4.10, the Borrower has not received any
notice of deficiency or other adjustment from any taxing authority that is
unresolved as of the Closing. No audit or examination, claim or proposed
assessment by any taxing authority is pending or, to the knowledge of the
Borrower, threatened against the Borrower or any of its properties. All ad
valorem and other property taxes imposed on Borrower, or that may become a lien
on the Borrower's assets and that are due and payable, have been paid in full
where the failure to do so would have a Material Adverse Effect. The Borrower
has withheld or collected from each payment made to each of its U.S. employees
the amount of all taxes (including federal income taxes, Federal Insurance
Contributions Act ("FICA") taxes, and state and local income, payroll, and wage
taxes, among others) required to be withheld or collected.
SECTION 4.11. CAPITALIZATION.
The authorized capital stock of Borrower consists of 20,000,000 shares
of Common Stock, no par value ("Common Stock"), and 10,000,000 shares of
Preferred Stock, no par value, of which 4,881,100 shares of Common Stock and no
shares of Preferred Stock are issued and outstanding as of the date hereof. All
of such outstanding shares have been duly authorized and validly issued are
fully paid and nonassessable, and were not issued in violation of the preemptive
rights of any person.
SECTION 4.12. USE OF PROCEEDS.
The Borrower intends to use proceeds from the Loan as disclosed in
Section 2.02 hereof.
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AGREEMENT (CONTINUED)
SECTION 4.13. EMPLOYEE BENEFIT AND INCENTIVE PLANS; ERISA.
(a) Borrower is not obligated under any Plan.
(b) Except as set forth on Schedule 4.13, Borrower is not a party to
any collective bargaining agreement and is not aware of any activities of any
labor union that is currently seeking to represent or organize its employees.
Borrower has not experienced any material labor problems, including work
stoppages, disputes or slowdowns with respect to its employees.
SECTION 4.14. COMPLIANCE WITH LAW.
Borrower is in compliance with all laws, rules, regulations, orders and
decrees which are applicable to Borrower or its properties by reason of any
Governmental Authority the noncompliance with which, individually or in the
aggregate, would have a Material Adverse Effect.
SECTION 4.15. COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS.
Except as set forth in Schedule 4.15, all properties of Borrower are in
compliance in all material respects with all federal, state or local
environmental protection laws, statutes, rules and regulations which are
material to the conduct of the business of the Borrower, and the Borrower is
currently in compliance in all material respects with all material environmental
reporting requirements which are applicable to Borrower or its properties.
SECTION 4.16. SHARES ISSUABLE UPON CONVERSION.
The shares of Common Stock of the Borrower when issued to the Lenders
upon conversion of the Debentures will be duly and validly issued, fully paid
and nonassessable and in compliance with all applicable securities laws. Such
issuance will not give rise to preemptive rights or similar rights by any other
security holder of Borrower.
SECTION 4.17. INSIDER.
(a) Neither the Borrower, nor any Person having "control" (as that term
is defined in the 1940 Act or in the regulations promulgated pursuant thereto)
of the Borrower is an "executive officer," "director," or "principal
shareholder" (as those terms are defined in the 1940 Act) of any Lender.
(b) The Borrower's 1996 Annual Report on Form 10-K discloses all
material transactions required to be disclosed therein pursuant to Item 404 of
Regulation S-K promulgated under the 1933 Act.
(c) All agreements between the Borrower and any of its officers,
directors, and principal shareholders, including employment agreements, are
disclosed in reports and filings made with the SEC or listed on Schedule 4.17.
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AGREEMENT (CONTINUED)
SECTION 4.18. SUBSIDIARIES.
(a) All of the Subsidiaries of the Borrower are listed on Schedule
4.18. Except as disclosed on Schedule 4.18, Borrower owns all of the outstanding
capital stock or other equity interests of the Subsidiaries, free and clear of
all adverse claims, other than Liens securing the Senior Obligations. All of
such outstanding capital stock of each Subsidiary has been duly and validly
authorized and issued and is fully paid and nonassessable. All such Subsidiaries
are duly organized and existing in good standing under the laws of the
respective jurisdictions of their incorporation or organization, are duly
qualified as foreign corporations and in good standing in all jurisdictions in
which failure to qualify would have a Material Adverse Effect, and have the
corporate power and authority to own their respective properties and assets and
to transact the business in which they are engaged and are or will be qualified
in those jurisdictions wherein they propose to transact material business
operations in the future.
(b) Except as disclosed on Schedule 4.18, the Borrower does not own any
equity or long-term debt interest in any other Person, or any right or option to
acquire any such interest in any such Person.
SECTION 4.19. CASUALTIES.
Neither the business nor the properties of Borrower is currently
affected by any environmental hazard, fire, explosion, accident, strike, lockout
or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or
other casualty (whether or not covered by insurance), which would have a
Material Adverse Effect.
SECTION 4.20. INVESTMENT COMPANY ACT.
Borrower is not an "investment company" as defined in Section 3 of the
1940 Act nor a company that would be an investment company, except for the
exclusions from the definition of an investment company in Section 3(C) of the
1940 Act, and Borrower is not controlled by such a company.
SECTION 4.21. SUFFICIENCY OF CAPITAL.
Borrower is, and after consummation of this Agreement and giving effect
to all Indebtedness incurred and transactions contemplated in connection
herewith will be, Solvent.
SECTION 4.22. CORPORATE NAMES.
The Borrower has not, during the preceding five (5) years, been known
as or used any other corporate, fictitious or trade names, except Toys
Management, Inc. and the Ace Novelty Co.
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AGREEMENT (CONTINUED)
SECTION 4.23. INSURANCE.
All of the insurable properties of the Borrower are insured for its
benefit under valid and enforceable policies, issued by insurers of recognized
responsibility in amounts and against such risks and losses as is customary in
Borrower's industry.
SECTION 4.24. LICENSES, TRADEMARKS, SERVICE MARKS AND COPYRIGHTS.
Borrower owns or possesses legal, valid and binding licenses to use all
material trademarks, service marks, trade names, patents and copyrights
presently used to conduct its business. All material licenses of Borrower are
listed in Schedule 4.24, showing licensor, character or trademark license,
product and licensed area, date of grant, date of renewal or modification (if
any) and date of expiration. Borrower has the right to use such intellectual
property rights without infringing or violating the rights of any third parties.
Except as disclosed in Schedule 4.24, no claim has been asserted by any person
to the ownership of or right to use any such rights or challenging or
questioning the validity or effectiveness of any such license or agreement.
Borrower is not in default of any such license agreements in any material
respect and no event has occurred and is continuing which, with notice or lapse
of time or both, would constitute a material default, except as disclosed in
Schedule 4.24. Each license agreement is enforceable in accordance with its
terms and has not been canceled, abandoned or terminated, nor has Borrower
received notice thereof. There are no claims for trademark or copyright
infringement against Borrower or the Subsidiaries, or their respective officers
or directors that could be reasonably expected to have a Material Adverse
Effect. Neither Borrower nor any Subsidiary is currently using copyrightable
material for which Borrower or any Subsidiary needs, but does not have, a
license to conduct its existing business, where the failure to have such license
could reasonably be expected to have a Material Adverse Effect. Neither Borrower
nor any Subsidiary is currently using any trademarks for which Borrower or any
Subsidiary needs, but does not have, a valid character or trademark license to
conduct its existing business, where the failure to have such license could
reasonably be expected to have a Material Adverse Effect.
SECTION 4.25. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
All representations and warranties of Borrower herein shall survive the
Loan Closing and the delivery of the Debentures, and any investigation at any
time made by or on behalf of the Lenders shall not diminish the Lenders' right
to rely on Borrower's representations and warranties as herein set forth.
SECTION 4.26. FULL DISCLOSURE.
Neither the representations, warranties, schedules, financial
statements referenced in Section 4.06, nor any business plan, offering
memorandum, prospectus, SEC registration statement, report or proxy statement,
certificate, document or written statement to be delivered or caused to be
delivered by Borrower or any of its agents or representatives to the Lenders in
connection with this Agreement, contains or will contain, as of the date
thereon, any untrue statement of a material fact or omits or will omit to state
any material fact necessary to keep the statements contained herein or therein
from being misleading in any material respect.
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AGREEMENT (CONTINUED)
ARTICLE V - AFFIRMATIVE COVENANTS OF BORROWER
So long as any part of the Debentures remains unpaid or has not been
redeemed or converted hereunder, and until such payment, redemption or
conversion in full, unless the Required Lenders shall otherwise consent in
writing, Borrower agrees that:
SECTION 5.01. FINANCIAL STATEMENTS, REPORTS AND DOCUMENTS.
(a) The Borrower shall accurately and fairly maintain its books of
account in accordance with GAAP, retain a firm of independent certified public
accountants, which firm is one of the six largest national accounting firms or
which is approved by the Required Lenders, to make annual audits of its accounts
in accordance with generally accepted auditing standards.
(b) The Borrower shall provide the following reports and information to
each Lender:
(i) As soon as available, and in any event within forty-five
(45) days after the close of each fiscal quarter, Borrower's quarterly reports
on Form 10-Q with exhibits for said period. As soon as available, Borrower's
reports on Form 8-K with any exhibits.
(ii) As soon as available, and in any event within ninety (90)
days after the close of each fiscal year, Borrower's annual report on Form 10-K
with exhibits for said period.
(iii) Each fiscal quarter, concurrent with the periodic report
required above, a certificate executed by the Chief Financial Officer or Chief
Executive Officer of the Borrower, (A) stating that a review of the activities
of the Borrower during such fiscal period has been made under his supervision
and that the Borrower has observed, performed and fulfilled each and every
obligation and covenant contained herein and is not in default under any of the
same or, if any such default shall have occurred, specifying the nature and
status thereof, and (B) stating that Borrower and the Subsidiaries are in
compliance as of the end of such fiscal quarter with the agreed minimum
financial ratios and standards set forth in Schedule 7.01 to this Agreement.
(iv) Promptly (but in any event within five (5) business days)
upon becoming aware of the existence of any condition or event which constitutes
a Default or which, with notice or the passage of time or both would become a
Default or an Event of Default, written notice specifying the nature and period
of existence thereof and the action which Borrower is taking or proposes to take
with respect thereto.
(v) Promptly (but in any event within five (5) business days)
upon the receipt thereof by the Borrower or the Board of Directors of the
Borrower, copies of all reports, all management letters and other detailed
information submitted to the Borrower or the Board by independent accountants in
connection with each annual or interim audit or review of the accounts or
affairs of the Borrower made by such accountants.
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AGREEMENT (CONTINUED)
(vi) Promptly (but in any event within five (5) business
days), such other information relating to the finances, properties, business and
affairs of the Borrower and each Subsidiary, as the Lenders may reasonably
request from time to time.
(vii) Promptly upon its becoming available, one copy of each
financial statement, report, press release, notice or proxy statement sent by
Borrower to stockholders generally, and of each regular or periodic report,
registration statement or prospectus filed by Borrower with any securities
exchange or the SEC or any successor agency, and of any order issued by any
Governmental Authority in any proceeding to which the Borrower is a party.
SECTION 5.02. PREPARATION OF BUDGETS.
(a) Prior to the beginning of Borrower's fiscal year Borrower agrees to
prepare and submit to the Board and furnish to each Lender a copy of, an annual
plan for such year which shall include, without limitation, plans for expansion,
if any, plans for incurrences of Indebtedness and projections regarding other
sources of funds, quarterly projected capital and operating expense budgets,
cash flow statements, profit and loss statements and balance sheet projections,
itemized in such detail as the Board and/or the Lenders may request.
(b) Borrower shall furnish to the Lenders monthly financial reports,
including budgets (as currently used by management in the conduct of business)
within 45 days of the end of each month until June 30, 1998 and within 30 days
of the end of each month thereafter.
SECTION 5.03. PAYMENT OF TAXES AND OTHER INDEBTEDNESS.
Borrower shall, and shall cause its Subsidiaries to, pay and discharge
(i) all taxes, assessments and governmental charges or levies imposed upon it or
upon its income or profits, or upon any property belonging to it, before
delinquent, (ii) all lawful claims (including claims for labor, materials and
supplies), which, if unpaid, will give rise to a Lien upon any of its property,
and (iii) all of its other Indebtedness, except as prohibited hereunder;
provided, however, that Borrower and its Subsidiaries, if any, shall not be
required to pay any such tax, assessment, charge, levy or other claim if and so
long as the amount, applicability or validity thereof shall currently be
contested in good faith by appropriate proceedings and appropriate accruals and
reserves therefor have been established in accordance with GAAP.
SECTION 5.04. MAINTENANCE OF EXISTENCE AND RIGHTS; CONDUCT OF BUSINESS.
Subject to Section 6.13, Borrower shall, and shall cause its operating
Subsidiaries to, preserve and maintain their respective corporate existence and
all of their respective material rights, privileges and franchises necessary in
the normal conduct of its business, except to the extent that the failure to
maintain any such rights, privileges and franchises could not reasonably be
expected to cause a Material Adverse Effect, and conduct its business in an
orderly and efficient manner consistent with good business practices and in
accordance with all valid regulations and orders of any Governmental Authority.
Borrower shall keep its principal place of business within the United States.
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AGREEMENT (CONTINUED)
SECTION 5.05. SEC FILINGS.
So long as Borrower has a class of securities registered pursuant to
Section 12 of the 1934 Act, Borrower shall duly file, when due, all reports and
proxy statements required of a company whose securities are registered for
public trading under and pursuant to the 1934 Act and any rules and regulations
issued thereunder, and to preserve and maintain its registration thereunder.
SECTION 5.06. NOTICE.
Borrower shall promptly notify the Lenders of (i) any Material Adverse
Change, (ii) any default under any Senior Obligations, other Indebtedness having
an aggregate principal amount in excess of $1,000,000, material agreement,
contract or other instrument to which it is a party or by which any of its
properties are bound, or any acceleration of the maturity of any Indebtedness
having an aggregate principal amount in excess of $1,000,000, if any, (iii) any
material adverse claim against or affecting Borrower or its Subsidiaries, if
any, or any of its properties, and (iv) the commencement of, and any material
determination in, any litigation with any third party or any proceeding before
any Governmental Authority, the negative result of which has a Material Adverse
Effect on Borrower and its Subsidiaries, taken as a whole.
SECTION 5.07. COMPLIANCE WITH LOAN DOCUMENTS.
Borrower shall, and shall cause each of its Subsidiaries to, promptly
comply with any and all covenants and provisions of the Loan Documents.
SECTION 5.08. COMPLIANCE WITH MATERIAL AGREEMENTS.
Borrower shall, and shall cause each of its Subsidiaries to, comply in
all material respects with all material agreements, indentures, mortgages or
documents binding on it or affecting its properties or business, to the extent
noncompliance with which would cause a Material Adverse Effect .
SECTION 5.09. OPERATIONS AND PROPERTIES.
Borrower shall, and shall cause each of its Subsidiaries to, act
prudently and in accordance with customary industry standards in managing or
operating its assets, properties, business and investments. Borrower shall, and
shall cause each of its Subsidiaries to, keep in good working order and
condition, ordinary wear and tear excepted, all of its assets and properties
which are necessary to the conduct of its business.
SECTION 5.10. BOOKS AND RECORDS; ACCESS.
Borrower shall, and shall cause each of its Subsidiaries to, maintain
complete and accurate books and records of its transactions in accordance with
good accounting practices. Borrower shall give each duly authorized
representative of the Lenders access during all normal business hours to, and
shall permit such representative to examine, copy or make excerpts from, any and
all books, records and documents in the
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AGREEMENT (CONTINUED)
possession of Borrower and its Subsidiaries and relating to its affairs, and to
inspect any of the properties of Borrower and its Subsidiaries, provided that
Borrower may refuse such access for up to three (3) business days, unless a
Default or Event of Default has occurred or is continuing, if it believes, in
good faith, that providing such access would be disruptive to its operations.
Borrower shall make a copy of this Agreement, along with any waivers, consents,
modifications or amendments, available for review at its principal office by the
Lenders or the Lenders' representatives.
SECTION 5.11. COMPLIANCE WITH LAW.
Borrower shall, and shall cause each of its Subsidiaries to, comply
with all applicable laws, rules, regulations, and all orders of any Governmental
Authority applicable to it or any of its property, business operations or
transactions, except where a breach of which could not reasonably be expected to
have a Material Adverse Effect.
SECTION 5.12. INSURANCE.
Borrower shall, and shall cause each of its Subsidiaries to, maintain
such worker's compensation insurance, liability insurance and insurance on its
properties, assets and business, now owned or hereafter acquired, against such
casualties, risks and contingencies, and in such types and amounts, as are
consistent with customary practices and standards of companies engaged in
similar businesses.
SECTION 5.13. AUTHORIZATIONS AND APPROVALS.
Borrower shall, and shall cause each of its Subsidiaries to, promptly
obtain, from time to time at its own expense, all such governmental licenses,
authorizations, consents, permits and approvals as may be required to enable it
to comply with its obligations hereunder and under the other Loan Documents.
SECTION 5.14. ERISA COMPLIANCE.
Borrower shall (i), at all times, make prompt payment of all
contributions required under all Plans, if any, and shall meet the minimum
funding standards set forth in ERISA with respect to its Plans subject to ERISA,
if any, (ii) notify the Lenders immediately of any fact in connection with any
of its Plans, which might constitute grounds for termination thereof by the
Pension Benefit Guaranty Corporation or for the appointment by the appropriate
United States District Court of a trustee to administer such Plan, together with
a statement, if requested by the Lenders as to the reason therefor and the
action, if any, proposed to be taken with respect thereto, and (iii) furnish to
the Lenders upon its request such additional information concerning any of its
Plans as may be reasonably requested.
SECTION 5.15. FURTHER ASSURANCES.
Borrower shall, and shall cause each of its Subsidiaries to, make,
execute or endorse, and acknowledge and deliver or file or cause the same to be
done, all such notices, certifications and additional agreements,
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AGREEMENT (CONTINUED)
undertakings, transfers, assignments, or other assurances, and take any and all
such other action, as the Lenders may, from time to time, deem reasonably
necessary or proper in connection with any of the Loan Documents, or the
obligations of Borrower or its Subsidiaries, if any, thereunder, which the
Lenders may request from time to time.
SECTION 5.16. INDEMNITY BY BORROWER.
Borrower shall indemnify, save, and hold harmless, the Lenders and
their directors, officers, lenders, attorneys, and employees (singularly or
collectively, the "Indemnitee") from and against (i) any and all claims,
demands, actions or causes of action that are asserted against any Indemnitee if
the claim, demand, action or cause of action directly or indirectly relates to
this Agreement and the other Loan Documents issued pursuant thereto, the use of
proceeds of the Loans, or the relationship of Borrower and the Lenders under
this Agreement or any transaction contemplated pursuant to this Agreement, (ii)
any administrative or investigative proceeding by any Governmental Authority
directly or indirectly related to a claim, demand, action or cause of action
described in clause (i) above, and (iii) any and all liabilities, losses, costs,
or expenses (including reasonable attorneys' fees and disbursements) that any
Indemnitee suffers or incurs as a result of any of the foregoing; provided,
however, that Borrower shall have no obligation under this Section 5.16 to the
Lenders with respect to any of the foregoing arising out of the gross negligence
or willful misconduct of the Lenders or their assignees or the breach by any
Lender or their assignees of this Agreement or any other Loan Document or other
document executed in connection with any of the aforesaid, the breach by the
Lenders or their assignees of any intercreditor or participation agreement or
commitment with other parties, the violation or alleged violation of any law,
rule or regulation by the Lenders or their assignees, or from the transfer or
disposition by the Lenders of any Debenture or the Common Stock issued upon
conversion of the Debenture. If any claim, demand, action or cause of action is
asserted against any Indemnitee, such Indemnitee shall promptly notify Borrower,
but the failure to so promptly notify Borrower shall not affect Borrower's
obligations under this Section unless such failure materially prejudices
Borrower's right or ability to participate in the contest of such claim, demand,
action or cause of action, as hereinafter provided. In the event that such
Indemnitee's failure to properly notify the Borrower materially prejudices
Borrower's right or ability to participate in the contest of such claim, demand,
action, or cause of action, then said Indemnitee shall have no right to receive,
and Borrower shall have no obligation to pay, any indemnification amounts
hereunder. Borrower may elect to defend any such claim, demand, action or cause
of action (at its own expense) asserted against said Indemnitee and, if
requested by Borrower in writing and so long as no Default or Event of Default
shall have occurred and be continuing, such Indemnitee (at Borrower's expense)
shall in good faith contest the validity, applicability and amount of such
claim, demand, action or cause of action and shall permit Borrower to
participate in such contest. Any Indemnitee that proposes to settle or
compromise any claim or proceeding for which Borrower may be liable for payment
to or on behalf of an Indemnitee hereunder shall give Borrower written notice of
the terms of such proposed settlement or compromise reasonably in advance of
settling or compromising such claim or proceeding and shall obtain Borrower's
written concurrence thereto. In the event that said Indemnitee fails to obtain
Borrower's prior written consent to any such settlement or compromise, said
Indemnitee shall have no right to receive and Borrower shall have no obligation
to pay any indemnification amounts hereunder. Each Indemnitee may employ counsel
in enforcing its rights hereunder and in defending against any claim, demand,
action, or cause of action covered by this Section 5.16; provided, however, that
each Indemnitee shall endeavor in connection with any matter covered by this
Section which
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AGREEMENT (CONTINUED)
also involves any other Indemnitee, use reasonable efforts to avoid unnecessary
duplication of effort by counsel for all Indemnitees, including by allowing
Borrower to select one lawyer for all parties, such selection to be subject to
the approval of such parties, which approval shall not be unreasonably withheld.
Any obligation or liability of Borrower to any Indemnitee under this Section
5.16 shall survive the expiration or termination of this Agreement and the
repayment of the Debentures.
SECTION 5.17. RESERVATION OF SHARES.
Borrower shall at all times reserve and keep available sufficient
authorized and unissued shares of Common Stock to effect the conversion of the
Debentures.
SECTION 5.18. STANDBY AGREEMENT.
This Agreement and the Debentures, and the indebtedness and obligations
evidenced thereby, are subject to (i) the provisions of the Standby Agreement by
and among Play By Play Toys & Novelties, Inc., Chase Manhattan Bank, agent, and
Renaissance III, Renaissance PLC, BOCPII and Agent, dated as of July 3, 1997,
which is incorporated herein by reference, (ii) the terms of the form of Standby
Agreement attached as Exhibit A hereto (which terms are hereby incorporated by
reference and which terms shall apply with respect to any Senior Obligation
hereafter arising without regard to any failure by a holder of a Debenture to
enter into a Standby Agreement in accordance with the terms hereof), and (iii)
the terms of any other Standby Agreement hereafter executed by the Lenders. Each
Lender and the Agent hereby agrees, upon the request of Borrower, to enter into
a Standby Agreement substantially in the form of Exhibit A hereto with any
holder of Senior Obligations.
SECTION 5.19. SHAREHOLDERS' MEETING OR CONSENT.
The Borrower shall submit to a vote or consent of its shareholders at
its next annual meeting of shareholders a proposal (the "Proposal") to approve
the issuance of shares of Common Stock upon conversion of the Debentures, unless
the Required Lenders shall otherwise consent. The Borrower shall cause the Board
of Directors to recommend that the shareholders vote in favor of, or consent to,
the Proposal, and the Borrower shall cause its principal shareholders and
executive officers to vote in favor of the Proposal in accordance with the terms
of the Voting Agreement.
ARTICLE VI - NEGATIVE COVENANTS OF BORROWER
So long as any part of the Debentures have not been redeemed or
converted hereunder, and until such redemption or conversion in full, unless the
Required Lenders shall otherwise consent in writing, Borrower agrees that:
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AGREEMENT (CONTINUED)
SECTION 6.01. LIMITATION ON INDEBTEDNESS.
At Loan Closing, Borrower and its Subsidiaries shall not have any
outstanding Indebtedness, except Indebtedness arising out of this Agreement, the
Debentures, Permitted Indebtedness or as set forth in Schedule 6.01. Borrower or
its Subsidiaries will not incur or guarantee any Indebtedness, unless:
(i) Borrower shall be in compliance with Section 7.01, as set forth in
its quarterly compliance certificate most recently delivered pursuant
to Section 5.01 provided that, notwithstanding the foregoing, during
any period in which Borrower is not in compliance with Section 7.01
upon prior written notice to each Lender, the Borrower may incur Senior
Obligations or may refund, refinance or extend the maturity of the
Indebtedness evidenced by the Senior Documents in the aggregate
principal amount not in excess of $45,800,000, subject to the Lenders'
rights of redemption as provided in the Debentures, or (ii) Borrower or
its Subsidiaries shall have obtained the consent of Required Lenders.
SECTION 6.02. LIMITATION ON LIENS.
Borrower shall not, and shall not permit its Subsidiaries to, create,
cause, incur, permit, suffer to exist any Lien upon any of its properties or
assets, other than Permitted Liens.
SECTION 6.03. LIMITATION ON INVESTMENTS.
Borrower shall not, and shall not permit its Subsidiaries to, make or
have outstanding any Investments in any Person, except for Borrower's and any
Subsidiary's acquisition or ownership of stock of or other equity interests in
Subsidiaries (including Persons that will be Subsidiaries after giving effect to
such Investments), loans and other transactions between the Borrower and any
Subsidiaries, short term bank deposits or money market investments, and such
other "cash equivalent" investments as the Lenders may from time to time
approve, and customer obligations and receivables arising out of sales or leases
made or the rendering of services in the ordinary course of business.
SECTION 6.04. ALTERATION OF MATERIAL AGREEMENTS.
Borrower shall not, and shall not permit its Subsidiaries to, consent
to or permit any alteration, amendment, modification, release, waiver or
termination of any material agreement to which it is party, other than in the
ordinary course of business, if such alteration, amendment, modification,
release, waiver or termination could reasonably be expected to have a Material
Adverse Effect.
SECTION 6.05. CERTAIN TRANSACTIONS.
Except as disclosed in Schedule 6.05, Borrower shall not, and shall not
permit its Subsidiaries to, enter into any transaction not in the ordinary
course of business with, or pay any management fees to, any Affiliate, except
for intercompany transactions, without the consent of the Required Lenders,
unless the terms thereof
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AGREEMENT (CONTINUED)
(1) are no less favorable to Borrower or such Subsidiary than those that could
be obtained at the time of such transaction in arm's-length dealings with a
Person who is not an Affiliate, or (2) if such transaction involves an amount
less than $250,000, are set forth in writing and have been approved by a
majority of the members of the Board of Directors having no personal stake in
the transaction.
SECTION 6.06. LIMITATIONS ON ACQUISITION OF NONRELATED BUSINESS.
Borrower shall not, and shall not permit its Subsidiaries to, engage in
any line of business or acquire any new product lines or business or acquire any
companies unless such new product line or business of the company acquired is
primarily involved in, or substantially similar or related to, the Borrower's
current lines of business.
SECTION 6.07. LIMITATION ON SALE OF PROPERTIES.
Borrower shall not, and shall not permit its Subsidiaries to, (i) sell,
assign, convey, exchange, lease or otherwise dispose of any of its properties,
rights, assets or business (including the capital stock of its operating
Subsidiaries), whether now owned or hereafter acquired having a market value in
excess of $2.5 millions in any single transaction or series of related
transactions, except (x) Borrower's vending business, (y) warehouse facilities
and (z) in the ordinary course of business and for fair consideration, or (ii)
sell, assign or discount any accounts receivable except in the ordinary course
of business (which shall include receivable financing or securitization) without
the consent of the Required Lenders.
SECTION 6.08. FISCAL YEAR AND ACCOUNTING METHOD.
Borrower shall not, and shall not permit its Subsidiaries to, change
its fiscal year or method of accounting, except as permitted by GAAP.
SECTION 6.09. LIQUIDATION.
Borrower shall not, and shall not permit its Subsidiaries to, (i)
dissolve or liquidate (except for dissolution or liquidation of inactive
Subsidiaries in the ordinary course of business) or (ii) enter into any other
transaction that has a similar effect.
SECTION 6.10. NO AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS.
Borrower shall not, and shall not permit its Subsidiaries to, amend its
Articles of Incorporation or bylaws in any manner that could reasonably be
expected to have a Material Adverse Effect, without the consent of the Required
Lenders.
SECTION 6.11. EXECUTIVE COMPENSATION.
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AGREEMENT (CONTINUED)
(a) Borrower will not increase the salary, bonus, or other compensation
programs (whether in cash, securities, or other property, and whether payment is
deferred or current) of its five most senior executive officers, unless such
compensation increase is approved by a majority of the Board or a Compensation
Committee of the Board of Directors, a majority of whom shall nonemployee
Directors.
(b) Borrower shall not implement any bonus, profit sharing or other
incentive plans, until such plans are formally adopted by the majority of the
Board or a Compensation Committee of the Board of Directors, a majority of which
shall be nonemployee Directors. Borrower's executive compensation shall be
consistent with the general compensation policies adopted by the Compensation
Committee of the Board of Directors.
SECTION 6.12. RESTRICTED PAYMENTS.
Borrower shall not (i) declare or pay any dividend (other than stock
dividends) or make any other cash distribution on any Common Stock or Preferred
Stock, without the consent of the Required Lenders, (ii) purchase, redeem, or
otherwise acquire any shares of Common Stock or Preferred Stock, without the
consent of the Required Lenders, (iii) make any payments of Indebtedness (other
than Senior Obligations) which are PARI PASSU or subordinated to the Debentures,
if at the time of such payment, the Borrower is in Default with respect to any
monetary obligation in respect of the Loan, except for the payment of
subordinated debt to the principal shareholder of Borrower pursuant to Section
2.02 hereof and to the former shareholders of Ace Novelty Co., Inc.
SECTION 6.13. CONSOLIDATION OR MERGER.
Borrower shall not consolidate with or merge into any other
corporation, unless the surviving corporation after such merger or consolidation
will not be in Default and the surviving corporation becomes a party to this
Agreement. Subsidiaries shall only consolidate with or merge into the Borrower
or another Subsidiary.
SECTION 6.14. OWNERSHIP OF SUBSIDIARIES.
The Borrower shall own at all times all of the capital stock, or other
equity interests in, of the Subsidiaries except for directors qualifying shares
and minority interests of foreign subsidiaries as required by applicable law.
ARTICLE VII - COVENANTS OF MAINTENANCE OF FINANCIAL STANDARDS
SECTION 7.01. FINANCIAL RATIOS.
So long as any of the Debentures have not been redeemed or converted
hereunder, and until such redemption or conversion has been made in full, or
unless the Required Lenders shall otherwise consent in writing, the Borrower, on
a consolidated basis, shall be in compliance with the agreed minimum financial
ratios
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AGREEMENT (CONTINUED)
and standards provided in Schedule 7.01, as of the end of each fiscal quarter of
Borrower and as set forth in its most recent quarterly compliance certificates
delivered pursuant to Section 5.01.
ARTICLE VIII - EVENTS OF DEFAULT
SECTION 8.01. EVENTS OF DEFAULT.
(a) An "Event of Default" shall exist if any one or more of the
following events (herein collectively called "Events of Default") shall occur
and be continuing:
(i) Borrower shall fail to pay when due (or shall state in
writing an intention not to pay or its inability to pay) any installment of
interest on or principal of, any Debenture or any fee, expense or other payment
required hereunder, and such failure continues for three (3) days following the
due date;
(ii) Any representation or warranty made under this Agreement,
or any of the other Loan Documents, or in any certificate or statement furnished
or made to Agent pursuant hereto or in connection herewith or with the Loans
hereunder, shall prove to be untrue or inaccurate in any material respect as of
the date on which such representation or warranty was made;
(iii) Default shall occur in the performance of any of the
covenants or agreements of Borrower or of its Subsidiaries contained herein, or
in any of the other Loan Documents, which Default is not remedied within (x) in
the case of any covenant in Article V or VI, thirty (30) days after the
occurrence of such breach or failure to perform, (y) in the case of any covenant
in Article VII, ten (10) days after the occurrence of such breach or failure to
perform and (z) in the case of any other covenant, thirty (30) days after notice
of the occurrence of such breach or failure to perform is given to Borrower by
Required Lender; provided that such 30 day grace period shall not apply to
defaults of any payment or notice required to be made or given by Borrower.
(iv) Default shall occur in the payment of any Senior
Obligations or in the payment of any other Indebtedness having an aggregate
principal amount in excess of $1,000,000, or nonmonetary default shall occur in
respect of any note, loan agreement or credit agreement relating to any
Indebtedness having an aggregate principal amount in excess of $5,000,000, and
such default continues for more than the period of grace, if any, specified
therein or any Indebtedness having an aggregate principal amount in excess of
$5,000,000, shall become due before its stated maturity by acceleration of the
maturity, or any indebtedness having an aggregate principal amount in excess of
$1,000,000, shall become due by its terms and shall not be promptly paid or
extended;
(v) Any of the Loan Documents shall cease to be legal, valid
and binding agreements enforceable against the Borrower in accordance with the
respective terms, or shall in any way be terminated or become or be declared by
any court or by Borrower or any Subsidiary in any legal proceeding to be
ineffective or inoperative, or shall in any way whatsoever cease to give or
provide the respective rights, titles, interests, remedies, powers or privileges
stated therein to be created thereby;
(vi) Borrower or its Subsidiaries shall (A) apply for or
consent to the appointment of a receiver, trustee, custodian, intervenor or
liquidator of itself, or of all or substantially all of such Person's assets,
(B) file a
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AGREEMENT (CONTINUED)
voluntary petition in bankruptcy, admit in writing that such Person is unable to
pay such Person's debts as they become due or generally not pay such Person's
debts as they become due, (C) make a general assignment for the benefit of
creditors, (D) file a petition or answer seeking reorganization or an
arrangement with creditors or to take advantage of any bankruptcy or insolvency
laws, (E) file an answer admitting the material allegations of, or consent to,
or default in answering, a petition filed against such Person in any bankruptcy,
reorganization or insolvency proceeding, or (F) take corporate action for the
purpose of effecting any of the foregoing;
(vii) An involuntary petition or complaint shall be filed
against Borrower or any of its Subsidiaries seeking bankruptcy or reorganization
of such Person or the appointment of a receiver, custodian, trustee, intervenor
or liquidator of such Person, or all or substantially all of such Person's
assets, and such petition or complaint shall not have been dismissed within
sixty (60) days of the filing thereof or an order, order for relief, judgment or
decree shall be entered by any court of competent jurisdiction or other
competent authority approving a petition or complaint seeking reorganization of
Borrower or its subsidiary or appointing a receiver, custodian, trustee,
intervenor or liquidator of such Person, or of all or substantially all of such
Person's assets;
(viii) Any final judgment(s) for the payment of money in
excess of the sum of $500,000 in the aggregate shall be rendered against
Borrower or any subsidiary and such judgment or judgments shall not be satisfied
or discharged prior to the date on which any of its assets could be lawfully
sold to satisfy such judgment; or
(ix) The Borrower shall fail to issue and deliver shares of
Common Stock as provided herein upon conversion of the Debenture.
SECTION 8.02. REMEDIES UPON EVENT OF DEFAULT.
(a) If an Event of Default shall have occurred and be continuing, then
the Required Lenders may exercise any one or more of the following rights and
remedies, and any other remedies provided in any of the Loan Documents, as the
Required Lenders in their sole discretion may deem necessary or appropriate:
(i) declare the unpaid Principal Amount (after application of
any payments or installments received by the Lenders) of, and all interest then
accrued but unpaid on, the Debentures and any other liabilities hereunder to be
forthwith due and payable, whereupon the same shall forthwith become due and
payable without presentment, demand, protest, notice of default, notice of
acceleration or of intention to accelerate or other notice of any kind, all of
which Borrower hereby expressly waives, anything contained herein or in the
Debentures to the contrary notwithstanding;
(ii) reduce any claim to judgment; and
(iii) without notice of default or demand, pursue and enforce
any of the Lenders' rights and remedies under the Loan Documents, or otherwise
provided under or pursuant to any applicable law or agreement, all of which
rights may be specifically enforced.
SECTION 8.03. PERFORMANCE BY THE LENDERS.
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AGREEMENT (CONTINUED)
Should Borrower fail to perform any covenant, duty or agreement
contained herein or in any of the other Loan Documents, any Lender or Agent may
perform or attempt to perform such covenant, duty or agreement on behalf of
Borrower. In such event, Borrower shall, at the request of any Lender or Agent,
promptly pay any amount reasonably expended by any Lender or Agent in such
performance or attempted performance to any Lender or Agent at its principal
office, together with interest thereon, at the interest rate specified in the
Debenture, from the date of such expenditure until paid. Notwithstanding the
foregoing, it is expressly understood that any Lender or Agent assumes no
liability or responsibility for the performance of any duties of Borrower
hereunder or under any of the other Loan Documents.
SECTION 8.04. PAYMENT OF EXPENSES INCURRED BY THE LENDERS.
Upon the occurrence of a Default or an Event of Default, which
occurrence is not cured within the notice provisions, if any, provided herein,
Borrower agrees to pay and shall pay all costs and expenses (including
attorneys' fees and expenses) incurred by any Lender or Agent in connection with
the preservation and enforcement of the Lenders' rights under this Agreement,
the Debenture or any other Loan Document.
ARTICLE IX - REGISTRATION RIGHTS
SECTION 9.01. DEMAND REGISTRATION.
(a) Subject to the Holder's rights to convert all or part of the
Debentures, the Borrower hereby agrees to register, subject to the terms and
conditions set forth herein, all or any portion of the Registrable Securities on
one occasion at least 18 months after Closing if it shall receive a written
request from the Holders of at least thirty-three percent (33%) of the
Registrable Securities Then Outstanding that the Borrower file a registration
statement under the 1933 Act covering the registration of at least a majority of
the Registrable Securities Then Outstanding. The Borrower shall, within 20 days
of its receipt thereof, give written notice of such request to all Holders of
record of Registrable Securities. The Holders of said Registrable Securities
shall then have 15 days from the date of mailing of such notice by the Borrower
to request that all or a portion of their respective Registrable Securities be
included in said registration. The Borrower hereby agrees, subject to the
limitations hereof, to use its reasonable efforts to effect as soon as
reasonably possible, and in any event (if legally possible, and as allowed by
the SEC, and if no factor outside the Borrower's reasonable control prevents it)
within 150 days of the receipt of the initial written registration request, to
effect the registration under the 1933 Act of all Registrable Securities which
the Holders thereof (the "Initiating Holders") have requested.
(b) If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Borrower as a part of their request made pursuant to this Agreement,
and the Borrower shall include such information in the written notice to the
other Holders of Registrable Securities referred to in Section 9.01(a). In such
event, the right of any Holder to include its Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by the Borrower, the underwriter,
a majority in interest of the Initiating Holders and such Holder) is limited to
the extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with the Borrower as provided in
Section 9.03(e)) enter into an underwriting agreement in customary form with the
underwriter or
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AGREEMENT (CONTINUED)
underwriters selected for such underwriting by mutual agreement of the Borrower
and a majority in interest of the Initiating Holders, which agreement shall not
be unreasonably withheld. Notwithstanding any other provision of this Section
9.01, if the underwriter advises the Initiating Holders and the Borrower in
writing that marketing factors require a limitation of the number of shares to
be underwritten, then the Initiating Holder(s) shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated on a pro rata basis among all Holders that have
requested to participate in such registration. The rights of Holders shall be
senior to those of any Persons subsequently granted registration rights.
(c) Notwithstanding the foregoing, if the Borrower shall furnish to the
Initiating Holders a certificate signed by the President of the Borrower stating
that in the good faith judgment of the Board of Directors of the Borrower, it
would be materially detrimental to the Borrower and its shareholders for such
registration statement to be filed at that time, and it is therefore essential
to defer the filing of such registration statement, the Borrower shall have the
right to defer the commencement of such a filing for a period of not more than
180 days after receipt of the request of the Initiating Holders; provided,
however, that at least 12 months must elapse between any two such deferrals.
SECTION 9.02. "PIGGY-BACK" REGISTRATION.
If the Borrower proposes to register any of its capital stock under the
1933 Act in connection with the public offering of such securities for its own
account or for the account of its security holders, other than Holders of
Registrable Securities pursuant hereto (a "Piggy-Back Registration Statement"),
except for (i) a registration relating solely to the sale of securities to
participants in the Borrower's stock plans or employee benefit plans or (ii) a
registration relating solely to an transaction for which Form S-4 may be used,
then:
(a) The Borrower shall give written notice of such determination to
each Holder of Registrable Securities, and each such Holder shall have the right
to request, by written notice given to the Borrower within 15 days of the date
that such written notice was mailed by the Borrower to such Holder, that a
specific number of Registrable Securities held by such Holder be included in the
Piggy-Back Registration Statement (and related underwritten offering, if any);
(b) If the Piggy-Back Registration Statement relates to an underwritten
offering, the notice given to each Holder shall specify the name or names of the
managing underwriter or underwriters for such offering. In addition such notice
shall also specify the number of securities to be registered for the account of
the Borrower and for the account of its shareholders (other than the Holders of
Registrable Securities), if any;
(c) If the Piggy-Back Registration Statement relates to an underwritten
offering, each Holder of Registrable Securities to be included therein must
agree (i) to sell such Holder's Registrable Securities on the same basis as
provided in the underwriting arrangement approved by the Borrower, and (ii) to
timely complete and execute all questionnaires, powers of attorney, indemnities,
hold-back agreements, underwriting agreements and other documents required under
the terms of such underwriting arrangements or by the SEC or by any state
securities regulatory body;
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AGREEMENT (CONTINUED)
(d) If the managing underwriter or underwriters for the underwritten
offering under the Piggy-Back Registration Statement determines that inclusion
of all or any portion of the Registrable Securities in such offering would
materially adversely affect the ability of the underwriters for such offering to
sell all of the securities requested to be included for sale in such offering at
the best price obtainable therefor, the aggregate number of Registrable
Securities that may be sold by the Holders shall be limited to such number of
Registrable Securities, if any, that the managing underwriter or underwriters
determine may be included therein without such adverse effect as provided below.
If the number of securities proposed to be sold in such underwritten offering
exceeds the number of securities that may be sold in such offering, there shall
be included in the offering, first, up to the maximum number of securities to be
sold by the Borrower for its own account and for the account of other
stockholders (other than Holders of Registrable Securities), as they may agree
among themselves, and second, as to the balance, if any, Registrable Securities
requested to be included therein by the Holders thereof (pro rata as between
such Holders based upon the number of Registrable Securities initially proposed
to be registered by each), or in such other proportions as the managing
underwriter or underwriters for the offering may require; provided, however,
that in the event that the number of securities proposed to be sold in such
underwritten offering exceeds the number of securities that may be sold in such
offering pursuant to the terms and conditions set forth above and the Piggy-Back
Registration Statement is a result of public offering by the Borrower of its
securities for its own account, there shall be included in the offering, first,
up to the maximum number of securities to be sold by the Borrower for its own
account and second, as to the balance, if any, securities to be sold for the
account of the Borrower's stockholders (both the Holders of Registrable
Securities requested and such other stockholders of the Borrower requested to be
included therein) on a pro rata basis;
(e) Holders of Registrable Securities shall have the right to withdraw
their Registrable Securities from the Piggy-Back Registration Statement, but if
the same relates to an underwritten offering, they may only do so during the
time period and on the terms agreed upon among the underwriters for such
underwritten offering and the Holders of Registrable Securities; and
(f) The exercise of the registration rights of the Holders with respect
to any specific underwriters offering shall be subject to a 90-day delay at the
request of the managing underwriter.
SECTION 9.03. OBLIGATIONS OF THE BORROWER.
Whenever required to effect the registration of any Registrable
Securities pursuant to this Agreement, the Borrower shall, as expeditiously as
reasonably possible:
(a) Prepare and file with the SEC a registration statement with respect
to such Registrable Securities and use all reasonable efforts to cause such
registration statement to become effective, and keep such registration statement
effective until the sooner of all such Registrable Securities having been
distributed, or until 120 days have elapsed since such registration statement
became effective (subject to extension of this period as provided below);
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
1933 Act with respect to the disposition of all securities covered by such
registration statement, or
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AGREEMENT (CONTINUED)
120 days have elapsed since such registration statement became effective
(subject to the extension of this period as provided below);
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
1933 Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them;
(d) Use all reasonable efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Borrower shall not be required in connection therewith or as a
condition thereto to qualify as a broker-dealer in any states or jurisdictions
or to do business or to file a general consent to service of process in any such
states or jurisdictions;
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with the managing
underwriter of such offering, in usual and customary form reasonably
satisfactory to the Borrower and the Holders of a majority of the Registrable
Securities to be included in such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement;
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto and
covered by such registration statement is required to be delivered under the
1933 Act, of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing; and
(g) In the event of the notification provided for in Section 9.03(f)
above, the Borrower shall use its best efforts to prepare and file with the SEC
(and to provide copies thereof to the Holders) as soon as reasonably possible an
amended prospectus complying with the 1933 Act, and the period during which the
prospectus referred to in the notice provided for in Section 9.03(f) above
cannot be used and the time period prior to the use of the amended prospectus
referred to in this Section 9.03(g) shall not be counted in the 120 day period
of this Section 9.03.
SECTION 9.04. FURNISH INFORMATION.
(a) It shall be a condition precedent to the obligations of the
Borrower to take any action pursuant to this Article IX that the selling Holders
shall furnish to the Borrower any and all information reasonably requested by
the Borrower, its officers, directors, employees, counsel, agents or
representatives, the underwriter or underwriters, if any, and the SEC or any
other Governmental Authority, including but not limited to: (i) such information
regarding themselves, the Registrable Securities held by them, and the intended
method of disposition of such securities, as shall be required to effect the
registration of their Registrable Securities, and (ii) the identity of and
compensation to be paid to any proposed underwriter or broker-dealer to be
employed in connection therewith.
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AGREEMENT (CONTINUED)
(b) In connection with the preparation and filing of each registration
statement registering Registrable Securities under the 1933 Act, the Borrower
shall give the Holders of Registrable Securities on whose behalf such
Registrable Securities are to be registered and their underwriters, if any, and
their respective counsel and accountants, at such Holders' sole cost and expense
(except as otherwise set forth herein), such access to copies of the Borrower's
records and documents and such opportunities to discuss the business of the
Borrower with its officers and the independent public accountants who have
certified its financial statements as shall be reasonably necessary in the
opinion of such Holders and such underwriters or their respective counsel, to
conduct a reasonable investigation within the meaning of the 1933 Act.
SECTION 9.05. EXPENSES OF REGISTRATION.
Except as set forth below, all expenses, other than underwriting
discounts and commissions incurred in connection with not more than one demand
registration pursuant to Section 9.01 above or any number of "piggyback"
registration rights pursuant to Section 9.06, including, without limitation, all
registration, filing and qualification fees, printers' expenses, accounting and
legal fees and expenses of Borrower, and legal fees and expenses of one counsel
for the selling Holders, shall be borne by the Borrower.
SECTION 9.06. INDEMNIFICATION REGARDING REGISTRATION RIGHTS.
If any Registrable Securities are included in a registration statement
under this Article IX:
(a) To the extent permitted by law, the Borrower will indemnify and
hold harmless each Holder, the officers and directors of each Holder, any
underwriter (as defined in the 1933 Act) for such Holder and each person, if
any, who controls such Holder or underwriter within the meaning of the 1933 Act
or the 1934 Act, against any losses, claims, damages, liabilities (joint or
several) or any legal or other costs and expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action to which they may become subject under the 1933 Act, the
1934 Act or other federal or state law, insofar as such losses, claims, damages,
costs, expenses or liabilities (or actions in respect thereof) arise out of or
are based upon any of the following statements, omissions or violations
(collectively, a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact with respect to the Borrower or its securities
contained in such registration statement, including any preliminary prospectus
or final prospectus contained therein or any amendments or supplements therein;
(ii) the omission or alleged omission to state therein a material fact with
respect to the Borrower or its securities required to be stated therein or
necessary to make the statements therein not misleading; or (iii) any violation
or alleged violation by the Borrower of the 1933 Act, the 1934 Act, any federal
or state securities law or any rule or regulation promulgated under the 1933
Act, the 1934 Act or any state securities law. Notwithstanding the foregoing,
the indemnity agreement contained in this Section 9.06(a) shall not apply and
the Borrower shall not be liable (i) in any such case for any such loss, claim,
damage, costs, expenses, liability or action to the extent that it arises out of
or is based upon a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person, or (ii) for
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the prior written consent of the
Borrower, which consent shall not be unreasonably withheld.
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AGREEMENT (CONTINUED)
(b) To the extent permitted by law, each Holder who participates in a
registration pursuant to the terms and conditions of this Agreement shall
indemnify and hold harmless the Borrower, each of its directors and officers who
have signed the registration statement, each Person, if any, who controls the
Borrower within the meaning of the 1933 Act or the 1934 Act, each of the
Borrower's employees, agents, counsel and representatives, any underwriter and
any other Holder selling securities in such registration statement, or any of
its directors or officers, or any person who controls such Holder, against any
losses, claims, damages, costs, expenses, liabilities (joint or several) to
which the Borrower or any such director, officer, controlling person, employee,
agent, representative, underwriter, or other such Holder, or director, officer
or controlling person thereof, may become subject, under the 1933 Act, the 1934
Act or other federal or state law, only insofar as such losses, claims, damages,
costs, expenses or liabilities or actions in respect thereto arise out of or are
based upon any Violation, in each case to the extent and only to the extent that
such Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection with such.
Each such Holder will indemnify any legal or other expenses reasonably incurred
by the Borrower or any such director, officer, employee, agent representative,
controlling person, underwriter or other Holder, or officer, director or of any
controlling person thereof, in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this Section 9.06(b) shall not apply to amounts
paid in settlement of any such loss, claim, damage, costs, expenses, liability
or action if such settlement is effected without the prior written consent of
the Holder, which consent shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under this Section
9.06 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 9.06, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the reasonable fees and expenses
of such counsel to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential conflict of interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall not
relieve the indemnifying party of its obligations under this Section 9.06,
except to the extent that the failure results in a failure of actual notice to
the indemnifying party and such indemnifying party is materially prejudiced in
its ability to defend such action solely as a result of the failure to give such
notice.
(d) If the indemnification provided for in this Section 9.06 is
unavailable to an indemnified party under this Section in respect of any losses,
claims, damages, costs, expenses, liabilities or actions referred to herein,
then each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, costs, expenses, liabilities or actions
in such proportion as is appropriate to reflect the relative fault of the
Borrower, on the one hand and of the Holder, on the other, in connection with
the Violation that resulted in such losses, claims, damages, costs, expenses,
liabilities or actions. The relative fault of the Borrower, on the one hand, and
of the Holder, on the other, shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of the material fact or
the
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AGREEMENT (CONTINUED)
omission to state a material fact relates to information supplied by the
Borrower or by the Holder, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
(e) The Borrower, on the one hand, and the Holders, on the other hand,
agree that it would not be just and equitable if contribution pursuant to this
Section 9.06 were determined by a pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. The amount paid or payable by an
indemnified party as a result of losses, claims, damages, costs, expenses,
liabilities and actions referred to in the immediately preceding paragraph shall
be deemed to include, subject to the limitations set forth above, any reasonable
legal or other expenses incurred by such indemnified party in connection with
defending any such action or claim. Notwithstanding the provisions of this
Section 9.06, neither the Borrower nor the Holders shall be required to
contribute any amount in excess of the amount by which the total price at which
the securities were offered to the public exceeds the amount of any damages
which the Borrower or each such Holder has otherwise been required to pay by
reason of such Violation. No person guilty of fraudulent misrepresentations
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation.
SECTION 9.07. REPORTS UNDER THE 1934 ACT.
So long as the Borrower has a class of securities registered pursuant
to Section 12 of the 1934 Act, with a view to making available to the Holders
the benefits of Rule 144 promulgated under the 1933 Act ("Rule 144") and any
other rule or regulation of the SEC that may at any time permit a Holder to sell
securities of the Borrower to the public without registration or pursuant to a
registration on Form S-3, if applicable, the Borrower agrees to use its
reasonable efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times;
(b) File with the SEC in a timely manner all reports and other
documents required of the Borrower under the 1933 Act and the 1934 Act;
(c) Use its best efforts to include all Common Stock covered by such
registration statement on NASDAQ if the Common Stock is then quoted on NASDAQ;
or list all Common Stock covered by such registration statement on such
securities exchange on which any of the Common Stock is then listed; or, if the
Common Stock is not then quoted on NASDAQ or listed on any national securities
exchange, use its best efforts to have such Common Stock covered by such
registration statement quoted on NASDAQ or, at the option of the Borrower,
listed on a national securities exchange; and
(d) Furnish to any Holder, so long as the Holder owns any Registrable
Securities, (i) forthwith upon request a copy of the most recent annual or
quarterly report of the Borrower and such other SEC reports and documents so
filed by the Borrower, and (ii) such other information (but not any opinion of
counsel) as may be reasonably requested by any Holder seeking to avail himself
of any rule or regulation of the SEC which permits the selling of any such
securities without registration or pursuant to such form.
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AGREEMENT (CONTINUED)
SECTION 9.08. ASSIGNMENT OF REGISTRATION RIGHTS.
Subject to the terms and conditions of this Agreement, and the
Debentures, the right to cause the Borrower to register Registrable Securities
pursuant to this Agreement may be assigned by Holder to any transferee or
assignee of such securities; provided that said transferee or assignee is a
transferee or assignee of at least ten percent (10%) of the Registrable
Securities and provided that the Borrower is, within a reasonable time after
such transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act; it being the intention that so long as Holder
holds any Registrable Securities hereunder, either Holder or its transferee or
assignee of at least ten percent may exercise the demand right to registration
and piggy-back registration rights hereunder. Other than as set forth above, the
parties hereto hereby agree that the registration rights hereunder shall not be
transferable or assigned and any contemplated transfer or assignment in
contravention of this Agreement shall be deemed null and void and of no effect
whatsoever.
SECTION 9.09. OTHER MATTERS.
(a) Each Holder of Registrable Securities hereby agrees by acquisition
of such Registrable Securities that, with respect to each offering of the
Registrable Securities, whether each Holder is offering such Registrable
Securities in an underwritten or nonunderwritten offering, such Holder will
comply with Rules 10b-2, 10b-6 and 10b-7 of the 1934 Act and such other or
additional anti-manipulation rules then in effect until such offering has been
completed, and in respect of any nonunderwritten offering, in writing will
inform the Borrower, any other Holders who are selling shareholders, and any
national securities exchange upon which the securities of the Borrower are
listed, that the Registrable Securities have been sold and will, upon the
Borrower's request, furnish the distribution list of the Registrable Securities.
In addition, upon the request of the Borrower, each Holder will supply the
Borrower with such documents and information as the Borrower may reasonably
request with respect to the subject matter set forth and described in this
Section 9.09.
(b) Each Holder of Registrable Securities hereby agrees by acquisition
of such Registrable Securities that, upon receipt of any notice from the
Borrower of the happening of any event which makes any statement made in the
registration statement, the prospectus or any document incorporated therein by
reference, untrue in any material respect or which requires the making of any
changes in the registration statement, the prospectus or any document
incorporated therein by reference, in order to make the statements therein not
misleading in any material respect, such Holder will forthwith discontinue
disposition of Registrable Securities under the prospectus related to the
applicable registration statement until such Holder's receipt of the copies of
the supplemented or amended prospectus, or until it is advised in writing by the
Borrower that the use of the prospectus may be resumed, and has received copies
of any additional or supplemental filings which are incorporated by reference in
the prospectus.
(c) The Borrower hereby agrees not to effect any public sale or other
distribution of its equity securities, or any securities convertible into or
exchangeable or exercisable for such equity securities, during the period
commencing on the 7th day prior to, and ending on the 90th day (subject to
extension as provided in Section 9.03 hereof) following the effective date of
any underwritten demand registration, other than pursuant to Form S-8.
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AGREEMENT (CONTINUED)
SECTION 9.10. TERMINATION OF RIGHTS.
The Holders' right to demand registration of Registrable Securities
shall terminate after the Holder has exercised one demand registration right at
the expense of the Borrower as provided in Article IX of this Agreement. The
Holders' right to piggy-back registration of Registrable Securities shall
terminate after the earlier of two years after the date of issuance of the
Debentures or the date upon which the Registrable Securities may be sold under
Rule 144(k).
ARTICLE X - INFORMATION; MEETINGS WITH MANAGEMENT
SECTION 10.01. INFORMATION.
Borrower shall furnish to each Lender within three (3) business days of
receipt or occurrence all material correspondence, reports, memoranda and other
information provided by Borrower to, and all minutes and consents of, the Board
of Directors, committees of the Board of Directors, and shareholders of
Borrower, together with all information provided by Borrower to its Senior
Obligations lenders.
SECTION 10.02. MEETINGS WITH MANAGEMENT.
Borrower's executive management shall meet quarterly with each Lender
or its representative, at the expense of Borrower, upon at least three (3)
business days' notice by the Required Lenders of any such meeting. Borrower may
postpone any such meeting for up to five (5) business days if it believes, in
good faith, that such a meeting will be disruptive to its business, unless a
Default exists and is continuing.
SECTION 10.03. NONLIABILITY OF THE LENDERS.
The relationship between Borrower and the Lenders is, and shall at all
times remain, solely that of borrower and lender. The Lenders neither undertake
nor assume any responsibility or duty to the Borrower to review, inspect,
supervise, pass judgment upon, or inform Borrower of any matter in connection
with any phase of Borrower's business, operations, or condition, financial or
otherwise. Borrower shall rely entirely upon its own judgment with respect to
such matters, and any review, inspection, supervision, exercise of judgment, or
information supplied to Borrower by the Lenders, or any representative or agent
of the Lenders, in connection with any such matter is for the protection of the
Lenders, and neither Borrower nor any third party is entitled to rely thereon.
ARTICLE XI - AGENCY AND INTER-LENDER PROVISIONS
SECTION 11.01. THE LENDERS' REPRESENTATIONS AND WARRANTIES TO OTHER LENDERS.
Each Lender represents and warrants to the other Lenders and the Agent:
(a) It is legal for it to make its portion of the Loan, and the making
of such portion of the Loan complies with laws applicable to it;
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AGREEMENT (CONTINUED)
(b) It has made, without reliance upon any other Lenders, its own
independent review (including any desired investigations and inspections) of,
and it accepts and approves, the Loan, this Agreement and the associated
documents and all other matters and information which it deems pertinent. It
acknowledges that the Loan Documents are a complete statement of all
understandings and respective rights and obligations between and among the
Lenders and Borrowers regarding the Loan.
(c) None of the Lenders have made any express or implied representation
or warranty to any other Lender with respect to this transaction.
(d) It will, independently and without reliance upon any other Lender,
and based upon such documents and information as it shall deem appropriate at
the time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement, and will make such
investigation as it deems necessary to inform itself as to the Loan, the Loan
Document, the Borrower and any collateral; provided, however, nothing contained
in this Section shall limit Agent's obligation to provide the other Lenders with
the information and documents Agent is expressly required to deliver under this
Agreement.
(e) The relationship of each Lender is, and shall at all times remain,
solely that of each Lender of its respective Loan. The Lenders are not partners
or joint venturers in connection with the Loan.
SECTION 11.02. WAIVER OF LOAN PROVISIONS OR INTEREST OR PRINCIPAL PAYMENTS.
A waiver of an interest or principal payment, a declaration of a
Default or any amendment, modification or waiver of this Agreement or the
Debentures will require the consent of the Required Lenders.
SECTION 11.03. AGENCY.
(a) Renaissance III and Renaissance PLC (the "Renaissance Funds") each
hereby designate and appoint Renaissance Group as its Agent under this Agreement
and authorizes the Agent to take such action on its behalf under the provisions
of this Agreement and the other Loan Documents and to exercise such powers as
are set forth herein or therein, together with such other powers as are
reasonable incidental thereto. In performing its functions and duties under this
Agreement, the Agent shall act solely as agent of Renaissance III and
Renaissance PLC and does not assume and shall not be deemed to have assumed any
obligation toward or relationship of agency or trust with or for the Borrower or
BOCPII. The Agent may perform any of its duties under this Agreement, or under
the other Loan Documents, by or through its agents or employees.
(b) The Agent shall have no duties or responsibilities except those
expressly set forth in this Agreement or in the other Loan Documents. Except as
expressly provided herein, the duties of the Agent shall be mechanical and
administrative in nature. The Agent shall have and may use its sole discretion
with respect to exercising or refraining from taking any actions which the Agent
is expressly entitled to take or assert under this Agreement and the other Loan
Documents. The Agent shall not have by reason of this Agreement a fiduciary
relationship with respect to the Renaissance Funds. Nothing in this Agreement or
any of the other Loan Documents, express or implied, is intended to or shall be
construed to impose upon the Agent any obligations in respect of this Agreement
or any of the other Loan Documents except as expressly set forth herein or
therein. If the Agent seeks
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AGREEMENT (CONTINUED)
the consent or approval of the Renaissance Funds to the taking or refraining
from taking any action hereunder, the Agent shall send notice thereof to the
Renaissance Funds. The Agent may employ agents, co-agents and attorneys-in-fact
and shall not be responsible to Renaissance III, Renaissance PLC, the Borrower
or BOCPII , except as to money or securities received by it or its authorized
agents, for the negligence or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care.
(c) Neither the Agent nor any of its officers, directors, employees or
agents shall be liable to the Renaissance Funds for any action taken or omitted
by it or any of them under this Agreement or under any of the other Loan
Documents, or in connection herewith or therewith, except that no Person shall
be relieved of any liability imposed by law, intentional tort or gross
negligence. The Agent shall not be not be responsible to the Renaissance Funds
for any recitals, statements, representations or warranties contained in this
Agreement or for the execution, effectiveness, genuineness, validity,
enforceability, collectability, or sufficiency of this Agreement or any of the
other Loan Documents or any of the transactions contemplated thereby, or for the
financial condition of any of the Borrowers. The Agent shall not be required to
make any inquiry concerning either the performance or observance of any of the
terms, provisions or conditions of this Agreement or any of the other Loan
Documents or the financial condition of the Borrower, or the existence or
possible existence of any Default or Event of Default. Agent shall give the
Renaissance Funds notice of any Default or Event of Default of which Agent has
actual notice. The Agent may at any time request instructions from Renaissance
III and Renaissance PLC with respect to any actions or approvals which by the
terms of this Agreement or of any of the other Loan Documents the Agent is
permitted or required to take or to grant, and if such instructions are promptly
requested, the Agent shall be absolutely entitled to refrain from taking any
action or to withhold any approval and shall not be under any liability
whatsoever to any Person for refraining from any action or withholding any
approval under any of the Loan Documents until it shall have received such
instructions from the Renaissance Funds. Without limiting the foregoing, the
Renaissance Funds shall not have any right of action whatsoever against the
Agent as a result of the Agent acting or refraining from acting under this
Agreement or any of the other Loan Documents in accordance with the instructions
of the Renaissance Funds.
(d) The Agent shall be entitled to rely upon any written notices,
statements, certificates, orders or other documents or any telephone message
believed by it in good faith to be genuine and correct and to have been signed,
sent or made by the proper Person, and with respect to all matters pertaining to
this Agreement or any of the other Loan Documents and its duties hereunder or
thereunder, upon advice of counsel selected by it.
(e) To the extent that the Agent is not reimbursed and indemnified by
the Borrower, Renaissance III and Renaissance PLC will reimburse and indemnify
the Agent for and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses, advances or disbursements
of any kind or nature whatsoever which may be imposed on, incurred by or
asserted against the Agent in any way relating to or arising out of this
Agreement or any of the other Loan Documents or any action taken or omitted by
the Agent under this Agreement or any of the other Loan Documents, in proportion
to the Renaissance Funds' pro rata share. The obligations of Renaissance III and
Renaissance PLC under this indemnification provision shall survive the payment
in full of the Loans and the termination of this Agreement.
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AGREEMENT (CONTINUED)
ARTICLE XII - MISCELLANEOUS
SECTION 12.01. STRICT COMPLIANCE.
Any waiver by the Required Lenders of any breach or any term or
condition of this Agreement or the other Loan Documents shall not be deemed a
waiver of any other breach, nor shall any failure to enforce any provision of
this Agreement or the other Loan Documents operate as a waiver of such provision
or of any other provision, nor constitute nor be deemed a waiver or release of
the Borrower for anything arising out of, connected with or based upon this
Agreement or the other Loan Documents.
SECTION 12.02. WAIVERS AND MODIFICATIONS.
All modifications, consents, amendments or waivers (herein "Waivers")
of any provision of this Agreement, the Debentures or any other Loan Documents,
and any consent to departure therefrom, shall be effective only if the same
shall be in writing by the Required Lenders and then shall be effective only in
the specific instance and for the purpose for which given. No notice or demand
given in any case shall constitute a waiver of the right to take other action in
the same, similar or other instances without such notice or demand. No failure
to exercise, and no delay in exercising, on the part of Agent or any Lender, any
right hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise any other right. The rights of any Lender hereunder and under the other
Loan Documents shall be in addition to all other rights provided by law.
SECTION 12.03. LIMITATION ON LIABILITY.
The duties, warranties, covenants and promises arising from the Loan
Documents of each Lender to Borrower shall be several and not joint, and the
Borrower shall have no legal or equitable cause of action against any Lender (or
its successors or assigns) for any liability of any other Lender (or its
successors or assigns).
SECTION 12.04. CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS AND JURISDICTION.
Any suit, action or proceeding against the Borrower with respect to
this Agreement, the Debentures or any judgment entered by any court in respect
thereof, may be brought in the courts of the State of Texas, County of Dallas,
the State of Ohio, County of Franklin, or in the United States courts located in
the States of Texas or Ohio, as each Lender in its sole discretion may elect,
and Borrower hereby submits to the nonexclusive jurisdiction of such courts for
the purpose of any such suit, action or proceeding. Borrower hereby agrees that
service of all writs, process and summonses in any such suit, action or
proceeding brought in the State of Texas may be brought upon, and Borrower
hereby irrevocably appoints, the CT Corporation System, Dallas, Texas, as its
true and lawful attorney-in-fact in the name, place and stead of Borrower to
accept such service of any and all such writs, process and summonses. Borrower
hereby irrevocably waives any objections which it may now or hereafter have to
the laying of venue of any suit, action or proceeding arising out of or relating
to this Agreement or any Debenture brought in such courts, and hereby further
irrevocably waives any claim that any such suit, action or proceeding brought in
any such court has been brought in any inconvenient forum.
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AGREEMENT (CONTINUED)
SECTION 12.05. ARBITRATION.
(a) Upon the demand of the Required Lenders or Borrower (collectively
the "parties"), made before the institution of any judicial proceeding or not
more than 60 days after service of a complaint, third party complaint,
cross-claim or counterclaim or any answer thereto or any amendment to any of the
above, any Dispute (as defined below) shall be resolved by binding arbitration
in accordance with the terms of this arbitration clause. A "Dispute" shall
include any action, dispute, claim, or controversy of any kind, whether founded
in contract, tort, statutory or common law, equity, or otherwise, now existing
or hereafter occurring between the parties arising out of, pertaining to or in
connection with this Agreement, any document evidencing, creating, governing, or
securing any indebtedness guaranteed pursuant to the terms hereof, or any
related agreements, documents, or instruments (the "Documents"). The parties
understand that by this Agreement they have decided that the Disputes may be
submitted to arbitration rather that being decided through litigation in court
before a judge or jury and that once decided by an arbitrator the claims
involved cannot later be brought, filed, or pursued in court. IF BORROWER SHALL
FAIL TO PAY (OR SHALL STATE IN WRITING AN INTENTION NOT TO PAY OR ITS INABILITY
TO PAY) NOT LATER THAN THREE (3) DAYS AFTER THE DUE DATE, ANY INSTALLMENT OF
INTEREST ON OR PRINCIPAL OF, ANY DEBENTURE OR ANY FEE, EXPENSE OR OTHER PAYMENT
REQUIRED HEREUNDER, THE LENDERS MAY, AT THEIR OPTION, ENFORCE THEIR RIGHTS
OUTSIDE THE ARBITRATION PROVISION FOUND IN THIS SECTION 12.05 OR ANY DEBENTURE.
(b) Arbitrations conducted pursuant to this Agreement, including
selection of arbitrators, shall be administered by the American Arbitration
Association ("Administrator") pursuant to the Commercial Arbitration rules of
the Administrator. Arbitrations conducted pursuant to the terms hereof shall be
governed by the provisions of the Federal Arbitration Act (Title 9 of the United
States Code), and to the extent the foregoing are inapplicable, unenforceable or
invalid, the laws of the State of Texas. Judgment upon any award rendered
hereunder may be entered in any court having jurisdiction; provided, however,
that nothing contained herein shall be deemed to be a waiver by any party that
is a bank of the protections afforded to it under 12 U.S.C. 91 or similar
governing state law. Any party who fails to submit to binding arbitration
following a lawful demand by the opposing party shall bear all costs and
expenses, including reasonable attorneys' fees, incurred by the opposing party
in compelling arbitration of any Dispute.
(c) No provision of, nor the exercise of any rights under, this
arbitration clause shall limit the right of any party to (i) foreclose against
any real or personal property collateral or other security, (ii) exercise
self-help remedies (including repossession and setoff rights) or (iii) obtain
provisional or ancillary remedies such as injunctive relief, sequestration,
attachment, replevin, garnishment, or the appointment of a receiver from a court
having jurisdiction. Such rights can be exercised at any time except to the
extent such action is contrary to a final award or decision in any arbitration
proceeding. The institution and maintenance of an action as described above
shall not constitute a waiver of the right of any party, including the
plaintiff, to submit the Dispute to arbitration, nor render inapplicable the
compulsory arbitration provisions hereof. Any claim or Dispute related to
exercise of any self-help, auxiliary or other exercise of rights under this
section shall be a Dispute hereunder.
(d) Arbitrator(s) shall resolve all Disputes in accordance with the
applicable substantive law of the State of Texas. Arbitrator(s) may make an
award of attorneys' fees and expenses if permitted by law or the agreement of
the parties. All statutes of limitation applicable to any Dispute shall apply to
any proceeding in accordance with this arbitration clause. Any arbitrator
selected to act as the only arbitrator in a Dispute shall be
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AGREEMENT (CONTINUED)
required to be a practicing attorney with not less than five (5) years practice
in commercial law in the State of Texas. With respect to a Dispute in which the
claims or amounts in controversy do not exceed five hundred thousand dollars
($500,000), a single arbitrator shall be chosen and shall resolve the Dispute.
In such case the arbitrator shall have authority to render an award up to but
not to exceed five hundred thousand dollars ($500,000) including all damages of
any kind whatsoever, costs, fees and expenses. Submission to a single arbitrator
shall be a waiver of all parties' claims to recover more than five hundred
thousand dollars ($500,000). A Dispute involving claims or amounts in
controversy exceeding five hundred thousand dollars ($500,000) shall be decided
by a majority vote of a panel of three arbitrators ("Arbitration Panel"), one of
whom must possess the qualifications to sit as a single arbitrator in a Dispute
decided by one arbitrator. If the arbitration is consolidated with one conducted
pursuant to the terms of an agreement between the Required Lenders and the
Borrower related to the indebtedness guaranteed, then the Arbitration Panel
shall be one which meets the criteria set forth between the Required Lenders and
Borrower. Arbitrator(s) may, in the exercise of their discretion, at the written
request of a party, (i) consolidate in a single proceeding any multiple party
claims that are substantially identical and all claims arising out of a single
loan or series of loans including claims by or against borrower(s), guarantors,
sureties and/or owners of collateral if different from the Borrower, and (ii)
administer multiple arbitration claims as class actions in accordance with Rule
23 of the Federal Rules of Civil Procedure. The arbitrator(s) shall be empowered
to resolve any dispute regarding the terms of this Agreement or any Dispute or
any claim that all or any part (including this provision) is void or voidable
but shall have no power to change or alter the terms of this Agreement. The
award of the arbitrator(s) shall be in writing and shall specify the factual and
legal basis for the award.
(e) To the maximum extent practicable, the Administrator, the
arbitrator(s) and the parties shall take any action necessary to require that an
arbitration proceeding hereunder be concluded within 180 days of the filing of
the Dispute with the Administrator. The arbitrator(s) shall be empowered to
impose sanctions for any party's failure to proceed within the times established
herein. Arbitration proceedings hereunder shall be conducted in Texas at a
location determined by the Administrator. In any such proceeding a party shall
state as a counterclaim any claim which arises out of the transaction or
occurrence or is in any way related to the Documents which does not require the
presence of a third party which could not be joined as a party in the
proceeding, The provisions of this arbitration clause shall survive any
termination, amendment, or expiration of the Documents and repayment in full of
sums owed to the Lenders by Borrower unless the parties otherwise expressly
agree in writing. Each party agrees to keep all Disputes and arbitration
proceedings strictly confidential, except for disclosures of information
required in the ordinary course of business of the parties or as required by
applicable law or regulation.
SECTION 12.06. INVALID PROVISIONS.
If any provision of any Loan Document is held to be illegal, invalid or
unenforceable under present or future laws during the term of this Agreement,
such provision shall be fully severable; such Loan Document shall be construed
and enforced as if such illegal, invalid or unenforceable provision had never
comprised a part of such Loan Document; and the remaining provisions of such
Loan Document shall remain in full force and effect and shall not be affected by
the illegal, invalid or unenforceable provision or by its severance from such
Loan Document. Furthermore, in lieu of each such illegal, invalid or
unenforceable provision shall be added as part of such Loan Document a provision
mutually agreeable to Borrower and the Lenders as similar in terms to such
illegal, invalid or unenforceable provision as may be possible and be legal,
valid and enforceable. In the event Borrower and the Lenders are unable to agree
upon a provision to be added to the Loan Document within a period of ten (10)
business
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AGREEMENT (CONTINUED)
days after a provision of the Loan Document is held to be illegal, invalid or
unenforceable, then a provision acceptable to independent arbitrators, such to
be selected in accordance with the provisions of the American Arbitration
Association, as similar in terms to the illegal, invalid or unenforceable
provision as is possible and be legal, valid and enforceable shall be added
automatically to such Loan Document. In either case, the effective date of the
added provision shall be the date upon which the prior provision was held to be
illegal, invalid or unenforceable.
SECTION 12.07. MAXIMUM INTEREST RATE.
(a) Regardless of any provision contained in any of the Loan Documents,
the Lenders shall never be entitled to receive, collect or apply as interest on
the Debentures any amount in excess of interest calculated at the Maximum Rate,
and, in the event that any Lender ever receives, collects or applies as interest
any such excess, the amount which would be excessive interest shall be deemed to
be a partial prepayment of principal and treated hereunder as such; and, if the
principal amount of the Obligation is paid in full, any remaining excess shall
forthwith be paid to Borrower. In determining whether or not the interest paid
or payable under any specific contingency exceeds interest calculated at the
Maximum Rate, Borrower and the Lenders shall, to the maximum extent permitted
under applicable law, (i) characterize any nonprincipal payment as an expense,
fee or premium rather than as interest; (ii) exclude voluntary prepayments and
the effects thereof, and (iii) amortize, pro rate, allocate and spread, in equal
parts, the total amount of interest throughout the entire contemplated term of
the Debentures; provided that, if the Debentures are paid and performed in full
prior to the end of the full contemplated term thereof, and if the interest
received for the actual period of existence thereof exceeds interest calculated
at the Maximum Rate, the Lenders shall refund to Borrower the amount of such
excess or credit the amount of such excess against the principal amount of the
Debentures and, in such event, the Lenders shall not be subject to any penalties
provided by any laws for contracting for, charging, taking, reserving or
receiving interest in excess of interest calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate
of interest permitted by applicable law on such day that at any time, or from
time to time, may be contracted for, taken, reserved, charged or received on the
Indebtedness evidenced by the Debentures under the laws which are presently in
effect of the United States of America and the laws of any other jurisdiction
which are or may be applicable to the holders of the Debentures and such
Indebtedness or, to the extent permitted by law, under such applicable laws of
the United States of America and the laws of any other jurisdiction which are or
may be applicable to the holder of the Debentures and which may hereafter be in
effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
SECTION 12.08. PARTICIPATIONS AND ASSIGNMENTS OF THE DEBENTURES.
(a) The Lenders and the Agent shall have the right to enter into a
participation agreement with any other party with respect to the Debentures or
its affiliates, or to sell all or any part of the Debentures, but any
participation or sale shall not affect the rights and duties of any such Lender
or the Agent hereunder vis-a-vis Borrower. In the event that all or any portion
of the Loan shall be, at any time, assigned, transferred or conveyed to other
parties, any action, consent or waiver (except for compromise or extension of
maturity), to be given or taken by any Lender or the Agent hereunder (herein
"Action"), shall be such action as taken by the holders of a majority
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AGREEMENT (CONTINUED)
in amount of the Principal Amount of the Debentures then outstanding, as such
holders are recorded on the books of the Borrower and represented by the Agent
as described in subsection (b) below.
(b) Assignment or sale of the Debentures shall be effective, on the
books of the Borrower only upon (i) endorsement of the Debenture, or part
thereof, to the proposed new holder, along with a current notation of the amount
of payments or installments received and net Principal Amount yet unfunded or
unpaid, and presentment of such Debenture to the Borrower for issue of a
replacement Debenture, or Debentures, in the name of the new holder; and (ii)
delivery of an opinion of counsel, reasonably satisfactory to Borrower, that
transfer shall not require registration or qualification under applicable state
or federal securities laws.
(c) The Debentures may be sold, transferred or assigned only to
Affiliates of the Lenders or permitted transferees. With the consent of the
Borrower, which shall not be unreasonably withheld, BOCPII may sell, transfer or
assign no less than $5 million principal amount of Debentures, in any case, to
not more than three (3) unaffiliated purchasers or their affiliates (if they act
through an agent).
SECTION 12.09. CONFIDENTIALITY.
(a) All financial reports or information that are furnished to the
Lenders, or its director designee or other representatives, pursuant to this
Agreement or pursuant to the Debentures or other Loan Documents shall be treated
as confidential unless and to the extent that such information has been
otherwise disclosed by the Borrower, but nothing herein contained shall limit or
impair the Lenders' right to disclose such reports to any appropriate
Governmental Authority, or to use such information to the extent pertinent to an
evaluation of the Obligation, or to enforce compliance with the terms and
conditions of this Agreement, or to take any lawful action which the Lenders
deems necessary to protect its interests under this Agreement.
(b) The Lenders and the Agent shall use their reasonable efforts to
protect and preserve the confidentiality of such information, except for such
disclosure as shall be required for compliance by the Lenders or its director
designees with SEC reporting requirements or otherwise as a matter of law. The
provisions of Section 5.01 notwithstanding, Borrower may refuse to provide
information as required pursuant thereto to an assignee or successor in interest
to the Lenders unless and until such assignee or successor shall have executed
an agreement to maintain the confidentiality of the information as provided
herein.
SECTION 12.10. BINDING EFFECT.
The Loan Documents shall be binding upon and inure to the benefit of
Borrower and the Lenders and their respective successors, assigns and legal
representatives; provided, however, that Borrower may not, without the prior
written consent of the Lenders, assign any rights, powers, duties or obligations
thereunder.
SECTION 12.11. NO THIRD PARTY BENEFICIARY.
The parties do not intend the benefits of this Agreement to inure to
any third party, nor shall this Agreement be construed to make or render the
Lenders liable to any materialman, supplier, contractor, subcontractor,
purchaser or lessee of any property owned by Borrower, or for debts or claims
accruing to any such persons against Borrower.
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AGREEMENT (CONTINUED)
Notwithstanding anything contained herein or in the Debentures, or in any other
Loan Document, no conduct by any or all of the parties hereto, before or after
signing this Agreement nor any other Loan Document, shall be construed as
creating any right, claim or cause of action against the Lenders, or any of its
officers, directors, agents or employees, in favor of any materialman, supplier,
contractor, subcontractor, purchaser or lessee of any property owned by
Borrower, nor to any other person or entity other than Borrower.
SECTION 12.12. ENTIRETY.
This Agreement and the Debentures and the other Loan Documents issued
pursuant thereto contain the entire agreement between the parties and supersede
all prior agreements and understandings, written or oral (if any), relating to
the subject matter hereof and thereof.
SECTION 12.13. HEADINGS.
Section headings are for convenience of reference only and, except as a
means of identification of reference, shall in no way affect the interpretation
of this Agreement.
SECTION 12.14. SURVIVAL.
All representations and warranties made by Borrower herein shall
survive delivery of the Debentures and the making of the Loans.
SECTION 12.15. MULTIPLE COUNTERPARTS.
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same agreement, and any of the
parties hereto may execute this Agreement by signing any such counterpart.
SECTION 12.16. NOTICES.
(a) Any notices or other communications required or permitted to be
given by this Agreement or any other documents and instruments referred to
herein must be (i) given in writing and personally delivered, mailed by prepaid
certified or registered mail or sent by overnight service, such as Federal
Express, or (ii) made by telex or facsimile transmission delivered or
transmitted to the party to whom such notice or communication is directed, with
confirmation thereupon given in writing and personally delivered or mailed by
prepaid certified or registered mail.
(b) Any notice to be mailed, sent or personally delivered shall be
mailed or delivered to the principal offices of the party to whom such notice is
addressed, as that address is specified herein below. Any such notice or other
communication shall be deemed to have been given (whether actually received or
not) on the day it is mailed, postage prepaid, or sent by overnight service or
personally delivered or, if transmitted by telex or facsimile transmission, on
the day that such notice is transmitted; provided, however, that any notice by
telex or facsimile transmission, received by any Borrower or the Lenders after
4:00 p.m., Standard Time, at the recipient's address,
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AGREEMENT (CONTINUED)
on any day, shall be deemed to have been given on the next succeeding business
day. Any party may change its address for purposes of this Agreement by giving
notice of such change to the other parties.
If to Borrower to:
Play By Play Toys & Novelties, Inc.
4400 Tejasco
San Antonio, Texas 78218-0267
210/829-4666
210/824-6565 (fax)
with a copy to:
David R. Schneider, Esq.
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010-3095
713/651-3639
713/651-5246 (fax)
If to the Lenders to:
Renaissance Capital Growth & Income Fund III, Inc.
Renaissance US Growth & Income Trust PLC
8080 North Central Expressway, Suite 210-LB59
Dallas, Texas 75206
214/891-8294
214/891-8291 (fax)
Banc One Capital Partners II, Ltd.
Attention Suzanne B. Kriscunas
300 Crescent Court, Suite 1600
Dallas, Texas 75201
214/979-4364
214/979-4355 (fax)
Banc One Capital Partners II, Ltd.
Attention John P. Witten, Esq.
150 East Gay Street
Columbus, Ohio 43215
614/217-1249
614/217-1217 (fax)
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AGREEMENT (CONTINUED)
with a copy to:
Norman R. Miller, Esq.
Wolin, Ridley & Miller, LLP
1717 Main Street, Suite 3100
Dallas, Texas 75201
214/939-4906
214/939-4949 (fax)
If to Agent to:
Renaissance Capital Group, Inc.
8080 North Central Expressway, Suite 210-LB59
Dallas, Texas 75206
214/891-8294
214/891-8291 (fax)
with a copy to:
Norman R. Miller, Esq.
Wolin, Ridley & Miller, LLP
1717 Main Street, Suite 3100
Dallas, Texas 75201
214/939-4906
214/939-4949 (fax)
Any notice delivered personally in the manner provided herein will be
deemed given to the party to whom it is directed upon the party's (or its
agent's) actual receipt. Any notice addressed and mailed in the manner provided
here will be deemed given to the party to whom it is addressed at the close of
business, local time of the recipient, on the fourth business day after the day
it is placed in the mail, or, if earlier, the time of actual receipt.
SECTION 12.17. GOVERNING LAW.
THIS LOAN AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND DELIVERED,
AND IS INTENDED TO BE PERFORMED IN THE STATE OF TEXAS, AND THE SUBSTANTIVE LAWS
OF SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA
SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS
LOAN AGREEMENT.
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AGREEMENT (CONTINUED)
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
executed and delivered, as of the date and year first above written.
BORROWER
Play By Play Toys & Novelties, Inc.
By:
Mark Gawlik, President and Chief Operating Officer
THE LENDERS
Renaissance US Growth & Income Trust PLC
By:
Vance M. Arnold, Vice President
Renaissance Capital Growth & Income Fund III, Inc.
By:
Vance M. Arnold, Vice President
Banc One Capital Partners II, Ltd.
By: BOCP Holdings Corporation, Manager
By:
Suzanne B. Kriscunas
Authorized Signer
AGENT
Renaissance Capital Group, Inc.
By:
Vance M. Arnold, Executive Vice President
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<PAGE>
SCHEDULES TO CONVERTIBLE LOAN AGREEMENT
Schedule 4.03 Schedule of Conflicts or Consents
Schedule 4.05 Schedule of Permitted Liens
Schedule 4.06 Schedule of Any Material Adverse Change
Schedule 4.08 Schedule of Material Agreements
Schedule 4.09 Schedule of Litigation
Schedule 4.10 Schedule of Unpaid Taxes
Schedule 4.15 Environmental Matters
Schedule 4.17 Schedule of Agreements between the Borrower and any
of its officers, directors, and principal
shareholders, including employment agreements
Schedule 4.18 Schedule of Subsidiaries
Schedule 4.23 Schedule of Insurance
Schedule 4.24 Schedule of Licenses, Trademarks, Service Marks and
Copyrights
Schedule 7.01 Schedule of Financial Ratios
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SCHEDULE 7.01 FINANCIAL RATIOS
(a) CURRENT RATIO. The Borrower will not permit its Current Ratio as of the
end of each fiscal quarter to be less than 1.60: 1.
(b) INDEBTEDNESS TO EBITDA RATIO. The Borrower will not permit its ratio of
Indebtedness to Consolidated Trailing Twelve Months EBITDA as of the
end of each fiscal quarter to exceed the following respective limits:
FOR FISCAL QUARTERS MAXIMUM
Beginning 7/31/97 through 7/31/98 4.00: 1
Beginning 10/31/98 through 7/31/99 3.75: 1
Beginning 10/31/99 through 7/31/2000 3.50: 1
After 7/31/2000 3.25: 1
(c) INDEBTEDNESS TO TOTAL CAPITALIZATION RATIO. The Borrower will not
permit its ratio of Indebtedness to Total Capitalization as of the end
of each fiscal quarter to exceed the following respect limits:
FOR FISCAL QUARTERS MAXIMUM
Beginning 7/31/97 through 7/31/98 60.0%
After 10/30/98 55.0%
(d) FIXED CHARGE COVERAGE RATIO. The Borrower will not permit its Fixed
Charge Coverage Ratio as of the end of each fiscal quarter to be less
than 1.0: 1.
52
EXHIBIT 10.10
*Omitted and filed separately with the Commission.
RETAIL LICENSE
WARNER BROS. CONSUMER PRODUCTS
#3775-WBLT
LICENSE AGREEMENT made MARCH 22, 1994, by and between Warner Bros., division of
Time Warner Entertainment, L.P., c/o Warner Bros. Consumer Products, a Time
Warner Entertainment Company, 4000 Warner Blvd., Burbank, CA 91522 (hereinafter
referred to as "LICENSOR") AND Ace Novelty, Inc., whose address is 13434
Northeast 16th Street, Bellevue, WA 98005 Attn: Saul Gamoran (hereinafter
referred to as "LICENSEE").
The Parties hereto agree as follows:
1. DEFINITIONS: As used in the Agreement, the following terms shall have the
following respective meanings:
(a) "Name and Character": the representations, names and logos,
movements, personalities, artwork, photographs and other material in
connection with the following "LOONEY TUNES" characters: BUGS BUNNY,
SYLVESTER, TWEETY, PEP LE PEW, PORKY PIG, DAFFY DUCK, SYLVESTER JR.,
ELMER FUDD, YOSEMITE SAM, ROAD RUNNER, WILE COYOTE, SPEEDY GONZALES,
WILE COYOTE, MARC ANTONY, TASMANIAN DEVIL, FOGHORN LEGHORN, HENERY
HAWK, PEPE LE PEW AND MARVIN THE MARTIAN only.
(b) "Licensed Product(s)":
i) Plush depictions of Characters
ii) *REDACTED
iii) *REDACTED
iv) *REDACTED
v) *REDACTED
vi) *REDACTED
vii) *REDACTED
viii) *REDACTED
ix) *REDACTED
x) *REDACTED
xi) *REDACTED
xii) *REDACTED
xiii) *REDACTED
ixx) *REDACTED
xx) *REDACTED
xxi) *REDACTED
xxii) *REDACTED
xxiii)*REDACTED
xxiv) *REDACTED
It is understood and agreed between the parties that the above
mentioned Licensed Products shall be distributed to the Amusement
Industry trade only. Sales through any other channel of distribution
are specifically excluded from the rights granted to Licensee
hereunder. It is further agreed that the Licensed Products are to be
awarded as prizes in connection with games of skill and are not to
be sold to the general public under any circumstances.
*redacted
<PAGE>
*Omitted and filed separately with the Commission.
** The category of "Bean Bag Chairs" shall be distributed and sold only
through the retail channel of distribution on a non-exclusive basis.
This Agreement specifically excludes the following articles: Vinyl
soft-stuffed balls, vinyl soft-stuffed figures and pillows,
bean-filled footballs (hack sacks), caps, plastic mugs & squeeze
bottles.
* Licensee recognizes that if figural prototype inflatables are
submitted, Licensor may elect not to approve for Licensee production
at any time during the Term of this Agreement.
(c) "Territory": United States
(d) "Marketing": June 1, 1994
(e) "Term": January 1, 1994 through *REDACTED
(f) "Royalty Rate": Licensee shall pay to Licensor the sum equal to
*REDACTED of all net sales by Licensee of the Licensed Product(s)
and *REDACTED of Licencee's net sales of the Licensed Product(s)sold
to customers F.O.B. to a location in the Territory.
(g) "Guaranteed Consideration": The sum of *REDACTED payable as
follows:
*REDACTED payable simultaneously upon the execution hereof; and
*REDACTED payable on or before *REDACTED
*REDACTED payable on or before *REDACTED
*REDACTED payable on or before *REDACTED
*REDACTED payable on or before *REDACTED
*REDACTED payable on or before *REDACTED
*REDACTED payable on or before *REDACTED
*REDACTED payable on or before *REDACTED
*REDACTED payable on or before *REDACTED
2. GRANT OF LICENSE.
(a) Upon the terms and conditions set forth in this Agreement, Licensor
hereby grants to Licensee and Licenseee hereby accepts for the Term
of this Agreement, a license to utilize the Name and Character
solely on or in connection with the manufacture, distribution and
sale of the Licensed Product(s) as specified above for the ultimate
retail sale to the public throughout the Territory on an exclusive
basis subject to Paragraph 1(b).
(b) For purposes of interpretation throughout this Agreement, every
application and utilization of each enumerated Name and Character
set forth above as to any given Licensed Product set forth above
shall be considered as a separate grant, and as a separate Licensed
Product.
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(c) Licensee specifically understands and agrees that no rights are
granted herein with respect to the Warner Bros. "shield" logo or
trademark, or any other trademark(s), logo(s) or copyrights owned by
Licensor other than those specifically set forth above in the Name
and Character, it being understood that all rights in and to said
properties are reserved exclusively to Licensor for use and/or
licensing as it deems appropriate to third party(s) of its choice.
(d) Licensee specifically understands and agrees that no rights are
granted herein with respect to the Warner Bros. "LOONEY TUNES
LOVABLES" infant property, it being understood that all rights in
and to said property are reserved exclusively to Licensor for us
and/or licensing as it deems appropriate to third party(s) of its
choice.
(e) Without limiting any other approvals of Licensor as contained
herein, no television commercials may be utilized under this License
without specific prior written approval of Licensor.
3. CONSIDERATION.
(a) The Guaranteed Consideration paid by Licensee as set forth above
shall be applied against such royalties as are, or have become, due
to Licensor. No part of such Guaranteed Consideration shall be
repayable to Licensee. Royalties earned in excess of the Guaranteed
Consideration applicable to the Term hereof shall not offset any
Guaranteed Consideration required in respect of the succeeding
renewal term (if any); likewise, royalties earned in excess of the
Guaranteed Consideration applicable to the renewal term shall not
offset any Guaranteed Consideration applicable to any prior terms.
(b) Royalty Payments: Licensee shall pay to Licensor a sum equal to the
Royalty Rate as set forth above all net sales by Licensee of the
Licensed Product(s) covered by this Agreement. The term "net sales:
herein shall mean the gross invoice price billed customers, less
actual quantity discounts and actual returns, but no deductions
shall be made for uncollectible accounts and deductions shall be
made for actual returns may not exceed 5% of total sales. No costs
incurred in the manufacture, sale, distribution, advertisement, or
exploitation of the Licensed Prodcut(s) shall be deducted from any
royalties payable by Licensee.
(c) Royalties shall be payable concurrently with the periodic statements
required in paragraph 5 hereof, except to the extent offset by
Guaranteed Consideration theretofore remitted.
4. RESERVATION OF RIGHTS; PREMIUMS.
(a) Licensor reserves all rights not expressly conveyed to Licensee
hereunder, and Licensor may grant licenses to others to use the Name
and Character, artwork and textual matter in connection with other
products whether similar or identical to the Licensed Product(s) or
otherwise. Notwithstanding anyting to the contrary in the foregoing
paragraph or elsewhere set forth in this Agreement, Licensor
specifically reserves the right without limitation throughout the
world to itself use, or license any third party(s) of its choice for
the manufacture, distribution and sale of products similar or
identical to those licensed herein in Paragraph 1(b) above for sale
through any catalogue(s) produced or distributed by or on behalf of
Licensor or its affiliated companies, or for
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<PAGE>
sale or distribution in any motion picture theaters, or for sale or
distribution in any retail stores operated by or on behalf of
Licensor or its affiliated compaies, or for sale or distribution in
any theme/amusement parks operated by or on behalf of Licensor and
its affiliated companies. In addition, Licensor reserves the right
to allow Six Flags Corporation to manufacture (or have manufactured
by a third party) products similar or identical to those licensed
herin for distribution or sale in theme and/or amusement parks owned
or operated by Six Flags Corporation. Further, Licensor reserves the
right to use, or license others to use, and/or manufacture products
similar or identical to those licensed herein for use as premiums.
(b) Licensee agrees that it will not use, or knowingly permit the use
of, and will exercise due care that its customers likewise will
refrain from the use of, the Licensed Product(s) as a premium,
except with the prior written consent of Licensor. Subject to
Licensor's prior written approval as aforesaid, Licensee shall pay
to Licensor a sum equal to TEN PERCENT (10%) of all premium sales.
For purposes of this paragraph, the term "premium" shall be defined
as including, but not necessarily limited to, combination sales,
free or self-liquidating items offered to the public in conjunction
with the sale or promotion of a product or service, including
traffic building or continuity visits by the consumer/customer, or
any similar scheme or device, the prime intenet of which is to
promote, publicize and or sell the products, services or business
image of the user of such item.
5. PERIODIC STATEMENTS.
(a) Within THIRTY (30) days after the initial shipment of the Licensed
Product(s) and promptly on the 15th day of every month thereafter,
Licensee shall furnish to Licensor complete and accurate statements
certified to be accurate by Licensee, or if a corporation, by an
officer of Licensee, showing with respect to all Licensed Product(s)
distributed and sold by Licensee during the preceding calendar month
the number of units, description of items sold (specifiying the
components of the Name and Character utilized and specifiying the
nature of the Licensed Product(s), gross sales price and itemized
deductions from gross sales price, and net sales price together with
any returns make during the preceding calendar month. Such
statements shall be furnished to Licensor whether or not any of the
Licensed Product(s) have been sold during the calendar months to
which such statements refer. Receipt or acceptance by Licensor of
any of the statements furnished pursuant to this Agreement or of any
sums paid hereunder shall not preclude Licensor from questioning the
correctness thereof at any time, and in the event that any
inconsistencies or mistakes are discovered in such statements or
payments, they shall immediately be rectified and the appropriate
payments made by Licensee. Upon demand of Licensor, Licensee shall
at it's own expense, but not more than once in any twelve (12) month
period, furnish to Licensor a detailed statement by an independent
certified accountant showing the number, description of items sold
specifying of the Name and Character utilized and nature of Licensed
Product(s), gross sales price itemized deductions from gross sales
price and net sales price of the Licensed Product(s) covered by this
Agreement distributed and/or sold by Licensee up to and including
the date upon which Licensor has made such demand.
4
<PAGE>
(b) The statements and payments required hereunder shall be delivered
to:
Warners Bros. Consumer Products
Domestic Accounting
4000 Warner Boulevard
Tower - 11th Floor
Burbank, California 91522
(c) Licensee agrees to provide, in the event of a material default in
payment, at Licensor's request: (i) a letter of credit issued in
favor of Licensor from a financial institution as approved by
Licensor in an amount up to the Guaranteed Consideration; and /or
(ii) such other form of security acceptable to Licensor. Licensee
agrees to execute all docuemnentation as Licensor may require in
connection with perfecting such security interests.
(d) Any payments which are made to Licensor hereunder after the due date
required therefore, shall bear interest at the then current prime
rate (or the minimum rate permissible by law, if less than the
current prime rate) from the date such payments are due to the date
of payment. Licensor's right hereunder to interest on late payments
shall not preclude Licensor from exercising any of its rights or
remedies pursuant to this Agreement or otherwise with regard to
Licensee's failure to make timely remittances.
6. BOOKS AND RECORDS.
(a) Licensee shall keep, maintain and preserve (in Licensee's principal
place of business) for at least two (2) years following termination
or expiration of the term of this Agreement or any renewal(s)
hereof, complete and accurate records of accounts including, without
limitation, invoices, correspondence, banking and financial and
other records pertaining to the various items required to be
submitted by Licensee. Such records and accounts shall be available
for inspeciton and audit at any time or times during or after the
term of this Agreement or any renewal(s) hereof during reasonable
business hours and upon reasonable notice by Licensor or its
nominees. Licensee agrees not to cause or permit any interference
with Licensor or nominees of Licensor in the performance of their
duties. During such inspections and audits, Licensor shall have the
right to take extracts and/or make copies of Licensee's records as
it deems necessary.
(b) The exercise by Licensor in whole or in part, at any time or the
right to audit records and accounts or of any other right herein
granted, or the acceptance by Licensor of any statement or
statements or the receipt and/or deposit by Licensor, of any payment
tendered on or on behalf of Licensee shall be without prejudice to
any rights or remedies of Licensor and such acceptance, receipt
and/or deposity shall not preclude or prevent Licensor from
thereafter disputing the accuracy of any such statements or payment,
(c) If pursuant to its rights hereunder Licensor causes an audit and
inspection to be instituted when thereafter discloses a deficiency
between the amount found to be due to Licensor and the amount
actually received or credited to Licensor, then Licensee shall be
responsible for payment of the deficiency, together with interest
thereon at the then current prime rate from the date such amount
became due until the date of payment, and, if the
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<PAGE>
deficiency is more than 5%, then Licensee shall pay the reasonable
costs and expenses of such audit and inspection.
7. INDEMNIFICATION.
(a) During the Term, and continuing after the expiration or termination
of this Agreement, Licensor shall idemnify Licensee and shall hold
it harmless from any loss, liability, damage, cost or expense
arising out of any claims or suits which may be brought or made
against Licensee by reason of the breach by Licensor of the
warranties or representaions set forth in paragraph 12 hereof,
provided that Licensee shall give prompt written notice, and full
cooperation and assistance to Licensor relative to any such claim or
suit and provided, further, that Licensor shall have the option to
undertake and conduct the defense of any suit so brought. Licensee
shall not, however, be entitled to recover for lost profits.
Licensee shall cooperate fully in all respects with Licensor in the
conduct and defense of said suit and/or proceedings related thereto.
(b) During the Term, and continuing after the expiration or termination
of this Agreement, Licensee shall indemnify Licensor and shall hold
it harmless from any loss, liability, damage, cost or expense
arising out of any claims or suits which may be brought or made
against Licensor by reason of: (i) any branch of Licensee's
covenants and undertakings hereunder, including those set forth in
paragraph 13 hereof; (ii) any unauthorized use of the Name and
Character; (iii) any unauthorized use of any trademark, copyright,
design, patent, process, method or device, except for those uses of
the Name and Character that are specifically approved by Licensor
pursuant to the terms of this Agreement; (iv) Licensee's
non-compliance with any applicable federal, state or local laws or
with any other applicable regulations; and (v) any alleged defects
and/or inherent dangers (whether obvious or hidden) in the Licensed
Product(s) or the use thereof.
(c) With regard to 7(b) above, Licensee agrees to obtain, at its own
expense, product liability insurance providing adequate protection
for Licensor and Licensee against any such claims or suits in
amounts no less than three million dollars ($3,000,000) per
occurrence, combined single limits. Simultaneously with the
execution of this Agreement, Licensee undertakes to submit to
Licensor a fully paid policy or certificate of insurance naming
Licensor as an additional insured party and, requiring that the
insurer shall not terminate or materially modify such without
written notice to Licensor at least twenty (20) days in advance
thereof.
8. ARTWORK; COPYRIGHT AND TRADEMARK NOTICES.
(a) The Name and Character shall be displayed or used only in such form
and in such manner as has been specifically approved in writing by
Licensor in advance and Licensee undertakes to assure usage of the
Trademark(s) and Character(s) solely as approved hereunder. Licensee
further agrees and acknowledges that any and all artwork authorized
for use hereunder by Licensor in connection with the Licensed
Product(s) or which otherwise features or includes the Name and
Character shall be owned in its entirety exclusively by Licensor.
Licensor reserves for itself or its designees all rights to sue any
and all artwork created, utilized and/or approved hereunder without
limitation.
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<PAGE>
(b) Licenses acknowledges that, as between Licensor and License, that
Name and character and all copyrights, trademarks and other
proprietary rights in and to the name and Character are owned
exclusively by Licensor. Licensee acknowledges that Licensor shall
have the right to terminate this Agreement in the event Licensee
asserts any rights (other than those granted pursuant to the
Agreement) in or to the Name and Character. Licensee further agrees
and acknowledges that Licensor shall own the copyright and other
proprietary rights in any and all artwork authorized for use
hereunder that incorporates the Name and Character. At the request
of Licensor, Licensee shall execute such form(s) of assignment of
copyright in any amendments or derivative works based in whole or
part on the Name and Character as Licensor may reasonably request.
If any third party makes or has made any contribution to the
creation of artwork authorized for use hereunder, Licensee agrees to
obtain from such party a full assignment of rights so that the
foregoing assignment by Licensee shall vest full rights in Licensor.
(c) Licensee shall, within thirty (30) days of receiving an invoice, pay
Licensor for artwork executed by Licensor (or by third parties under
contract to Licenser) for use in the development of the Licensed
Product(s) and any related packaging, display and promotional
materials at Licensor's prevailing commercial art rates. The
foregoing shall include any artwork that, in Licensor'opinion, is
necessary to modify artwork initially prepared by Licensee and
submitted for approval. Estimates of artwork charges are available
upon request.
(d) Licensee shall cause to be imprinted, irremovably and legibly on
each Licensed Product(s) manufactured, distributed or sold under
this Agreement, and all advertising, promotional packaging and
wrapping material wherein the Name and Character appears, the
following as directed by Licensor:
(i) The appropriate Copyright Notices, as directed and in each
instance specified by Licensor, including an encircled c, the
Name of Licensor, year date of first publication of the art
and/or textual material generally in the following form:
LOONET TUNES, names, characters and all related indicia are
trademarks of Warner Bros. C 199-. The year data shall be as
instructed by Licensor.
(ii) The appropriate Trademark, Notices with respect to the
Trademark(s) and Character(s) (and: any component thereof) as
specified in each instance by Licensor, including the initials
"TM", or the letter "R" encircled or "*"(asterisk), and/ or
any such legend(s) as may be required by Licensor, including
but not limited to a legend that the Name and Character (and
any component thereof) are trademarks of Licensor used under
license by Licensee.
(e) In no event shall Licensee use, in respect to the Licensed
Product(s) and/or in relation to any advertising, promotional,
packaging or wrapping material, any copyright or trademark notices
which shall conflict with, be confusing with, or negate, any notices
required hereunder by Licensor in respect to the Name and Character.
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(f) Licensee agrees to deliver to Licensor free of cost twelve(12) of
each of the Licensed Product(s) together with their packaging and
wrapping material for trademark registration purposes in compliance
with applicable laws, simultaneously upon distribution to the
public. Any copyrights or trademarks with respect to the Licensed
Product(s) shall be procured by and for the benefit of Licensor and
at Licensor's expense. Licensee further agrees to provide Licensor
with the date of the first use of the Licensed Product(s) in
intrastate commerce.
(g) Licensee shall assist Licensor, at Licensor's expense, in the
procurement, protection, and maintenance of Licensor's rights to the
Name and Character. Licensor may, in its sole discretion, commence
or prosecute and effect the disposition of any claims or suits
relative to the imitation, infringement and/or unauthorized use of
the Name and Character either in its own name, or in the name of
Licensee, or join as a party in the prosecution of such claims or
suits. Licensee agrees to cooperate fully with Licensor in
connection with any such claims or suits and undertakes to furnish
full assistance to Licensor in the conduct of all proceedings in
regard thereto. Licensee shall promptly notify Licensor in writing
of any infringements or imitations or unauthorized uses by others or
the Name and Character, on or in relation to products identical to
similar to or related to the Licensed Product(s). Licensor shall in
its sole discretion have the right to settle or effect compromises
in respect thereof. Licensee shall not institute any suit or take
any action on account of such infringements, imitations or
unauthorized uses.
9. APPROVALS AND QUALITY CONTROLS.
(a) Licensee agrees to comply and maintain compliance with the quality
standards and specifications of Licensor in respect to all usage of
the Name and Character on or in relation to the licensed Product(s)
throughout the Term of this Agreement and any renewals or extensions
thereof. Licensee agrees to furnish to Licensor free of cost for its
written approval as to quality and style, samples of each of the
Licensed Product(s), together with their packaging, hangtags,
wrapping material, as follows in the successive stages indicated (a)
rough sketches/layout concepts; (b) finished artwork or final
proofs; (C) preproduction samples or strike-offs; (d) finished
products, including packaged samples.
(b) No Licensed Product(s) and no material whatever utilizing the Name
and Character shall be manufactured, sold, distributed or promoted
by Licensee without prior written approval. Licensee may, subject to
Licensor's prior written approval, use textual and/or pictorial
matter pertaining to the name and Character on such promotional,
display and advertising material as may, in its reasonable judgment,
promote the sale of the Licensed Product(s). All advertising and
promotional material relating to the Licensed Product(s) must be
submitted to the Licensor for its written approval at the following
stages appropriate to the medium used. (a) rough concepts (b)
layout, storyboard, script; and (C) finished materials.
(c) Approval or disapproval shall lie in Licensor's sole discretion. Any
Licensed Product(s) not so approved in writing shall be deemed
unlicensed and shall not be manufactured or sold. If any unapproved
Licensed Product(s) are being sold, Licensor may, together with
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other remedies available to it including, but not limited to,
immediate termination of this Agreement, require such Licensed
Product(s) to be immediately withdrawn from the market and to be
destroyed, such destruction to be attested to in a certificate
signed by an officer of Licensee.
(d) Any modification of a Licensed Product must be submitted in advance
for Licensor's written approval as if it were a new Licensed
Product. Approval of a Licensed Product which uses particular
artwork does not imply approval of such artwork for use with a
different Licensed Product.
(e) licensed Product(s) must conform in all material respects to the
final production samples approved by Licensor. If in Licensor's
reasonable judgment, the quality of a Licensed Product originally
approved has deteriorated in later production runs, or if a Licensed
product has otherwise been altered, Licensor may, in addition to
other remedies available to it, require that such Licensed Product
be immediately withdrawn from the market.
(f) licensee shall permit Licensor, upon reasonable notice, to impact
Licensee's manufacturing operations and testing records (including
those operations and records of any supplier or manufacturer
approved pursuant to Paragraph 10 below) with respect to the
Licensed Product(s).
(g) If any changes or modifications are required to be made to any
material submitted to Licensor for its written approval in order to
ensure compliance with Licensor's specifications or standards of
quality, licensee agrees promptly to make such changes of
modifications . Subsequent to final approval , no fewer than
twenty-four (24) production samples of Licensed Product(s) will be
sent to Licensor, to ensure quality control simultaneously upon
distribution to the public. In addition, Licensor shall have the
right to purchase any and all licensed Product(s) in any quantity at
the price Licensee charges its customer at the maximum discount
price.
(h) To avoid confusion of the public, licensee agrees not to associate
other characters or licensed properties with the Name and Character
on the Licensed Product(s) or in any packaging, promotional or
display materials unless Licensee receives Licensor's prior written
approval. Furthermore, Licensee agrees not to use the Name and
Character (or any component thereof) on any business sign, business
cards, stationery or forms, nor to use the Name and Character as
part of the name of Licensee's business or any division thereof.
(i) Licensee shall use its best efforts to notify its customers of the
requirement that Licensor has the right to approve all promotional,
display and advertising material pursuant to this Agreement.
(j) It is understood and agreed that any animation used in electronic
media, including but not limited to animation for television
commercials and character voices for radio commercials, shall be
produced by Warner Bros. Animation pursuant to a separate agreement
between Licensee and Warner Bros. Animation, subject to Warner Bros.
Animation customary rates. Any payment made to Warner Bros.
Animation for such animation shall be in addition to and shall not
offset the consideration set forth in paragraph 3.
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10. DISTRIBUTION; SUB-LICENSEE MANUFACTURE
(a) Licensee shall sell the Licensed Product(s) either to jobbers,
wholesalers, distributors or retailers for sale or resale and
distribution directly to the public. If licensee sells or
distributes the Licensed Product(s) at a special price, directly or
indirectly, to itself, including without limitation, any subsidiary
of Licensee or to any other person, firm, or corporation affiliated
with Licensee or its officers, directors or major stockholders, for
ultimate sale to unrelated third parties, Licensee shall pay
royalties with respect to such sales or distribution, based upon the
price generally charged the trade by Licensee.
(b) Licensee shall not be entitled to sub-license and of its rights
under this Agreement. In the event licensee is not the manufacturer
of the Licensed Product(s), Licensee shall be, subject to the prior
written approval of Licensor (which approval shall not be
unreasonably withheld), be entitled to utilize a third party
manufacturer in connection with the manufacture and production of
the Licensed Product(s) provided that such manufacturer shall
execute a letter in the form of Exhibit 1 attached hereto and by
this reference made a part hereof. In such event, Licensee shall
remain primarily obligated under all of the provisions of this
agreement. In no event shall any such sub-license agreement include
the right to grant any further sublicenses.
11. GOOD WILL.
Licensee recognizes the great value of the publicity and good will
associated with the Name and Character and, acknowledges (I) such goodwill
is exclusively that of the Licensor and (ii) that the Name and Character
have acquired a secondary meaning as Licensor's trademarks and/or
identifications in the mind of the purchasing public. Licensee further
recognizes and acknowledges that a breach by licensee of any of its
covenants, agreements or undertakings hereunder will cause Licensor
irreparable damage, which cannot be readily remedied in damages in an
action at law, and may, in addition thereto, constitute an infringement of
Licensor's copyrights, trademarks and other proprietary rights in, and to
the Name and Character, thereby entitling Licensor to seek equitable
remedies and costs.
12. LICENSOR'S WARRANTIES AND REPRESENTATIONS.
Licensor represents and warrants to Licensee that:
(a) It has, and will have throughout the term of this Agreement, the
right to license the Name and Character to Licensee in accordance
with the terms and provisions of this Agreement, and,
(b) The making of this Agreement by Licensor does not violate any
agreements, rights or obligations existing between Licensor and any
other person, firm or corporation.
13. SPECIFIC UNDERTAKINGS OF LICENSEE.
During the Term and thereafter, Licensee agrees that:
(a) It will not attack the title of Licensor or its Grantors in and to
the Name and Character or any copyright or trademark pertaining
thereto, nor will it attack the validity of the license granted
hereunder:
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(b) It will not harm, misuse or bring into disrepute the Name and
Character, but on the contrary, will maintain the value and
reputation thereof to the best of its ability;
(c) It will manufacture, sell, promote and distribute the Licensed
Product(s) in an ethical manner and in accordance with the terms and
intent of this Agreement, and in compliance with all applicable
government regulations and industry standards;
(d) It will not create any expenses chargeable to Licensor without the
prior written approval of Licensor;
(e) It will protect to the best of its ability its right to manufacture,
sell, promote, and distribute the Licensed Product(s) hereunder;
(f) It will at all times comply with all government laws and
regulations, including but not limited to product safety, food,
health, drug, cosmetic, sanitary or other similar laws, and all
voluntary industry standards relating or pertaining to the
manufacture, sale, advertising or use of the Licensed Product(s),
and shall maintain its appropriate customary high quality standards.
It shall comply with any regulatory agencies which shall have
jurisdiction over the Licensed Product(s) and shall procure and
maintain in force any and all permissions, certifications and/or
other authorizations from governmental and/or other official
authorities that may be required in relation thereto. Each Licensed
Product and component thereof distributed hereunder shall comply
with all applicable laws, regulations and voluntary industry
standards. Licensee shall follow reasonable and proper procedures
for testing that all Licensed Product(s) comply with such laws,
regulations and standards. Upon reasonable notice, Licensee shall
permit Licensor or its designees to inspect testing records and
procedures with respect to the Licensed product(s) for compliance.
Licensed Product(s) that do not comply with all applicable laws,
regulations and standards shall automatically be deemed unapproved;
(g) It shall, upon Licensor's request, provide credit information to
Licensor including, but not limited to, fiscal year-end financial
statements (profit-and-loss statement and balance sheet) and
operating statements.
(h) It will provide Licensor with the date(s) of first use of the
Licensed Product(s) in interstate and intrastate commerce, where
appropriate; and
(i) It will pursuant to Licensor's instructions, duly take any and all
necessary steps to secure execution of all necessary documentation
for the recordation of itself as user of the Name and Character in
any jurisdiction where this is required or where Licensor reasonably
requests that such recordation shall be effected. Licensee further
agrees that it will at its own expense cooperate with Licensor in
cancellation of any such recordation at the expiration of this
Agreement or upon termination of Licensee's right to use the Name
and Character. Licensee hereby appoints Licensor its
Attorney-in-fact for such purpose.
14. TERMINATION BY LICENSOR.
(a) Licensor shall have the right to terminate this Agreement without
prejudice to any rights which it may have in the premises, whether
pursuant to the provisions of this
11
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Agreement, in law, or in equity, or otherwise, upon the occurrence
of any one or more of the following events (herein called
"defaults"):
(i) If Licensee defaults in the performance of any of its
obligations provided for in this Agreement; or
(ii) Licensee shall have failed to deliver to Licensor or to
maintain in full force and effect the insurance referred to in
subparagraph 7(c) hereof; or
(iii) If Licensee shall fail to make any payments due hereunder on
the date due; or
(iv) If Licensee shall fail to deliver any of the statements
hereinabove referred to or to give access to the premises
and/or license records pursuant to the provisions hereof to
Licensor's authorized representatives for the purposes
permitted hereunder; or
(v) If Licensee shall fail to comply with any laws, regulations or
voluntary industry standards as provided in Paragraph 13(f) or
if any governmental agency or other body, office or official
vested with appropriate authority finds that the Licensed
Product(s) are harmful or defective in any way, manner or
form, or are being manufactured, sold or distributed in
contravention of applicable laws, regulations or standards, or
in a manner likely to cause harm; or
(vi) If Licensee shall be unable to pay its debts when due, or
shall make any assignment for the benefit of creditors, or
shall file any petition under the bankruptcy or insolvency
laws of any jurisdiction, country or place, or shall have or
suffer a receiver or trustee to be appointed for its business
or property, or be adjudicated a bankrupt or an insolvent; or
(vii) In the event that Licensee does not commence in good faith to
manufacture, distribute and sell each Licensed Product(s) and
utilize each Character set forth in the Name and Character
within the Territory on or before the Marketing Date and
thereafter fails to diligently and continuously manufacture,
distribute and sell each of the Licensed Products and utilize
each Character within the Territory. Such default and
Licensor's resultant right of termination (or recapture)
shall only apply to the specific Character(s) and/or the
specific Licensed Product(s), which or wherein Licensee fails
to meet said Marketing Date requirement; or
(viii) If Licensee shall manufacture, sell or distribute, whichever
first occurs, any of the Licensed Products(s) without the
prior written approval of Licensor as provided in paragraph 9
hereof; or
(ix) If Licensee undergoes a substantial change of management; or
(x) If a manufacturer approved pursuant to subparagraph 10(b)
hereof shall engage in conduct, which conduct if engaged in by
Licensee would entitle Licensor to terminate this Agreement;
or
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<PAGE>
(xi) If Licensee delivers or sells Licensed Product(s) outside the
Territory or knowingly sells Licensed Products(s) to a third
party for delivery outside the Territory; or
(xii) If Licensee shall breach any other agreement in effect between
Licensor or any other client or Warner Bros. Consumer Products
on the other.
(b) In the event any of these defaults occur, Licensor shall give notice
of termination in writing to Licensee by certified mail. Licensee
shall have ten (10) days from the date of receiving notice in which
to correct any of these defaults (except subdivisions (vi) and
(viii) above which are not curable), and failing such, this
Agreement shall thereupon immediately terminate and any and all
payments then or later due from Licensee hereunder (including
Guaranteed Consideration) shall then be promptly due and payable and
no portion of prior payments shall be repayable to Licensee.
15. FINAL STATEMENT UPON TERMINATION OR EXPIRATION.
Licensee shall deliver, as soon as practicable, but not later than
thirty (30) days following expiration or termination, a statement
indicating the number and description of Licensed Product(s) on hand
together with a description of all advertising and promotional materials
relating thereto. Following expiration or termination, Licensee shall not
continue to manufacture the Licensed Product(s). However, if Licensee has
complied with all the terms of this Agreement, including, but not limited
to, complete and timely payment of the Guaranteed Consideration then,
Licensee may continue to distribute and sell its remaining inventory on a
non-exclusive basis for a period not to exceed SIXTY (60) days following
such termination or expiration, subject to payment of applicable royalties
thereto. In no event, however, may Licensee distribute and sell during
such period an amount of Licensed Product(s) that exceeds the average
amount of Licensed Product(s) sold during a consecutive SIXTY (60) day
period during the Term. If Licensee has any remaining inventory of the
Licensed Product(s) following such SIXTY (60) day period, Licensee shall,
at Licensor's option, make available such inventory to Licensor for
purchase at cost, deliver up to Licensor for destruction said remaining
inventory or furnish to Licensor an affidavit attesting to the destruction
of said remaining inventory. Licensor shall have the right to conduct a
physical inventory in order to ascertain or verify such inventory and/or
physical inventory. In the event this Agreement is terminated by Licensor
for cause, Licensee shall be deemed to have forfeited its sell-off rights
hereunder. In addition to the forfeiture, Licensor shall have recourse to
all other legal remedies available to it.
16. NOTICES.
Except as otherwise specifically provided herein, all notices which
either party hereto is required or may desire to give to the other shall
be given by addressing the same to the other at the address set forth
above, or at such other address as may be designated in writing by any
such party in a notice to the other given in the manner prescribed in this
paragraph. All such notices shall be sufficiently given when the same
shall be deposited so addressed, postage prepaid, in the United States
mail and/or when the same shall have been delivered, so addressed to a
facsimile or over-night delivery
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service and the date of said mailing shall be the date of the giving of
such notice and/or transmitted via facsimile with receipt of a confirming
copy.
17. NO PARTNERSHIP, ETC.
This Agreement does not constitute and shall not be construed as
constitution of a partnership or joint venture between Licensor and
Licensee. Neither party shall have any right to obligate or bind the other
party in any manner whatsoever, and nothing herein contained shall give,
or is intended to give, any rights of any kind to any third persons.
18. NON-ASSIGNABILITY.
This Agreement shall bind and inure to the benefit of Licensor, its
successors and assigns. This Agreement is personal to Licensee, and
Licensee shall not sub-license nor franchise its rights hereunder, and
neither this Agreement nor any of the rights of Licensee hereunder shall
be sold, transferred or assigned by Licensee and no rights hereunder shall
devolve by operation of law or otherwise upon any receiver, liquidation,
trustee or other party.
19. CONSTRUCTION.
This Agreement shall be construed in accordance with the laws of the
State of California and of the United States of America.
20. WAIVER, MODIFICATION ETC.
No waiver, modification or cancellation of any term or condition of
this Agreement shall be effective unless executed in writing by the party
charged therewith. No written waiver shall excuse the performance of any
acts other than those specifically referred to therein. The fact that the
Licensor has not previously insisted upon Licensee expressly complying
with any provision of this Agreement shall not be deemed to be a waiver of
Licensor's future right to require compliance in respect thereof and
Licensee specifically acknowledges and agrees that the prior forbearance
in respect of any act, term or condition shall not prevent Licensor from
subsequently requiring full and complete compliance thereafter. If any
term or provision of this Agreement is held to be invalid or unenforceable
by any court of competent jurisdiction or any other authority vested with
jurisdiction, such holding shall not affect the validity or enforceability
of any other term or provision hereto and this Agreement shall be
interpreted and construed as if such term or provision, to the extent the
same shall have been held to be invalid, illegal or unenforceable, had
never been contained herein. Headings of paragraphs herein are for
convenience only and are without substantive significance.
21. ACCEPTANCE BY LICENSOR.
This instrument, when signed by Licensee shall be deemed an
application for license and not a binding agreement unless and until
accepted by Warner Bros. Consumer Products, a Time Warner Entertainment
Company by signature of a duly authorized officer and the delivery of such
a signed copy to Licensee. The receipt and/or deposit by Warner Bros.
Consumer Products, a Time Warner Entertainment Company of any check or
other consideration given by Licensee and/or delivery of any material by
Warner Bros. Consumer Products, a Time Warner
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Entertainment Company to Licensee shall not be deemed an acceptance by
Warner Bros. Consumer Products, a Time Warner Entertainment Company of
this application. The foregoing shall apply to any documents relating to
renewals or modifications hereof.
This Agreement shall be of no force or effect unless and until it is
signed by all of the parties listed below:
AGREED AND ACCEPTED AGREED AND ACCEPTED:
LICENSOR: LICENSEE:
WARNER BROS. CONSUMER PRODUCTS, A ACE NOVELTY COMPANY, INC.
TIME WARNER ENTERTAINMENT COMPANY
As Agent for Warner Bros. a
division of Time Entertainment
Company, L.F.
By: /s/ GARY R. SIMON By: /s/ SAUL GAMORAN
Gary R. Simon Saul Gamoran
Vice President, Legal Affairs Executive Vice President
Date: 3/22/97 Date: 3-17-97
15
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EXHIBIT 1 #3775-WBLT
Dated
Warner Bros. Consumer Products, a
Time Warner Entertainment Company
4000 Warner Boulevard
Burbank, CA 91522
Gentlemen:
This letter will serve as notice to you that pursuant to subparagraph
10(b) of the License Agreement between your client WARNER BROS. and ACE NOVELTY
COMPANY, INC., we have been engaged as the manufacturer for ACE NOVELTY COMPANY,
INC. in connection with the manufacture of the Licensed Product(s) as defined in
the aforesaid License Agreement. We hereby acknowledge that we have received a
copy and are cognizant of the terms and conditions set forth in said License
Agreement and hereby agree to observe those provisions of said License Agreement
which are applicable to our function as manufacturer of the Licensed Product(s).
It is understood that this engagement is on a royalty free basis.
We understand that our engagement as the manufacturer for ACE NOVELTY
COMPANY, INC. is subject to your written approval. We request, therefore, that
you sign in the space below, thereby showing your acceptance of our engagement
as aforesaid.
Very truly yours,
(MANUFACTURER)
By: ____________________________
Signature
____________________________
Printed name
____________________________
Address
____________________________
____________________________
Dated
AGREED TO AND ACCEPTED;
WARNER BROS. CONSUMER PRODUCTS, A
TIME WARNER ENTERTAINMENT COMPANY
By: _____________________________
Gary R. Simon
Vice President, Legal Affairs
Date: __________________
16
EXHIBIT 10.11
RETAIL LICENSE
WARNER BROS. CONSUMER PRODUCTS
#6832-SPJ/WBLT
LICENSE AGREEMENT made 3-22-96, by and between Warner Bros., a division of Time
Warner Entertainment Company, L.P., c/o Warner Bros. Consumer Products, a Time
Warner Entertainment Company, 4000 Warner Blvd. Burbank, CA 91522 (hereinafter
referred to as "LICENSOR") and Ace Novelty Company, Inc., whose address is 13434
Northeast 16th Street, Bellevue, WA 98005 Attn: Saul Gamoran (hereinafter
referred to as "LICENSEE").
WITNESSETH:
The Parties hereto agree as follows:
1. DEFININTIONS: As used in the Agreement, the following term shall have the
following respective meanings:
(a) "Licensed Property(s)":
1. Those certain elements depicted in the theatrical motion picture
entitled "SPACE JAM" (the "Motion Picture"), including all
trademarks, copyrights, related logos, indicia, set and costume
designs, and other elements depicted therein. In addition, the
Licensed Property shall also include the representations, names,
logos, movements, personalities, artwork, photographs, and other
material in connection with the animated characters NERDLUCKS,
MONSTARS, SWACKHAMMER, and LOLA BUNNY as well as the following
"Looney Tunes" animated characters as depicted in the Motion
Picture: BUGS BUNNY, DAFFY DUCK, SYLVESTER, TWEETY, ROAD RUNNER,
WILE E. COYOTE, TASMANIAN DEVIL, ELMER FUDD, PORKY PIG, YOSEMITE
SAM, PEPE LE PEW AND MARVIN THE MARTIAN only. Specifically excluded
herein, however, is the right to reproduce the likenesses of the
actors and actresses in the Motion Picture (the "Performer(s)")
except to the extent specifically permitted otherwise in writing by
Licensor and then only to the extent the Performer(s) have granted
merchandising rights to Licensor. Notwithstanding the foregoing, all
uses of any of the elements set forth above, including the names and
likenesses of any of the performer(s) afforded hereunder must be
specifically approved in writing by Licensor, pursuant to Paragraph
9 herein. It is specifically understood that subject to approval of
the specific Licensed Product(s), the license granted hereunder
shall include the right to use the name and likeness of Michael
Jordan. However, Licensee understands and agrees that Licensee has
no rights in and to Michael Jordan's voice and that Michael Jordan's
voice shall not be utilized or reproduced under any circumstances.
Licensee acknowledges that the rights granted herein are limited
only to the elements contained in the Motion Picture and that any
and all rights in, to or associated with any subsequently produced
motion picture, as well as with any sequels thereto, as well as with
any subsequently produced television series are specifically
excluded herefrom.
2. The representations, names, logos, movements, personalities,
artwork, photographs and other material in connection with the
following "LOONEY TUNES" characters: BUGS BUNNY, SYLVESTER, TWEETY,
PORKY PIG, SPEEDY GONZALES, DAFFY DUCK, ROAD RUNNER, WILE E. COYOTE,
YOSEMITE SAM, TASMANIAN DEVIL, PETUNIA PIG, FOGHORN LEGHORN, HENERY
HAWK, SHE-DEVIL, HECTOR, MARC ANTHONY, PEPE LE PEW, PENELOPE, MARVIN
THE MARTIAN, SYLVESTER JR., GRANNY, PUSSYFOOT, GOSSAMER and MICHIGAN
J. FROG only.
<PAGE>
*Omitted and filed separately with the Commission.
(b) "Licensed Product(s)":
1. Exclusive Products including:
i) Plush Characters
ii) Plush Puppets
iii) Plush with features
(for example pull-string design)
iv) Plush Marionettes
2. Non Exclusive Products including:
v) *REDACTED
vi) *REDACTED
vii) *REDACTED
viii) *REDACTED
ix) *REDACTED
x) *REDACTED
xi) *REDACTED
xii) *REDACTED
xiii) *REDACTED
xiv) *REDACTED
xv) *REDACTED
xvi) *REDACTED
The above mentioned Licensed Products (i) through (xvi) shall be
distributed in Mass Market in the United States and Canada; and
Amusement Industry and Licensee's Fund Raising Division in the
United States only.
3. Non Exclusive Products for "Space Jam" only:
(without M. Jordan's likeness)
xvii) *REDACTED
xviii) *REDACTED
xix) *REDACTED
xx) *REDACTED
xxi) *REDACTED
xxii) *REDACTED
xxiii) *REDACTED
xxiv) *REDACTED
xxv) *REDACTED
xxvi) *REDACTED
The above mentioned Licensed Products (xvii) through (xxv) shall
only be distributed in the United States through the Amusement
Industry (as defined herein) and Licensee's Fund Raising Division;
and through Licensed Product (xxvi) may be distributed and sold in
Mass Market, Amusement Industry and Licensee's Fund Raising
Division.
Sales through the Amusement Industry channel of distribution are to
be awarded as prized in connection with games of skill and are not
be sold to the general public under any circumstance. Furthermore,
fund raising sales on a non-exclusive basis, may be through direct
mail, prize programs and in-school sales.
Distribution in Canada: Mass Merchandisers in toy department only,
Mass Markets (toy department only), Toy Wholesalers, Supermarkets,
Toy Stores, Catalog Show Rooms and Drug Store Chains.
It is understood and agreed between the parties that then above
mentioned Licensed Products shall not be packaged and sold as party
favors.
(c) "Territory": United States (fifty states) and Canada
(d) "Marketing Date": September 1, 1996 for "Looney Tunes" and "Space
Jam" Licensed Products, with the exception as
noted below.
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*Omitted and filed separately with the Commission.
Licensee specifically understands and agrees that the category of
SPACE JAM "Plush" Licensed Products shall not be on the retail
shelves until December 1, 1996.
(e) "Term": With respect to Licensed Property "Looney Tunes" the Term
shall be January 1, 1996 through *REDACTED. With respect to Licensed
Property "Space Jam" the Term shall be January 1, 1996 through
*REDACTED.
(f) "Royalty Rate": With respect to Licensed Property, "Looney Tunes"
Licensee shall pay *REDACTED of all net sales. With respect to
Licensed Property, "Space Jam" Licensee shall pay *REDACTED of all
net sales.
(g) "Guaranteed Consideration": The sum of *REDACTED payable as
follows:
*REDACTED payable simultaneously upon the execution hereof; and
*REDACTED payable on or before *REDACTED
*REDACTED payable on or before *REDACTED
*REDACTED payable on or before *REDACTED
*REDACTED payable on or before *REDACTED
*REDACTED payable on or before *REDACTED.
2. GRANT OF LICENSE.
(a) Upon the terms and conditions set forth in this agreement, Licensor
hereby grants to Licensee and Licensee hereby accepts for the Term
of this Agreement, a license to utilize the Licensed Property solely
on or in connection with the manufacture, distribution and sale of
the Licensed Product(s) as specified above for the ultimate retail
sale to the public throughout the Territory on an exclusive basis
subject to Paragraph 1(b). Licensee acknowledges that Licensor has
granted rights to certain characters "Nerdlucks" based from the
Motion Picture to an alternate licensee through an affiliate of
Licensor. Licensee further acknowledges that Licensor may grant a
license to a third party for the category of "Plush Characters"
embodied with electronic features, so long as the third party
advertises the electronic "Plush" on television.
(b) For purposes of interpretation throughout this Agreement, every
application and utilization of each enumerated Licensed Property set
forth above as to any given Licensed Product set forth above shall
be considered as a separate grant, and as a separate Licensed
Product.
(c) Licensee specifically understands and agrees that no rights are
granted herein with respect to the Warner Bros. "shield" logo or
trademark, or any other trademark(s), logo(s) or copyrights owned by
Licensor other than those specifically set forth above in the
Licensed Property, it being understood that all rights in and to
said properties are reserved exclusively to Licensor for use and/or
licensing as it deems appropriate to third party(s) or its choice.
(d) Licensee specifically understands and agrees that no rights are
granted herein with respect to the Warner Bros. "LOONEY TUNES
LOVABLES" infant property, it being
3
<PAGE>
*Omitted and filed separately with the Commission.
understood that all rights in and to said property are reserved
exclusively to Licensor for use and/or licensing as it deems
appropriate to third party(s) of its choice.
(e) Without limiting any other approvals of Licensor as contained
herein, no television commercials may be utilized under this License
without the specific prior written approval of Licensor.
3. CONSIDERATION.
(a) The Guaranteed Consideration paid by Licensee as set forth above
shall be applied against such royalties as are, or have become, due
to Licensor. No part of such Guaranteed Consideration shall be
repayable to Licensee. Royalties earned in excess of the Guaranteed
Consideration applicable to the Term hereof shall not offset any
Guaranteed Consideration required in respect of the succeeding
renewal term (if any); likewise, royalties earned in excess of the
Guaranteed Consideration applicable to the renewal term shall not
offset any Guaranteed Consideration applicable to any prior term.
(b) To secure payment by Licensee to Licensor of the Guaranteed
Consideration referred to in Paragraph 3(a) above, Licensee shall
deliver to Licensor and original irrevocable standby letter of
credit in an aggregate fact amount of *REDACTED (the "Letter of
Credit"). Timely delivery of the Letter of Credit shall by thirty
(30) days after execution of this Agreement. The Letter of Credit
shall have a term concurrent with the Term of this Agreement and
shall be self-liquidating to the amount of Guaranteed Consideration
remaining unpaid under this Agreement. Upon payment to Licensor of
the total amount of Guaranteed Consideration due under this
Agreement, the Letter of Credit shall terminate. The Letter of
Credit shall be issued by a United States bank approved by Licensor
and shall contain terms and conditions satisfactory to Licensor in
its reasonable discretion. In the event of the bankruptcy or
insolvency of Licensee, or upon the occurrence of any other default
as set forth in Paragraph 14 below, in addition to Licensor's other
rights and remedies hereunder, at law, in equity or otherwise,
Licensor shall, at Licensor's election, be entitled to draw down the
full face amount available under the Letter of Credit and retain all
such as cash collateral and then or at any time thereafter apply
such sums against any and all amounts then due or thereafter to
become due to Licensor hereunder, at law, in equity or otherwise.
(c) ROYALTY PAYMENTS: Licensee shall pay to Licensor a sum equal to the
Royalty Rate as set forth above of all net sales by Licensee of the
Licensed Product(s) covered by this Agreement. The term "net sales"
shall mean the gross invoice price billed customers, less quantity
discounts, returns and freight charges if itemized separately, but
no deduction shall be made for uncollectable accounts. It is a
material term and condition of this Agreement that Licensee report
net sales separately on each of the Licensed Properties and on a
country-by-country basis. In the event Licensee fails to do so,
Licensor shall have the right to terminate this Agreement. No costs
incurred in the manufacture, sale, distribution, advertisement, or
exploitation of the Licensed Product(s) shall be deducted from any
royalties payable by Licensee.
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<PAGE>
(d) Royalties shall be payable concurrently with the periodic statements
required in Paragraph 5 hereof, except to the extent offset by
Guaranteed Consideration theretofore remitted.
4. RESERVATION OF RIGHTS; PREMIUMS.
(a) Licensor reserves all rights not expressly conveyed to Licensee
hereunder, and Licensor may grant licenses to others to use the
Licensed Property, artwork and textual matter in connection with
other products whether similar or identical to the Licensed
Product(s).
(b) Notwithstanding anything to the contrary in the foregoing paragraph
or elsewhere set forth in this Agreement, Licensor specifically
reserves the right without limitation throughout the world to itself
use, or license any third party(s) of its choice for the
manufacture, distribution and sale of product. similar or identical
to those licensed herein in Paragraph 1(b) above for sale through
any catalogue(s) produced or distributed by or on behalf of Licensor
or its affiliated companies, or for sale or distribution in any
theaters or arena, or for sale or distribution in any retail stores
operated by or on behalf of Licensor, its affiliated companies
franchises, or for sale or distribution in any theme/amusement parks
operated by or on behalf of Licensor and its affiliated companies,
including without limitation, the Six Flags and Movie World parks.
In addition, Licensor reserves the right to allow Six Flags
Corporation and Movie World to manufacture (or have manufactured by
a third party) products similar or identical to those licensed
herein for distribution or sale in theme and/or amusement parks
owned or operated by Six Flags Corporation and Movie World. Further,
Licensor reserves the right to use, or license others to use, and/or
manufacture products similar or identical to those licensed herein
for use as premiums.
(c) Licensee agrees that it will not use, or knowingly permit the use
of, and will exercise due care that its customers likewise will
refrain from the use of, the Licensed Product(s) as a premium,
except with the prior written consent of Licensor. Subject to
Licensor's prior written approval as aforesaid, Licensee shall pay
to Licensor a sum equal to TEN PERCENT (1O%) of all premium sales.
For purposes of this paragraph, the term "premium" shall be defined
as including, but not necessarily limited to, combination sales,
free or self-liquidating items offered to the public in conjunction
with the sale or promotion of a product or service, including
traffic building or continuity visits by the consumer/customer, or
any similar scheme or device, the prime intent of which is to use
the Licensed Products in such a way as to promote, publicize and or
sell the products, services or business image of the user of such
item.
5. PERIODIC STATEMENTS.
(a) Within THIRTY (30) days after the initial shipment of the Licensed
Product(s) and promptly on the 30th day of every month thereafter,
Licensee shall furnish to Licensor complete and accurate statements
certified to be accurate by Licensee, or if a corporation, by an
officer of Licensee, showing with respect to all Licensed Product(s)
distributed and sold by Licensee during the preceding calendar month
the number of units, description of items sold (specifying the
components of the Licensed Property utilized and specifying the
nature of the Licensed Product(s), gross sales price and itemized
deductions
5
<PAGE>
from gross sales price, and net sales price together with any
returns made during the preceding calendar month. Such statements
shall be furnished to Licensor whether or not any of the Licensed
Product(s) have been sold during calendar months to which such
statements refer. Receipt or acceptance by Licensor of any of the
statements furnished pursuant to this Agreement or of any sums paid
hereunder shall not preclude Licensor from questioning the
correctness thereof at any time, and in the event that any
inconsistencies or mistakes are discovered in such statements or
payments, they shall immediately be rectified and the appropriate
payments made by Licensee. Upon demand of Licensor, Licensee shall
at its own expense, but not more than once in any TWELVE (12) month
period, furnish to Licensor a detailed statement by an independent
certified public accountant showing the number, description of items
sold specifying the components of the Licensed Property utilized and
nature of Licensed Product(s), gross sales price itemized deductions
from gross sales price and net sales price of the Licensed
Product(s) covered by this Agreement distributed and/or sold by
Licensee up to and including the date upon which Licensor has made
such demand.
(b) The statements and payments required hereunder shall be delivered
to:
Warner Bros. Consumer Products
4000 Warner Boulevard
Bridge Building, 4th Floor
Burbank, California 91522
Attn: Asst. controller, Domestic Accounting
(c) Any payments which are made to Licensor hereunder after the due date
required therefore shall bear interest at the then current prime
rate (or the maximum rate permissible by law, if less than the
current prime rate) from the date such payments are due to the date
of payment. Licensor's right hereunder to interest on late payments
shall not preclude Licensor from exercising any of its other rights
or remedies pursuant to this Agreement or otherwise with regard to
Licensee's failure to make timely remittances.
6. BOOKS AND RECORDS.
(a) Licensee shall keep, maintain and preserve (in Licensee's principal
place of business) for at least two (2) years following termination
or expiration of the term of this Agreement or any renewal(s)
hereof, complete and accurate records of accounts including, without
limitation, purchase orders, inventory records, invoices,
correspondence, banking and financial and other records pertaining
to the various items required to be submitted by Licensee. Such
records and accounts shall be available for inspection and audit at
any time or times during or after the term of this Agreement or any
renewal(s) hereof during reasonable business hours and upon
reasonable notice by Licensor or its nominees. Licensee agrees not
to cause or permit any interference with Licensor or nominees of
Licensor in the performance of their duties. During such inspections
and audits, Licensor shall have the right to take extracts and/or
make copies of Licensee's records as it deems necessary.
(b) The exercise by Licensor in whole or in part, at any time of the
right to audit records and accounts or of any other right herein
granted, or the acceptance by Licensor of any statement or
statements or the receipt and/or deposit by Licensor, of any payment
tendered by or on
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behalf of Licensee shall be without prejudice to any rights or
remedies of Licensor and such acceptance, receipt and/or deposit
shall not preclude or prevent Licensor from thereafter disputing the
accuracy of any such statement or payments
(c) if pursuant to its right. hereunder Licensor causes an audit and
inspection to be instituted which thereafter discloses a deficiency
between the amount found to be due to Licensor and the amount
actually received or credited to Licensor, then Licensee shall be
responsible for payment of the deficiency, together with interest
thereon at the then current prime rate from the date such amount
became due until the date of payment, and, if the deficiency is more
than five percent (5%), then Licensee shall pay the reasonable costs
and expenses of such audit and inspection.
7. INDEMNIFICATIONS.
(a) During the Term, and continuing after the expiration or termination
of this Agreement, Licensor shall indemnify Licensee and shall hold
it harmless from any loss, liability, damage, cost or expense
arising out of any claims or suits which may be brought or made
against License by reason of the breach by Licensor of the
warranties or representations as set forth in Paragraph 12 hereof,
provided that Licensee shall give prompt written notice, and full
cooperation and assistance to Licensor relative to any such claim or
suit and provided, further, that Licensor shall have the option to
undertake and conduct the defense of any suit so brought. Licensee
shall not, however, be entitled to recover for lost profits.
Licensee shall cooperate fully in all respects with Licensor in the
conduct and defense of said suit and/or proceedings related thereto.
(b) During the Term, and continuing after the expiration or termination
of this Agreement, Licensee shall indemnify Licensor and shall hold
it harmless from any loss, liability, damage, cost or expense
arising out of any claims or suits which may be brought or made
against Licensor by reason of: (i) any breach of Licensee's
covenants and undertakings hereunder, including those set forth in
Paragraph 13 hereof; (ii) any unauthorized use of the Licensed
Property; (iii) any use of any trademark, copyright, design, patent,
process, method. or device, except for those uses of the Licensed
Property that are specifically approved by Licensor pursuant to the
terms of this Agreement; (iv) Licensee's non-compliance with any
applicable federal, state or local laws or with any other applicable
regulations; and (v) any alleged defects and/or inherent dangers
(whether obvious or hidden) in the Licensed Product(s) or the use
thereof.
(c) with regard to 7(b) above, Licensee agrees to obtain, at its own
expense, product liability insurance providing adequate protection
for Licenser and Licensee against any such claims or suits in
amounts no less than three million dollars ($3,000,000) per
occurrence, combined single limits. Simultaneously with the
execution of this Agreement, Licensee undertakes to submit to
Licensor a fully paid policy or certificate of insurance naming
Licensor as an additional insured party and, requiring that the
insurer shall not terminate or materially modify such without
written notice to Licensor at least twenty (20) days in advance
thereof.
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<PAGE>
8. ARTWORK; COPYRIGHT AND TRADEMARK NOTICES.
(a) The Licensed Property shall be displayed or used only in such form
and in such manner as has been specifically approved in writing by
Licensor in advance and Licensee undertakes to assure usage of the
Trademark(s) and the License Property solely as approved hereunder.
Licensee further agrees and acknowledges that any and all artwork
authorized for use hereunder by Licensor in connection with the
Licensed Product(s) or which otherwise features or includes the
Licensed Property shall be owned in its entirety exclusively by
Licensor. Licensor reserves for itself or its designees all rights
to use any and all artwork created, utilized and(or approved
hereunder without limitation.
(b) Licensee acknowledges that, as between Licensor and Licensee, the
Licensed Property and all copyrights, trademarks and other
proprietary rights in and to the Licensed Property are owned
exclusively by Licensor. Licensee acknowledges that Licensor shall
have the right to terminate this Agreement in the event Licensee
asserts any rights (other than those granted pursuant to the
Agreement) in or to the Licensed Property. Licensee further agrees
and acknowledges that Licensor shall own the copyright and other
proprietary rights in any and all artwork authorized for use
hereunder that incorporates the Licensed Property. At the request of
Licensor, Licensee shall execute such form(s) of assignment of
copyright in any amendments or derivative works based in whole or
part on the Licensed Property as Licensor may reasonably request. If
any third party makes or has made any contribution to the creation
of artwork authorized for use hereunder, Licensee agrees to obtain
from such party a full assignment of rights so that the foregoing
assignment by Licensee shall vest full right in Licensor.
(c) Licensee shall, within thirty (30) days of receiving an invoice, pay
Licensor for artwork executed by Licensor (or by third parties under
contract to Licensor) for use in the development of the Licensed
Product(s) and any related packaging, display and promotional
materials at Licensor's prevailing commercial art rates. The
foregoing shall include any artwork that, in Licensor's opinion, is
necessary to modify artwork initially prepared by Licensee and
submitted for approval. Estimates of artwork charges are available
upon request.
(d) Licensee shall cause to be imprinted, irremovably and legibly on
each Licensed Product(s) manufactured, distributed or sold under
this Agreement, and all advertising, promotional, packaging and
wrapping material wherein the Licensed Property appears, the
following as directed by Licensor:
(i) The appropriate Copyright Notices, as directed and in each
instance specified by Licensor, including an encircled c, the
name of Licensor, year date of first publication of the art
and/or textual material generally in the following form:
TX & (copyright) Warner Bros. 199_.
LOONEY TUNES, characters, names and all related
indicia are trademarks of Warner Bros. (copyright) l99_.
(The year date shall be as instructed by Licensor)
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<PAGE>
(ii) The appropriate Trademark Notices with respect to the
Trademark (s) and Character (s) (and any component thereof) as
specified in each instance by Licensor, including the initials
"TM" or the letter "R" encircled or "*" (asterisk), and/or
such legend(s) as may be required by Licensor, including but
not limited to a legend indicating that the Licensed Property
(and any component thereof) are trademarks of Licensor used
under license by Licensee.
(e) In no event shall Licensee use, in respect to the Licensed
Product(s) and/or in relation to any advertising, promotional,
packaging or wrapping material, any copyright or trademark notices
which shall conflict with, be confusing with, or negate, any notices
required hereunder by Licensor in respect to the Licensed Property.
(f) Licensee agrees to deliver to Licensor free of cost twelve (12) of
each of the Licensed Product(s) together with their packaging and
wrapping material for trademark registration purposes in compliance
with applicable laws, simultaneously upon distribution to the
public. Any, copyrights or trademarks with respect to the Licensed
Property shall be procured by and for the benefit of Licensor and at
Licensor's expense. Licensee further agrees to provide Licensor with
the date of the first use of the Licensed Product(S) in interstate
and intrastate commerce.
(g) Licensee shall assist Licensor, at Licensor's expense, in the
procurement, protection, and maintenance of Licensor's' rights to
the Licensed Property. Licensor may, in its sole discretion,
commence or prosecute and effect the disposition of any claims or
suits relative to the imitation, infringement and/or unauthorized
use of the Licensed Property either in its own name, or in the name
of Licensee, or join Licensee as a party in the prosecution of such
claims or suits. Licensee agrees to cooperate fully with Licensor in
connection with any such claims or suits and undertakes to furnish
full assistance to Licensor in the conduct of all proceedings in
regard thereto. Licensee shall promptly notify Licensor in writing
of any infringements or imitations or unauthorized uses by others of
the Licensed Property, on or in relation to products identical to
similar to or related to the Licensed Product(s). Licensor shall in
its sole discretion have the right to settle or effect compromises
in respect thereof . Licensee shall not institute any suit or take
any action on account of such infringements, imitations or
unauthorized uses.
9. APPROVALS AND QUALITY CONTR0LS,
(a) Licensee agrees to comply and maintain compliance with the quality
standards and specifications of Licensor in respect to all usage of
the Licensed Property on or in relation to the Licensed Product(s)
throughout the Term of this Agreement and any renewals or extensions
thereof. Licensee agrees to furnish to Licensor free of cost for its
written approval as to quality and style, samples of each of the
Licensed Product(s), together with their packaging, hangtags, and
wrapping material, as follows in the successive stages indicated (a)
rough sketches/layout concepts; (b) finished artwork or final
proofs; (c)pre-production samples or strike-offs; (d) finished
products, including packaged samples.
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<PAGE>
(b) No Licensed Product(s) and no material whatever utilizing the
Licensed Property shall be manufactured, sold, distributed or
promoted by Licensee without prior written approval. Licensee may,
subject to Licensor's prior written approval, use textual and/or
pictorial matter pertaining to the Licensed Property on such
promotional, display and advertising material as may, in its
reasonable judgment, promote the sale of the Licensed Product(s).
All advertising and promotional material relating to the Licensed
Product(s) must be submitted to the Licensor for its written
approval at the following stages appropriate to the medium used: (a)
rough concepts (b) layout, storyboard, script; and (c) finished
materials.
(c) Approval or disapproval shall lie in Licensor's sole discretion. Any
Licensed Product(s) not approved in writing shall be deemed
unlicensed and shall not be manufactured or sold. If any unapproved
Licensed Product(s) are being sold, Licensor may, together with
other remedies available to it including, but not limited to,
immediate termination of this Agreement, require such Licensed
Product(s) to be immediately withdrawn from the market and to be
destroyed, such destruction to be attested to in a certificate
signed by an officer of Licensee.
(d) Any modification of a Licensed Product must be submitted in advance
for Licensor's written approval as if it were a new Licensed
Product. Approval of a Licensed Product which uses particular
artwork does not imply approval of such artwork for use with a
different Licensed Product.
(e) Licensed Product(s) must conform in all material respects to the
final production samples approved by Licensor. If in Licensor's
reasonable judgment, the quality of a Licensed Product originally
approved has deteriorated in later production runs, or if a Licensed
Product has otherwise been altered, Licensor may, in addition to
other remedies available to it, require that such Licensed Product
be immediately withdrawn from the market.
(f) Licensee shall permit Licensor, upon reasonable notice, to inspect
Licensee's manufacturing operations and testing records (including
those operations and records of any supplier or manufacturer
approved pursuant to Paragraph 10 below) with respect to the
Licensed Product(s).
(g) If any changes or modifications are required to be made to any
material submitted to Licensor for its written approval in order to
ensure compliance with Licensor's specifications or standards of
quality, Licensee agrees promptly to make such changes or
modifications. Subsequent to final approval, no fewer than
twenty-four (24) production samples of Licensed Product(s) will be
sent to Licensor, to ensure quality control simultaneously upon
distribution to the public. In addition, Licensor shall have the
right to purchase any and all Licensed Product(s) in any quantity at
the price Licensee charges its best customer at the maximum discount
price.
(h) To avoid confusion of the public, Licensee agrees not to associate
other characters or licensed properties with the Licensed Property
on the Licensed Product(s) or in any packaging, promotional or
display materials unless Licensee receives Licensor's prior written
approval. Furthermore, Licensee agrees not to use the Licensed
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Property (or any component thereof) on any business sign, business
cards, stationery or forms, nor to use the Licensed Property as
part of the name of Licensee's business or any division thereof.
(i) Licensee shall use its best of forts to notify its customers of
the requirement that Licensor has the right to approve all
promotional, display and advertising material pursuant to this
Agreement.
(j) It is understood and agreed that any animation used in electronic
media, including but not limited to animation for television
commercials and character voices for radio commercials, shall be
produced by Warner Bras. Animation pursuant to a separate
agreement between Licensee and Warner Bros. Animation, subject to
Warner Bras. Animation customary rates. Any payment made to Warner
Bros. Animation for such animation shall be in addition to and
shall not offset the Consideration set forth in Paragraph 3.
(k) Licensor's approval of Licensed Product(s) (including without
limitation, the Licensed Product(s) themselves as well as
promotional, display and advertising materials) shall in no way
constitute or be construed as an approval by Licensor of
Licensee's use of any trademark, copyright and/or other
proprietary materials, not owned by Licensor
10. DISTRIBUTION; SUB-LICENSE MANUFACTURE
(a) Within the Channels of Distribution as set forth in Paragraph 1(b)
hereof, Licensee shall sell the Licensed Product(s) either to
jobbers, wholesalers, distributors or retailers for sale or resale
and distribution directly to the public. Unless explicitly set
forth in Paragraph 1(h) hereof, Licensee shall not sell the
Licensed Product(s) through any cable home shopping service. If
Licensee sells or distributes the Licensed Product(s) at a special
price, directly or indirectly, to itself, including with out
limitation, any subsidiary of Licensee or to any other person,
firm, or corporation affiliated with Licensee or its officers,
directors or major stockholders, for ultimate sale to unrelated
third parties, Licensee shall pay royalties with respect such
sales or distribution, based upon the price generally charged the
trade by Licensee.
(b) Licensee shall not be entitled to sublicense any of its rights
under this Agreement. In the event Licensee is not the
manufacturer of the Licensed Product(s), Licensee shall be,
subject to the prior written approval of Licensor (which approval
shall not be unreasonably withheld), be entitled to utilize a
third party manufacturer in connection with the manufacture and
production of the Licensed Product(s) provided that such
manufacturer shall execute a letter in the form of Exhibit 1
attached hereto and by this reference made a part hereof. In such
event, Licensee shall remain primarily obligated under all of the
provisions of this Agreement. In no event shall any such
sublicense agreement include the right to grant any further
sublicenses.
11. GOODWILL.
Licensee recognizes the great value of the publicity and goodwill
associated with the Licensed Property and, acknowledges (i) such goodwill
is exclusively that of Licensor and (ii) that the Licensed Property have
acquired a secondary
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meaning as Licensor's trademarks and/or identifications in the mind or the
purchasing public. Licensee further recognizes and acknowledges that a
breach by Licensee of any of its covenants, agreements or undertakings
hereunder will cause Licensor irreparable damage, which cannot be readily
remedied in damaqes in an action at law, and may, in addition thereto,
constitute an infringement of Licensor'8 copyrights, trademarks and/other
proprietary rights in, and to the Licensed Property, thereby entitling
Licensor to seek equitable remedies and costs.
12. LICENSOR'S WARRANTIES AND REPRESENTATIONS.
Licensor represents and warrants to Licensee that:
(a) It has, and will have throughout the Term of this Agreement, the
right to license the Licensed Property to Licensee in accordance
with the terms and provisions of this Agreement; and
(b) The making of this Agreement by Licensor does not violate any
agreements, rights or obligations existing between Licensor and any
other person, firm or corporation.
13. LICENSEE'S WARRANTIES AND REPRESENTATIONS.
Licensee represents and warrants to Licensor that, during the Term and
thereafter:
(a) It will not attack the title of Licensor or its Grantors in and to
the Licensed Property or any copyright or trademark pertaining
thereto, nor will it attack the validity of the license granted
hereunder;
(b) It will not harm, misuse or bring into disrepute the Licensed
Property, but on the contrary, will maintain the value and
reputation thereof to the best of its ability;
(c) It will manufacture, sell, promote and distribute the Licensed
Product(s) in an ethical manner and in accordance with the terms and
intent of this Agreement, and in compliance with all applicable
government regulations and industry standards;
(d) It will not create any expenses chargeable to Licensor without the
prior written approval of Licensor;
(e) It will protect to the best of its ability its right to manufacture,
sell, promote, and distribute the Licensed Product(s) hereunder;
(f) It will at all times comply with all government laws and
regulations, including but not limited to product safety, food,
health, drug, cosmetic, sanitary or other similar laws, and all
voluntary industry standards relating or pertaining to the
manufacture, sale, advertising or use of the Licensed Product(s),
and shall maintain its appropriate customary high quality standards.
It shall comply with any regulatory agencies which shall have
jurisdiction over the Licensed Product(s) and shall procure and
maintain in force any and all permissions, certifications and or
other authorizations from governmental and/or other official
authorities that may be required in relation thereto. Each Licensed
Product and component thereof distributed hereunder shall comply
with all applicable laws, regulations and voluntary industry
standards. Licensee shall follow reasonable and proper procedures
for testing that all Licensed Product(s) comply with such laws,
regulations and standards. Upon reasonable notice, Licensee shall
permit
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Licensor or its designees to inspect testing records and procedures
with respect to the Licensed Product(s) for compliance. Licensed
Product(s) that do not comply with all applicable laws regulations
and standards shall automatically be deemed unapproved;
(g) It shall, upon Licensor's request, provide credit information to
Licensor including, but not limited to, fiscal year-end financial
statements (profit-and-loss statement and balance sheet) and
operating statements;
(h) It will provide Licensor with the date(s) of first use of the
Licensed Product(s) in interstate and intrastate commerce, where
appropriate;
(i) It will, pursuant to Licensor's instructions, duly take any and all
necessary steps to secure execution of all necessary documentation
for the recordation of itself as user of the Licensed Property in
any jurisdiction where this is required or where Licensor reasonably
requests that such recordation shall be effected. Licensee further
agrees that it will at its own expense cooperate with Licensor in
cancellation of any such recordation at the expiration of this
Agreement or upon termination of Licensee's right to use the
Licensed Property. Licensee hereby appoints Licensor its
Attorney-in-fact for such purpose; and
(j) It will not deliver or sell Licensed Products outside the Territory
or knowingly sell Licensed Products to a third party for delivery
outside the Territory.
14. TERMINATION BY LICENSOR.
(a) Licensor shall have the right to terminate this Agreement without
prejudice to any rights which it may have in the premises, whether
pursuant to the provisions of this Agreement, in law, or in equity,
or otherwise, upon the occurrence of any one or more of the
following events (herein called "defaults"):
(i) If Licensee defaults in the performance of any of its
obligations provided for in this Agreement; or
(ii) Licensee shall have failed to deliver to Licensor or to
maintain in full force and effect the insurance referred to in
Paragraph 7(c) hereof; or
(iii) If Licensee shall fail to make any payments due hereunder on
the date due; or
(iv) If Licensee shall fail to deliver any of the statements
hereinabove referred to or to give access to the premises
and/or license records pursuant to the provisions hereof to
Licensor's authorized representatives for the purposes
permitted hereunder; or
(v) If Licensee shall fail to comply with any laws, regulations
or voluntary industry standards as provided in Paragraph 13(f)
or if any governmental agency or other body, office or
official vested with appropriate authority finds that the
Licensed Product(s) are harmful or defective in any way,
manner or form, or are being manufactured, sold or distributed
in contravention of applicable laws, regulations or standards,
or in a manner likely to cause harm; or
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(vi) If Licensee shall be unable to pay its debts when due, or
shall make any assignment for the benefit of creditors, or
shall file any petition under the bankruptcy or insolvency
laws of any jurisdiction, county or place, or shall have or
suffer a receiver or trustee to be appointed for its business
or property, or be adjudicated a bankrupt or an insolvent; or
(vii) In the event that Licensee does not commence in good faith to
manufacture, distribute and sell each Licensed Product(s) and
utilize each Character set forth in the Licensed Property
within the Territory on or before the Marketing Date and
thereafter fails to diligently and continuously manufacture,
distribute and sell each of the Licensed Products and utilize
each Character within the Territory. Such default and
Licensor's resultant right of termination (or recapture) shall
only apply to the specific Character(s) and/or the specific
Licensed Product(s), which or wherein Licensee fails to meet
said Marketing Date requirement; or
(viii)If Licensee shall manufacture, sell or distribute, whichever
first occurs, any of the Licensed Products(s) without the
prior written approval of Licensor as provided in Paragraph 9
hereof; or
(ix) If Licensee undergoes a substantial change of management; or
(x) If a manufacturer approved pursuant to Paragraph 10(b) hereof
shall engage in conduct, which conduct if engaged in by
Licensee would entitle Licensor to terminate this Agreement;
or
(xi) If Licensee delivers or sells Licensed Product(s) outside the
Territory or knowingly sells Licensed Products(s) to a third
party for delivery outside the Territory; or
(xii) If Licensee has made a material misrepresentation or has
omitted to state a material fact necessary to make the
statements not misleading; or
(xiii)If Licensee shall breach any other agreement in effect
between Licensee and Licensor.
(b) In the event any of these defaults occur, Licensor shall give notice
of termination in writing to Licensee by certified mail. Licensee
shall have ten (10) days from the date of receiving notice in which
to correct any of these defaults (except subdivisions (vii), (viii),
(xi) and (xii) above which are not curable), and failing such, this
Agreement shall thereupon immediately terminate, and any and all
payments then or later due from Licensee hereunder (including
Guaranteed Consideration) shall then be promptly due and payable and
no portion of prior payments shall be repayable to Licensee.
15. FINAL STATEMENT UPON TERMINATION OR EXPIRATION.
Licensee shall deliver, as soon as practicable, but not later
than thirty (30) days following expiration or termination, a
statement indicating the number and description of Licensed
Product(s) on hand together with a description of all advertising
and promotional materials relating thereto. Following expiration or
termination, Licensee shall not continue to manufacture the Licensed
Product(s). However, if Licensee has complied with all the terms of
this Agreement,
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including, but not limited to, complete and timely payment of the
Guaranteed Consideration then, Licensee may continue to distribute and
sell its remaining inventory on a non-exclusive basis for a period not to
exceed SIXTY (60) days following such termination or expiration, subject
to payment of applicable royalties thereto. In no event, however, may
Licensee distribute and sell during such period an amount of Licensed
Product(s) that exceeds the average amount of Licensed Product(s) sold
during a consecutive SIXTY (60) day period during the Term. If Licensee
has any remaining inventory of the Licensed Product(s) following such
SIXTY (60) day period, Licensee shall, at Licensor's option, make
available such inventory to Licensor for purchase at cost, deliver up to
Licensor for destruction said remaining inventory or furnish to Licensor
an affidavit attesting to the destruction of said remaining inventory.
Licensor shall have the right to conduct a physical inventory in order to
ascertain or verify such inventory and/or physical inventory. In the event
this Agreement is terminated by Licensor for cause, Licensee shall be
deemed to have forfeited its sell-off rights hereunder. In addition to the
forfeiture, Licensor shall have recourse to all other legal remedies
available to it.
16. NOTICES.
Except as otherwise specifically provided herein, all notices which
either party hereto is required or may desire to give to the other shall
be given by addressing the same to the other at the address set forth
above, or at such other address as may be designated in writing by any
such party in a notice to the other given in the manner prescribed in this
paragraph. All such notices shall be sufficiently given when the same
shall be deposited so addressed, postage prepaid, in the United States
mail and/or when the same shall have been delivered, so addressed, to a
facsimile or over-night delivery service and the date of said mailing
shall be the date of the giving of such notice' and/or transmitted via
facsimile with receipt of a confirming copy.
17. NO PARTNERSHIP, ETC.
This Agreement does not constitute and shall not be construed as
constitution of a partnership or joint venture between Licensor and
Licensee. Neither party shall have any right to obligate or bind the other
party in any manner whatsoever, and nothing contained herein shall give,
or is intended to give, any rights of any kind to any third persons.
18. NON-ASSIGNABILITY.
This Agreement shall bind and inure to the benefit of Licensor, its
successors and assigns. This Agreement is personal to Licensee, and
Licensee shall not sub-license nor franchise its rights hereunder, and
neither this Agreement nor any of the rights of Licensee hereunder shall
be sold, transferred or assigned by Licensee and no rights hereunder shall
devolve by operation of law or otherwise upon any receiver, liquidator,
trustee or other party.
19. CONSTRUCTION.
This Agreement shall be construed in accordance with the laws of the
State of California of the United States of America.
20. WAIVER, MODIFICATION ETC.
No waiver, modification or cancellation of any term or condition of
this Agreement shall be effective unless executed
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in writing by the party charged therewith. No written waiver shall excuse
the performance of any acts other than those specifically referred to
therein. The fact that the Licensor has not previously insisted upon
Licensee expressly complying with any provision of this Agreement shall
not be deemed to be a waiver of Licensor's future right to require
compliance in respect thereof and Licensee specifically acknowledges and
agrees that the prior forbearance in respect of any act, term or condition
shall not prevent Licensor from subsequently requiring full and complete
compliance thereafter. If any term or provision of this Agreement is held
to be invalid or unenforceable by any court of competent jurisdiction or
any other authority vested with jurisdiction, such holding shall not
affect the validity or enforceability of any other term or provision
hereto and this Agreement shall be interpreted and construed as if such
term or provision, to the extent the same shall have been held to be
invalid, illegal or unenforceable, had never been contained herein.
Headings of paragraphs herein are for convenience only and are without
substantive significance.
21. ACCEPTANCE BY LICENSOR;
This instrument, when signed by Licensee shall be deemed an
application for license and not a binding agreement unless and until
accepted by Warner Bros. Consumer Products by signature of a duly
authorized officer and the delivery of such a signed copy to Licensee. The
receipt and/or deposit by Warner Bros. Consumer Products of any check or
other consideration given by Licensee and/or delivery of any material by
Warner Bros. Consumer Products to Licensee shall not be deemed an
acceptance by Warner Bros. Consumer Products of this application. The
foregoing shall apply to any documents relating to renewals or
modifications hereof.
This Agreement shall be of no force or effect unless and until it is
signed by all of the parties listed below:
AGREED AND ACCEPTED: AGREED AND ACCEPTED:
LICENSOR: LICENSEE:
PARKER BR0S. CONSUMER PRODUCTS, A ACE NOVELTY COMPANY, INC.
TIME WARNER ENTERAINMENT COMPANY
as Agent for Warner Bros., a
division of Time Warner
Entertainment Company, L.P.
By:/s/ GARY R. SIMON By:/s/ SAUL GAMORAN
Gary R. Simon
Vice President, Legal Affairs
Date: 3/22/96 Date:3/19/96
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EXHIBIT 1 #6832-SPJ/WBLT
Dated
Warner Bros. Consumer Products
4000 Warner Boulevard
Burbank, CA 91522
RE: APPROVAL FOR THIRD PARTY MANUFACTURER
Gentlemen:
This letter will serve as notice to you that pursuant to Paragraph 10(b)
of the License Agreement dated ______, 199_ between your client WARNER BROS. and
ACE NOVELTY COMPANY INC, ("Licensee"), we have been engaged as the manufacturer
for LICENSEE in connection with the manufacture of the Licensed Product(s) as
defined in the aforesaid License Agreement. We hereby acknowledge that we may
not manufacture Licensed Product(s) for, or sell or distribute Licensed
Product(s) to, anyone other than Licensee. We hereby further acknowledge that we
have received a copy and are cognizant of the terms and conditions set forth in
said License Agreement and hereby agree to observe those provisions of said
License Agreement which are applicable to our function as manufacturer of the
Licensed Product(s). It is understood that this engagement is on a royalty free
basis.
We understand that our engagement as the manufacturer for LICENSEE is
subject to your written approval. We request, therefore, that you sign in the
space below, thereby showing your acceptance of our engagement as aforesaid.
Sincerely,
_______________________________
MANUFACTURER/COMPANY NAME
By:____________________________
SIGNATURE
____________________________
PRINTED NAME
____________________________
ADDRESS
____________________________
____________________________
DATED
AGREED TO AND ACCEPTED:
WARNER BROS. CONSUMER PRODUCTS
By:________________________
Gary R. Simon
Vice President, Legal Affairs
Date:_______________
17
*Omitted and filed separately with the Commission.
EXHIBIT 10.12
RETAIL LICENSE -- WORLDWIDE
WARNER BROS. CONSUMER PRODUCTS
#8700-BLT ("BABY LOONEY TUNES")
LICENSE AGREEMENT made September 10, 1997 by and between WARNER BROS., A
DIVISION OF TIME WARNER ENTERTAINMENT COMPANY L.P., c/o Warner Bros. Consumer
Products, a Division of Time Warner Entertainment Company L.P., whose address is
4000 Warner Blvd., Burbank, CA 91522 (hereinafter referred to as "LICENSOR") and
PLAY-BY-PLAY TOYS & NOVELTIES, INC., whose address is 4400 Tejasco, San Antonio,
TX 78218-0267, c/o 13434 N.E. 16th St., Bellevue, WA 98005, Attention: Saul
Gamoran (hereinafter referred to as "LICENSEE").
WITNESSETH:
The parties hereto mutually agree as follows:
1. DEFINITIONS: As used in this Agreement, the following terms shall have the
following respective meanings:
(a) "LICENSED PROPERTY": The fictional cartoon characters BABY BUGS
BUNNY, BABY LOLA BUNNY, BABY DAFFY DUCK, BABY SYLVESTER, BABY
TWEETY, BABY TASMANIAN DEVIL, BABY WILE E. COYOTE, BABY ROAD RUNNER,
BABY MARVIN THE MARTIAN and BABY K-9 which constitute "BABY LOONEY
TUNES", including the names of said characters and all trademarks,
copyrights, environmental settings and artwork associated therewith.
Unless otherwise set forth below, specifically excluded herefrom are
any other properties, trademarks or copyrights of Licensor,
including but not limited to the cartoon characters referred to
collectively as the "LOONEY TUNES" characters, and Licensee
acknowledges and agrees that it shall enjoy no rights whatsoever
hereunder with respect to such properties, trademarks, and
copyrights, it being understood that such properties, trademarks,
and copyrights are and will continue to be the subject of separate
licensing agreements with licensees of Licensor's choice. Without
limiting the generality of the foregoing, Licensee is obtaining no
right hereunder, unless otherwise specifically set forth below, in
or to the adult versions of BUGS BUNNY, LOLA BUNNY, DAFFY DUCK,
SYLVESTER, TWEETY, TASMANIAN DEVIL, WILE E. COYOTE, ROAD RUNNER,
MARVIN THE MARTIAN and K-9.
(b) "TERRITORY": Worldwide, composed of the following delineated regions
(the "Region(s)"):
(i) UNITED STATES
(ii) CANADA
(iii) ASIA/PACIFIC RIM
(iv) EUROPE/MIDDLE EAST/AFRICA ("EMEA")
(v) LATIN AMERICA
(c) "LICENSED PRODUCT(S)": As defined for each Region in Schedules
*REDACTED through *REDACTED as set forth below, attached hereto and
incorporated by reference:
*REDACTED *REDACTED
*REDACTED *REDACTED
*REDACTED *REDACTED
*REDACTED *REDACTED
(d) "TERM": January 1, 1998 through *REDACTED.
(e) "MARKETING DATE": January 31, 1998.
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*Omitted and filed separately with the Commission.
(f) "GUARANTEED CONSIDERATION": The sum of *REDACTED U.S. Dollars
*REDACTED to be allotted among the Regions and payable according to
the following schedule:
<TABLE>
<CAPTION>
UNITED STATES CANADA ASIA/PACIFIC RIM EMEA LATIN AMERICA TOTAL
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
*REDACTED
</TABLE>
All payments hereunder shall be made in U.S. Dollars.
It is understood and agree that the amounts listed above shall not
be cross-collateralized among the Regions.
(g) ROYALTY RATE: Licenses shall pay to Licensor the following sums:
(i) *REDACTED of Licensee's Net Sales (as defined in Paragraph
4.(b) below) of the Licensed Product(s) that are sold directly
to retailers;
(ii) *REDACTED for all Licensed Products sold FOB to Authorized
Distributers (as defined below) for final sale to retailers in
Asia/Pacific Rim, EMEA and Latin America.
(h) "CHANNELS OF DISTRIBUTION": Licensee may distribute the Licensed
Products through the channels respective to each Region in the
Territory as set forth on Schedules B-1 through B-4, attached hereto
and incorporated by reference:
Schedule B-1: *REDACTED
Schedule B-2: *REDACTED
Schedule B-3: *REDACTED
Schedule B-4: *REDACTED
Licensee and Licensor agree that Licensee shall be permitted to
utilize third-party distributors within specific Regions
("Authorized Distributors"), which shall have the right to import,
manufacture, distribute and sell Licensed Products subject to (i)
Licensor's prior written approval, not to be unreasonably withheld,
or (ii) subject to Licensee's approval, the execution of a separate
license agreement between each such Authorized Distributor and
Licensor with respect to the Licensed Property. In such event,
Licensee shall remain primarily obligated under all of the
provisions of this Agreement and any default of this Agreement by
such Authorized distributor shall be deemed a default by Licensee
hereunder.
2. GRANT OF LICENSE:
(a) Subject to the restrictions, limitations, reservations and
conditions and Licensor's approval rights set forth in this
Agreement, Licensor hereby grants to Licensee and Licensee hereby
accepts for the Term of this Agreement, a license to utilize the
Licensed Property solely on or in connection with the manufacture,
distribution and sale of the Licensed Products as specified above
for the ultimate distribution to the public throughout the
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*Omitted and filed separately with the Commission.
Territory on an exclusive or non-exclusive basis, as set forth in
Schedules A-1 through A-4.
(b) Without limiting any other approval rights of Licensor as contained
herein, no television commercials may be utilized under this
Agreement without the specific prior written approval of Licensor.
3. RESERVATION OF RIGHTS; PREMIUMS:
(a) Licensor reserves all rights not expressly conveyed to Licensee
hereunder, and Licensor may grant licenses to others to use the
Licensed Property, artwork and textual matter in connection with
other uses, services and products without limitation.
(b) Notwithstanding anything to the contrary stated herein, Licensor
specifically reserves the right, without limitation throughout the
world, to itself use, or license any third party(s) of its choice to
use the Licensed Property for the manufacture, distribution and sale
of products similar or identical to those licensed herein in
Paragraph 1.(c) above for sale through any catalogue (s) produced or
distributed by or on behalf of Licensor or its affiliated companies
or franchisees, or for sale or distribution in any theaters or
arenas, or for sale or distribution in any retail stores operated by
or on behalf of Licensor, its affiliated companies or franchisees,
or for sale or distribution in any theme/amusement parks operated by
or on behalf of Licensor and its affiliated companies, including
without limitation, the Six Flags and Movie World parks. In
addition, Licensor reserves the right to allow Six Flags Corporation
and Movie World to manufacture (or have manufactured by a third
party) products similar or identical to those licensed herein for
distribution or sale in theme and/or amusement parks owned or
operated by both Six Flags Corporation and Movie World. Further,
Licensor reserves the right to use, or license others to use, and/or
manufacture products similar or identical to those licensed herein
for use as premiums.
(c) Licensee specifically understands and agrees that no rights are
granted herein with respect to the Warner Bros. "shield" logo or
trademark, or any other trademark(s), logo(s) or copyrights owned by
Licensor other than those specifically set forth above in the
Licensed Property, it being understood that all rights in and to
said properties are reserved exclusively to Licensor for use and/or
licensing as it deems appropriate to third party(s) of its choice.
(d) Licensee agrees that it will not use, or knowingly permit the use
of, and will exercise due care that its customers likewise will
refrain from the use of, the Licensed Products as a premium, except
with the prior written consent of Licensor. Subject to Licensor's
prior written consent of Licensor. Subject to Licensor's prior
written approval as aforesaid, Licensee shall pay to Licensor a sum
equal to *REDACTED of all premium sales. For purposes of
this paragraph, the term "premium" shall be defined as including,
but not necessarily limited to, combination sales, free or
self-liquidating items offered to the public in conjunction with the
sale or promotion of a product or service, including traffic
building or continuity visits by the consumer/customer, or any
similar scheme or device, the prime intent of which is to use the
Licensed Products in such way as to promote, publicize and or sell
the products, services or business image of the user of such item.
-3-
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4. CONSIDERATION:
(a) The Guaranteed Consideration paid by Licensee as set forth above
shall be applied against such royalties as are, or have become, due
to Licensor. No part of such Guarantor Consideration shall be
repayable to Licensee. Royalties earned in excess of the Guaranteed
Consideration applicable to the Term hereof shall not offset any
Guaranteed Consideration required in respect of the succeeding
renewal term (if any); likewise, royalties earned in excess of the
Guaranteed Consideration applicable to the renewal term (if any)
shall not offset any Guaranteed Consideration applicable to any
prior term.
(b) ROYALTY PAYMENTS: Licensee shall pay to Licensor a sum equal to the
Royalty Rate as set forth above of all Net Sales by Licensee of the
Licensed Products covered by this Agreement. The term "Net Sales"
herein shall mean the gross invoice price billed customers, less
(i) actual quantity discounts and actual returns, but no
deductions shall be made for uncollectible accounts and
deductions for actual returns may not exceed five percent (5%)
of total sales; and
(ii) any sales, excise or value added taxes which are separately
stated and which are required to be collected from customers
and which are payable to tax authorities. No deduction shall
be taken in computing Net Sales for taxes not described
immediately above, including but not limited to income taxes,
withholding taxes or remittance taxes.
No costs incurred in the manufacture, sale, distribution,
advertisement, or exploitation of the Licensed Products shall be
deducted from any royalties payable by Licensee.
(c) IT IS A MATERIAL TERM AND CONDITION OF THIS AGREEMENT THAT LICENSEE
REPORT NET SALES ON A COUNTRY-BY-COUNTRY BASIS. IN THE EVENT
LICENSEE FAILS TO DO SO, LICENSOR SHALL HAVE THE RIGHT TO TERMINATE
THIS AGREEMENT.
(d) Licensee will pay all taxes, customs, duties, assessments, excise
except as provided in Subparagraph 4.(b)(ii), and other charges
levied upon the importation of or assessed against the Licensed
Product under this Agreement, as well as all Licensee's costs of
doing business and Licensor shall have no liability therefor.
(e) In the event Licensee has earned royalties in currencies other than
in U.S. Dollars, then Licensee shall convert said amounts into U.S.
Dollars based upon the exchange rate published by the Wall Street
Journal as of the fifteenth (15th) day of the applicable month or if
such day shall fall on a non-business day then as of the first
business day following said fifteenth (15th) day.
(f) Royalties shall be payable concurrently with the periodic statements
required in Paragraph 5.(a) hereof, except to the extent offset by
Guaranteed Consideration theretofore remitted.
5. PERIODIC STATEMENTS:
(a) Within thirty (30) days after the initial shipment of the Licensed
Products and promptly on the thirtieth (30th) day of every month
thereafter, Licensee shall furnish to Licensor complete and accurate
statements certified to be accurate by Licensee, or if a
corporation, by an officer of Licensee, showing with respect to all
Licensed Products distributed and sold by Licensee during the
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<PAGE>
preceding calendar month the (i) number of units; (ii) country in
which manufactured, sold and/or to which shipped; (iii) Description
(as such term is defined below) of the Licensed Products; (iv) gross
sales price; and (v) itemized deductions from gross sales price, and
net sales price together with any returns made during the preceding
calendar month. Such statements shall be furnished to Licensor
whether or not any of the Licensed Products have been sold during
calendar months to which such statements refer. Receipt or
acceptance by Licensor of any of the statements furnished pursuant
to this Agreement or any sums paid hereunder shall not preclude
Licensor from questioning the correctness thereof at any time, and
in the event that any inconsistencies or mistakes are discovered in
such statements or payments, they shall immediately be rectifies and
the appropriate payments made by Licensee. Upon demand of Licensor,
Licensee shall at its own expense, but not more than once in any
twelve (12) month period, furnish to Licensor a detailed statement
by an independent certified public accountant showing the (i) number
of units; (ii) country in which manufactured, sold and/or shipped;
(iii) Description of the Licensed Products; (iv) gross sales price;
and (v) itemized deductions from gross sales price and net sales
price of the Licensed Products covered by this Agreement distributed
and/or sold by Licensee up to and including the date upon which
Licensor has made such demand. For purposes of this subparagraph,
the term "Description" shall mean a detailed description of the
Licensed Products including the nature of each of the Licensed
Products, any and all names and likenesses, whether live actors or
animated characters, from the Licensed Property utilized on the
Licensed Products and/or any related packaging and/or wrapping
material, and any other components of the Licensed Property utilized
on the Licensed Products and/or any related packaging and/or
wrapping material. In the event Licensor is responsible for the
payment of any additional third party participations based on
Licensee not reporting by character name and likeness as provided
above, Licensee shall be responsible for reimbursing Licensor for
the full amount of all such third party claims, including without
limitation, the participation itself, interest audit and attorneys'
fees. Licensee understands and agrees that it is a material term and
condition of this Agreement that Licensee include the Description on
all statements. In the event Licensee fails to do so, Licensor shall
have the right to terminate this Agreement, in accordance with the
provisions of Paragraph 14 herein.
(b) The statements and payments required hereunder shall be delivered
to:
WARNER BROS. CONSUMER PRODUCTS
4000 Warner Boulevard
Bridge Building, 4th Floor
Burbank, CA 91522
Attention: Assistant Controller, Domestic Accounting
(c) Any payments which are made to Licensor hereunder after the due date
required therefore, shall bear interest at the then current prime
rate plus six percent (6%) (or the maximum rate permissible by law,
if less than the current prime rate) form the date such payments are
due to the date of payment. Licensor's right hereunder to interest
on late payments shall not preclude Licensor from exercising any of
its other rights or remedies pursuant
-5-
<PAGE>
to this Agreement or otherwise with regard to Licensee's failure to
make timely remittances.
(d) Any income taxes, withholding taxes, other taxes and/or fees which
local law requires to be levied against Licensor's royalty shall be
paid by Licensee on behalf of Licensor within the period of time
required by local law, provided that Licensee shall not make such
payment if Licensor has advised Licensee in writing not to do so,
and has taken appropriate legal action to contest the propriety of
such taxes and/or fees. In such event, Licensor shall indemnify
Licensee against any interest charges or penalties with respect to
such taxes. Any such taxes or fees which Licensee pays on behalf of
Licensor shall be deducted from the royalty otherwise payable to
Licensor. The original receipt (or a bona fide copy thereof) for
such taxes as may be deducted from royalties shall accompany the
statements described in Paragraph 5.(a) above for the accounting
period in which such deduction is made. Licensee shall timely file
all necessary tax returns or other government documents on
Licensor's behalf, as required by local law, at Licensee's cost.
6. BOOKS AND RECORDS:
(a) Licensee shall keep, maintain and preserve (in Licensee's principal
place of business) for at least two (2) years following termination
or expiration of the Term of this Agreement or any renewal(s) hereof
(if applicable), complete and accurate records of accounts
including, without limitation, purchase orders, inventory records,
invoices, correspondence, banking and financial and other records
pertaining to the various items required to be submittted by
Licensee as well as to ensure Licensee's compliance with local laws
as required pursuant to Paragraph 13.(k) hereof. Such records and
accounts shall be available for inspection and audit at any time or
times during or after the Term of this Agreement or any renewal(s)
hereof (if applicable) during reasonable business hours and upon
reasonable notice by Licensor or its nominees. Licensee agrees not
to cause or permit any interference with Licensor or nominees of
Licensor in the performance of their duties. During such inspections
and audits, Licensor shall have the right to take extracts and/or
make copies of Licensee's records as it deems necessary.
(b) The exercise by Licensor in whole or in part, at any time of the
right to audit records and accounts or of any other right herein
granted, or the acceptance by Licensor of any statement or
statements or the receipt and/or deposit by Licensor, of any
payment tendered by or on behalf of Licensee shall be without
prejudice to any rights or remedies of Licensor and such acceptance,
receipt and/or deposit shall not preclude or prevent Licensor from
thereafter disputing the accuracy of any such statement or payment.
(c) If pursuant to its right hereunder Licensor causes an audit and
inspection to be instituted which thereafter discloses a deficiency
between the amount found to be due to Licensor and the amount
actually received or credited to Licensor, then Licensee shall, upon
Licensor's demand, promptly pay the deficency, together with
interest thereon at the then current prime rate from the date such
amount became due until the date of payment, and, if the deficiency
is more than five percent (5%) of all Royalties paid by Licensee
during the period covered by the audit, then Licensee shall pay the
reasonable costs and expenses of such audit and inspection.
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(d) Licensee understands and agrees that Licensor shall have access to
Licensee's sell-through information, with respect to the Licensed
Products, pertaining to various retail customers (e.g. Wal*Mart, JC
Penney) (the "Sell Through System"). Licensor agrees to keep
confidential all information obtained by Licensor through the Sell
Through Systems except: (i) to the extent necessary to comply with a
law or the valid order of a court of competent jurisdiction, in
which event the party making such disclosure shall so notify the
other and shall seek confidential treatment of such information;
(ii) as part of normal reporting or review procedure to the
respective parties' boards of directors, parent company, auditors
and attorneys who agree to be bound by the provisions of this
subparagraph; (iii) in order to enforce its rights or perform its
obligations under this Agreement; or (iv) when discussing the sale
of Licensed Products with the applicable retail customer in an
effort to improve business results.
7. INDEMNIFICATIONS:
(a) During the Term, and continuing after the expiration or termination
of this Agreement, Licensor shall indemnify Licensee and shall hold
it harmless from any loss, liability, damage, cost or expense
arising out of any claims or suits which may be brought or made
against Licensee by reason of the breach by Licensor of the
warranties or representations as set forth in Paragraph 12 hereof,
provided that Licensee shall give prompt written notice, and full
cooperation and assistance to Licensor relative to any such claim or
suit and provided, further, that Licensor shall have the option to
undertake and conduct the defense of any suit so brought. Licensee
shall not, however, be entitled to recover for lost profits.
Licensee shall cooperate fully in all respects with Licensor in the
conduct and defense of said suit and/or proceedings related thereto.
(b) During the Term, and continuing after the expiration or termination
of this Agreement, Licensee shall indemnify Licensor and shall hold
it harmless from any loss, liability, damage, cost or expense
arising out of any claims or suits which may be brought or made
against Licensor by reason of: (i) any breach of Licensee's
covenants and undertakings hereunder; (ii) any unauthorized use by
Licensee of the Licensed Property; (iii) any use of any trademark,
copyright, design, patent, process, method or device, except for
those uses of the Licensed Property that are specifically approved
by Licensor pursuant to the terms of this Agreement; (iv) Licensee's
non-compliance with any applicable federal, state or local laws or
with any other applicable regulations; and (v) any alleged defects
and/or inherent dangers (whether obvious or hidden) in the Licensed
Products or the use thereof.
(c) With regard to 7(b)(v) above, Licensee agrees to obtain, at its own
expense, product liability insurance providing adequate protection
for Licensor and Licensee against any such claims or suits in
amounts no less than three million dollars ($3,000,000) per
occurrence, combined single limits. Simultaneously with the
execution of this Agreement, Licensee undertakes to submit to
Licensor a fully paid policy or certificate of insurance naming
Licensor as an additional insured party and, requiring that the
insurer shall not terminate or materially modify such policy or
certificate of insurance without written notice to Licensor at least
twenty (20) days in advance thereof. Such insurance and delivery of
the policy or certificate are material obligations of Licensee.
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8. ARTWORK; COPYRIGHT AND TRADEMARK NOTICES:
(a) The Licensed Property shall be displayed or used only in such form
and in such manner as has been specifically approved in writing by
Licensor in advance and Licensee undertakes to assure usage of the
trademark(s) and character(s) solely as apporved hereunder. Licensee
further agrees and acknowledges that any and all Artwork (defined
below) created, utilized, approved and/or authorized for use
hereunder by Licensor in connection with the Licensed Products or
which otherwise features or includes the Licensed Property shall be
owned in its entirety exclusively by Licensor. "Artwork" as used
herein shall include, without limitation, all pictorial, graphic,
visual, audio, audio-visual, digital, literary, animated, artistic,
dramatic, sculptural, musical or any other tyupe of creations and
applications, whether finished or not, including, but not limited
to, animation, drawings, designs, sketches, images, illustrations,
film, video, electronic, digitized or computerized information,
software, object code, source code, on-line elements, music, text,
dialogue, stories, visuals, effects, scripts, voiceovers, logos,
one-sheets, promotional pieces, packaging, display materials,
printed materials, photographs, interstitials, notes, shot logs,
character profiles and translations, produced by Licensee or for
Licensee, pursuant to this Agreement. Licensor reserves for itself
or its designees all rights to use any and all Artwork created,
utilized and/or approved hereunder without limitation.
(b) (i) Licensee acknowledge that, as between Licensor and Licensee,
the Licensed Property and Artwork and all other depictions
expressions and derivations thereof, and all copyrights,
trademarks and other proprietary rights therein are owned
exclusively by Licensor and Licensee shall have no interest in
or claim thereto, except for the limited right to use the same
prusuant to this Agreement and subject to its terms and
conditions.
(ii) Licensee agrees and acknowledges that any Artwork created by
Licensee or for Licensee hereunder is a "work made for hire"
for Licensor under the U.S. Copyright Act, and any and all
similar provisions of law under other jurisdictions, and that
Licensor is the author of such works for all purposes, and
that Licensor is the exclusive owner of all the rights
comprised in the undivided copyright and all renewals,
extensions and reversions therein, in and to such works in
perpetuity and throughout the universe. Licensee hereby waives
and releases in favor of Licensor all rights (if any) or of
"droit moral," rental rights and similar rights in and to the
Artwork (the "Intangible Rights") and agrees that Licensor
shall have the right to revise, condense, abridge, expand,
adapt, change, modify, add to, subtract from, re-title,
re-draw, re-color, or otherwise modify the Artwork, without
the consent of Licensee. Licensee hereby irrevocably grants,
transfers and assigns to Licensor all right, title and
interest, including copyrights, trademark rights, patent
rights and other proprietary rights, it may have in and to the
Artwork, in perpetuity and throughout the universe, and to all
proprietary depictions, expressions or derivations of the
Licensed Property created by or for Licensee. Licensee
acknowledges that Licensor shall have the right
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to terminate this Agreement in the event Licensee asserts any
rights (other than those specifically granted pursuant to this
Agreement) in or to the Licensed Property or Artwork.
(iii) Licensee hereby warants that any and all work created by
Licensee under this Agreement apart from the materials
provided to Licensee by Licensor is and shall be wholly
original with or fully cleared by Licensee and shall not copy
or otherwise infringe the rights of any third parties, and
Licensee hereby indemnifies Licensor and will hold Licensor
harmless from any such claim of infringement or otherwise
involving Licensee's performance hereunder. At the request of
Licensor, Licensee shall execute such form(s) of assignment of
copyright or other papers as Licensor may reasonably request
in order to confirm and vest in Licensor the rights in the
properties as provided for herein. In addition, Licensee
hereby appoints Licensor as Licensee's Attorney-in-Fact to
take such actions and to make, sign, execute, acknowledge and
deliver all such documents as may from time to time be
necessary to confirm in Licensor, its successors and assigns,
all rights granted herein. If any third party makes or has
made any contribution to the creation of Artwork authorized
for use hereunder, Licensee agrees to obtain from such party a
full confirmation and assignment of rights so that the
foregoing rights shall vest fully in Licensor, in the form of
the Contributor's Agreement attached hereto as Exhibit 2 and
by this reference made a part hereof, prior to commencing
work, ensuring that all rights in the Artwork and Licensed
Property arise in and are assigned to Licensor. Promptly upon
entering into each such Agreement, Licensee shall give
Licensor a copy of such agreement. Licensee assumes all
responsbility for such parties and agrees that Licensee shall
bear any and all risks arising out of or relating to the
performance of services by them and to the fulfillment of
their obligations under the Contributor's Agreement.
(iv) Upon expiration of termination of this Agreement for any
reason, or upon demand by Licensor at any time, Licensee shall
promptly deliver to Licensor all Artwork or Licensed Property,
whether finished or not, including drawings, drafts, sketches,
illustrations, screens, data, digital files and information,
copies or other items, information or things created in the
course of preparing the Licensed Property and all materials
provided to Licensee by Licensor hereunder, or, at Licensor's
option and instruction, shall destroy some or all of the
foregoing and shall confirm to Licensor in writing that
Licensee has done so. Licensee shall not use such Artwork or
Licensed Property, items, information or things, material, for
any purpose other than is permitted, under this Agreement.
(c) Licensee shall, within thirty (30) days of receiving an invoice, pay
Licensor for artwork executed for Licensee by Licensor (or by third
parties under contract to Licensor) for use in the development of
the Licensed Products and any related packaging, display and
promotional materials at Licensor's prevailing commercial art rates.
The foregoing shall include any artwork that,
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in Licensor's opinion, is necessary to modify artwork initially
prepared by Licensee and submitted for approval. Estimates of
artwork charges are available upon request.
(d) Licensee shall reimburse WB Toy for its product development costs
with respect to the Licensed Products (including without limitation
a percentage of WB Toy's salary costs and overhead based on the
amount of time spent working on the Licensed Products). Licensor and
Licensee shall mutually agree upon the mechanism, details and
payment plan with respect to the payments to be made under this
paragraph.
(e) Licensee shall cause to be imprinted, irremovably and legibly on
each Licensed Product manufactured, distributed or sold under this
Agreement, and all advertising, promotional, packaging and wrapping
material wherein the Licensed Property appears, the following
copyright and/or trademark notice(s):
"BABY LOONEY TUNES, characters, names and all related indicia
are trademarks of Warner Bros. (C)19 ."
(The year date shall be as instructed by Licensor.)
(f) In no event shall Licensee use, in respect to the Licensed Products
and/or in relation to any advertising, promotional, packaging or
wrapping material, any copyright or trademark notices which shall
conflict with, be confusing with, or negate, any notices required
hereunder by Licensor in respect to the Licensed Property.
(g) Licensee agrees to deliver to Licensor free of cost six (6) of each
of the Licensed Products together with their packaging and wrapping
material for trademark registration purposes in compliance with
applicable laws, simultaneously upon distribution to the public. Any
copyrights or trademarks with respect to the Licensed Products shall
be procured by and for the benefit of Licensor and at Licensor's
expense. Licensee further agrees to provide Licensor with the date
of the first use of the Licensed Products in interstate and
intrastate commerce.
(h) Licensee shall assist Licensor, at Licensor's expense, in the
procurement, protection, and maintenance of Licensor's rights to the
Licensed Property. Licensor may, in its sole discretion, commence or
prosecute and effect the disposition of any claims or suits relative
to the imitation, infringement and/or unauthorized use of the
Licensed Property either in its own name, or in the name of
Licensee, or join Licensee as a party in the prosecution of such
claims or suits. Licensee agrees to cooperate fully with Licensor in
connection with any such claims or suits and undertakes to furnish
full assistance to Licensor in the conduct of all proceedings in
regard thereto. Licensee shall promptly notify Licensor in writing
or any infringements or imitations or unauthorized uses by others of
the Licensed Property, on or in relation to products identical to
similar to or related to the Licensed Products. Licensor shall in
its sole discretion have the right to settle or effect compromises
in respect thereof. Licensee shall not institute any suit or take
any action on account of such infringements, imitations or
unauthorized uses.
-10-
<PAGE>
9. APPROVALS AND QUALITY CONTROLS:
(a) Licensee agrees to strictly comply and maintain compliance with the
quality standards, specifications and rights of approval of Licensor
in respect to any and all usage of the Licensed Property on or in
relation to the Licensed products throughout the Term of this
Agreement and any renewals or extensions thereof (if applicable).
Licensee agrees to furnish to Licensor free of cost for its written
approval as to quality and style, samples of each of the Licensed
Products, together with their packaging, hangtags, and wrapping
material , as follows in the successive stages indicated: (i) rough
sketches/layout concepts; (ii) finished artwork or final proofs;
(iii) pre-production samples or strike-offs; and (iv) finished
products, including packaged samples.
(b) No Licensed Products and no material whatever utilizing the Licensed
Property shall be manufactured, sold, distributed or promoted by
Licensee without prior written approval. Licensee may, subject to
Licensor's prior written approval, use textual and/or pictorial
matter pertaining to the Licensed Property on such promotional,
display and advertising materials as may, in its reasonable
judgment, promote the sale of the Licensed Products. All advertising
and promotional material relating to the Licensed Products must be
submitted to the Licensor for its written approval at the following
stages appropriate to the medium used: (i) rough concepts; (ii)
layout, storyboard, script; and (iii) finished materials.
(c) Approval or disapproval shall lie in Licensor's sole discretion. Any
Licensed Products not so approved in writing shall be deemed
unlicensed and shall not be manufactured or sold. If any unapproved
Licensed Products are being sold, Licensor may, together with other
remedies available to it including, but not limited to, immediate
termination of this Agreement, require such Licensed Products to be
immediately withdrawn from the market and to be destroyed, such
destruction to be attested to in a certificate signed by an officer
of Licensee.
(d) Any modification of a Licensed Product must be submitted in advance
for Licensor's written approval as if it were a new a Licensed
Product which uses particular artwork does not imply approval of
such artwork for use with a different Licensed Product.
(e) Licensed Products must conform in all material respects to the final
production samples approved by Licensor. If in Licensor's reasonable
judgement, the quality of a Licensed Product originally approved has
deteriorated in later production runs, or if a Licensed Product has
otherwise been altered, Licensor may, in addition to other remedies
available to it, require that such Licensed Product be immediately
withdrawn from the market.
(f) Licensee shall permit Licensor to inspect Licensee's manufacturing
operations, testing and payroll records (including those operations
and records of any supplier or manufacturer approved pursuant to
Paragraph 10.(b) below) with respect to the Licensed Product.
(g) If any changes or modifications are required to be made to any
material submitted to Licensor for its written approval in order to
ensure compliance with Licensor's specifications or standards of
quality, Licensee agrees promptly to make such changes or
modifications.
-11-
<PAGE>
(h) Subsequent to final approval, no fewer than twenty-four (24)
production samples of Licensed Products will be sent to Licensor, to
ensure quality control simultaneously upon distribution to the
public. In addition, Licensee shall provide Licensor with six (6)
catalogs which display all of Licensee's products, not just the
Licensed Products. Further, Licensor shall have the right to
purchase any and all Licensed Products in any quantity at the
maximum discount price Licensee charges its best customer.
(i) To avoid confusion of the public, Licensee agrees not to associate
other characters or properties with the Licensed Property on the
Licensed Products or in any packaging, promotional or display
materials unless Licensee receives Licensor's prior written
approval. Furthermore, Licensee agrees not to use the Licensed
Property (or any component thereof) on any business sign, business
cards, stationary or forms, nor as part of the name of Licensee's
business or any division thereof.
(j) Licensee shall use its best efforts to notify its customers of the
requirement that Licensor has the right to approve all promotional,
display and advertising material pursuant to this Agreement.
(k) It is understood and agreed that any animation used in electronic
media, including but not limited to animation for television
commercials and character voices for radio commercials, shall be
produced by Warner Bros. Animation pursuant to a separate agreement
between Licensee and Warner Bros. Animation, subject to Warner Bros.
Animation customary rates. Any payment made to Warner Bros.
Animation for such animation shall be in addition to and shall not
offset the Guaranteed Consideration set forth in Paragraph 1.(f).
(l) Licensor's approval of Licensed Products (including, without
limitation, the Licensed Products themselves as well as promotional,
display and advertising materials) shall in no way constitute or be
construed as an approval by Licensor of Licensee's use of any
trademark, copyright and/or other proprietary materials not owned by
Licensor.
10. DISTRIBUTION; SUBLICENSE MANUFACTURE:
(a) Within the Channels of Distribution set forth in Paragraph 1.(h)
hereof, Licensee shall sell the Licensed Products either to jobbers,
wholesalers, distributors or retailers for sale or resale and
distribution directly to the public. Unless explicitly set forth in
Paragraph 1.(h) hereof, Licensee shall not sell the Licensed
Products through any cable home shopping service or through
electronic media, including on any on-line network or service. If
Licensee sells or distributes the Licensed Products at a special
price, directly or indirectly, to itself, including without
limitation, any subsidiary of Licensee or to any other person, firm,
or corporation affiliated with Licensee or its officers, directors
or major stockholders, for ultimate sale to unrelated third parties,
Licensee shall pay royalties with respect to such sales or
distribution, based upon the price generally charged the trade by
Licensee.
(b) Except as specifically permitted hereunder, Licensee shall not be
entitled to sublicense any of its rights under this Agreement. In
the event Licensee is not the manufacturer of the Licensed Products,
Licensee shall, subject to the prior written approval of Licensor,
which approval shall not be unreasonably withheld, be entitled to
utilize a third party manufacturer in connection with
-12-
<PAGE>
the manufacture and production of the Licensed Products, provided
that such manufacturer shall execute a letter in the form of Exhibit
1 attached hereto and by this reference made a part hereof. In such
event, Licensee shall remain primarily obligated under all of the
provisions of this Agreement and any default of this Agreement by
such manufacturer shall be deemed a default by Licensee hereunder.
In no event shall any such third party manufacturer agreement
include the right to grant any rights to subcontractors.
11. GOOD WILL: Licensee recognizes the great value of the publicity and good
will associated with the Licensed Property and, acknowledges that: (i)
such good will is exclusively that of Licensor; and (ii) the Licensed
Property has acquired a secondary meaning as Licensor's trademarks and/or
identifications in the mind of the purchasing public. Licensee further
recognizes and acknowledges that a breach by Licensee of any of its
covenants, agreements or undertakings hereunder will cause Licensor
irreparable damage, which cannot be readily remedied in damages in an
action at law, and may, in addition, thereto, constitute an infringement
of Licensor's copyrights, trademarks and/other proprietary rights in, and
to the Licensed Property, thereby entitling Licensor to equitable remedies
and costs.
12. LICENSOR'S WARRANTIES AND REPRESENTATIONS:
Licensor represents and warrants to Licensee that:
(a) It has, and will have throughout the Term of this Agreement, the
right to licenses the Licensed Property to Licensee in accordance
with the terms and provisions of this Agreement; and
(b) The making of this Agreement by Licensor does not violate any
agreements, rights or obligations of any person, firm or
corporation.
13. LICENSEE'S WARRANTIES AND REPRESENTATIONS:
Licensee represents and warrants to Licensor that, during the Terms and
thereafter:
(a) It will not attack the title of Licensor (or third parties that have
granted rights to Licensor) in and to the Licensed Property or any
copyright or trademarks pertaining thereto, nor will it attach the
validity of the license granted hereunder;
(b) It will not harm, misuse or bring into disrepute the Licensed
Property, but on the contrary, will maintain the value and
reputation thereof to the best of its ability;
(c) It will manufacture, sell, promote and distribute the Licensed
Products in an ethical manner and in accordance with the terms and
intent of this Agreement, and in compliance with all applicable
government regulations and industry standards;
(d) It will not create any expenses chargeable to Licensor without the
prior written approval of Licensor in each and every instance. It
will not cause or allow any liens or encumbrances to be placed
against the Licensed Property;
(e) It will protect to the best of its ability its right to manufacture,
sell, promote, and distribute the Licensed Products hereunder;
-13-
<PAGE>
(f) It will at all times comply with all government laws and
regulations, including but not limited to product safety, food,
health, drug, cosmetic, sanitary or other similar laws, and all
voluntary industry standards relating or pertaining to the
manufacture, sale, advertising or use of the Licensed Products, and
shall maintain its appropriate customary high quality standards
during the agencies which shall have jurisdiction over the Licensed
Products and shall procure and maintain in force any and all
permissions, certifications and/or other authorizations from
governmental and/or other official authorities that may be required
in response thereto. Each Licensed Product and component thereof
distributed hereunder shall comply with all applicable laws,
regulations and voluntary industry standards. Licensee shall follow
reasonable and property procedures for testing that all Licensed
Products comply with such laws, regulations and standards. Licensee
shall permit Licensor or its designees to inspect testing records
and procedures with respect to the Licensed Products for compliance.
Licensed Products that do not comply with all applicable laws,
regulations and standards shall automatically be deemed unapproved
and immediately taken off the market;
(g) It shall, upon Licensor's request, provide credit information to
Licensor including, but not limited to fiscal year-end financial
statements (profit-and-loss statement and balance sheet) and
operating statements;
(h) It will provide Licensor with the date(s) of first use of the
Licensed Products in interstate and intrastate commerce, where
appropriate;
(i) It will, pursuant to Licensor's instructions, duly take any and all
necessary steps to secure execution of all necessary documentation
for the recordation of itself as user of the Licensed Property in
any jurisdiction where this is required or where Licensor reasonably
requests that such recordation shall be effected. Licensee further
agrees that it will at its own expense cooperate with Licensor in
cancellation of any such recordation at the expiration of this
Agreement or upon termination of Licensee's right to use the
Licensed Property. Licensee hereby appoints Licensor its
Attorney-in-Fact for such purpose;
(j) It will not deliver or sell Licensed Products outside the Territory
or knowingly sell Licensed Products to a third party for a delivery
outside the Territory;
(k) It will not use any labor that violates any local labor laws,
including all wage and hour laws, laws against discrimination and
that it will not use prison, slave or child labor in connection with
the manufacture of the Licensed Products;
(l) It shall at all times comply with all manufacturing, sales,
distributions, retail and marketing policies and strategies
promulgated by Licensor from time-to-time;
(m) If requested by Licensor to do so, it will utilize specific design
elements of the Licensed Property provided to Licensee by Licensor
or hangtags, labels, and other materials; and
(n) It will participate in a maximum of two (2) Warner Bros. Consumer
Products' sponsored creative programs per contract year.
-14-
<PAGE>
14. TERMINATION BY LICENSOR:
(a) Licensor shall have the right to terminate this Agreement without
prejudice to any rights which it may have, whether pursuant to the
provisions of this Agreement, or otherwise in law, or in equity, or
otherwise, upon the occurrence of any one or more of the following
events (herein called "defaults"):
(i) Licensee defaults in the performance of any of its obligations
provided for in this Agreement; or
(ii) Licensee shall have failed to deliver to Licensor or to
maintain in full force and effect the insurance referred to in
Paragraph 7. (c) hereof; or
(iii) Licensee shall fail to make any payments due hereunder on the
date due; or
(iv) Licensee shall fail to deliver any of the statements required
herein or to give access to the premises and/or license
records pursuant to the provisions hereof to Licensor's
authorized representatives for the purposes permitted
hereunder; or
(v) Licensee shall fail to comply with any laws, regulations or
voluntary industry standards as provided in Paragraph 13.(f)
or any governmental agency or other body, office or official
vested with appropriate authority finds that the Licensed
Products are harmful or defective in any way, manner or form,
or are being manufactured, sold or distributed in
contravention or applicable laws, regulations or standards or
in a manner likely to cause harm; or
(vi) Licensee shall be unable to pay its debts when due, or shall
make any assignment for the benefit of creditors, or shall
file any petition under the bankruptcy or insolvency laws of
any jurisdiction, county or place, or shall have or suffer a
receiver or trustee to be appointed for its business or
property, or be adjudicated a bankrupt or an insolvent; or
(vii) Licensee does not commence in good faith to manufacture,
distribute and sell each Licensed Products and utilize each
character set forth in the Licensed Property ("Character")
throughout the Territory on or before the Marketing Date and
thereafter fails to diligently and continuously manufacture,
distribute and sell each of the Licensed Products and utilize
each Character throughout the Territory. Such default and
Licensor's resultant right of termination (or recapture) shall
only apply to the specific Character(s) and/or the specific
Licensed Products, which or wherein Licensee fails to meet
said Marketing Date requirement; or
(viii) Licensee shall manufacture, sell or distribute, whichever
first occurs, any of the Licensed Products(s) without the
prior written approval of Licensor as provided in Paragraph 9
hereof; or
(ix) Licensee undergoes a substantial change of management; or
-15-
<PAGE>
(x) A manufacturer approved pursuant to Paragraph 10.(b) hereof
shall sell Licensed Products to parties other than Licensee or
engage in conduct, which conduct if engaged in by Licensee
would entitle Licensor to terminate this Agreement; or
(xi) Licensee delivers or sells Licensed Products outside the
Territory or knowingly sells Licensed Products(s) to a third
party who Licensee knows intends to, or who Licensee
reasonably should suspect intends to, sell or deliver such
Licensed Products outside the Territory; or
(xii) Licensee uses any labor that violates any local labor laws
and/or it uses prison, slave or child labor in connection with
the manufacture of the Licensed Products; or
(xiii) Licensee has made a material misrepresentation or has omitted
to state a material fact necessary to make the statements not
misleading; or
(xiv) Licensee shall breach any other agreement in effect between
Licensee on the one hand and Licensor on the other.
(b) In the event any of these defaults occur, Licensor shall give notice
of termination in writing to Licensee by facsimile and certified
mail. Licensee shall have ten (10) days from the date of giving
notice in which to correct any of these defaults (except
subdivisions (vii), (viii), (xi) and (xiii) above which are not
curable), and failing such, this Agreement shall thereupon
immediately terminate, and any and all payments then or later due
from Licensee hereunder (including Guaranteed Consideration) shall
then be promptly due and payable in full and no portion of those
prior payments shall be repayable to Licensee.
15. FINAL STATEMENT UPON TERMINATION OR EXPIRATION: Licensee shall deliver, as
soon as practicable, but not later than thirty (30) days following
expiration or termination of this Agreement, a statement indicating the
number and description of Licensed Products on hand together with a
description of all advertising and promotional materials relating thereto.
Following expiration or termination of this Agreement, Licensee shall
immediately cease any and all manufacturing of the Licensed Product.
However, if Licensee has complied with all the terms of this Agreement,
including, but not limited to, complete and timely payment of the
Guaranteed Consideration and Royalty Payments, then Licensee may continue
to distribute and sell its remaining inventory for a period not to exceed
sixty (60) days following such termination or expiration (the "Sell-Off
Period"), subject to payment of applicable royalties thereto. In no event,
however, may Licensee distribute and sell during the Sell-Off Period an
amount of Licensed Products that exceeds the average amount of Licensed
Products sold during any consecutive sixty (60) day period during the
Term. In the event this Agreement is terminated by Licensor for any reason
under this Agreement, Licensee shall be deemed to have forfeited its
Sell-Off Period. If Licensee has any remaining inventory of the Licensed
Products following the Sell-Off Period, Licensee shall, at Licensor's
option, make available such inventory to Licensor for purchase at or below
cost, deliver up to Licensor for destruction said remaining inventory or
furnish to Licensor an affidavit attesting to the destruction of said
remaining inventory. Licensor shall have the right to conduct a physical
inventory in order to ascertain or verify such inventory and/or statement.
In the event that Licensee refuses to permit Licensor to conduct such
physical inventory,
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<PAGE>
Licensee shall forfeit its right to the Sell-Off Period hereunder or any
other rights to dispose of such inventory. In addition to the forfeiture,
Licensor shall have recourse to all the legal remedies available to it.
16. MCDONALD'S SPACE JAM PLUSH ("SJ PLUSH"):
(a) Licensee acknowledges the receipt of substantially all of the
balance of 4,147,392 units of SJ Plush from McDonald's , the
remainder of which Licensee has been promised it will receive by
September 30, 1997. Licensee further acknowledges its obligation to
pay Licensor for the SJ Plush at the rate of $1.69 per unit for a
total of $7,009,092.48. Licensee has agreed to separately account to
Licensor and pay to Licensor on a quarterly basis for its sales of
SJ Plush during the prior calendar quarter. Licensor further agrees
to pay to Licensor any outstanding balance between $7,009,092.48 and
actual sales times $1.69 per unit by no later than March 31, 1999.
Licensor acknowledges that, as of the date hereof, it has received
the amount of $1,114,605.60 from Licensee in connection herewith,
leaving a balance due in the amount of $5,894,486.88. Licensee shall
be permitted to sell the SJ Plush in any and all Regions within the
Territory.
(b) It is understood and agreed that the amounts paid by Licensee to
Licensor with respect to the SJ Plush shall not offset the
Guaranteed consideration for this Agreement set forth in Paragraph
1.(f) and that other than the unit price set froth in 16.(a) above,
Licensee shall not pay royalties to Licensor on its sales of the SJ
Plush.
(c) Licensee agrees that it has no claim against Licensor for any
damages and/or losses it may have against Licensor in connection
with its purchase and/or subsequent resale and/or any other
disposition of the SJ Plush and Licensee hereby specifically waives
any and all such claims which have been, may have been or may be
made in connection therewith.
17. NOTICES: Except as otherwise specifically provided herein, all notices
which either party hereto is required or may desire to give to the other
shall be given by addressing the same to the other at the address set
forth above, or at such other address as may be designated in writing by
any such party in a notice to the other given in the manner prescribed in
this paragraph. All such notices shall be sufficiently given when the same
shall be deposited to addressed, postage prepaid, in the United States
mail and/or when the same shall have been delivered, so addressed, by
facsimile or by overnight delivery service and the date of transmission by
facsimile, receipt of overnight delivery service or two business days
after mailing shall for the purposes of this Agreement be deemed the date
of the giving of such notice.
18. NO PARTNERSHIP, ETC.: This Agreement does not constitute and shall not be
construed as constitution of a partnership or joint venture between
Licensor and Licensee. Neither party shall have any right to obligate or
bind the other party in any manner whatsoever, and nothing herein
contained shall give, or is intended to give, any rights of any kind to
any third persons.
19. NO SUBLICENSING/NON-ASSIGNABILITY: This Agreement shall bind and inure to
the benefit of Licensor, its successors and assigns. This Agreement is
personal to Licensee. Licensee shall not sublicense, franchise or delegate
to third parties its rights hereunder (except as set forth in Paragraph
10.(b) hereof). Neither this Agreement nor any of the rights of
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<PAGE>
Licensee hereunder shall be sold, transferred or assigned by Licensee and
no rights hereunder shall devolve by operation of law or otherwise upon
any receiver, liquidator, trustee or other party.
20. CONSTRUCTION: This Agreement shall be construed in accordance with the
laws of the State of California of the United States of America without
regard to its conflicts of laws provisions.
21. WAIVER, MODIFICATION ETC.: No waiver, modification or cancellation of any
term or condition of this Agreement shall be effective unless executed in
writing by the party charged therewith. No written waiver shall excuse the
performance of any acts other than those specifically referred to therein.
The fact that the Licensor has not previously insisted upon Licensee
expressly complying with any provision of this Agreement shall not be
deemed to be a waiver of Licensor's future right to require compliance in
respect thereof and Licensee specifically acknowledges and agrees that the
prior forbearance in respect of any act, term or condition shall not
prevent Licensor from subsequently requiring full and complete compliance
thereafter. If any term or provision of this Agreement is held to be
invalid or unenforceable by any court of competent jurisdiction or any
other authority vested with jurisdiction, such holding shall not affect
the validity or enforceability of any other term or provision hereto and
this Agreement shall be interpreted and construed as if such term or
provision, to the extent the same shall have been held to be invalid,
illegal or unenforceable, had never been contained herein. Headings of
paragraphs herein are for convenience only and are without substantive
significance.
22. ACCEPTANCE BY LICENSOR: This instrument, when signed by Licensee shall be
deemed an application for license and not a binding agreement unless and
until accepted by Warner Bros. Consumer Products by signature of a duly
authorized officer and the delivery of such a signed copy to Licensee. The
receipt and/or deposit by Warner Bros. Consumer Products of any check or
other consideration given by Licensee and/or delivery of any material by
Warner Bros. Consumer Products to Licensee shall not be deemed an
acceptance by Warner Bros. Consumer Products of this application. The
foregoing shall apply to any documents relating to renewals or
modifications hereof.
This Agreement shall be of no force of effect unless and until it is signed by
all of the parties listed below:
AGREED AND ACCEPTED: AGREED AND ACCEPTED:
LICENSOR: LICENSEE:
WARNER BROS. CONSUMER PRODUCTS, a PLAY-BY-PLAY TOYS &
Division of Time Warner Entertainment Company NOVELTIES, INC.
L.P., on behalf of itself and as Agent for
Warner Bros., a Division of Time Warner
Entertainment Company L.P.
By: /s/ GARY R. SIMON By: /s/ SAUL GAMORAN
Gary R. Simon
Vice President, Legal Affairs
Date: 9/10/97 Date: 9-9-97
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<PAGE>
*Omitted and filed separately with the Commission.
#8700-BLT ("BABY LOONEY TUNES")
SCHEDULE 1-A
LICENSED PRODUCTS - *REDACTED
1. EXCLUSIVE PRODUCTS:
(a) PLUSH TOYS*:
Plush dolls (all materials and sizes; with or without mechanical
features)
Talking plush
Plush puppets
Plush and plastic musical toys
Plush balls
Plush blocks (with or w/o sound)
Plush infant activity toys
*REDACTED
(b) INFANT PRE-SCHOOL TOYS:
*REDACTED
(c) ROLE PLAYING TOYS:
(d) VEHICLES:
*REDACTED
(e) MISCELLANEOUS TOYS:
*REDACTED
2. NON-EXCLUSIVE PRODUCTS:
(a) CRAFTS:
*REDACTED
(b) PUZZLES AND GAMES:
*REDACTED
A1-1
<PAGE>
*Omitted and filed separately with the Commission.
3. RIDE-ONS:
*REDACTED
(a) MISCELLANEOUS TOYS:
*REDACTED
4. ITEMS SPECIFICALLY EXCLUDED:
*REDACTED
5. ADDITIONAL TERMS SPECIFIC TO THIS REGION:
(a) *REDACTED
(b) Licensee agrees to hire a dedicated preschool/infant marketing
person to manage product line in San Antonio, Texas.
(c) *REDACTED
A1 - 2
<PAGE>
*Omitted and filed separately with the Commission.
#8700-BLT ("BABY LOONEY TUNES")
SCHEDULE A-2
LICENSED PRODUCTS - *REDACTED
1. EXCLUSIVE PRODUCTS:
(a) PLUSH DOLLS:
Plush dolls (all materials and sizes; with or without mechanical
features)
Talking plush
Plush Puppets
Plush and plastic musical toys
Plush balls
Plush blocks (with or w/o sound)
Plush infant activity toys
Plush rattles
Plush dolls with rattles
(b) INFANT PRE-SCHOOL TOYS:
*REDACTED
(c) ROLE PLAYING TOYS:
(d) VEHICLES:
*REDACTED
(e) MISCELLANEOUS TOYS:
*REDACTED
2. NON-EXCLUSIVE PRODUCTS:
(a) CRAFTS:
*REDACTED
(b) PUZZLES AND GAMES:
*REDACTED
A2-1
<PAGE>
*Omitted and filed separately with the Commission.
(c) RIDE-ONS:
*REDACTED
(d) MISCELLANEOUS TOYS
*REDACTED
3. ITEMS SPECIFICALLY EXCLUDED:
*REDACTED
4. ADDITIONAL TERRMS SPECIFIC TO THIS REGION:
(a) Licensee agrees to hire a dedicated preschool/infant marketing
person to manage product line in Asia/Pacific Rim Region.
(b) Licensee agrees to submit marketing plan directed to both retail and
to consumers.
(c) Licensee and Licensor shall work together to develop a business plan
specifically to address the needs of China with respect to the
Licensed Products. Licensor shall have final approval of such
business plan, such approval not to be unreasonably withheld.
(d) Licensor shall have input into the pricing of the Licensed Products
due to import duties, provided however, Licensor and Licensee shall
not enter into any agreement to set minimum price points for any
Licensed Products. In some countries (including without limitation
Indonesia, Thailand, Malaysia and the Philippines), due to high duty
fees, Licensee shall be permitted to subcontract local production in
order to reduce retail price points to competitive levels.
(e) Licensee agrees to modify designs for Plush Toys in Japan if
Licensor and Licensee agree that sales of such Licensed Products are
not adequate for that country.
A2-2
<PAGE>
*Omitted and filed separately with the Commission.
#8700-BLT ("BABY LOONEY TUNES")
SCHEDULE A-3
LICENSED PRODUCTS - EUROPE, MIDDLE EAST, AFRICA
1. EXCLUSIVE PRODUCTS:
(a) PLUSH TOYS:
Plush dolls (all materials and sizes; with or without mechanical
features)
Talking plush
Plush puppets
Plush and plastic musical toys
Plush infant activity toys
Plush rattles
Plush dolls with rattles
(b) INFANT PRE-SCHOOL TOYS:
*REDACTED
(c) ROLE PLAYING TOYS:
(d) VEHICLES:
*REDACTED
(e) MISCELLANEOUS TOYS:
*REDACTED
2. NON-EXCLUSIVE PRODUCTS
(a) CRAFTS:
*REDACTED
(b) PUZZLES AND GAMES:
*REDACTED
A3-1
<PAGE>
*Omitted and filed separately with the Commission.
(c) RIDE-ONS:
*REDACTED
(d) MISCELLANEOUS TOYS
*REDACTED
3. ITEMS SPECIFICALLY EXCLUDED:
*REDACTED
4. ADDITIONAL TERMS SPECIFIC TO THIS REGION
(a) Licensee agrees to hire a dedicated preschool/infant marketing
person to manage product line in EMEA Region.
A3-2
<PAGE>
*Omitted and filed separately with the Commission.
#8700-BLT ("BABY LOONEY TUNES")
SCHEDULE A-4
LICENSED PRODUCTS - LATIN AMERICA
1. EXCLUSIVE PRODUCTS
(a) PLUSH TOYS:
Plush dolls (all materials and sizes; with or without mechanical
features)
Talking plush
Plush puppets
Plush and plastic musical toys
Plush infant activity toys
Plush rattles
Plush dolls with rattles
(b) INFANT PRE-SCHOOL TOYS:
*REDACTED
(c) ROLE PLAYING TOYS:
(d) VEHICLES:
*REDACTED
2. NON-EXCLUSIVE PRODUCTS:
(a) PLUSH TOYS:
*REDACTED
(b) PVC TOYS:
*REDACTED
(c) CRAFTS:
*REDACTED
(d) RIDE-ONS:
*REDACTED
A4-1
<PAGE>
*Omitted and filed separately with the Commission.
(e) MISCELLANEOUS TOYS:
*REDACTED
3. ITEMS SPECIFICALLY EXCLUDED:
*REDACTED
4. ADDITIONAL TERMS SPECIFIC TO THIS REGION:
(a) Licensee agrees to hire a dedicated preschool/infant marketing
person to manage product line in Latin America Region.
(b) Licensee agrees to hire a dedicated staff for Warner Bros. Business
in Latin America.
(c) Licensee shall develop a business plan specifically to address the
needs of Brazil and Mexico with respect to the Licensed Products.
Licensor shall have final approval of such business plan, such
approval not to be unreasonably withheld.
(d) All pre-existing agreements and any automatic renewals therof within
the Latin America Region which conflict with this Agreement shall
continue during the Term of this Agreement and shall not be affected
by this Agreement in any way. All such conflicting agreements are
listed below:
LICENSEE COUNTRY EXP. DATE PRODUCTS
- -------- ------- --------- --------
Festcolor Ind. E Brazil 4/30/98 Figures
Comecio Ltda..
Comercializadora Ecuador 7/31/98 Plush
Procomfa S.A. Peru 8/14/98 Bath Toys, Blocks, Musical Toys,
Plush, Plush Dolls and Characters
(talking and non-talking), Toy
Vehicles (electronic and
non-electronic)
A4-2
<PAGE>
*Omitted and filed separately with the Commission.
#8700-BLT ("BABY LOONEY TUNES")
SCHEDULE B-1
CHANNELS OF DISTRIBUTION - *REDACTED
1. EXCLUSIVE CHANNELS OF DISTRIBUTION:
(a) DISCOUNT/MASS MARKET* *REDACTED
(b) SUPERMARKET/GROCERY *REDACTED
(c) DRUGSTORES *REDACTED
(d) TOY WHOLESALERS *REDACTED
(e) TOY STORES *REDACTED
(f) WAREHOUSE CLUBS *REDACTED
(g) COMIC BOOK STORES *REDACTED
"Discount/Mass" channel of distribution is defined as a retailer which
usually carries a broad assortment of unrelated product categories and is
usually self service with more of an emphasis on price than aesthetics.
Discount/Mass suppliers typically advertise in trade publications such as
"DISCOUNT STORE NEWS" and "DISCOUNT MERCHANDISER." Additionally, this type
of retailer/supplier usually attends the IMRA (International MassRetailer
Association) trade show. This type of retailer generally carries products
which do not classify as "better/best" quality in terms of general trade
categories. This type of store generally does not need individual store
servicing.
Licensee shall not sell to Home Furnishings buyers within the
Discount/Mass channels. In cases where the retailer has a Toy buyer,
Licensee must sell specifically to the Toy Buyer.
2. NON-EXLUSIVE CHANNELS OF DISTRIBUITON:
(a) ELECTRONIC MEDIA *REDACTED
(b) ART SUPPLY & CRAFT STORES *REDACTED
(c) HOBBY & MODEL STORES *REDACTED
(d) PARTY STORES *REDACTED
(e) OTHER STORES *REDACTED
B1-1
<PAGE>
(f) MID-TIER STORES *REDACTED
(g) DIRECT MAIL CATALOGS *REDACTED
(h) ELECTRONICS *REDACTED
(i) WARNER KIDS SHOPS
3. EXCLUDED CHANNELS OF DISTRIBUTION:
(a) *REDACTED
(b) *REDACTED
(c) *REDACTED
(d) *REDACTED
(e) *REDACTED
(f) *REDACTED
(g) *REDACTED
(h) *REDACTED
(i) *REDACTED
(j) *REDACTED
(k) *REDACTED
(l) *REDACTED
(m) *REDACTED
(n) *REDACTED
(o) *REDACTED
(p) *REDACTED
(q) *REDACTED
(r) *REDACTED
(s) *REDACTED
(t) *REDACTED
(u) *REDACTED
(v) *REDACTED
B1-2
<PAGE>
(w) *REDACTED
(x) *REDACTED
(y) *REDACTED
(z) *REDACTED
(aa) *REDACTED
(ab) *REDACTED
(ac) *REDACTED
(ad) *REDACTED
(ae) *REDACTED
(af) *REDACTED
(ag) *REDACTED
(ah) *REDACTED
(ai) *REDACTED
A "Gift Retailer" is defined as a retailer that generally carries better
quality, higher priced merchandise typically known as "gifts" in the
trade. This retailer does not usually discount merchandise or sell it at a
greatly reduced suggested retail. Gross margins are usually at fifty
percent (50%) or more. Merchandise displays are usually more focused on
aesthetics as opposed to price. Product categories carried are generally
somewhat related.
Such retailers will often carry other "gift" type products from companies
like Enesco, Midwest of Cannon Falls, New Creative Enterprises, Dale
Tiffany, Pacific Rim, Ande Rooney, Waterford, GriftCraft, Carson
Industries, Possible Dreams, Lenox, Department 56, Lefton, Swarovski,
Flambro, etc. (Obviously, this is not a complete listing and Licensor
reserves the right to add/delete as it sees fit).
"Gift" suppliers typically advertise in trade publications such as "GIFT &
STATIONARY BUSINESS"", "Giftware news" and "GIFTS & DECORATIVE
ACCESSORIES." This type of store generally requires servicing of
individual stores in merchandise set up, display, sku maintenance and
reordering.
Any other category of retailer not listed above where rights have no been
specifically granted is excluded hereunder unless Licensee receives prior
written approval from Licensor. Licensor reserves the right to make the final
decision as to how to classify a retail channel of distribution.
B1-3
<PAGE>
*Omitted and filed separately with the Commission.
#8700-BLT ("BABY LOONEY TUNES")
SCHEDULE B-2
CHANNELS OF DISTRIBUTION - *REDACTED
Department Stores
Specialty Stores
Gift Stores
Toy Stores
Mass Retailers (where applicable)
B2-1
<PAGE>
*Omitted and filed separately with the Commission.
#8700-BLT ("BABY LOONEY TUNTES")
SCHEDULE B-3
CHANNELS OF DISTRIBUTION - *REDACTED
1. EXCLUSIVE CHANNELS OF DISTRIBUTION:
(a) MIXED MULTIPLES *REDACTED
(b) DEPARTMENT STORES *REDACTED
(c) SUPERMARKET/GROCERY *REDACTED
(d) DRUGSTORES *REDACTED
(e) SPECIALIST NURSERY RETAILERS *REDACTED
(f) TOY WHOLESALERS *REDACTED
(g) TOY STORES *REDACTED
(h) WAREHOUSE CLUBS *REDACTED
(i) CATALOGUE AND MAIL ORDER *REDACTED
Licensee shall not sell to Home Furnishings/Domestics buyers within the
channels of distribution. In cease where the retailer has a Toy buyer,
Licensee must sell specifically to the Toy Buyer.
2. EXCLUDED CHANNELS: "Gift Specialist" retailers are specifically excluded
hereunder (Clinton's Cards).
Any other category of retailer not listed above where rights have not been
specifically granted is excluded hereunder unless Licensee receives prior
written approval from Licensor. Licensor reserves the right to make the final
decision as to how to classify a retail channel of distribution.
B3-1
<PAGE>
*Omitted and filed separately with the Commission.
#8700-BLT ("BABY LOONEY TUNES")
SCHEDULE B-4
CHANNELS OF DISTRIBUTION - *REDACTED
1. EXCLUSIVE CHANNELS OF DISTRIBUTION:
(a) DISCOUNT/MASS MARKET" (As defined below)
(b) SUPERMARKET/GROCERY
(c) DRUGSTORES
(d) TOY WHOLESALERS *REDACTED
(e) TOY STORES *REDACTED
(f) WAREHOUSE CLUBS
*"Discount/Mass" channels of distribution is defined as a retailer which
usually carries a broad assortment of unrelated product categories and is
usually self service with more of an emphasis on price than aesthetics.
2. NON-EXCLUSIVE CHANNELS OF DISTRIBUTION:
(a) ELECTRONIC MEDIA *REDACTED
(b) ART SUPPLY & CRAFT STORES
(c) HOBBY & MODEL STORES
(d) PARTY STORES
(e) MID-TIER STORES *REDACTED
(f) DIRECT MAIL CATALOGS
(g) ELECTRONICS
(h) CONVENIENCE STORES
(i) COMIC BOOK STORES
Any other category of retailer not listed above where rights have not been
specifically granted is excluded hereunder unless Licensee receives prior
written approval from Licensor. Licensor reserves the right to make the final
decision as to how to classify a retail channel of distribution.
B4-1
<PAGE>
EXHIBIT 1
#8700-BLT ("BABY LOONEY TUNES")
WARNER BROS. CONSUMER PRODUCTS
4000 Warner Blvd.
Triangle Bldg. - 3rd Floor
Burbank, CA 91522
RE: APPROVAL OF THIRD PARTY MANUFACTURER
Gentlemen:
This letter will serve as notice to you that pursuant to Paragraph 10.(b)
of the License Agreement dated ___________________, between WARNER BROS., A
DIVISION OF TIME WARNER ENTERTAINMENT COMPANY L.P. and PLAY-BY-PLAY TOYS &
NOVELTIES, INC. ("Licensee"), we have been engaged as the manufacturer for
Licensee in connection with the manufacture of Licensed Products as defined in
the aforesaid License Agreement. We hereby acknowledge that we may not
manufacture Licensed Products for, or sell or distribute Licensed Products to,
anyone other than Licensee. We hereby further acknowledge that we have received
a copy and are cognizant of the terms and conditions set forth in said License
Agreement which are applicable to our function as manufacturer of the Licensed
Products. It is expressly understood that we are obligated to comply with all
local laws, including without limitation, labor laws, wage and hour laws and
anti-discrimination laws and that you or your representative shall, at anytime,
have the right to inspect our facilities and review our records to ensure
compliance therewith. It is understood that this engagement is on a royalty free
basis and that we may not subcontract any of our work without your prior written
approval.
We understand that our engagement as the manufacturer for Licensee is
subject to your written approval. We regquest, therefore, that you sign in the
space below, thereby showing your acceptance of our engagement as aforesaid.
Very truly yours,
___________________________________
Manufacturer/Company Name
By: _______________________________
signature
_______________________________
printed name
_______________________________
address
AGREED TO AND ACCEPTED: _______________________________
WARNER BROS. CONSUMER PRODUCTS, _______________________________
A DIVISION OF TIME WARNER dated
ENTERTAINMENT COMPANY, L.P.
_______________________________
By: _______________________________ product(s) manufacturing
Gary R. Simon
Vice President, Legal Affairs _______________________________
_______________________________ _______________________________
dated
_______________________________
<PAGE>
EXHIBIT 2
#8700-BLT ("BABY LOONEY TUNES")
CONTRIBUTOR'S AGREEMENT
I, _____________________, the undersigned ("Contributor"), have been engaged by
_________________ ("Licensee") to work on or contribute to the creation of
Licensed Products, described as ______________________________________, by
Licensee under an agreement between Licensee and Warner Bros., a division of
Time Warner Entertainment Company L.P., c/o Warner Bros. Consumer Products, a
division of Time Warner Entertainment Company L.P. ("Warner"), dated
___________________________.
I understand and agree that the Licensed Products, and all artwork or other
results of my services for Licensee in connection with such Licensed Products
("Work") is a "work made for hire" for Warner and that all right, title and
interest in and to the Work shall vest and remain with Warner. I reserve no
rights therein. Without limiting the foregoing, I hereby assign and transfer to
Warner all other rights whatsoever, in perpetuity throughout the universe which
I may have or which may arise in me or in connection with the Work. I hereby
waive all moral rights in connection with such Work together with any other
rights which are not capable of assignment. I further agree to execute any
further documentation relating to such transfer or waiver or relating to such
Work at the request of Warner or Licensee, failing which Warner is authorized to
execute same as my Attorney-in-Fact.
CONTRIBUTOR:
By: _________________________________
Date: _______________________________
WARNER BROS. CONSUMER PRODUCTS:
By: _________________________________
Date: _______________________________
EXHIBIT 11
Play By Play Toys & Novelties, Inc. and Subsidiaries
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Year Ended July 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Primary:
Weighted average shares outstanding ......... 4,871,867 4,841,100 2,612,333
Dilutive effect of stock options and warrants 87,718 -- --
------------ ------------ ------------
Weighted average number of common
and common equivalent shares .............. 4,959,585 4,841,100 2,612,333
============ ============ ============
Income before discontinued operations ....... 6,215,972 4,052,115 1,898,598
Loss from discontinued operations ........... -- (384,038) (259,361)
Net Income .................................. $ 6,215,972 $ 3,668,077 $ 1,639,237
============ ============ ============
Income per share:
Income before discontinued operations ....... $ 1.25 $ 0.84 $ 0.73
Loss from discontinued operations ........... -- (0.08) (0.10)
------------ ------------ ------------
Net Income per share: ....................... $ 1.25 $ 0.76 $ 0.63
============ ============ ============
Fully Diluted:
Weighted average shares outstanding ......... 4,871,867 4,841,100 2,612,333
Assumed conversion of Convertible
Subordinated Debentures ................... 70,105 -- --
Dilutive effect of stock options and warrants 236,653 -- --
------------ ------------ ------------
Weighted average number of common
and common equivalent shares .............. 5,178,625 4,841,100 2,612,333
============ ============ ============
Net Income .................................. $ 6,215,972 $ 3,668,077 $ 1,639,237
Interest on convertible debt, net of tax .... 59,112 -- --
Loss from discontinued operations ........... -- (384,038) (259,361)
------------ ------------ ------------
Net income applicable to common stock ....... $ 6,275,084 $ 3,284,039 $ 1,379,876
============ ============ ============
Income per share:
Income before discontinued operations ....... $ 1.21 $ 0.76 $ 0.63
Loss from discontinued operations ........... -- (0.08) (0.10)
------------ ------------ ------------
Net income per share: ....................... $ 1.21 $ 0.68 $ 0.53
============ ============ ============
</TABLE>
EXHIBIT 21
Subsidiaries of the Company
Play By Play (Far East) Limited
Play By Play Toys & Novelties Europa, S.A.
Restaurants International, Inc.
Newco Novelty, Inc.
Ace Novelty Co., Inc.
Play By Play Toys & Novelties U.K., Ltd.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement on
Form S-8 (File No. 333-07031) 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 as of
July 31, 1997 and 1996, and for each of the three years in the period
ended July 31, 1997, which report is included in this Annual Report on
Form 10-K.
COOPERS & LYBRAND L.L.P.
Austin, Texas
October 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED STATEMENTS OF
OPERATIONS FOUND ON PAGES F-3 AND F-4 OF THE COMPANY'S FORM 10-K FOR THE TWELVE
MONTHS ENDED JULY 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 4,960,612
<SECURITIES> 0
<RECEIVABLES> 40,941,907
<ALLOWANCES> 3,213,653
<INVENTORY> 47,239,520
<CURRENT-ASSETS> 93,710,110
<PP&E> 18,416,904
<DEPRECIATION> 3,431,017
<TOTAL-ASSETS> 129,905,574
<CURRENT-LIABILITIES> 82,236,645
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 125,905,574
<SALES> 137,386,257
<TOTAL-REVENUES> 137,386,257
<CGS> 89,797,884
<TOTAL-COSTS> 89,797,884
<OTHER-EXPENSES> 34,441,660
<LOSS-PROVISION> 2,024,847
<INTEREST-EXPENSE> 4,414,701
<INCOME-PRETAX> 8,940,122
<INCOME-TAX> 2,724,150
<INCOME-CONTINUING> 6,215,972
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,215,972
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.21
</TABLE>
