UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED OCTOBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM _________ TO _________
Commission file number 0-26374
PLAY BY PLAY TOYS & NOVELTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Texas 74-2623760
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4400 Tejasco
San Antonio, Texas 78218-0267
(Address of principal executive offices and zip code)
(210) 829-4666
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The aggregate number of the Registrant's shares outstanding on December 9,
1998 was 7,315,000 shares of Common Stock, no par value.
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements:
Consolidated Balance Sheets as of October 31, 1998
(unaudited) and July 31, 1998 ........................... 3
Consolidated Statements of Income (unaudited) for
the Three Months Ended October 31, 1998 and 1997 ........ 4
Consolidated Statements of Cash Flows (unaudited)
for the Three Months Ended October 31, 1998 and 1997 .... 5
Notes to Consolidated Financial Statements
(unaudited) ............................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ........................................... 13
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K .......................... 15
SIGNATURES ........................................................ 18
2
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
------------- -------------
1998 1998
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................................................. $ 8,115,081 $ 3,024,028
Accounts and notes receivable, less allowance for
doubtful accounts of $5,825,641 and $5,262,053 .................................... 53,658,979 48,950,055
Inventories ............................................................................ 69,078,805 72,613,130
Prepaid royalties ...................................................................... 3,116,063 2,560,464
Deferred income taxes .................................................................. 224,728 224,728
Other current assets ................................................................... 6,207,553 6,135,579
------------- -------------
Total current assets .............................................................. 140,401,209 133,507,984
Property and equipment, net ............................................................ 19,783,714 17,914,998
Goodwill, less accumulated amortization of $873,358 and $754,179 ....................... 13,994,341 14,043,748
Other assets ........................................................................... 2,352,661 2,417,166
------------- -------------
Total assets ...................................................................... $ 176,531,925 $ 167,883,896
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft ......................................................................... $ 1,086,060 $ --
Notes payable to banks and others ...................................................... 20,679,502 14,760,950
Current maturities of long-term debt ................................................... 3,393,783 3,393,149
Current obligations under capital leases ............................................... 1,067,957 1,142,687
Accounts payable, trade ................................................................ 26,483,066 28,070,980
Other accrued liabilities .............................................................. 5,328,717 5,312,081
Income taxes payable ................................................................... 5,011,525 4,374,249
Deferred income taxes .................................................................. -- --
------------- -------------
Total current liabilities ......................................................... 63,050,610 57,054,096
------------- -------------
Long-term liabilities:
Long-term debt, net of current maturities .............................................. 4,251,370 4,860,247
Convertible subordinated debentures .................................................... 15,000,000 15,000,000
Obligations under capital leases ....................................................... 1,063,153 1,102,135
Deferred income taxes .................................................................. 1,148,297 878,787
------------- -------------
Total liabilities ................................................................. 84,513,430 78,895,265
------------- -------------
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; 7,315,000 shares issued ............................................... 1,000 1,000
Additional paid-in capital ............................................................. 70,986,820 70,986,820
Deferred compensation .................................................................. (443,333) (478,333)
Accumulated other comprehensive income ................................................. 20,256 (1,548,381)
Retained earnings ...................................................................... 21,453,752 20,027,525
------------- -------------
Total shareholders' equity ........................................................ 92,018,495 88,988,631
------------- -------------
Total liabilities and shareholders' equity ........................................ $ 176,531,925 $ 167,883,896
============= =============
</TABLE>
The accompanying notes are an integral part of the
Consolidated Financial Statements.
3
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales ...................................... $ 55,726,986 $ 58,417,556
Cost of sales .................................. 38,953,298 38,069,727
------------ ------------
GROSS PROFIT .............................. 16,773,688 20,347,829
Selling, general and administrative expenses ... 13,363,527 13,842,858
------------ ------------
OPERATING INCOME .......................... 3,410,161 6,504,971
Interest expense ............................... (1,354,780) (1,298,330)
Interest income ................................ 57,408 64,476
Other income ................................... 81,297 47,818
------------ ------------
INCOME BEFORE INCOME TAX .................. 2,194,086 5,318,935
------------ ------------
Income tax provision ........................... (767,859) (1,861,627)
------------ ------------
NET INCOME ................................ $ 1,426,227 $ 3,457,308
============ ============
Basic earnings per common share:
Net income ............................... $ 0.20 $ 0.71
============ ============
Diluted earnings per common share:
Net income ............................... $ 0.20 $ 0.58
============ ============
Weighted average shares outstanding:
Basic ........................................ 7,315,000 4,903,078
------------ ------------
Diluted ...................................... 8,272,008 6,312,987
------------ ------------
</TABLE>
The accompanying notes are an integral part of the
Consolidated Financial Statements.
4
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31,
------------------------------------
1998 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 1,426,227 $ 3,457,308
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization ................................................ 680,018 596,579
Provision for doubtful accounts receivable ................................... 495,325 1,052,257
Deferred income tax provision (benefit) ...................................... 269,510 (442,213)
Amortization of deferred compensation ........................................ 35,000 35,000
Loss on sale of property and equipment ....................................... 62,507 --
Change in operating assets and liabilities:
Accounts and notes receivable .............................................. (5,204,249) (4,135,423)
Inventories ................................................................ 3,534,325 (5,366,950)
Prepaids and other assets .................................................. (572,943) (3,401,905)
Accounts payable and accrued liabilities ................................... (1,619,628) 14,258,731
Income taxes payable ....................................................... 637,276 859,336
----------- ------------
Net cash provided by (used in) operating activities ..................... (256,632) 6,912,720
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .............................................. (2,403,781) (591,747)
Proceeds from sale of property and equipment .................................... 5,989 --
Payments for intangible assets .................................................. -- (37,010)
----------- ------------
Net cash used in investing activities ................................... (2,397,792) (628,757)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing (repayments) under Revolving Credit Agreement ..................... 5,918,552 (3,348,157)
Repayment of long-term debt ..................................................... (608,243) (710,854)
Repayment of capital lease obligations .......................................... (219,529) (175,842)
Increase in bank overdraft ...................................................... 1,086,060 621,184
Proceeds from exercise of stock options ......................................... -- 73,005
----------- ------------
Net cash provided by (used in) financing activities ..................... 6,176,840 (3,540,664)
----------- ------------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATES ......................................... 1,568,637 417,051
----------- ------------
Increase in cash and cash equivalents ................................... 5,091,053 3,160,350
Cash and cash equivalents at beginning of period .................................. 3,024,028 4,960,612
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................ $ 8,115,081 $ 8,120,962
=========== ============
Non-cash financing and investing activity - capital leases incurred ............... $ 105,817 $ 142,000
=========== ============
</TABLE>
The accompanying notes are an integral part of the
Consolidated Financial Statements.
5
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying unaudited consolidated financial statements and related
disclosures have been prepared in accordance with generally accepted accounting
principles applicable to interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. The year-end balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation of
the financial position and interim results of Play By Play Toys & Novelties,
Inc. and Subsidiaries (the "Company") as of and for the periods presented have
been included. Certain amounts in the financial statements for the prior period
have been reclassified to conform to the current year presentation. Because the
Company's business is seasonal, results for interim periods are not necessarily
indicative of those which may be expected for a full year.
The financial information included herein should be read in conjunction
with the Company's consolidated financial statements and related notes in its
Annual Report on Form 10-K for the fiscal year ended July 31, 1998, which is on
file with the United States Securities and Exchange Commission.
2. INVENTORIES
Inventories are comprised of the following:
OCTOBER 31, 1998 JULY 31, 1998
----------- -----------
Purchased for resale ............... $68,746,622 $72,325,886
Operating supplies ................. 332,183 287,244
----------- -----------
Total .......................... $69,078,805 $72,613,130
=========== ===========
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3. EARNINGS PER SHARE
Basic earnings per common share were computed by dividing net income by
the weighted average number of shares of common shares outstanding during the
period. Diluted earnings per share differs from basic earnings per share due to
the assumed conversions of dilutive options, warrants and convertible debt that
were outstanding during the period. The calculations of basic and diluted
earnings per share for the three month periods ended October 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31,
-------------------------------------------------------------------------------
1998 1997
---------------------------------- -----------------------------------
Common Per Common Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
As reported .............................. $1,426,227 7,315,000 $ 0.20 $3,457,308 4,903,078 $ 0.71
EFFECT OF DILUTIVE SECURITIES:
Options .................................. 19,508 440,201
Warrants ................................. -- 32,208
8% Convertible Debentures ................ 194,466 937,500 194,466 937,500
---------- --------- ----------- ---------- --------- -----------
DILUTED EPS: ............................. $1,620,693 8,272,008 $ 0.20 $3,651,774 6,312,987 $ 0.58
---------- --------- ----------- ---------- --------- -----------
</TABLE>
During the three month periods ended October 31, 1998 and 1997, the
Company had various amounts of common stock options and warrants outstanding
which were not included in the diluted earnings per share calculation because
the options and warrants would have been anti-dilutive.
4. COMPREHENSIVE INCOME
The Company's comprehensive income is comprised of net income and foreign
currency translation adjustments. The adoption of Statement of Financial
Accounting Standards ("SFAS") No. 130, "Comprehensive Income", had no impact on
the Company's net income or total shareholders' equity. Prior to the adoption of
SFAS No. 130, foreign currency translation adjustments were reported separately
in the statement of shareholders' equity.
The components of comprehensive income, net of related tax, are as
follows:
THREE MONTHS ENDED OCTOBER 31,
------------------------------
1998 1997
----------- ----------
Net income ............................... $1,426,227 $3,457,308
Foreign currency translation
adjustment, net of tax ................. 1,568,637 417,051
---------- ----------
Comprehensive income ..................... $2,994,864 $3,874,359
========== ==========
7
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5. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standard Board ("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 has not yet determined the impact, if any, that SFAS 131 will
have on its financial statement disclosures.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY, INCLUDING,
WITHOUT LIMITATION, RELATIONSHIPS WITH LICENSORS AND CUSTOMERS, REALIZATION OF
ROYALTY ADVANCES, NEW PRODUCT INTRODUCTION, ABILITY TO MANAGE GROWTH, ABILITY TO
SOURCE PRODUCTS, CONCENTRATION OF CREDIT RISK, INTERNATIONAL TRADE RELATIONS AND
MANAGEMENT OF QUARTER TO QUARTER RESULTS, AND OTHER RISKS DETAILED FROM TIME TO
TIME IN THE COMPANY'S SEC REPORTS, INCLUDING THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED JULY 31, 1998 (SEE "RISK FACTORS" IN SUCH FORM
10-K). UPDATED INFORMATION WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS
REQUIRED BY THE SECURITIES EXCHANGE ACT OF 1934.
RESULTS OF OPERATIONS
The following unaudited table sets forth the Company's results of
operations as a percentage of net sales for the periods indicated below:
THREE MONTHS ENDED
--------------------
OCTOBER 31,
--------------------
1998 1997
------ ------
Net sales .......................................... 100. % 100. %
Cost of sales ...................................... 69.9 65.2
------ ------
Gross profit ....................................... 30.1 34.8
Selling, general and administrative expenses ....... 24.0 23.7
------ ------
Operating income ................................... 6.1 11.1
Interest expense ................................... (2.4) (2.2)
Interest income .................................... 0.1 0.1
Other income (expense) ............................. 0.1 0.1
Income tax provision ............................... (1.4) (3.2)
====== ======
Net income ......................................... 2.5% 5.9%
====== ======
THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997
NET SALES. Net sales for the fiscal quarter ended October 31, 1998
decreased 4.6%, or $2.7 million, to $55.7 million from $58.4 million in the
comparable period in fiscal 1998. The decrease in net sales was primarily
attributable to a decrease in retail net sales of 30.2%, or $7.8 million, to
$17.9 million offset by an increase in amusement net sales growth of 16.2%, or
$5.1 million, to $37.1 million over the comparable period in fiscal 1998.
Domestic net toy sales for the first quarter of fiscal 1999 compared to the
comparable period of fiscal 1998 decreased 9.6%, or $4.9 million, to $45.7
million, and international net toy sales increased 32.4%, or $2.2 million, to
$9.3 million.
Net sales of licensed products for the first quarter of fiscal 1999
increased 13.1%, or $4.2 million, to $36.9 million from $32.7 million in the
comparable period of fiscal 1998. The increase in licensed product sales was
attributable to growth of sales of the Company's licensed plush to amusement
customers of 36.4%, or $5.9 million, to $22.2 million from $16.3 million in the
comparable period of fiscal 1998. Within licensed
9
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products, sales of Looney Tunes' characters increased 6.7%, or $1.8 million, to
$28.9 million for the first quarter of fiscal 1999 from $27.1 million in the
comparable period of fiscal 1998. The increase in licensed plush sales to
amusement customers was offset with a decrease in licensed product sales to
retail customers of licensed electronic toys of 17.7%, or $1.4 million, and
licensed plush sales of 19.6%, or $1.1 million. Net sales of non-licensed
products for the first quarter of fiscal 1999 and 1998 accounted for 32.5%, or
$18.1 million, and 42.8%, or $25.0 million, respectively, of the Company's net
sales.
Net toy sales to retail customers for the first quarter of fiscal 1999 and
fiscal 1998 accounted for 32.2%, or $17.9 million, and 43.9%, or $25.6 million,
respectively, of the Company's net sales. The $7.8 million decrease in net sales
to retail customers from the first quarter of fiscal 1998 to the first quarter
of fiscal 1999 is attributable to a decrease in sales of non-licensed electronic
toys of 65.8%, or $6.1 million, to $3.2 million, from $9.3 million, a decrease
in licensed electronic toys of 17.7%, or $1.4 million, and a decrease of 19.6%,
or $1.1 million of licensed plush sales, offset by an increase in sales of
PLAYOFACES(R) of 27.7%, or $836,000, to $3.8 million, from $3.0 million, in the
comparable period of fiscal 1998. Net sales of Talkin' Tunes(TM) anD Singin' and
Swingin' Tweety(TM) accounted for 5.6%, or $3.1 million, and 2.7%, or $1.5
million, respectively, of the Company's net sales.
Net toy sales to amusement customers for the first quarter of fiscal 1999
and fiscal 1998 accounted for 66.6%, or $37.1 million, and 54.8%, or $32.0
million, respectively, of the Company's net sales. The 16.2%, or $5.1 million,
increase is primarily attributable to an increase in sales of licensed plush of
36.4%, or $5.9 million, an increase in sales of novelty items of 216.5%, or $3.7
million, offset by a decrease in sales of non-licensed plush toys of 30.7%, or
$4.5 million, from the comparable period of 1998.
GROSS PROFIT. Gross profit decreased 17.6%, or $3.5 million, to $16.8
million for the first quarter of fiscal 1999 from $20.3 million in the
comparable period of fiscal 1998, because of lower gross profits in Europe due
to certain late shipments of retail products, significantly higher margins in
1998 for Talkin' Tots(TM) which were television advertised products and from the
sale in fiscal 1999 of certain older retail products at lower margins. As a
result of the above, gross profit as a percentage of net sales decreased to
30.1% for the first quarter of fiscal 1999 from 34.8% in the comparable period
in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately 3.5%, or $479,000, to $13.4
million for the first quarter of fiscal 1999 from $13.8 million in the
comparable period in fiscal 1998. This decrease is primarily attributable to
decreases in advertising expense of $1.7 million, partially offset with
increases in payroll expenses of $837,000 and increased expenses related to the
expansions of distribution facilities in Europe, Hong Kong and China. As a
percentage of net sales, selling, general and administrative expenses increased
to 24.0% for the first quarter of fiscal 1999 from 23.7% in the comparable
period in fiscal 1998.
INTEREST EXPENSE. Interest expense remained flat to $1.4 million for the
first quarter of fiscal 1999 and 1998.
INCOME TAX EXPENSE. Income tax expense for the first quarter of fiscal
1999 and 1998 reflects an effective tax rate of approximately 35%, consistent
with the prior year.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the Company's working capital was $77.4 million
compared to $38.6 million at October 31, 1997. This increase was primarily
attributable to the effect of the completion of the Company's follow-on public
offering of its common stock in December 1997 and net income.
10
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The Company satisfies its capital requirements and seasonal working
capital needs with cash flow primarily from borrowings and operations. The
Company's primary capital needs have consisted of funding for business
acquisitions, inventory, property, plant and equipment, customer receivables,
letters of credit, licenses and international expansion.
As of October 31, 1998, the revolving line of credit balance was $20.7
million, the term loan balance was $6.6 million, and the amount of convertible
debt outstanding was $15 million. The Company had $3.4 million of additional
borrowing capacity available under its Revolving Credit Term Loan with Letter of
Credit Facility with The Chase Manhattan Bank ("Credit Facility"). The Credit
Facility was extended through January 15, 1999. The Company expects to either
extend or refinance the Credit Facility prior to January 15, 1999. However,
there is no assurance that the Company will be able to refinance or obtain a new
line of credit, or that if obtained, it will be on terms at least as favorable
as those on the existing Credit Facility.
The Company's operating activities used net cash of $257,000 in the first
quarter of fiscal 1999 and provided net cash of $6.9 million in the comparable
period of fiscal 1998. The cash flow from operations in the first quarter of
fiscal 1999 was primarily affected by the decrease in net income, and increases
in accounts receivable, inventory, and accounts payable.
Net cash used in investing activities during the first quarter of fiscal
1999 and 1998 was $2.4 million and $629,000, respectively. For fiscal 1999, net
cash used in investing activities consisted principally of expenditures of $1.4
million for computer equipment, $785,000 for costs incurred related to new
accounting, software and operating system implementation, and $186,000 for
leasehold improvements for the San Antonio facility. In the first quarter of
fiscal 1998, net cash used in investing activities consisted principally of the
purchase of property and equipment of $592,000.
Net cash provided by financing activities during the first quarter of
fiscal 1999 and 1998 was $6.2 million while net cash used in the first quarter
of fiscal 1997 was $3.5 million. During the first quarter of fiscal 1999, the
Company received aggregate advances of $40.9 million, and made repayments of
$35.0 million on the line of Credit Facility, and reduced the principal on the
term loan by $600,000. During the first quarter of fiscal 1998, $39.9 million
was used in repayment of borrowings on the revolving line of credit offset by
advances of $36.6 million.
The Company believes that its current available cash, net cash provided by
operating activities and available borrowings under the Company's Credit
Facility will be sufficient to meet the Company's cash requirements through
January 15, 1999. The Company believes that it will be able to extend or
refinance the Credit Facility by January 15, 1999, however, there is no
assurance that the Company will be able to refinance or obtain a new line of
credit, or that if obtained, it will be on terms at least as favorable as those
on the existing line of credit.
YEAR 2000 COMPLIANCE
Similar to many business entities, the Company will be impacted by the
inability of computer application software programs to distinguish between the
year 1900 and 2000 due to a commonly-used programming convention. Until such
programs are modified or replaced prior to 2000, calculations and
interpretations based on date-based arithmetic or logical operations performed
by such programs may be incorrect.
Management's plan addressing the impact on the Company of the Year 2000
issue focuses on the following areas: application systems, process control
systems (embedded chips), technology infrastructure, and third party business
partners and suppliers with which the Company has significant relationships.
Management's analysis and review of these areas is comprised primarily of five
phases: developing an
11
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inventory of hardware, software and embedded chips; assessing the degree to
which each area is currently in compliance with Year 2000 requirements;
performing renovations and repairs as needed to attain compliance; testing to
ensure compliance; and developing a contingency plan if repair and renovation
efforts are either unsuccessful or untimely.
Management has substantially completed the inventory and assessment phases
regarding application systems, process control systems and technology
infrastructure, and is performing upgrades, repairs and testing of the former
two categories. The review of physical infrastructure and business partners and
merchandise suppliers is in the inventory stage. While the Company anticipates
that any additional assessment efforts will be completed by the end of calendar
year 1999. Costs incurred to date have primarily consisted of labor from the
redeployment of existing information technology, legal and operational resources
as well as computer hardware and software costs. The Company has budgeted
approximately $5.0 million for these Year 2000 compliance efforts, however, the
Company's Year 2000 program is an ongoing process and the estimates of costs and
completion dates for various aspects of the program are subject to change.
The Company is currently replacing its accounting, software, and operating
systems with new applications that are Year 2000 compliant. The Company has
formed a contingency team to develop a work plan in the event that such programs
are not fully operational by July of calendar year 1999. The Company does not
presently anticipate a material business interruption as a result of the Year
2000.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Company's current and planned
activities with respect to the Year 2000 problem are expected to significantly
reduce the Company's level of uncertainty about the problem and, in particular,
about the Year 2000 compliance and readiness of its material customers and
suppliers. The Company believes that, with the implementation of new business
systems and completion of the planned activities as scheduled, the possibility
of significant interruptions of normal operations should be reduced.
Although there is a risk that the Company's plans for achieving Year 2000
compliance may not be completed on time, failure to meet critical milestones
identified in our plans would provide advance notice such that appropriate steps
could be taken to mitigate the risk of failure. Management believes that its
customers and suppliers would also receive advance notice allowing them to
implement alternate plans.
EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Union will introduce the euro, which will then become the common currency among
the participating member countries. The participating members' sovereign
currency will be converted to the euro at the exchange rates in effect on the
introduction date. Spain is one of the participating members, which is the
country in which Play By Play Toys & Novelties Europa, S.A. ("Play By Play
Europe") is located. Play By Play Europe intends to keep its books in Spain's
sovereign currency, the peseta, through the substantial portion of the
three-year introductory period, at the end of which all companies in
participating member countries must adopt the euro. As Play By Play Europe's
accounting system is currently capable of performing the euro conversion, the
Company does not anticipate that the costs related to the conversion will be
significant. In addition, as Play By Play Europe operates primarily in Spain and
in non-European Union countries, management does not anticipate that the
introduction of the euro will have a material effect on Play By Play Europe's
results of operations, financial position, or cash flows for the forseeable
future.
12
<PAGE>
SEASONALITY
Both the retail and amusement toy industries are inherently seasonal.
Generally, in the past, the Company's sales to the amusement industry have been
highest during the third and fourth fiscal quarters, and collections for those
sales have been highest during the succeeding fiscal quarters. The Company's
sales to the retail toy industry have been highest during its first and fourth
fiscal quarters, and collections from those sales have been highest during the
succeeding fiscal quarters. The Company's working capital needs and borrowings
to fund those needs have been highest during the third and fourth fiscal
quarters. As a result of the Company's increased sales to the amusement industry
and increased penetration of the retail market, the Company anticipates that its
sales, collections and borrowings to fund working capital needs may become more
significant in the third and fourth fiscal quarters.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 5 to the consolidated financial statements included elsewhere
herein for a discussion of new pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the areas of changes in United States and
international borrowing rates (i.e. prime rate or LIBOR), and changes in foreign
currency exchange rates as measured against the United States ("U.S.") dollar
and functional currencies of its subsidiaries (i.e. British pound/Spanish
peseta). In addition, the Company is exposed to market risk in certain
geographic areas that have experienced or are likely to experience an economic
downturn, such as China and Latin America. The Company purchases substantially
all of its inventory from companies in China, therefore, the Company is subject
to the risk that such suppliers will be unable to provide inventory at
competitive prices. While the Company believes that if such an event were to
occur it would be able to find alternate sources of inventory at competitive
prices, there can be no assurance that the Company would be successful. The
Company has $7.5 million of accounts receivable outstanding, payable in US
dollars from two companies based in Mexico and Brazil. If the currencies of
these countries were to fall significantly against the US dollar, there can be
no assurance that such companies would be able to repay the receivables in full.
These exposures are directly related to its normal operating and funding
activities. Historically and as of October 31, 1998, the Company has not used
derivative instruments or engaged in hedging activities to minimize its market
risk.
INTEREST RATE RISK
The interest payable on the Company's revolving line-of-credit is variable
based on LIBOR and/or the prime rate, and therefore, affected by changes in
market interest rates. At October 31, 1998, approximately $20.7 million was
outstanding. The Credit Facility matures January 15, 1999. The Company expects
to either extend or refinance the Credit Facility prior to January 15, 1999.
However, there is no assurance that the Company will be able to refinance or
obtain a new line of credit, or that if obtained, it will be on terms at least
as favorable as those on the existing line of credit. See "Liquidity and Capital
Resources."
13
<PAGE>
FOREIGN CURRENCY RISK
The Company has wholly-owned subsidiaries in Valencia, Spain and
Doncaster, England. Sales from these operations are typically denominated in
Spanish Pesetas or British Pounds, respectively, thereby creating exposures to
changes in exchange rates. Changes in the Pesetas/U.S. Dollars exchange rate and
British Pounds/U.S. Dollars exchange rate may positively or negatively affect
the Company's sales, gross margins and retained earnings. The Company does not
believe that reasonably possible near-term changes in exchange rates will result
in a material effect on future earnings, fair values or cash flows of the
Company, and therefore, has chosen not to enter into foreign currency hedging
transactions. There can be no assurance that such an approach will be
successful, especially in the event of a significant and sudden decline in the
value of the Spanish Peseta or the British Pound. Purchases of inventory by the
Company's European toy 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 this
European subsidiary's license agreements call for payment of royalties in a
currency different from their functional currency, and 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.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (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 (filed as Exhibit 10.4 to Form 10-K for the
fiscal year ended July 31, 1997), incorporated herein by reference.
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 (filed as
Exhibit 10.5 to Form 10-K for the fiscal year ended July 31, 1997),
incorporated herein by reference.
10.6 Employment agreement dated May 2, 1996, between the Company and Saul
Gamoran, as amended by Amendment No. 1 dated May 16, 1996 (filed as
Exhibit 10.6 to Form 10-K for the fiscal year ended July 31, 1997),
incorporated herein by reference.
10.7 Employment agreement dated June 20, 1997, between the Company and James
A. Weisfield (filed as Exhibit 10.7 to Form 10-K for the fiscal year
ended July 31, 1997), incorporated herein by reference.
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") (filed as
Exhibit 10.8 to Form 10-K for the fiscal year ended July 31, 1997),
incorporated herein by reference.
10.9 Convertible Loan Agreement dated July 3, 1997, among the Company, the
Convertible Lenders and Renaissance Capital Group, Inc. (filed as
Exhibit 10.9 to Form 10-K for the fiscal year ended July 31, 1997),
incorporated herein by reference
10.10 License Agreement dated March 22, 1994 by and between Warner Bros., a
division of Time Warner Entertainment, L.P., and the Company (as
successor by assignment to Ace Novelty, Inc.) (filed as Exhibit 10.10
to Form 10-K for the fiscal year ended July 31, 1997), incorporated
herein by reference.
10.11 License Agreement dated March 22, 1996 by and between Warner Bros., a
division of Time Warner Entertainment, L.P., and the Company (as
successor by assignment to Ace Novelty, Inc.) (filed as Exhibit 10.11
to Form 10-K for the fiscal year ended July 31, 1997), incorporated
herein by reference.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
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.) (filed as Exhibit 10.12
to Form 10-K for the fiscal year ended July 31, 1997), incorporated
herein by reference.
10.13 License Agreement dated January 1, 1998 by and between Warner Bros., a
division of Time Warner Entertainment, L.P. and the Registrant (filed
as Exhibit 10.13 to Form 10-Q for the quarter ended January 31, 1998,
and incorporated herein by reference).
10.14 License Agreement dated January 1, 1998 by and between Warner Bros., a
division of Time Warner Entertainment, L.P. and the Registrant (filed
as Exhibit 10.14 to Form 10-Q for the quarter ended January 31, 1998,
and incorporated herein by reference).
10.15 Amendment dated January 14, 1998 to License Agreement dated September
10, 1997 by and between Warner Bros., a division of Time Warner
Entertainment, L.P. and the Registrant (filed as Exhibit 10.15 to Form
10-Q for the quarter ended January 31, 1998, and incorporated herein by
reference).
27 Financial Data Schedule
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 15th day of December 1998.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By: /s/ RAYMOND G. BRAUN
Raymond G. Braun
CHIEF FINANCIAL OFFICER
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED STATEMENTS OF
OPERATIONS FOUND ON PAGES F-3 AND F-4 OF THE COMPANY'S FORM 10-Q FOR THE THREE
MONTHS ENDED OCTOBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 8,115,081
<SECURITIES> 0
<RECEIVABLES> 59,484,620
<ALLOWANCES> 5,825,641
<INVENTORY> 69,078,805
<CURRENT-ASSETS> 140,401,209
<PP&E> 25,547,732
<DEPRECIATION> 5,764,018
<TOTAL-ASSETS> 176,531,925
<CURRENT-LIABILITIES> 63,050,610
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 176,531,925
<SALES> 55,726,986
<TOTAL-REVENUES> 55,726,986
<CGS> 38,953,298
<TOTAL-COSTS> 38,953,298
<OTHER-EXPENSES> 13,363,527
<LOSS-PROVISION> 495,325
<INTEREST-EXPENSE> 1,354,780
<INCOME-PRETAX> 2,194,086
<INCOME-TAX> 767,859
<INCOME-CONTINUING> 1,426,227
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,426,277
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
