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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, 1999 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
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 November 8, 1999, 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
$20,509,582. (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 November 8, 1999 was 7,395,000.
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
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PART I
ITEM 1. Business .............................................................................. 3
General ........................................................................... 3
Business History .................................................................. 3
Company Strengths ................................................................. 5
Business Strategy ................................................................. 6
Products .......................................................................... 8
Licensed Products ................................................................. 8
Non-Licensed Products ............................................................. 9
License Agreements ................................................................ 10
Sales, Marketing and Distribution ................................................. 11
Design and Development ............................................................ 13
Manufacturers and Suppliers ....................................................... 14
Advertising ....................................................................... 14
Vending Operations ................................................................ 14
Competition ....................................................................... 15
Product Liability ................................................................. 15
Government Regulation ............................................................. 15
Tariffs and Duties ................................................................ 16
Trademarks ........................................................................ 16
Employees ......................................................................... 16
Risk Factors ...................................................................... 16
ITEM 2. Properties .......................................................................... 23
ITEM 3. Legal Proceedings ................................................................... 24
ITEM 4. Submission of Matters to a Vote of Security Holders ................................. 24
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters ............... 24
Market Information ................................................................ 24
Shareholders ...................................................................... 24
Dividends and Distributions ....................................................... 24
ITEM 6. Selected Consolidated Financial Data ................................................ 25
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 26
General ........................................................................... 26
Results of Operations ............................................................. 28
Liquidity and Capital Resources ................................................... 31
Euro .............................................................................. 33
Dividend Policy ................................................................... 34
Year 2000 ......................................................................... 34
Seasonality ....................................................................... 35
Inflation ......................................................................... 35
New Accounting Pronouncement ...................................................... 35
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks ......................... 35
ITEM 8. Financial Statements and Supplementary Data ......................................... 36
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 36
PART III
ITEM 10. Directors and Executive Officers of the Registrant .................................. 37
ITEM 11. Executive Compensation .............................................................. 37
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ...................... 37
ITEM 13. Certain Relationships and Related Transactions ...................................... 37
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TABLE OF CONTENTS (CONTINUED)
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PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................... 37
SIGNATURES ................................................................................... 38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE ....................................................................... F-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, THE COMPANY's liquidity and
capital resources, COMPETITIVE AND ECONOMIC FACTORS, CHANGES IN CONSUMER
PREFERENCES, PRICE CHANGES BY COMPETITORS, RELATIONSHIPS WITH LICENSORS AND
CUSTOMERS, 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 a broad line
of stuffed toys, novelty items and its PLAY-FACES(R) line of sculpted toy
pillows based on licenses for popular children's entertainment characters,
professional sports team logos and corporate 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
Since inception through fiscal 1998, the Company's net sales have
grown from $32.6 million for fiscal 1994 to $178.1 million in fiscal 1998,
representing a 54.2% average annual increase, and net income increased from $1.1
million for fiscal 1994 to $8.4 million for fiscal 1998, representing a 70.4%
average annual increase. However, in fiscal 1999, net sales declined to $156.5
million, a decrease of 12.1% as compared to the $178.1 million reported in
fiscal 1998, and the Company reported a net loss of $30.2 million including the
impact of certain significant charges recorded by the Company in fiscal 1999.
The Company develops its licensed stuffed toys and novelties based
principally on popular, classic characters such as LOONEY TUNES, GARFIELD,
SUPERMAN, BATMAN, SCOOBY-DOO(TM), and on popular, classic trademark licenses
such as The Coca-Cola Company's COCA-COLA(R) brand stuffed toys, and
Harley-Davidson Motor Company'S HARLEY HOg(TM) as well as on popular
professional sports properties such as Major League Baseball, National Hockey
League, National Football League, and various collegiate teams. 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 has developed a significant relationship with Warner Bros., a
Division of Time Warner Entertainment Company L.P. approximately
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46.8% of the Company's net sales in fiscal 1999 were derived from the sale of
products based on Warner Bros.' Looney Tunes characters. 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 1999,
net sales of licensed products and non-licensed products accounted for 70.1% and
28.2%, respectively, of the Company's net sales.
The Company introduced 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 Play-Faces(R) line is
based upon popular, classic characters, including The Walt Disney Company's
animated characters, LOONEY TUNES, SUPERMAN, BATMAN, GARFIELD(TM), RugrAts(R),
and new characters developed and introduced from time to time by leading
entertainment companies. During fiscal 1997, the Company extended the line by
adding full-bodied pillows. 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 3.3% of
the Company's net sales for fiscal 1999.
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 fiscal 1997, including standing,
sitting and bean bag stuffed toys, and another television promoted electronic
stuffed toy, the Tornado Taz(TM) that spins, shakes, grunts and laughs. The
Looney Tunes based 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).
During fiscal 1998, the Company introduced several new electronic
interactive talking products such as Bugs & Daffy Talkin' Tunes(TM), Sylvester &
Tweety Talkin' Tunes(TM), and Singin' & Swingin' Tweety(TM), that utilize
infrared technology. The Company also introduced full-bodied pillows, beanbags
based on the popular Rugrats(TM) characters, and FaniMal(TM) beanbags utilizing
professional sports properties licensed from Major League Baseball and the
National Football League. The Company also developed a retail line of infant,
toddler and preschool products ranging from play toys to pulls toys based on
Baby Looney Tunes characters.
During fiscal 1998, the Company enhanced its existing retail and
amusement business by launching a new direct marketing division, which focuses
on selling to consumers via direct mail catalogs and via the Company's on-line
retail internet site, Funstuff4u.com. The direct mail catalog, issued under the
name Fun Stuff(TM), features many of the Company's quality licensed and
non-licensed stuffed toys and novelty items.
During fiscal 1999, the Company introduced several new electronic
interactive talking products such as My Best Friend(TM), Tongue Twisting
Taz(TM), Macarena Tweety(TM), and Fortune Teller Tweety(TM). The Tongue Twisting
Taz(TM) features the popular Tasmanian Devil(TM) character. The Macarena
Tweety(TM) features a plush Tweety dressed for a party in a brightly colored
shirt and is sound activated. The Fortune Teller Tweety(TM) features characters
Sylvester(TM) and Tweety(TM) and is activated by pressing Sylvester in his magic
ball. The Company also introduced a wide range of plush toys including
interactive products, Play-Faces(R) pillows and backpacks, inflatable furniture
products and novelties based on the characters in the Garfield comic strip for
both retail and amusement markets. Additionally, the Company introduced
interactive plush products based on Walt Disney's classic characters including
Mickey Mouse(TM), Minnie Mouse(TM) and Winnie the Pooh(TM), in the retail market
throughout Latin America.
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The Company has a diversified base of customers in both the amusement
and retail markets. Amusement customers, which accounted for 73.4% of net sales
for fiscal 1999, include theme parks such as Premier Parks/Six Flags, Paramount,
Universal Studios, Busch Gardens and Sea World, family entertainment centers
such as Tilt, Dave and Buster's, Inc. and Namco, carnivals and state fairs. The
Company also distributes its merchandise to its Fun Services(R) (sales through
franchisees), fundraising and premium (products designed for specific companies)
customers. Retail customers, which accounted for 24.8% of net sales for the same
period, principally consist of mass market retailers such as Wal-Mart, Kmart,
and Target, and specialty retailers such as Toys `R' Us and Kay Bee Toy. No one
customer accounted for more than 10% of net sales for fiscal 1999.
The Company completed two strategic acquisitions that have
contributed to its growth. In June 1996, the Company acquired substantially all
of the operating assets, business operations and facilities of Ace Novelty Co.,
Inc. ("Ace") for $44.7 million (the "Ace Acquisition"). 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.
In November 1996, the Company, through its wholly owned subsidiary
Play-By-Play Toys & Novelties Europe, S.A., ("Play-By-Play Europe") acquired The
TLC Gift Company, Ltd. ("TLC") based in Doncaster, England. Similarly, the TLC
acquisition resulted in additional distribution channels in Europe, particularly
the U.K.
In March 1999, the Company, through a wholly owned subsidiary,
acquired certain assets and liabilities of Caribe Marketing and Sales Co., Inc.
("Caribe") for the purchase price of $2.5 million. The purchase price consisted
of cash, the issuance to the Sellers of 80,000 shares of the Company's common
stock, and the assumption of a Seller's note. The Company believes that Caribe
provides the Company with a new base for its Latin American operations and
enhances the Company's marketing and distribution capabilities.
COMPANY STRENGTHS
The Company believes its principal strengths include its:
o focus on licenses for popular classic characters, trademarks and new
characters introduced by leading entertainment companies,
o capability to develop new and innovative toys such as Talkin' Tots(TM),
Tornado Taz(TM), Talkin' Tunes(TM), Macarena Tweety(TM), Fortune Teller
Tweety(TM), and Singin' & Swingin' Tweety(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
domestic amusement industry,
o balance between amusement and retail markets, which reduces seasonal
fluctuations and stabilizes revenues,
o experienced management team with toy and licensing expertise;
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o in-house design and development team which enables the Company to shorten
development lead times and more quickly meet changing consumer tastes and
trends,
o presence in Hong Kong and China which supports the Company in direct
sourcing in the Far East and enhances its ability to better manage product
quality, production and timely availability of products,
o diverse customer base comprised of more than 4,000 customers,
o multiple distribution channels which enhance the Company's ability to sell
slower moving items while minimizing the impact on gross profit margins,
and
o distribution facilities strategically located throughout North America and
Europe, allowing the Company to better serve its customers, particularly
those with multiple locations and with minimal inventory storage capacity.
BUSINESS STRATEGY
The Company's growth strategy includes the following key elements:
LICENSED PRODUCT LINE EXPANSION. The Company believes that by
developing licensed products based principally on popular, classic characters
and trademarks, it has established a core licensed product portfolio that is
characterized by a longer product 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
line of licensed products 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 development of proprietary toys and other
licensed-based product lines represent distinct unique products, 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.
INTERNATIONAL EXPANSION. The Company plans to increase its
international sales, primarily in Europe and Latin America, in both the
amusement and retail markets through the Company's Hong Kong, United States,
European and Latin America distribution facilities and independent distributors.
The Company believes that markets outside the United States present significant
opportunities, and except for Europe, 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 significant additional international growth
opportunities.
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
Tongue Twisting Taz(TM), Macarena Tweety(TM), and Fortune Teller Tweety(TM)) and
product
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categories (such as Play-Faces(R)). Based on the Company's relatively small
share of the retail toy market and its proven ability to develop product niches
and obtain key licenses, increased retail distribution continues to be a growth
opportunity for the Company. The Company's retail sales declined significantly
during 1999 as a result of many factors; however, the Company has brought in new
retail industry management, and restructured its retail sales force, product
development and operations. Accordingly, the Company's objective is to have
sustained annual sales growth of its retail operations beginning in calendar
year 2000.
AMUSEMENT MARKET PENETRATION. With the Ace Acquisition, the Company
has become a leading supplier of stuffed toys and novelty items to the domestic
amusement market. The Company believes this market is less susceptible to
changing consumer preferences than the retail market. The Company's broad and
continually updated line of licensed and non-licensed stuffed toys and novelty
items, its purchasing power, distribution facilities, and reputation as a
leading amusement supplier provide competitive advantages over many other
suppliers to this market. While the Company believes there is greater
opportunity to grow its retail and international businesses, the domestic
amusement business provides the Company with stable revenue and consistent cash
flow.
DIRECT MARKETING PENETRATION. The Company distributed its first
direct mail catalog in October 1998 followed by series of strategically timed
Fun Stuff(TM) catalogs. The necessary executive and telemarketing resources have
been assembled which will allow the Company to consolidate resources and bring
this entire process in-house during the first quarter of calendar year 2000. In
addition, in March 1999 the Company launched its on-line retail internet site,
Funstuff4u.com, geared to the consumer and which features many of the same
products contained in the Company's direct mail catalogs. The Company believes
that the Direct Marketing Division's efforts also provides growth opportunities
and expands consumer awareness of the Company's product lines.
ACQUISITION STRATEGY. The Company will continue to seek and evaluate
acquisition candidates that either provide new or unique products for existing
distribution channels, or conversely, that provide new venues of distribution
for existing product lines. Through this strategy, the Company intends to
achieve greater economies of scale by growing revenues while reducing general
and administrative costs. However, the Company does not anticipate making any
significant acquisitions during fiscal 2000.
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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:
1999 1998 1997
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(IN MILLIONS)
Licensed products
Stuffed toys ............. $ 94.6 $ 90.4 $ 63.4
Play-Faces(R) ............ 5.2 9.5 16.5
Electronic toys .......... 9.9 14.5 2.0
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109.7 114.4 81.9
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Non-licened products
Stuffed toys ............. 28.9 32.3 38.7
Novelty items ............ 10.8 13.3 8.8
Electronic toys .......... 4.4 15.1 4.8
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44.1 60.7 52.3
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Total ................ $ 153.8 $ 175.1 $ 134.2
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(PERCENTAGES OF NET TOYS SALES)
Licensed products
Stuffed toys ............. 61.5 % 51.6 % 47.3 %
Play-Faces(R) ............ 3.4 5.4 12.3
Electronic toys .......... 6.4 8.4 1.5
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71.3 65.4 61.1
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Non-licensed products
Stuffed toys ............. 18.8 18.4 28.8
Novelty items ............ 7.0 7.6 6.5
Electronic toys .......... 2.9 8.6 3.6
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28.7 34.6 38.9
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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 programs provided by its
licensors. Net sales of licensed products were $109.7 million, $114.4 million
and $81.9 million (70.1%, 64.3% and 59.7% of net sales) during fiscal 1999, 1998
and 1997, respectively.
STUFFED TOYS. The Company designs, develops, markets and distributes over
2,000 different stuffed toys based upon its licenses for children's
entertainment characters and corporate trademarks. The Company offers a variety
of sizes and styles of its licensed stuffed toys. The Company seeks to
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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 those based on the Looney Tunes characters, which
include standing, sitting and beanbag stuffed toys. During fiscal 1999, the
Company introduced a wide range of plush toys as well as interactive products,
Play-Faces(R) pillows and backpacks, inflatable furniture products and novelties
based on the characters in the Garfield comic strip.
Play-Faces(R). The Company's Play-Faces(R) line consists of sculpted toy
pillows shaped in the facial likenesses of licensed animated characters.
Play-Faces(R) are sold primarily to retail customers and have suggested retail
prices of under $20. The Company believes its Play-Faces(R) line is a distinct
recognizable product category, which has enhanced its ability to acquire
additional character and trademark licenses. Play-Faces(R) products accounted
for 3.3% of the Company's net sales for fiscal 1999.
ELECTRONIC TOYS. During fiscal 1997, the Company began selling a
television promoted electronic stuffed toy, Tornado Taz(TM). Tornado TAz(TM) is
a plush depiction of Tasmanian Devil(TM) that spins, shakes, grunts and laughs.
During fiscal 1998, the Company further expanded its electronic stuffed toys
offerings by adding Bugs & Daffy Talkin' Tunes(TM), Sylvester & Tweety Talkin'
Tunes(TM), and Singin' & Swingin' Tweety(TM). During fiscal 1999, the Company
introduced several new electronic interactive products such as Tongue Twisting
Taz(TM), Macarena TweEtY(TM), and Fortune Teller Tweety(TM). The Company also
introduced interactive plush products based on Walt Disney's classic characters
including Mickey Mouse(TM), Minnie Mouse(TM) and Winnie the Pooh(TM), for retail
distribution in Latin America.
NON-LICENSED PRODUCTS
The Company markets and distributes a broad line of non-licensed products,
including internally designed and developed stuffed and electronic toys, 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 $44.1 million, $60.7 million and $52.3 million (28.1%, 34.1% and
38.0% of net sales) during fiscal 1999, 1998 and 1997, 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 for use as redemption prizes. The Company frequently redesigns its
product line. Over the three year period ended July 31, 1999, sales of
non-licensed stuffed toys have decreased as a percentage of total net toy sales,
primarily due to changing consumer trends and preference for 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
1999, 1998 or 1997.
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 include plastic toys, cosmetic jewelry, novelty school supplies,
inexpensive electronic toys and radios, rubber balls and styrofoam gliders. The
Company frequently changes its mix of novelty items. No single novelty item
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accounted for more than 10% of the Company's net sales or 10% of the Company's
net sales of novelty items during fiscal 1999, 1998 and 1997.
ELECTRONIC TOYS. During fiscal 1997, the Company entered the large doll
market with the introduction of the Talkin' Tots(TM), a pair of interactive
dolls available in several different languages, which talk and sing together
utilizing infrared technology. A squeeze of each doll's hand initiates the
pre-recorded conversations, singing of the alphabet and nursery rhymes. Since
then, the Company has introduced other interactive dolls, such as Knickie &
Knockie(TM), Penny & PatcHes(R) and most recently My Best Friend(TM).
LICENSE AGREEMENTS
Approximately 70.1%, 64.3% and 59.7% of the Company's net sales in fiscal
1999, 1998 and 1997, respectively, were derived from sales of licensed products.
Products based on Looney Tunes' characters accounted for 46.8% of net sales in
fiscal 1999. The Company's licenses generally have terms of one to three years
and limit sales to certain geographic territories and distribution channels. The
Company's license agreements typically require the payment of non-refundable
advances and guaranteed minimum royalties. Certain of the Company's material
licenses are non-exclusive. The Company focuses on licenses for characters or
trademarks with a popular identity, developed generally 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 also require the Company to obtain approval of the
Company's third party manufacturers and approval of the final product prior to
distribution from the licensor. The Company's license agreements may also
require certain types and amounts of insurance, licensor approval prior to
merger, reorganization, certain stock sales, or assignment of the license, or
approval by the licensor of certain "Key" or "Executive" 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 characters in a timely manner. Such determinations 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, success is
dependent upon the ability of management to acquire licenses and to develop the
corresponding products in a timely manner.
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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,
such as those to customers in Latin America, are considered domestic sales. The
export sales for fiscal 1999, 1998 and 1997 were $8.8 million, $14.4 million,
and $2.6 million, respectively. Sales by the European subsidiaries are
considered international sales.
<TABLE>
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YEAR ENDED JULY 31,
--------------------------
1999 1998 1997
------ ------ ------
(IN MILLIONS)
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Domestic toy sales:
Retail ............................................................... $ 25.5 $ 41.8 $ 31.7
Amusement ............................................................ 93.4 101.6 81.4
------ ------ ------
118.9 143.4 113.1
------ ------ ------
International toy sales:
Retail ............................................................... 13.4 10.1 6.6
Amusement ............................................................ 21.5 21.6 14.5
------ ------ ------
34.9 31.7 21.1
====== ====== ======
Total ............................................................. $153.8 $175.1 $134.2
====== ====== ======
(AS A PERCENTAGE OF NET TOY SALES)
Domestic toy sales:
Retail ............................................................... 16.6% 23.9% 23.6%
Amusement ............................................................ 60.7 58.0 60.7
------ ------ ------
77.3 81.9 84.3
------ ------ ------
International toy sales:
Retail ............................................................... 8.7 5.8 4.9
Amusement ............................................................ 14.0 12.3 10.8
------ ------ ------
22.7 18.1 15.7
------ ------ ------
====== ====== ======
Total ............................................................. 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
The Company markets its products to amusement and retail customers in the
United States through salaried in-house salespersons and through commissioned
independent sales representatives. The Company's in-house and independent sales
representatives use 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; Chicago, Illinois; Los
Angeles, California; New York, New York; and Woodinville, Washington, where it
displays its amusement and retail product lines. The Company designs and
develops its own product catalogs and brochures. Senior management 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 1999.
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The Company distributes its products from its warehouse/distribution
facilities located in San Antonio, Texas; Los Angeles, California; Chicago,
Illinois; Woodinville, Washington; and Burnaby, British Columbia, and arranges
direct shipments from the Far East to its larger retail and amusement customers.
In fiscal 1996, the Company established an office in Hong Kong to facilitate
sourcing, quality control and production scheduling. The Company's Far East
presence was enhanced when, in fiscal 1998, the Company opened an office in
China to assist the Hong Kong office. In fiscal 1999, the Company extended its
Latin American presence with its acquisition of Caribe and its sales and
warehouse/distribution facilities located in Puerto Rico.
Retail customers which accounted for 24.8% of net domestic sales for
fiscal 1999, principally consisting of the largest mass market retailers in the
United States 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, Kmart, Spencer Gifts, Mervyns and
Toys "R" Us and is testing the EDI program with other customers. The Company
plans to participate in the EDI programs with several of its other major retail
customers. No fees or other commitments are required to participate. The Company
believes that this participation will allow it to monitor store inventory
levels, schedule production to meet anticipated reorders, and to maintain
sufficient inventory levels to serve customers. 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. The
Company has tested the advanced shipping notice ("ASN") program, which is part
of the EDI program, with Mervyns, Sears and Target. The ASN program provides
information to the customer prior to shipment and expedites the customer's
receiving process and significantly reduces invoice quantity discrepancies.
The Company's Fun Services(R) division sells to approximately fifty
franchisees throughout the United States with Play-By-Play serving as the
franchisor. The Fun Services(R) franchisees sell products at schools, churches
and company fairs. The most notable sales program is the Santa's Secret Shop(R)
which allows school children and their families to purchase Christmas gifts on
the school premises during the holiday season. Fun Services(R) sales during
fiscal 1999, 1998 and 1997 were $7.4 million, $6.5 million and $7.1 million,
respectively. The Fundraising division's customers consist principally of
various not-for-profit organizations or their independent event contractors. The
Premiums division designs, develops and/or sources stuffed toys and novelty
items specifically tailored for certain customers. These products are typically
distributed by the customer to their clients or employees as promotional or
incentive items. During fiscal 1999 and 1998, Premiums and Fundraising sales
totaled $11.6 million and $14.7 million, respectively.
Generally, the Company does not sell its products on a consignment basis
and accepts returns only for defective merchandise. In certain instances, where
retailers are unable to sell the quantity of products they have ordered, the
Company may, consistent with industry practice, assist retailers in selling such
excess inventory by offering discounts on subsequent purchases or other
concessions. Returns, concessions and canceled orders have historically been
immaterial to the Company's net sales, however, in fiscal 1999, due to the
insolvency of its distributor in Mexico, the Company accepted returns of
merchandise from the distributor totaling $1.8 million in partial satisfaction
of amounts due to the Company.
INTERNATIONAL SALES. The Company began its international expansion with
the opening of its distribution facility in Valencia, Spain in August 1993. In
November 1996, the Company acquired TLC with distribution facilities in
Doncaster, England. The Company's principal international customers are
12
<PAGE>
located in Spain, the United Kingdom, France, the Benelux countries, Italy,
Germany, Portugal, Israel, Scandinavia, Ireland, Greece, Austria and certain
Eastern European countries. The Company has expanded its distribution into the
Middle East and South Africa.
The Company markets its products to international amusement and retail
customers in Spain, Portugal, U.K. and Ireland through independent commissioned
sales representatives and distributors. Foreign independent distributors
typically retain their own sales representatives. The Company maintains product
showrooms in Valencia, Spain and Doncaster, England to display its product
lines, and the Company's independent distributors display the Company's products
in their own product showrooms.
The Company distributes its amusement and retail products to European
customers through its Company-operated European distribution 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 licenses are exclusive to the European market, and
licenses from European licensors for properties such as Noddy, a classic British
character.
The Company believes that the European and domestic retail industries are
equally competitive. The Company's European license agreements are generally
less restrictive and permit sales to a broader base of customers than do the
domestic licenses. The Company believes that, accordingly, it can expand its
European presence through these channels. The Company has introduced certain new
retail feature items, such as Tornado Taz(TM), Talkin' Tunes, and Singin' &
Swingin' Tweety to the European market and plans to introduce Tongue Twisting
Taz and Tweety Fortune Teller as well as other items in the near future.
The Company believes that the amusement industry is generally less
competitive in Europe than in the United States. Europe is fragmented and
competitors are generally local. The Company believes that it was the first to
develop and use a product catalog for European amusement sales. Europe has
generally had limited access to licensed products but this trend is slowly
changing and exclusive licenses for amusement, such as Garfield, have been
secured and are being marketed successfully.
European amusement customers include theme parks such as Port Aventura,
Isla Magica and Tibidabo New Park 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, Efteling in
Holland, and carnival, fair and arcade operators. International retail customers
include mass merchandisers and specialty retailers such as J-Sainsbury, Tescos,
British Homes Stores, Aucham, Pryca, Alcampo, Toys "R" Us, El Corte Ingles and
Hipercor.
DESIGN AND DEVELOPMENT
The Company relies on senior management and the marketing department to
target licensing opportunities and relies on its product design and development
departments to design and develop additions to its product line. The Company
typically drafts initial product drawings and produces prototypes in-house and
with the assistance of outside consultants. The Company maintains its sample
design department in San Antonio, Texas. The design department enables the
Company to expedite licensed product approval, which is a typical condition of
most licenses. To date, the Company has experienced reasonable success in
obtaining licensor approval of its products. The Company's marketing department
also designs product packaging and promotional materials. To minimize risk, the
Company normally solicits the reactions to prototypes from select customers
prior to production.
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<PAGE>
MANUFACTURERS AND SUPPLIERS
The Company contracts with third party manufacturers in the Far East,
principally within The People's Republic of China ("China"), to manufacture its
stuffed toy 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. Senior management negotiates most manufacturing contracts without
using agents. The Far East is the largest and most widely used manufacturing
center of toys in the world. Manufacturers are selected based on price, quality,
consistency, and timeliness. 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 the same item. One manufacturer in China accounted for
12.4% of the Company's purchases during fiscal 1999. No other manufacturer
accounted for more than 10% of the Company's purchases of toy products during
fiscal 1999. While the Company is not dependent on any single manufacturer,
political or economic disruptions affecting the business or operations of
manufacturers in the Far East could adversely impact ongoing operations.
The principal materials used in the production of the Company's products
are fabrics and plastic parts made from petrochemical derivatives. 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 stuffs
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 will continue to advertise certain products and believes that
television advertising in particular, is effective for certain retail products.
Although most of the retail advertising budget has historically been allocated
to television, the Company also uses retail catalogs, advertisements in trade
magazines, such as THE TOY BOOK(TM), and retailers' cooperative promotional
programs. In addition, the Company benefits from media exposure such as
television, movies, commercials, cartoons and comic books, and by advertising,
promotional and other media events produced by licensors. The Company's
amusement merchandise is typically promoted to the industry via a limited number
of advertisements in trade publications such as AMUSEMENT BUSINESS(TM) anD
REPLAY MAGAZINE(TM) and catalogs. Advertising expenses are incurred in the
design, development, printing and shipping of Company catalogs and
advertisements in trade publications. The Company's advertising expenses were
approximately $5.8 million, $7.6 million and $2.7 million during fiscal years
1999, 1998 and 1997, respectively.
VENDING OPERATIONS
The Company owns and operates approximately 1,800 coin-operated amusement
game machines (crane machines, compact disc jukeboxes and video game machines)
located primarily in Texas and New Mexico. Approximately 900 of these are in
Pizza Hut(R) restaurants and Furr's Supermarkets. The remainder are generally
operated under month-to-month arrangements with numerous other small businesses.
The Company shares machine revenues with the owners of locations where the
machines are placed. Approximately 1.7%, 1.6% and 2.3% of the Company's net
sales in fiscal 1999, 1998 and 1997, respectively, were derived from the
Company's vending operations. The Company currently intends to maintain its
present level of vending operations.
14
<PAGE>
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, Time Warner Entertainment Company, L.P., Harley-Davidson Motor Company
and The Coca-Cola Company, distribute competing products through proprietary
retail outlets and amusement parks. The Company also 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 liability umbrella 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. These regulations generally require certain written disclosures
prior to the offer for sale of a franchise. The disclosure documents are subject
to state review and registration requirements and must be updated at least
annually. Some states also 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.
15
<PAGE>
TARIFFS AND DUTIES
In December 1994, the United States approved a trade agreement eliminating
import duties on toys, games, dolls and other specified items manufactured in
countries with Most Favored Nation status ("MFN"), including China. The
imposition or increase in quotas, duties, tariffs, the loss of China's MFN
status or other changes or trade restrictions could have a materially adverse
effect on the Company's financial condition, operating results or ability to
import products.
The Company could attempt to mitigate the effects of an increase in duties
by purchasing from manufacturers in 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.
Prior to January 1, 1998, Spain imposed an import duty for certain
products imported into the country from China that exceed specified levels. On
January 1, 1998, Spain abolished the quota on toys. Although this import duty
exemption covers all items currently imported by the Company from China to
Spain, future changes in such regulation or in the items imported could result
in the imposition of import duties.
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 registered
trademarks for Talkin' Tots(R), Talkin' Tunes(R), Penny and Patches(R), and
Fanimals(R) in the United States.
EMPLOYEES
As of July 31, 1999, the Company employed approximately 652 people in its
toy operations and 15 people in its vending operation. Of the 652 employees in
the toy operations, approximately 355 are engaged in warehousing and
distribution, 98 are engaged in finance and administration, 137 are engaged in
sales and marketing, and 62 are engaged in product development. A union
represents some of the Company's employees in Chicago, Illinois. In Spain, the
Company has standard national employment contracts with all of its Spanish
employees. The Company believes its relationship with its employees is
satisfactory.
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, WITHOUT LIMITATIONS, COMPETITIVE AND ECONOMIC
FACTORS, CHANGES IN CONSUMER PREFERENCES, PRICE CHANGES BY COMPETITORS,
RELATIONSHIPS WITH LICENSORS AND CUSTOMERS, 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.
LEVERAGE AND FUTURE DEBT SERVICE AND CAPITAL NEEDS. Monthly principal
payments on the Company's outstanding Convertible Debentures commence in June
2000, and the Convertible Debentures
16
<PAGE>
mature on December 31, 2000. The Company currently expects that, by itself, cash
flow from operations will be insufficient to meet these debt service obligations
under the Convertible Debentures. Accordingly, unless earlier converted to the
Company's common stock, the Company will need to refinance the Convertible
Debentures in order to satisfy its repayment obligations thereunder. There can
be no assurance that the Company will be able to refinance the Convertible
Debentures or, if such a refinancing is obtained, that the terms will be as
favorable to the Company as those contained in the Convertible Debentures. In
connection with a refinancing, the Company may be required to issue equity to
the new lenders which would result in dilution to existing shareholders. In the
event a refinancing cannot be accomplished, the Company may be required to sell
assets or one or more business lines to generate the funds necessary to repay
the Convertible Debentures.
The Company has borrowed substantially all of its available capacity under
its new credit facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources. " Thus,
any future losses or other capital needs could require the Company to seek
additional financing from public or private issuances of debt and/or equity or
from asset sales. The Company may not be able to complete any such financing or
asset sale or, if so, on terms favorable to the Company. Any equity financing
could result in dilution to existing shareholders.
RISKS ASSOCIATED WITH LICENSE AGREEMENTS. 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 three years. The Company expects
greater pressure to be placed on liquidity 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. Certain of the Company's license agreements
require insurance bonds to secure payment of the guarantees of minimum
royalties. The Company's license agreements limit both the products that can be
manufactured thereunder and the territories and markets in which such products
may be marketed. Generally, the Company's license agreements require certain
types and amounts of insurance, licensor approval before any merger or
reorganization involving the licensee, certain stock sales, or assignment of the
license. 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. Some 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 46.8% of the Company's net sales in fiscal 1999 were derived
from the sale of products based on Warner Brothers' Looney Tunes characters. The
loss of the Warner Bros. license rights would have a materially adverse effect
on the Company. The Company expects that Warner Bros. 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. Warner Bros. 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 Warner Bros. will offer any such business opportunities to
the Company or that such opportunities will be offered on terms acceptable to
the Company.
17
<PAGE>
As a result of weakness in the Company's domestic and international retail
business experienced during fiscal 1999, the Company has reevaluated commitments
for guaranteed minimum royalties on certain license agreements. The Company
estimates that projected future revenues over the remaining terms of three
particular license agreements with a particular licensor, will be insufficient
to allow the Company to earn-out the guaranteed minimum royalties advanced or
required to be paid to the licensor over the remaining terms of the agreements
that commenced in 1998 and expire during fiscal year 2001 and has accrued
amounts for the estimated guaranteed minimum royalty shortfall as of July 31,
1999. The Company recorded a charge of $14.9 million for the write-downs of the
guaranteed minimum royalties. The Company is in the process of negotiating
extensions of the license terms and/or concessions relative to the remaining
guaranteed minimum royalties. These negotiations are expected to be completed by
the end of the first quarter of calendar year 2000. There can be no assurance
that the Company will be able to secure extensions or concessions from the
licensor or that if secured, will be sufficient in scope to mitigate the impact
of the revenue shortfalls as it relates to the guaranteed minimum royalties.
CONSUMER PREFERENCES; NEW PRODUCT INTRODUCTION. As a result of changing
consumer preferences, many toys are successfully marketed for only one or two
years. There can be no assurance that any of the Company's products or any of
the Company's product lines will continue to be popular for any significant
period of time or that new products and product lines introduced by the Company
will achieve an acceptable degree of market acceptance, or that if such
acceptance is achieved, it will be maintained for any significant period of
time. The Company's success will be dependent upon the Company's ability to
enhance existing product lines and develop new products and product lines. The
failure of the Company's new products and product lines to achieve and sustain
market acceptance and to produce acceptable margins could have a material
adverse effect on the Company's financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's future success will be highly
dependent on the continued efforts of Arturo G. Torres, Chairman of the Board
and Chief Executive Officer, Raymond G. Braun, President and Chief Operating
Officer and Richard Neitz, President-Retail Operations. Other than employment
agreements with Mr. Braun, Mr. Neitz, two other employees, and the statutory
employment contracts required in Spain, 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 materially adverse effect on the Company. The
Company's success also depends on 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. 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.
18
<PAGE>
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.
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 government policies, delays in and restrictions on the transfer of funds and
currency fluctuations. In particular, purchases of inventory by the Company's
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, the Spanish peseta and the British pound. Certain of the
European subsidiaries' 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. During fiscal 1999, due to significant negative market
conditions in Latin America including material currency devaluation in Brazil
and Mexico, the Company incurred bad debt losses of approximately $3.4 million,
as well as a significant decline in sales. While the Company has instituted much
more conservative terms of sales such as requiring letters of credit or reducing
credit limits, there can be no assurance that growth of the Company's
international operations will not subject it to greater exposure to risks of
foreign operations. The Company will from time to time examine the need, if any,
to engage in hedging transactions to reduce the risk of currency fluctuations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POTENTIAL FOR PRODUCT LIABILITY CLAIMS. Products that have been or may be
developed or sold by the Company may expose the Company to potential liability
from personal injury or property damage claims by end-users of such products.
The Company 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 and certain customers 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. Certain of the Company's licensors
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. While there are no guarantees that retail shelf space and
other particular avenues of distribution will always be available to the
company, management is confident that it will be able to continue to reach
end-consumers with its products in the foreseeable future.
19
<PAGE>
RAW MATERIALS PRICES. The principal raw materials in most of the Company's
products are fabrics and plastic parts made from petrochemical derivatives. The
prices for the Company's raw materials are influenced by numerous factors beyond
the control of the Company, including general economic conditions, competition,
labor costs, import duties, 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 materially adverse effect on the Company's operating
margins unless and until the increased cost could be passed along to consumers.
YEAR 2000. Similar to many business entities, the Company may 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 application systems, process control systems (embedded chips),
technology infrastructure, and third party business partners and suppliers with
which the Company has significant relationships. The plan is comprised of five
phases: (1) developing an inventory of hardware, software and embedded chips,
(2) assessing the degree to which each area is currently in compliance with Year
2000 requirements, (3) performing renovations and repairs as needed to attain
compliance, (4) testing to ensure compliance, and (5) developing a contingency
plan if repair and renovation efforts are either unsuccessful or untimely.
Management has completed steps (1), (2), and (5) of this plan. Steps (3)
and (4) were in process at the Balance Sheet date, and subsequent to that date,
have been substantially completed. The Company feels that all phases will be
completed by the end of calendar 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 $5.2 million for these Year 2000
compliance efforts, and management feels that actual final costs will not
materially deviate from this. 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 financial and core business system
software with a new Oracle Enterprise Resource Planning System designed to
enhance management information, financial reporting, inventory management, order
entry, purchasing and has the added benefit of addressing the Year 2000 issues.
The new enterprise system has necessitated enhancement of the Company's existing
computer networks and desktop applications. The Company does not presently
anticipate a material business interruption as a result of the Year 2000.
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 the new enterprise systems and completion of the planned
activities as scheduled, the possibility of significant interruptions of normal
operations should be minimal.
20
<PAGE>
Management believes that its customers and suppliers would also receive
advance notice of any material year 2000 compliance problems, allowing them to
implement alternate plans, if necessary.
SEASONALITY. Both the retail and amusement toy industries are inherently
seasonal. Generally, in the past, the Company's sales to the amusement industry
have been highest during the third and fourth fiscal quarters, and collections
for those sales have been highest during the succeeding two fiscal quarters. The
Company's sales to the retail toy industry have been highest during 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
GROWTH STRATEGY. The Company's growth strategy provides for (1) further
development and diversification of the Company's retail and amusement toy
business, (2) expanding new distribution channels, such as mail order catalogs
and on-line internet retailing, (3) acquiring additional license agreements and
(4) further developing international markets. Implementing this strategy
involves risks including competition, lack of acceptance of new products,
economic downturns, the inability to affordably obtain or renew licenses, and
the inability to finance increased working capital requirements, if any. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ACQUISITION RISKS. The Company expects to continue to evaluate and pursue
attractive acquisition candidates, although the Company is not actively pursuing
any acquisition targets currently. Assessing the characteristics of potential
target companies 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 materially adverse effect on the Company.
SHARES ELIGIBLE FOR FUTURE SALE. The Company has 7,395,000 shares of
Common Stock outstanding as of October 29, 1999. 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
1,639,500 shares of common stock owned by existing shareholders and registered
pursuant to a registration statement on Form S-3 as filed by the Company on June
2, 1998 allowing for the resale of such shares free of restriction by applicable
securities laws. There are also (i) 1,515,300 shares of Common Stock reserved
for issuance under outstanding options to purchase shares of Common Stock, (ii)
217,000 shares of Common Stock subject to outstanding warrants and (iii) a
maximum of 2,500,000 shares of Common Stock issuable upon partial or total
conversion, if any, of the Company's outstanding convertible debentures (which
amount could increase if the Company fails to repay in full the Convertible
Debentures by December 31, 2000). 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.
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 on, the earnings, capital requirements, operating and financial condition
of the Company,
21
<PAGE>
compliance with various financing covenants and other relevant factors. 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 provisions establishing a classified Board of Directors. The
Board of Directors may issue preferred stock and has the power to determine the
rights, preferences, privileges and restrictions without any further vote or
action by the shareholders. A two-thirds vote of shareholders is required to
remove directors, amend the Bylaws or 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, including offers or attempted takeovers that
might otherwise result in current 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 Company's Common
Stock may be influenced by a number of factors, including the Company's
operating results, liquidity and capital resources and other factors affecting
the Company specifically. The price might also be influenced by factors in the
toy industry as a whole and the financial markets generally, as well as the
depth and liquidity of the market for the Common Stock. In the past, the
Company's Common Stock price has been extremely volatile and has experienced
substantial and sudden fluctuations; accordingly, such volatility may continue
in the future.
22
<PAGE>
ITEM 2. PROPERTIES
The Company's principal executive offices, warehouse and showroom in San
Antonio, Texas, include 39,450 square feet of office space, 8,600 square feet of
showroom space and 192,014 square feet of distribution warehouse space, pursuant
to lease agreements that expire at various times during January 2000 and
December 2003.
The Company owns the Chicago, Illinois property and building comprising
9,920 square feet of office space, 6,480 square feet of showroom space, and
363,100 square feet of distribution and warehouse space. The Company has a 51%
ownership interest in the Los Angeles, California 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 and warehouse space. The
remaining 49% interest in the Los Angeles, California facility was owned by and
leased from certain of the Ace Sellers. On October 25, 1999, in connection with
the Company's debt refinancing and restructuring transactions, Arturo G. Torres,
Chairman and Chief Executive Officer, agreed to personally assume the Company's
$1.7 million current obligation to purchase the remaining 49% interest in the
Company's Los Angeles distribution facility.
The Company also leases the following offices, warehouses, distribution
centers and showrooms:
APPROXIMATE
LOCATION TYPE OF FACILITY SQUARE FOOTAGE
-------- ---------------- --------------
New York, New York Showroom 4,600
Los Angeles, California Warehouse 119,000
Woodinville, Washington Office/Warehouse 34,100
Kowloon, Hong Kong,
China Office/Showroom/Warehouse 4,299
Panyu, China Showroom/Office 12,000
Burnaby, British Columbia, Office/Showroom/Warehouse 23,500
and Mississauga, Ontario
Canada
San Juan, Puerto Rico Office/Showroom/Warehouse 35,000
Doncaster, England Office/Showroom/Warehouse 36,000
Valencia, Spain Office/Showroom/Warehouse 108,130
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.
23
<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 materially 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 fiscal periods indicated,
the reported high and low close sale prices of the Company's Common Stock, as
reported on the Nasdaq National Market System:
1999 1998
--------------- ---------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $ 10.88 $ 7.13 $ 23.63 $ 16.25
Second Quarter 8.88 7.00 21.38 16.25
Third Quarter 7.25 4.75 21.38 16.19
Fourth Quarter 5.56 2.38 17.75 9.06
SHAREHOLDERS
According to the records of the Company's transfer agent, the Company had
202 holders of record of Common Stock as of October 29, 1999. The Company
believes that a substantially larger number of beneficial owners hold such
shares in depository or nominee form.
DIVIDENDS AND DISTRIBUTIONS
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's ability to pay dividends is limited 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 but not limited to
future earnings, capital requirements, the financial condition and prospects of
the Company and any credit agreement restrictions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity &
Capital Resources Dividend Policy."
24
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL 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, 1999, 1998, and
1997 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,
-----------------------------------------------------------
1999 1998 1997 (3) 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data (1):
Net sales (2) .................................... $ 156,515 $ 178,103 $ 137,386 $ 74,197 $ 47,730
Income (loss) from continuing operations ......... (30,230) 8,445 6,216 4,052 1,898
(Loss) from discontinued operations (2) .......... -- -- -- (384) (259)
Net income (loss) ................................ $ (30,230) $ 8,445 $ 6,216 $ 3,668 $ 1,639
Basic earnings (loss) per common share ........... $ (4.12) $ 1.30 $ 1.28 $ 0.84 $ 0.74
Diluted earnings (loss) per common share ......... $ (4.12) $ 1.19 $ 1.25 $ 0.84 $ 0.73
Average number of shares outstanding - basic ..... 7,338 6,474 4,872 4,841 2,580
Average number of shares outstanding - diluted ... 7,338 7,760 5,036 4,856 2,582
<CAPTION>
JULY 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
BALANCE SHEET DATA (1):
Working capital .................................. $ 32,106 $ 76,454 $ 35,372 $ 19,910 $ 26,159
Total assets ..................................... 155,318 167,884 125,906 104,922 47,300
Long-term debt, including capital leases ......... 22,153 20,962 23,238 11,096 148
Total liabilities ................................ 97,378 78,895 82,237 62,222 15,273
Shareholders' equity ............................. 57,940 88,989 43,669 38,700 32,027
--------- --------- --------- --------- ---------
</TABLE>
(1) In June 1996, the Company acquired Ace, which was accounted for as a
purchase. Ace's 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 fiscal years 1996 and 1995 is not comparable
to subsequent periods.
(2) Fiscal year 1995 has 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.
(3) In November 1996, Play By Play Europe acquired TLC, which was accounted
for as a purchase. TLC's assets and liabilities are included in the
Company's Consolidated Balance Sheet at January 31, 1997 and its results
of operations were included in the Consolidated Statement of
Operations beginning November 1996.
25
<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, THE COMPANY'S LIQUIDITY AND CAPITAL RESOURCES,
COMPETITIVE AND ECONOMIC FACTORS, CHANGES IN CONSUMER PREFERENCES, PRICE CHANGES
BY COMPETITORS, RELATIONSHIPS WITH LICENSORS AND CUSTOMERS, 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 98.3% of net sales for fiscal 1999. Approximately
1,800 coin-operated amusement game machines operated by the Company's vending
division provide the remaining 1.7% of net sales. Net sales derived from vending
operations as a percentage of net sales have declined in recent periods as the
Company has emphasized its toy operations, and the Company anticipates that such
trend will continue. Based on the current weakness in the domestic traditional
retail toy market, the Company does not expect the growth in the retail
division's sales to continue at rates as rapid as it has experienced in the past
years.
The Company has divested and acquired several entities in its history. In
each case, management evaluates the strategic role of each entity relative to
its overall long-term business plan. Management also estimates future return
versus the current market value of such entities to determine if divesting or
acquiring a business makes economic sense at any given time. In March 1996, the
Company sold Restaurants Universal, its European subsidiary to an unrelated
third party, for approximately $1.6 million. The outstanding balance of the
non-performing note receivable in the amount of $742,000 due from the purchaser
of the restaurants was fully reserved for in the fourth quarter of fiscal 1999
by the Company due to the purchaser's failure to remit the required payments on
the note and the filing by the Company of a lawsuit against the purchaser to
enforce collection. In June 1996, the Company acquired substantially all of the
operating assets, business operations and facilities of Ace. The purchase price,
paid principally with cash and debt, was approximately $44.7 million and was
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 the Company's common stock. The
acquisition was accounted for using the purchase method. In March 1999, the
Company through a wholly-owned subsidiary, acquired certain assets and
liabilities of Caribe Marketing and Sales Co., Inc. ("Caribe") for the purchase
price of $2.5 million consisting of cash, 80,000 shares of the Company's common
stock, and the assumption of a Sellers' note. The Company believes that Caribe
provides the Company with a new base for its Latin American operations and
enhances the Company's marketing and distribution capabilities within the
market.
26
<PAGE>
Net toy sales to amusement customers accounted for 73.4% of the Company's
net sales for fiscal 1999. The Company sells both licensed and non-licensed
products to its amusement customers for use principally as redemption prizes.
Net toy sales to retail customers accounted for 24.8% of the Company's net sales
for fiscal 1999. Since the beginning of fiscal 1994, the Company has expanded
its product offering of licensed stuffed toys through the addition of several
licensed characters and trademarks. Prior to fiscal 1997, substantially all of
the Company's sales to retail customers involved licensed products.
Sales to amusement customers generally provide a higher gross margin than
do sales to retail customers. Among the amusement sales, licensed products
typically provide a higher gross margin than do non-licensed products. Retailers
typically buy in higher volumes, therefore they demand lower margins. However,
retail sales of television promoted products generally result in higher gross
margins than non-promoted items, but also require higher associated advertising
costs, which are reported as a component of selling, general and administrative
costs. The Company spent approximately $1.9 million on media advertising for
certain retail products during fiscal 1999.
The Company began its international toy operations with the opening of its
distribution facility in Spain in August 1993. Since that time and with the
acquisition of TLC in the U.K., the Company has experienced significant sales
growth in its international operations, particularly in Western Europe. The
Company anticipates continued international sales growth in both the amusement
and retail markets, particularly with respect to licensed products. Non-licensed
products are comparable in both the United States and Europe; licensed products
might be sold worldwide or only in some markets, depending on local tastes and
licensing restrictions. The Company's European toy sales have historically
resulted in higher gross margins than domestic toy sales; however, the Company
believes this trend will change as the large retailers continue to quickly gain
market share.
Most of the Company's international toy sales are made in European
countries by Play-By-Play Europe, S.A. located in Valencia, Spain and by
Play-By-Play U.K. Ltd. located in Doncaster, England. To date, the cost of most
direct shipment sales from third-party manufacturers to international customers
has been borne by Play-By-Play Europe and 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
subsidiaries are transacted in Spanish pesetas or British pounds, their
functional currencies, and therefore any gain or loss on currency translation is
reported as a component of Shareholders' Equity on the Company's consolidated
financial statements. In addition, the Company faces similar risk on inventory
purchases from third-party manufacturers by the Company's European subsidiaries.
These transactions are also denominated in United States dollars so foreign
currency risk exists from the time that the subsidiaries are notified of the
shipment until payment is made.
Some of the Company's license agreements require royalty payments in
Canadian dollars. Likewise, some of Play-By-Play Europe's license agreements
require payments in United States dollars. As a result, the Company experiences
currency risk to the extent that exchange rates fluctuate from the date the
royalty liability or minimum guarantee is incurred until the date the royalty is
actually paid to the licensor. Additionally, the Company is exposed to foreign
currency risk for intercompany receivable and payable transactions through the
settlement date.
Historically, no attempt has been made to minimize, by means of hedging or
derivatives, the risk of potential currency fluctuations, since the currency
risk has not been significant to the Company on a consolidated basis.
The 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, respectively, of
27
<PAGE>
1996. 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,
--------------------------------
1999 1998 1997
-------- -------- --------
Net sales .................................. 100.0 % 100.0 % 100.0 %
Cost of sales .............................. 82.8 65.6 66.3
Gross profit ............................... 17.2 34.4 33.7
Selling, general and administrative expenses 35.7 24.8 24.2
Operating income (loss) .................... (18.4) 9.6 9.5
Interest expense ........................... (3.1) (2.6) (3.1)
Interest income ............................ 0.2 0.2 --
Other income ............................... 0.1 -- --
Income tax benefit (provision) ............. 1.9 (2.6) (2.0)
Net income (loss) .......................... (19.3) 4.6 4.4
-------- -------- --------
YEARS ENDED JULY 31, 1999 AND 1998
NET SALES. Net sales for fiscal 1999 decreased 12.1%, or $21.6 million, to
$156.5 million from $178.1 million in fiscal 1998. The decrease in net sales was
primarily attributable to a decrease in domestic retail sales of 39.1%, or $16.3
million, to $25.5 million from $41.8 million as a result of a weak retail
environment for traditional toys in the U.S. and Latin America, caused by
several factors, including the closing of several Toys `R' Us locations in the
U.S., shrinking of toy inventories by retailers, and the economic weakness in
Latin America during fiscal 1999. Domestic amusement net sales for fiscal 1999
decreased 8.1%, or $8.2 million, to $93.4 million from $101.6 million in fiscal
1998. Domestic net toy sales for fiscal 1999 compared to fiscal 1998 decreased
17.2%, or $24.6 million, to $118.8 million, and international net toy sales
increased 10.3%, or $3.3 million, to $34.9 million.
Net sales of licensed products for fiscal 1999 decreased by 4.1%, or $4.7
million, to $109.7 million from $114.4 million in fiscal 1998. The decrease in
licensed product sales was primarily attributable to decreased net sales of the
Company's licensed electronic products of 32.2%, or $4.6 million, to $9.9
million from $14.5 million in fiscal 1998. Within licensed products, net sales
of Looney Tunes' characters, decreased 18.7%, or $16.9 million, to $73.3 million
for fiscal 1999 from $90.2 million in fiscal 1998. Net sales of Play-Faces(R)
decreased 45.1%, or $4.3 million, to $5.2 million, from $9.5 million in fiscal
1998. Net sales of non-licensed products for fiscal 1999 and 1998 accounted for
28.2%, or $44.1 million, and 34.1%, or $60.7 million, respectively, of the
Company's net sales.
Net toy sales to retail customers for fiscal 1999 and fiscal 1998
accounted for 24.8%, or $38.9 million, and 29.1%, or $51.9 million,
respectively, of the Company's net sales. The 25.1% decrease in net sales to
retail customers from fiscal 1998 to fiscal 1999 is primarily attributable to
the decreased net
28
<PAGE>
sales of licensed and non-licensed electronic products and a decrease in sales
of Play-Faces(R) sales during fiscal 1999.
Net toy sales to amusement customers for fiscal 1999 and fiscal 1998
accounted for 73.4%, or $114.9 million, and 69.2%, or $123.2 million,
respectively, of the Company's net sales. The 6.8%, or $8.3 million, decrease to
$114.9 million is primarily attributable to the decrease in sales of
non-licensed plush toys of $3.4 million, a 10.6% decrease from fiscal 1998, a
decrease in sales of novelty items of $2.4 million, an 18.3% decrease from
fiscal 1998, and a decrease in sales of licensed plush toys of $2.5 million, a
3.2% decrease from fiscal 1998.
GROSS PROFIT. Gross profit decreased 56.1% to $26.9 million in fiscal 1999
from $61.3 million in fiscal 1998, due principally to charges recorded in the
fourth quarter of fiscal 1999 related to royalty and inventory write-down
reserves and the overall decrease in the Company's net sales. The Company
recorded a charge of $14.9 million for write-downs of guaranteed minimum royalty
advances paid or required to be paid on certain long-term licenses that the
Company anticipates it will be unable to earn out over the remaining term of the
license agreements. In addition, in the fourth quarter of fiscal 1999, the
Company recorded a provision of $4.5 million to write-down the carrying value of
certain slow or non-moving inventory items to their estimated net realizable
values. Accordingly, gross profit as a percentage of net sales decreased from
34.4% for fiscal 1998 to 17.2% for fiscal 1999. Exclusive of these charges,
gross profit would have decreased 25.1%, or $15.4 million to $45.9 million over
the comparable period in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general and administrative expenses increased to 35.7% in fiscal
1999 from 24.8% in fiscal 1998. Such expenses increased 26.6% to $55.8 million
for fiscal 1999 from $44.1 million in fiscal 1998. The increase in selling,
general and administrative expenses is principally attributable to bad debt
expense of $2.2 million recorded in the third quarter of fiscal 1999 related to
the write-off of amounts due from its insolvent distributor in Mexico and
approximately $1.3 million representing a provision recorded in the fourth
quarter for the anticipated loss related to the Company's acquisition of certain
assets from a U.S. distributor, as well as specific bad debt reserves of $2.1
million for certain non-performing trade and non-trade receivables from
customers and the $742,000 balance of a non-performing note receivable from the
purchaser of Restaurants Universal, as well as, approximately $409,000 of
severance costs related to recent management restructuring initiatives and
personnel reductions. Excluding these expenditures, selling, general and
administrative expenses would have increased 11.3% or $5.0 million, to $49.1
million over the comparable period in fiscal 1998.
INTEREST EXPENSE AND OTHER INCOME. Interest expense increased 7.1% or
approximately $321,000, to $4.8 million for fiscal 1999 from $4.5 million in
fiscal 1998. The increase is attributable to increased borrowings outstanding
under the Company's credit facility partially offset by lower overall borrowing
rates.
INCOME TAX EXPENSE (BENEFIT). The Company realized a net tax benefit of
$2.9 million as compared to a provision of $4.5 million in the prior year. The
tax benefit was realized as a result of the net loss in fiscal year 1999 to the
extent of net loss carrybacks, offset by tax expense on taxable income of
certain foreign subsidiaries.
YEARS ENDED JULY 31, 1998 AND 1997
NET SALES. Net sales for fiscal 1998 increased 29.6%, or $40.7 million, to
$178.1 million from $137.4 million in fiscal 1997. The increase in net sales was
primarily attributable to domestic amusement sales increase of 24.9%, or $20.3
million, to $101.6 million from $81.4 million. Domestic net toy sales
29
<PAGE>
for fiscal 1998 compared to fiscal 1997 increased 26.9%, or $30.3 million, to
$143.4 million, and international net toy sales increased 50.2%, or $10.6
million, to $31.7 million.
Net sales of licensed products for fiscal 1998 increased 39.8%, or $32.6
million, to $114.5 million from $81.9 million in fiscal 1997. The increase in
licensed product sales was primarily attributable to growth of net sales of the
Company's licensed products to domestic and international amusement customers of
60.5%, or $29.3 million, to $77.7 million from $48.4 million in fiscal 1997.
Within licensed products, net sales of Looney Tunes' characters, increased
75.5%, or $38.8 million, to $90.2 million for fiscal 1998 from $51.4 million in
fiscal 1997. Net sales of the Tornado Taz(TM) accounted for $10.6 million, or
6.0%, of the Company's net toy sales for fiscal 1998. Net sales of Play-Faces(R)
decreased 42.4%, or $7.0 million, to $9.5 million, from $16.5 million in fiscal
1997. Net sales of non-licensed products for fiscal 1998 and 1997 accounted for
34.1%, or $60.7 million, and 38.0%, or $52.2 million, respectively, of the
Company's net sales.
Net toy sales to retail customers for fiscal 1998 and fiscal 1997
accounted for 29.1%, or $51.9 million, and 27.9%, or $38.3 million,
respectively, of the Company's net sales. The 35.5% increase in net sales to
retail customers from fiscal 1997 to fiscal 1998 is primarily attributable to
the introduction of new electronic products added during fiscal 1998, the
Talkin' Tots(TM) sales increase of $10.3 million or 215.6%, the Tornado Taz(TM)
sales increase of $8.6 million or 421.1%, and the increase of licensed stuffed
toys of $1.6 million, or 10.9%. The growth in retail sales was offset with a
decrease in Play-Faces(R) sales of $7.0 million or 42.2%.
Net toy sales to amusement customers for fiscal 1998 and fiscal 1997
accounted for 69.2%, or $123.2 million, and 69.8%, or $95.9 million,
respectively, of the Company's net sales. The 28.6%, or $27.4 million, increase
to $77.7 million, is primarily attributable to an increase in sales of licensed
plush toys to amusement customers, a 60.5% increase from fiscal 1997, sales of
novelty items of $4.5 million, a 51.2% increase from fiscal 1997, partially
offset by a decrease in sales of non-licensed plush toys of $6.4 million.
GROSS PROFIT. Gross profit increased 32.3% to $61.3 million in fiscal 1998
from $46.4 million in fiscal 1997, due to the overall increase in the Company's
net sales. Gross profit as a percentage of net sales increased from 33.7% for
fiscal 1997 to 34.4% for fiscal 1998. This increase was principally a result of
increased retail sales of advertised products which carry a higher gross profit
margin which is offset by the advertising costs included in selling, general and
administrative expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general and administrative expenses increased to 24.8% in fiscal
1998 from 24.2% in fiscal 1997. Such expenses increased 32.7% to $44.1 million
for fiscal 1998 from $33.2 million in fiscal 1997. This increase was primarily
attributable to increased television advertisement cost of $5.7 million and
increased payroll and related costs of $3.2 million, product development costs,
and the growth of the Company's infrastructure and increased expenses related to
the expansion of the Company's facilities in the U.S., Hong Kong and Europe. In
addition, during the second half of fiscal 1998, the Company established a
Direct Mail division that incurred expenses for which no revenues were
generated.
INTEREST EXPENSE AND OTHER INCOME. Interest expense increased 2.2% or
approximately $95,000, to $4.5 million for fiscal 1998 from $4.4 million in
fiscal 1997. An increase in interest expense due to the issuance of the $15.0
million of convertible debt was almost fully offset by the decrease in interest
on the portion of the Revolving Line of Credit was paid off with funds from the
December 1997 secondary offering. Interest income increased 66.8% or
approximately $144,000, to $360,000 for fiscal
30
<PAGE>
1998 from $216,000 in fiscal 1997 principally due to the interest earned on net
proceeds generated from the 1997 follow-on public offering that were temporarily
invested.
INCOME TAX EXPENSE. Income tax expense for fiscal 1998 and 1997 reflects
an effective tax rate of 35.0%, compared to the fiscal 1997 rate of 30.5%. The
lower 1997 rate resulted 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 UK.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, the Company's working capital was $32.1 million compared
to $76.4 million at July 31, 1998. The decrease is attributable to the
significant operating losses incurred during fiscal 1999 and includes certain
significant charges recorded by the Company related to provisions for projected
guaranteed minimum royalty shortfalls on three licenses, inventory write-down
reserves for slow or non-moving inventory and bad debt provisions on certain
non-performing trade and non-trade receivables and notes receivables.
The Company believes that projected future revenues over the remaining
terms of three significant license agreements will be insufficient to allow the
Company to earn-out the guaranteed minimum royalties advanced or required to be
paid to the licensor over the remaining terms of the agreements that commenced
in 1998 and will end in fiscal 2001. Accordingly, the Company recorded a
provision totaling $14.9 million for the projected guaranteed minimum royalty
shortfall. The Company is required to pay the remaining advances or royalties
due under the license agreements irrespective of the provisions recorded by the
Company, and may result in the payment of significant royalty amounts for which
no product sales have occurred.
The Company satisfies its capital requirements and seasonal working
capital needs with cash flow primarily from borrowings and secondarily from
operations. The Company's primary capital needs have consisted of funding for
acquisitions, purchases of inventory, customer receivables, letters of credit,
licenses and international expansion.
Effective July 31, 1999, the Company amended its $35 million Credit
Facility which expired on July 31, 1999; the amendment effectively extended the
maturity date until October 29, 1999 and waived all existing defaults. In
connection with the amendment, the senior lender exercised certain blockage
rights preventing the Company from making any principal or interest payments to
subordinated debtors, including the Company's convertible subordinated notes. As
of July 31, 1999, borrowings outstanding under the $35 million Credit Facility
included a balance of approximately $26.1 million outstanding on the revolving
line of credit and $4.8 million on the related term loan, as well as an
aggregate of $2.1 million in outstanding irrevocable letters of credit in
support of inventory purchases.
On October 25, 1999, the Company entered into a new $60 million Credit
Facility which replaced the Company's $35 million credit facility. The new
Credit Facility has an initial three-year term but may be extended an additional
year. The new Credit Facility includes a $57.6 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 sub-limit for the issuance of letters of credit. The new Credit Facility
also includes two term loans totaling $2.4 million. Interest on borrowings
outstanding under the revolving line of credit and the term loans is payable
monthly at an annual rate equal to, at the Company's option, (i) the Lender's
Prime Rate plus 1/4 percent or (ii) the Lender's Adjusted Euro Dollar rate plus
2 3/4%. The new 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.
31
<PAGE>
Based on the level of the Company's eligible accounts receivable and inventory
at October 31, 1999, the Company had $1.4 million of additional borrowing
capacity available under the new Credit Facility, all of which could be used to
support borrowings under the revolving line of credit or additional letters of
credit. The new Credit Facility contains certain restrictive covenants and
conditions among which are a prohibition on the payment of 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. In addition, the
new Credit Facility prohibits the Company's Chief Executive Officer from
reducing his ownership in the Company below specified levels. (See Footnote 5 -
Restructuring and Refinancing of Notes Payable and Long-Term Debt)
The Company had entered into a Convertible Loan Agreement ("Convertible
Loan Agreement") dated July 3, 1997, pursuant to which the Company issued $15
million of convertible subordinated notes. In March 1999, the Company defaulted
under certain financial covenants of the Convertible Loan Agreement, and in July
1999 the Company defaulted in the payment of interest due on the convertible
subordinated notes as required by the senior lenders. On October 22, 1999, the
Company and the holders of the convertible subordinated notes entered into a
First Amendment to the Convertible Loan Agreement (the "First Amendment") which
waived existing defaults under the Convertible Loan Agreement, provided consent
to the New Credit Facility, and modified the financial covenants in the
Convertible Loan Agreement to conform to the financial covenants in the New
Credit Facility. In addition, the First Amendment increased the interest rate
from 8.5% to 10.5% per annum, changed the convertible debentures' final maturity
date from June 30, 2004 to December 31, 2000, and adjusted the conversion price
from $16 per share of common stock to the lesser of (i) $16 per share and (ii)
the greater of $6 per share or the average closing price of the Company's common
stock for the 30 days following October 22, 1999. In connection with the First
Amendment, the Company granted the holders of the convertible subordinated
debentures a first lien on its 51% interest in its Los Angeles warehouse and a
second lien on substantially all its other assets. The First Amendment also
includes limitations on the issuance of stock options to employees, and entitles
the holders to two advisory board positions. The First Amendment also provide
for permanent Board seats, as well as limitation on the total number of board
seats and a possible reset of the conversion price if the outstanding debentures
have not been converted or paid in full by final maturity.
Principal payments on the Company's outstanding Convertible Debentures
commence in June 2000, and the Convertible Debentures mature on December 31,
2000. The Company currently expects that, by itself, cash flow from operations
will be insufficient to meet these debt service obligations under the
Convertible Debentures. Accordingly, unless earlier converted to the Company's
common stock, the Company will need to refinance in order to satisfy its
repayment obligations thereunder. There can be no assurance that the company
will be able to refinance the convertible debentures or, if such refinancing is
obtained, that the terms will be as favorable to the Company as these contained
in the convertible debentures.
The Company has borrowed substantially all of its available capacity under
its new credit facility. Thus, any future losses or other capital needs could
require the Company to seek additional financing from public or private
issuances of debt and/or equity or from asset sales. The Company may not be able
to complete any such financing or asset sale at all or, if so, on terms
favorable to the Company. Any equity financing could result in dilution to
existing shareholders. See "Risk Factors - Leverage and Future Debt Service and
Capital Needs"
As of July 31, 1999, Play-By-Play Europe had an aggregate of approximately
$1.0 million outstanding in irrevocable letters of credit in support of
inventory purchases. The Company's current
32
<PAGE>
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.
The Company's operating activities used net cash of $1.6 million and $23.1
million in fiscal 1999 and 1998, respectively. The cash flow from operations for
fiscal 1999 was primarily affected by the net loss. The cash flow from
operations for fiscal 1998 was primarily affected by changes in accounts
receivable as a result of the increase in sales experienced by the Company, as
well as inventory which increased in part due to the increase in sales as well
as to support the expansion in the European market.
Net cash used in investing activities during fiscal 1999 and 1998 was $8.0
million and $3.3 million, respectively. For fiscal 1999, net cash used in
investing activities consisted principally of expenditures for property and
equipment of approximately $8.2 million. In the third quarter of fiscal 1999,
the Company acquired substantially all of the assets and liabilities of Caribe
Marketing for the purchase price of $2.5 million consisting of cash, 80,000
shares of the Company's common stock and the assumption of a Seller's note. (See
Footnote 14 - "Acquisition"). For fiscal 1998, net cash used in investing
activities consisted principally of the purchase of property and equipment of
approximately $3.3 million. The $3.3 million consisted principally of
expenditures of $1.1 million for costs related to the implementation of the
Company's Oracle Enterprise Resource Planning System and $874,000 for leasehold
improvements for the San Antonio facility.
Net cash provided by financing activities during fiscal 1999 and 1998 was
$10.4 million and $23.6 million, respectively. During fiscal 1999, the Company
received aggregate advances of $139.1 million, and made repayments of $124.8
million, on the Credit Facility, and reduced the principal on the term loan by
$2.4 million. During fiscal 1998, the Company repaid $7.8 million of net
borrowings on the revolving line of credit under the Credit Facility and repaid
$2.4 million principal on the term loan.
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 July
31, 2000, however, there is no assurance that the Company will be able to obtain
additional borrowings to meet its working capital needs, or that if obtained, it
will be on terms at least as favorable as those existing credit facilities.
EURO. On January 1, 1999, eleven of the fifteen member countries of the
European Union introduced the euro, which became the common currency among the
participating member countries. The participating members' sovereign currency
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 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 other non-European Union countries, the introduction of the euro will not
have a material effect on Play By Play Europe's results of operations, financial
position, or cash flows for the forseeable future.
33
<PAGE>
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 on, among other factors, the earnings, capital requirements, operating
and financial condition of the Company and other relevant factors, and
compliance with various financing covenants such as those contained in the
agreements relative to the credit facilities to which the Company is or may
become a party.
YEAR 2000. Similar to many business entities, the Company may 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 application systems, process control systems (embedded chips),
technology infrastructure, and third party business partners and suppliers with
which the Company has significant relationships. The plan is comprised of five
phases: (1) developing an inventory of hardware, software and embedded chips,
(2) assessing the degree to which each area is currently in compliance with Year
2000 requirements, (3) performing renovations and repairs as needed to attain
compliance, (4) testing to ensure compliance, and (5) developing a contingency
plan if repair and renovation efforts are either unsuccessful or untimely.
Management has completed steps (1), (2), and (5) of this plan. Steps (3)
and (4) were in process at the Balance Sheet date, and subsequent to that date,
have been substantially completed. The Company feels that all phases will be
completed by the end of calendar 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 $5.2 million for these Year 2000
compliance efforts, and management feels that actual final costs will not
materially deviate from this. 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 financial and core business system
software with a new Oracle enterprise resource planning system designed to
enhance management information, financial reporting, inventory management, order
entry, purchasing and has the added benefit of addressing the Year 2000 issues.
The new enterprise system has necessitated enhancement of the Company's existing
computer networks and desktop applications. The Company does not presently
anticipate a material business interruption as a result of the Year 2000.
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 the new enterprise systems and completion of the planned
activities as scheduled, the possibility of significant interruptions of normal
operations should be minimal.
Management believes that its customers and suppliers would also receive
advance notice of any material year 2000 compliance problems, allowing them to
implement alternate plans, if necessary.
34
<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 two fiscal quarters. The Company's
sales to the retail toy industry have been highest during the first and fourth
fiscal quarters, and collections from those sales have been highest during the
succeeding two fiscal quarters. The Company's working capital needs and
borrowings to fund those needs have been highest during the third and fourth
fiscal quarters. As a result of the Company's increased sales to amusement
customers and to retail customers, the Company anticipates that its borrowings
to fund working capital needs may become more significant in the third and
fourth fiscal quarters.
The Company utilizes borrowings under its Credit Facility to finance
purchases of inventory and accounts receivable, primarily during peak selling
periods. During fiscal 1999, the highest level of aggregate borrowings under the
Credit Facility was $27.9 million in May 1999.
The following sets forth the Company's net sales by fiscal quarter for
fiscal 1999, 1998 and 1997:
FISCAL YEAR
--------------------------------------
FISCAL QUARTER 1999 1998 1997
-------------- -------- ------- -------
(IN THOUSANDS)
First $55,727 $58,418 $39,891
Second 28,432 30,867 22,039
Third 35,683 37,262 28,001
Fourth 36,673 51,556 47,455
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 PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by
SFAS No. 137, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000 (August 1, 2000, for the Company). SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives which meet the definition of a
hedge transaction are recorded each period in the either earnings or other
comprehensive income. The Company believes that the impact of the pronouncement
will be minimal, as historically, the Company has not entered into any
derivative or hedging transactions.
ITEM 7A. 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
35
<PAGE>
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. Company believes if such as event
were to occur, it would be able to find alternate sources of inventory at
competitive prices, however, there can be no assurance that the Company would be
successful. Historically and as of July 31, 1999, 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 and term
loan under the old credit facility was variable based on LIBOR or the Bank's
Alternate Base Rate. The interest payable on the Company's revolving
line-of-credit and term loans under the new credit facility entered into on
October 25, 1999 is variable based on the lender's prime rate or adjusted
Eurodollar rate, and therefore, affected by changes in market interest rates. At
July 31, 1999, approximately $26.1 million was outstanding under the old credit
facility with a weighted average interest rate of 8.0%.
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 Spanish 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 subsidiaries 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 or the British Pound.
Certain of the European subsidiaries' 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the 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
PricewaterhouseCoopers LLP dated November 12, 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
<PAGE>
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
Comapny's defenitive 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.
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 exhibts filed as part of this Report.
(b) Reports on Form 8-K. None.
37
<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 15th
day of November 1999.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By: /S/ JOE M. GUERRA
Joe M. Guerra
Chief Financial Officer, Secretary 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 November 15, 1999
----------------------------------- Executive Officer
Arturo G. Torres (Principal Executive Officer)
By: /S/ RAYMOND G. BRAUN President, Chief Operating Officer and November 15, 1999
--------------------------------------- Director
Raymond G. Braun
By: /S/ JOE M. GUERRA Chief Financial Officer, November 15, 1999
--------------------------------------- Secretary and Treasurer
Joe M. Guerra (Principal Financial and Accounting
Officer)
By: /S/ RICHARD NEITZ President - Retail Division November 15, 1999
----------------------------------- and Director
Richard Neitz
By: /S/ MANUEL FERNANDEZ BARROSO President - Caribe Sales and Marketing. November 15, 1999
---------------------------- and Director
Manuel Fernandez Barroso
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
By: /S/ TOMAS DURAN Director November 15, 1999
-----------------------------------
Tomas Duran
By: /S/ STEVE K. C. LIAO Director November 15, 1999
-----------------------------------
Steve K. C. Liao
By: /S/ OTTIS W. BYERS Director November 15, 1999
-----------------------------------
Ottis W. Byers
By: /S/ BERTO GUERRA, JR. Director November 15, 1999
-----------------------------------
Berto Guerra, Jr.
</TABLE>
39
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants ........................................ F-2
Consolidated Balance Sheets as of July 31, 1999 and 1998 ................. F-3
Consolidated Statements of Operations for the Fiscal Years Ended ......... F-4
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended ......... F-6
Notes to Consolidated Financial Statements ............................... F-7
Financial Statement Schedule:
Report of Independent Accountants on Financial Statement Schedule ........ S-1
Schedule II - Valuation and Qualifying Accounts .......................... S-2
</TABLE>
All other schedules are omitted as the required information is not applicable or
the information is presented in the consolidated financial statements, related
notes or other schedules.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Play By Play Toys & Novelties, Inc. and Subsidiaries:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Play By Play Toys & Novelties, Inc. and Subsidiaries at
July 31, 1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended July 31, 1999, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Austin, Texas
November 12, 1999
F-2
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
JULY 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 2,345,634 $ 3,024,028
Accounts and notes receivable, less allowance for
doubtful accounts of $7,976,984 and $5,262,053 .......... 36,243,047 48,950,055
Inventories, net ............................................. 69,116,899 72,613,130
Prepaid royalties ............................................ -- 4,677,331
Other prepaid expenses ....................................... 2,811,776 4,018,712
Deferred income taxes ........................................ -- 224,728
Other current assets ......................................... 468,710 --
------------- -------------
Total current assets .................................... 110,986,066 133,507,984
Property and equipment, net ....................................... 25,859,145 17,914,998
Goodwill, less accumulated amortization of $1,187,890 and $754,179 16,442,777 14,043,748
Other assets ...................................................... 2,030,273 2,417,166
============= =============
Total assets ............................................ $ 155,318,261 $ 167,883,896
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdraft ............................................... $ 2,281,447 $ --
Notes payable to banks ....................................... 29,982,533 14,760,950
Current maturities of long-term debt ......................... 1,953,487 3,393,149
Current obligations under capital leases ..................... 1,701,911 1,142,687
Accounts payable, trade ...................................... 32,081,780 28,070,980
Accrued royalties payable .................................... 7,706,423 --
Other accrued liabilities .................................... 3,172,479 5,312,081
Income taxes payable ......................................... -- 4,374,249
------------- -------------
Total current liabilities ............................... 78,880,060 57,054,096
------------- -------------
Long-term liabilities:
Long-term debt, net of current maturities .................... 2,140,418 4,860,247
Convertible subordinated debentures .......................... 14,701,500 15,000,000
Obligations under capital leases ............................. 1,655,826 1,102,135
Deferred income taxes ........................................ -- 878,787
------------- -------------
Total liabilities ....................................... 97,377,804 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; 7,395,000 and 7,315,000 shares issued ....... 1,000 1,000
Additional paid-in capital ................................... 71,486,820 70,986,820
Deferred compensation ........................................ (338,333) (478,333)
Accumulated other comprehensive losses ....................... (3,006,208) (1,548,381)
Retained earnings (deficit) .................................. (10,202,822) 20,027,525
------------- -------------
Total shareholders' equity .............................. 57,940,457 88,988,631
============= =============
Total liabilities and shareholders' equity .............. $ 155,318,261 $ 167,883,896
============= =============
</TABLE>
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 OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JULY 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales .................................. $ 156,515,361 $ 178,102,835 $ 137,386,257
Cost of sales .............................. 129,582,244 116,755,386 91,024,319
------------- ------------- -------------
GROSS PROFIT .......................... 26,933,117 61,347,449 46,361,938
Selling, general and administrative expenses 55,808,965 44,088,681 33,215,225
------------- ------------- -------------
OPERATING INCOME (LOSS) ............... (28,875,848) 17,258,768 13,146,713
Interest expense ........................... (4,831,276) (4,509,897) (4,414,701)
Interest income ............................ 371,722 360,048 215,895
Other income (loss) ........................ 164,751 (116,957) (7,785)
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES ..... (33,170,651) 12,991,962 8,940,122
Income tax benefit (provision) ............. 2,940,304 (4,547,187) (2,724,150)
------------- ------------- -------------
NET INCOME (LOSS) ..................... $ (30,230,347) $ 8,444,775 $ 6,215,972
============= ============= =============
Net income (loss) per share:
Basic .................................... $ (4.12) $ 1.30 $ 1.28
-------------
Diluted .................................. $ (4.12) $ 1.19 $ 1.25
------------- ------------- -------------
Weighted average shares outstanding:
Basic .................................... 7,338,297 6,473,724 4,871,952
------------- ------------- -------------
Diluted .................................. 7,338,297 7,759,866 5,035,723
------------- ------------- -------------
</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>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER RETAINED
------------------------ PAID-IN DEFERRED COMPREHENSIVE EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSSES) (DEFICIT)
------------- ------ ------------ -------------- ------------------ -------------
<S> <C> <C> <C> C> <C> <C>
Balance, July 31, 1996 4,841,100 1,000 33,746,597 - (414,306) 5,366,778
Comprehensive income:
Net income 6,215,972
Foreign currency translation
adjustments (1,888,721)
Comprehensive income
Acquisition of TLC 40,000 345,000
Exercise of stock options 20,200 214,942
Deferred employee
compensation 700,000 (700,000)
Amortization of deferred
compensation 81,667
--------------------------------------------------------------------------------------------
Balance, July 31, 1997 4,901,300 1,000 35,006,539 (618,333) (2,303,027) 11,582,750
Comprehensive income:
Net income 8,444,775
Foreign currency translation
adjustments 754,646
Comprehensive income
Warrants issued 522,000
Stock issued in secondary
public offering 2,300,000 34,147,474
Exercise of stock options 113,700 1,310,807
Amortization of deferred
compensation 140,000
--------------------------------------------------------------------------------------------
Balance, July 31, 1998 7,315,000 1,000 70,986,820 (478,333) (1,548,381) 20,027,525
Comprehensive income (loss):
Net loss (30,230,347)
Foreign currency translation
adjustments (1,457,827)
Comprehensive income (loss)
Acquisition of Caribe Marketing 80,000 500,000
Amortization of deferred
compensation 140,000
============================================================================================
Balance, July 31, 1999 7,395,000 $1,000 $71,486,820 $ (338,333) $ (3,006,208) $ (10,202,822)
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
---------------
<S> <C>
Balance, July 31, 1996 38,700,069
Comprehensive income:
Net income 6,215,972
Foreign currency translation
adjustments (1,888,721)
------------------
Comprehensive income 4,327,251
------------------
Acquisition of TLC 345,000
Exercise of stock options 214,942
Deferred employee
compensation -
Amortization of deferred
compensation 81,667
------------------
Balance, July 31, 1997 43,668,929
Comprehensive income:
Net income 8,444,775
Foreign currency translation
adjustments 754,646
------------------
Comprehensive income 9,199,421
------------------
Warrants issued 522,000
Stock issued in secondary
public offering 34,147,474
Exercise of stock options 1,310,807
Amortization of deferred
compensation 140,000
------------------
Balance, July 31, 1998 88,988,631
Comprehensive income (loss):
Net loss (30,230,347)
Foreign currency translation
adjustments (1,457,827)
------------------
Comprehensive income (loss) (31,688,174)
------------------
Acquisition of Caribe Marketing 500,000
Amortization of deferred
compensation 140,000
==================
Balance, July 31, 1999 $ 57,940,457
==================
</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>
FISCAL YEARS ENDED JULY 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................................. $(30,230,347) $ 8,444,775 $ 6,215,972
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ................................... 2,973,943 2,271,943 2,041,950
Provision for doubtful accounts receivable ...................... 7,833,697 2,173,736 2,024,847
Provision for inventory reserve ................................. 4,091,849 -- --
Provision for royalty license reserves .......................... 14,883,940 -- --
Deferred income tax provision (benefit) ......................... (654,059) (503,290) 554,229
Amortization of deferred compensation ........................... 140,000 140,000 81,667
Loss (gain) on sale of property and equipment ................... 200,154 89,248 (51,356)
Change in operating assets and liabilities (net of acquisitions):
Accounts and notes receivable ................................. 3,332,834 (13,395,537) (9,822,434)
Inventories ................................................... 540,030 (25,373,610) (5,343,092)
Prepaids and other assets ..................................... 5,755,804 (3,987,081) 985,489
Accounts payable and accrued liabilities ...................... (6,126,917) 5,151,647 4,513,600
Income taxes payable .......................................... (4,377,026) 1,936,817 647,106
------------ ------------ ------------
Net cash provided by (used in) operating activities ........ (1,636,098) (23,051,352) 1,847,978
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................. (8,245,474) (3,269,603) (791,869)
Proceeds from sale of property and equipment ....................... 74,571 35,115 --
Purchase of Caribe, net of cash paid ............................... 147,088 -- --
Purchase of TLC, net of cash acquired .............................. -- -- (488,811)
Payments for intangible assets ..................................... -- (32,246) (29,999)
------------ ------------ ------------
Net cash used in investing activities ...................... (8,023,815) (3,266,734) (1,310,679)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offering of common stock, net ................. -- 34,147,474 --
Net borrowings (repayments) under Revolving Credit Agreement ....... 14,321,583 (7,846,771) 831,912
Payment of note payable to shareholder ............................. -- -- (3,000,000)
Costs related to issuance of debt .................................. -- -- (823,862)
Proceeds from long-term debt ....................................... -- -- 15,000,000
Repayment of long-term debt ........................................ (4,847,598) (2,570,041) (3,964,594)
Repayment of capital lease obligations ............................. (1,316,086) (953,393) (628,658)
Proceeds from exercise of stock options ............................ -- 1,310,807 214,942
Increase (decrease) in book overdraft .............................. 2,281,447 (461,220) (1,896,216)
------------ ------------ ------------
Net cash provided by financing activities .................. 10,439,346 23,626,856 5,733,524
------------ ------------ ------------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATES ............................ (1,457,827) 754,646 (1,841,251)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ........... (678,394) (1,936,584) 4,429,572
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 3,024,028 4,960,612 531,040
============ ============ ============
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 2,345,634 $ 3,024,028 $ 4,960,612
============ ============ ============
</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. NATURE OF BUSINESS
The principal business of Play-By-Play Toys & Novelties, Inc. ("PBP" and
together with all majority owned subsidiaries, the "Company") 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 98.3% of net sales for fiscal 1999.
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 loss for fiscal 1999 was $25,165 the loss for fiscal 1998 was
$117,000, and the translation was not material for fiscal 1997. Transaction
gains and losses result primarily from sales in Europe and purchases of products
by the Company's foreign subsidiaries from suppliers in the Far East.
Certain of the Company's license agreements require payment of royalties
in Canadian dollars. The Company's subsidiary in Spain also has license
agreements that requires payment of 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.
F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Historically, no attempt has been made to manage, by means of hedging or
derivatives, the risk of potential currency fluctuations.
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.
BUSINESS AND 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. From time to time, the
Company may have on deposit in certain bank accounts including foreign banks,
amounts in excess of insured limits. The Company's trade receivables result
primarily from its retail and amusement operations and in general, reflect a
broad customer base. As of July 31, 1999, the outstanding trade receivables were
$40.3 million, of which $27.5 million trade receivables were from customers in
the United States and Canada, $642,000 were trade receivables from customers in
Latin American countries, and $12.2 million were trade receivables from European
customers. During fiscal 1999 and prior years, due to the difficult economic
environment in Latin America, the Company provided more aggressive terms to
Latin America customers. During 1999, the Company changed its credit terms to
customers in Latin America, whereby the Company generally requires letters of
credit or has reduced customer credit limits. The Company generally requires no
collateral from its customers; however, it routinely assesses the financial
strength of its customers and in some instances requires customers to issue a
letter of credit for the amount of purchases in favor of the Company. No
customer accounted for more than 10% of the Company's net sales in fiscal 1999,
1998 and 1997.
The majority of the Company's manufacturing is arranged directly by the
Company with third party manufacturers, a substantial portion of which are
located in the People's Republic of China ("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. A Chinese
manufacturer accounted for 12.4% of the Company's purchases during fiscal 1999.
No other manufacturer accounted for more than 10% of the Company's purchases of
toy products during fiscal 1999, 1998 or 1997, with the exception of one other
Chinese manufacturer, which accounted for 4.3%, 6.6% and 26.3% of such purchases
during fiscal 1999, 1998 and 1997, respectively. During these periods, this
manufacturer manufactured plush Play-Faces(R) and thE COCA-COLA(R) brand plush
POLAR BEAR products. This manufacturer is currently one of several manufacturers
of these and other products for the Company.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost of PBP's U.S.
inventory is determined using the first-in, first-out (FIFO) and last-in,
first-out (LIFO) method. Inventory-in-transit is determined based on the
specific identification method.
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 3 years
Software 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.
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
In accordance with SFAS No. 121, "Accounting for the Impairment of Long
Lived Assets and Long Lived Assets to be Disposed of", 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 were 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 amounts 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 their 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.
F-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
The costs of producing media advertising are capitalized and amortized to
expense over the anticipated sale period, while airtime is expensed over the
sale period. Committed media communication costs are accrued as a cost of sale
of the related product. Costs 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.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share", effective for the year ending July 31, 1998 and
has restated its earnings per share ("EPS") disclosure for the year ended July
31, 1997 to comply with SFAS No. 128. SFAS No. 128 simplifies the standards for
computing EPS previously found in Accounting Principles Board Opinion No. 15,
"Earnings Per Share", and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS,
which excludes dilution. It also requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. Basic earnings per share were computed by dividing net income by the
weighted average number of shares of common stock 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
outstanding during the period.
The calculations of basic and diluted EPS for the fiscal years ended July 31,
1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JULY 31,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income (loss) from operations available
to common stockholders - basic ................. $(30,230,347) $ 8,444,775 $ 6,215,972
Plus: interest on convertible debt ............... -- 780,000 61,973
Income (loss) from operations available to
common stockholders plus income from
------------ ------------ ------------
assumed conversions - diluted .................. $(30,230,347) $ 9,224,775 $ 6,277,945
============ ============ ============
Weighted average shares outstanding - basic ...... 7,338,297 6,473,724 4,871,952
Plus: assumed exercise of options and warrants .. -- 348,642 89,285
Plus: assumed conversion of convertible debt .... -- 937,500 74,486
------------ ------------ ------------
Weighted average shares outstanding - diluted .... 7,338,297 7,759,866 5,035,723
============ ============ ============
</TABLE>
F-10
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During the fiscal years ended July 31, 1999, 1998 and 1997, the Company
had 1,732,000, 1,702,558, and 980,515, respectively, 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.
Additionally, the common stock issuable upon the assumed conversion by the
Convertible Debentures holders at July 31, 1999 was not included in the diluted
earnings per share calculation as it would have been anti-dilutive.
COMPREHENSIVE INCOME (LOSS)
In fiscal year 1998, the Company adopted SFAS No. 130. "Reporting
Comprehensive Income" which establishes new rules for the reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The Company's comprehensive income is comprised of net
income and foreign currency translation adjustments. The adoption of SFAS No.
130 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
comprehensive income amounts in the prior fiscal years' financial statements
have been reclassified to conform to SFAS No. 130.
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS
No. 137, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000 (August 1, 2000, for the Company). SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives which meet the definition of a
hedge transaction are recorded each period in the either earnings or other
comprehensive income. The Company believes that the impact of the pronouncement
will be minimal, as historically, the Company has not entered into any
derivative or hedging transactions.
4. DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information", which establishes reporting
standards for the way public companies report information about operating
business segments in annual and interim reports. While the Company is organized
and managed internally by sales and operating divisions, revenues are segmented
retail and amusement customers.
F-11
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
(CONTINUED)
Information about revenue segments is presented below.
SALES REVENUE SEGMENTS
(in 000's)
<TABLE>
<CAPTION>
AMUSEMENT RETAIL OTHER TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fiscal Year 1999
Net operating revenue ............................ $114,906 $ 38,880 $ 2,729 $156,515
Cost of sales .................................... 98,655 29,594 1,333 129,582
-------- -------- -------- --------
Gross profit ..................................... 16,251 9,286 1,396 26,933
FISCAL YEAR 1998
Net operating revenue ............................ $123,234 $ 51,914 $ 2,954 $178,102
Cost of sales .................................... 76,011 39,302 1,442 116,755
-------- -------- -------- --------
Gross profit ..................................... 47,223 12,612 1,512 61,347
FISCAL YEAR 1997
Net operating revenue ............................ $ 95,845 $ 38,319 $ 3,222 $137,386
Cost of sales .................................... 61,598 28,029 1,397 91,024
-------- -------- -------- --------
Gross profit ..................................... 34,247 10,290 1,825 46,362
The following are sales by georgraphic areas as of and for the years ended July 31:
1999 1998 1997
-------- -------- --------
Domestic ......................................... $112,719 $132,002 $113,726
Europe ........................................... 34,940 31,684 21,091
Latin America .................................... 8,856 14,416 2,569
$156,515 $178,102 $137,386
-------- -------- --------
</TABLE>
5. RESTRUCTURING AND REFINANCING OF NOTES PAYABLE AND LONG-TERM DEBT
NEW SENIOR CREDIT FACILITY
On October 25, 1999, the Company entered into a new $60 million credit
facility ("New Credit Facility") with a new lender that replaced the Company's
$35 million credit facility. The New Credit Facility has an initial three-year
term but may be extended an additional year unless either party gives 60 days
prior written notice of intent to terminate. The New Credit Facility includes a
$57.6 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 with a $15 million sub-limit for the issuance of
letters of credit. The New Credit Facility also includes two term loans totaling
$2.4 million. The term loan in the amount of $817,000 matures on October 1, 2004
and requires monthly principal payments of $13,167 plus accrued interest. The
second term loan in the amount of $1.6 million, matures on October 1, 2006 and
requires monthly principal payments of $20,836 for the first sixty months, and
monthly principal payments of $14,286 for the remaining months thereafter until
maturity, plus accrued interest.
F-12
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RESTRUCTURING AND REFINANCING OF NOTES PAYABLE AND LONG-TERM DEBT
(CONTINUED)
Interest on borrowings outstanding under the revolving line of credit and
the term loans is payable monthly at an annual rate equal to, at the Company's
option, (i) the Lender's Prime Rate plus 1/4 percent or (ii) the Lender's
Adjusted Euro Dollar rate plus 2 3/4%. The New 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. Based on the
level of the Company's eligible accounts receivable and inventory at October 31,
1999, the Company had $1.4 million of additional borrowing capacity available
under the New Credit Facility , all of which could be used to support borrowings
under the revolving line of credit or additional letters of credit. The New
Credit Facility also calls for certain early termination fees in the event the
it is terminated before maturity, except in the event of a refinancing by an
affiliate of the lender or in connection with certain capital market events. The
New Credit Facility contains certain restrictive covenants and conditions among
which are a prohibition on the payment of 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 a minimum adjusted net worth and a
minimum domestic adjusted net worth. In addition, the New Credit Facility
prohibits the Company's Chief Executive Officer from reducing his ownership in
the Company below specified levels.
CONVERTIBLE DEBT
The Company had entered into a Convertible Loan Agreement ("Convertible
Loan Agreement") dated July 3, 1997, pursuant to which the Company issued $15
million of convertible subordinated notes. In March 1999, the Company defaulted
under certain financial covenants of the Convertible Loan Agreement, and in July
1999 the Company defaulted in the payment of interest due on the convertible
subordinated notes as required by the senior lenders. On October 22, 1999, the
Company and the holders of the convertible subordinated notes entered into a
First Amendment to the Convertible Loan Agreement (the "First Amendment") which
waived existing defaults under the Convertible Loan Agreement, provided consent
to the New Credit Facility, and modified the financial covenants in the
Convertible Loan Agreement to conform to the financial covenants in the New
Credit Facility. In addition, the First Amendment increased the interest rate
from 8.5% to 10.5% per annum, changed the convertible debentures' final maturity
date from June 30, 2004 to December 31, 2000, and adjusted the conversion price
from $16 per share of common stock to the lesser of (i) $16 per share and (ii)
the greater of $6 per share or the average closing price of the Company's common
stock for the 30 days following October 22, 1999. Principal is payable monthly
commencing June 30, 2000 at a rate of 1% of the outstanding principal balance,
with the remaining unpaid balance due at final maturity. In connection with the
First Amendment, the Company granted the holders of the convertible subordinated
debentures a first lien on its 51% interest in its Los Angeles warehouse and a
second lien on substantially all its other assets. The First Amendment also
includes limitations on the issuance of stock options to employees, and entitles
the holders to two advisory board positions. The First Amendment also provides
for permanent Board seats, as well as limitations on the total number of board
seats and a possible reset of the conversion price if the outstanding debentures
have not been converted or paid in full by final maturity.
SETTLEMENT OF LITIGATION & RESTRUCTURING OF ACE NOTE
On October 25, 1999, the Company entered into a Settlement Agreement that
provides for the dismissal of the outstanding action instituted against the
Company by the sellers and stockholders of Expo Management Co., formerly Ace
Novelty Co., Inc., ("Stockholders") and the related counter suit by the Company.
Under the terms of the Settlement Agreement, both parties agreed to the mutual
release of certain
F-13
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RESTRUCTURING AND REFINANCING OF NOTES PAYABLE AND LONG-TERM DEBT
(CONTINUED)
matters and claims arising from or related to the Company's acquisition of Ace
Novelty Co., the issuance by the Company of a promissory note in the amount of
$637,000 to the Stockholders in final payment of amounts due in connection with
the Company's acquisition of Ace Novelty Co., payment of $50,000 upon execution
and the assumption by the Company's Chairman of the Company's obligation in the
amount of approximately $1.7 million to purchase the Stockholders' remaining 49%
interest in the Company's distribution center located in Los Angeles,
California. The promissory note payable to the Stockholders bears interest at
the rate of 8% per annum; calls for monthly principal payments of $60,000 plus
accrued interest beginning November 1999 and is subject to a personal guaranty
by the Chairman. The Company will continue to lease the 49% interest in the
Company's Los Angeles distribution center from the Chairman pursuant to the
terms of the existing lease agreement.
6. WRITE-OFF OF ACCOUNTS RECEIVABLE
During the third quarter of fiscal 1999, the Company wrote-off $2.2
million of trade accounts receivable from one of its distributors as a result of
the commencement of insolvency proceedings by the Company's former distributor
in Mexico. The write-off was included in selling, general and administrative
expenses.
In the fourth quarter of fiscal 1999, the Company recorded allowance for
doubtful account provisions totaling $1.7 million related to non-performing
trade receivables from two Latin American customers, $742,000 for the balance of
a non-performing note receivable from the purchaser of Restaurants Universal,
and $826,000 for other specific non-performing receivables.
On October 6, 1999, the Company purchased substantially all of the assets,
principally inventory, and assumed certain liabilities, with a net value of $1.9
million, of South Florida Toys & Novelties, Inc. ("SFT"), the Company's
distributor based in Miami, Florida in exchange for the cancellation of amounts
due to the Company from SFT totaling $2.8 million. A provision for the loss
based on the difference between the net assets acquired and the balance due to
the Company of approximately $1.0 million, less a previously established
allowance for doubtful accounts of approximately $300,000, was recorded at July
31, 1999 and is included in selling, general and administrative expenses.
7. INVENTORIES
Inventories consist of the following:
JULY 31,
-------------------------------
1999 1998
----------- -----------
Purchased for resale ................... $68,592,189 $72,325,886
Operating supplies ..................... 524,710 287,244
Total ............................. $69,116,899 $72,613,130
----------- -----------
Replacement cost of inventories approximates LIFO cost at each of the
balance sheet dates. At July 31, 1999 and 1998 inventories in the amount of
$40.1 million and $45.3 million, respectively, were valued using the FIFO and
specific identification methods. The excess current cost over the LIFO value of
inventories was $215,000 at July 31, 1999 and 1998.
F-14
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVENTORIES (CONTINUED)
In the fourth quarter of fiscal 1999, the Company recorded a provision of
$4.5 million to write-down the carrying value of certain slow or non-moving
inventory items to their estimated net realizable values.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JULY 31,
----------------------------
1999 1998
------------ ------------
Buildings ............................... $ 3,740,275 $ 3,379,773
Land .................................... 1,240,729 1,207,729
Equipment ............................... 14,783,215 11,656,496
Vehicles ................................ 744,278 707,006
Computer equipment ...................... 3,555,294 2,524,361
Software ................................ 6,603,820 1,455,071
Leasehold improvements .................. 2,825,698 2,213,263
------------ ------------
33,493,309 23,143,699
------------ ------------
Accumulated depreciation and amortization (7,634,164) (5,228,701)
------------ ------------
$ 25,859,145 $ 17,914,998
Included in property and equipment in the accompanying consolidated
balance sheets are the following assets held under capital leases:
JULY 31,
----------------------------
1999 1998
------------ ------------
Equipment ............................... $ 2,892,054 $ 1,525,726
Computer equipment ...................... 2,629,563 1,073,019
Accumulated depreciation ................ (801,752) (766,800)
------------ ------------
$ 4,719,865 $ 1,831,945
------------ ------------
F-15
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. NOTES PAYABLE AND LONG-TERM DEBT
The following classifications and maturities of amounts outstanding at
July 31, 1999 are based on the refinancing and restructuring completed on
October, 25, 1999 (See Note 5):
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
NOTES PAYABLE:
Revolving lines of credit ................................. $ 29,982,533 $ 14,760,950
============ ============
LONG-TERM DEBT:
Convertible subordinated debentures ....................... $ 15,000,000 $ 15,000,000
Term loan ................................................. 2,410,000 7,200,000
Notes payable to banks, financing companies, and other due
in monthly installments with interest rates ranging from
7.4% to 12.0% collaterized by equipment ................ 1,385,405 1,053,396
------------ ------------
$ 18,795,405 $ 23,253,396
------------ ------------
Less current maturities ................................... (1,953,487) (3,393,149)
------------ ------------
$ 16,841,918 $ 19,860,247
============ ============
</TABLE>
The aggregate amount of maturities on long-term borrowings as of July 31, 1999
were as follows:
Year ended July 31:
2000 $ 1,948,564
2001 15,148,008
2002 425,782
2003 413,436
2004 413,436
Beyond 446,179
---------------
$18,795,405
===============
CREDIT FACILITY
In June 1996, the Company entered into a $65 million Credit Facility the
("Old Credit Facility") which included 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 Old Credit Facility
also included a $12 million term loan, which required 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. During fiscal 1999, the
Old Credit Facility was amended reducing the total revolving line of credit
commitment to an aggregate amount of $35 million. The Old Credit Facility's
maturity was extended, through a series of short-term extensions, to October 29,
1999. On October 25, 1999, the Company entered into a New Credit Facility with
another lender that matures October 24, 2002 (See Note 5).
F-16
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Interest on borrowings outstanding under the Old Credit Facility's
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 or (ii) the LIBOR rate plus
2.00%. The weighted average interest rate was 8.0% at July 31, 1999 and 8.50%
for the year ended July 31, 1998. 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 0.25% or (ii) the
LIBOR rate plus 2.25%. The weighted average interest rate was 8.25% at July 31,
1999 and 8.75% for the year ended July 31 1998. The Old 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, 1999, the Company had $2.1 million in outstanding
irrevocable letters of credit under the Old Credit Facility.
In March 1999, Caribe Marketing and Sales Co., Inc. ("Caribe") entered
into a credit facility with a bank that provides for an aggregate commitment of
$5.0 million for the issuance of letters of credit and a $1.5 million sublimit
for cash advances. Interest accrues at prime minus .75% and is payable monthly,
with principal due at maturity, June 30, 2000. The facility is guaranteed by the
Company.
CONVERTIBLE DEBT
During July 1997, the Company completed a private placement of $15 million
of 8% 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 the Company's common stock at any time during the loan
period. Pursuant to the terms of the Convertible Loan Agreement, the conversion
price was adjusted from the original $17.00 per share to $16.00 per share as a
result of the December 1997 offering of the Company's common stock at $16.00 per
share. 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's 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 term of the convertible debentures on a straight-line
basis, which approximates the interest method.
On October 25, 1999, the Company restructured its Convertible Debentures
(See Note 5).
10. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
The Company leases equipment under capital lease agreements that expire at
various dates through 2003. The lease agreements generally provide purchase
options and require the Company to pay property taxes, utilities and insurance.
F-17
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments under capital leases at July 31, 1999 are as
follows:
Year ended July 31:
2000 $1,701,911
2001 $1,176,026
2002 699,375
2003 81,714
2004 23,938
----------
Total minimum lease payments 3,682,964
Less amounts representing interest (325,227)
----------
Less current portion 3,357,737
Long-term obligations under capital
leases 1,701,911
----------
$1,655,826
OPERATING LEASES
The Company leases 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 $4.2 million,
$2.1 million and $2.5 million for the years ended July 31, 1999, 1998 and 1997,
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, 1999
are as follows:
Year ended July 31:
2000 $ 2,424,189
2001 1,907,764
2002 1,827,512
2003 1,640,545
2004 1,075,318
Thereafter 3,643,839
-----------
Total minimum lease $12,519,167
===========
ROYALTIES
The Company markets its products under a variety of licensed trademarks
for which the Company pays associated royalties based on sales of the related
products. Approximately 70.1%, 64.2% and 59.7% of the Company's net sales in
fiscal 1999, 1998 and 1997, respectively, were derived from product lines based
on licensed entertainment characters or corporate trademarks. The Company's
products based on licensed trademarks for Looney Tunes' characters accounted for
46.8%, 50.6% and 37.5% of net sales in fiscal 1999, 1998 and 1997, 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 three
years and include guaranteed
F-18
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-19
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
minimum royalty payments and advertising commitments over the life of the
agreements. Royalty expense is recorded based on sales for the period multiplied
by the contractual royalty rate specified in the related licenses and included
in cost of sales.
The Company has estimated that projected future revenues over the
remaining terms of three significant license agreements will be insufficient to
allow the Company to earn-out the guaranteed minimum royalties advanced or
required to be paid to the licensor over the remaining terms of the agreements
that commenced in 1998 and will end in fiscal 2001. Accordingly, the Company
recorded a provision totaling $14.9 million in the fourth quarter of fiscal 1999
for the estimated guaranteed minimum royalty shortfall associated with these
licenses and is reflected in cost of sales in the accompanying consolidated
statement of operations.
In addition, two of the three above indicated licenses also require the Company
to incur certain types and amounts of advertising and promotional expenditures
relative to the licensed properties. Given the level of advertising and
promotional expenditures incurred to date by the Company, the risk exists that
the Company will not meet the advertising commitments specified in the license
agreements. Accordingly, the Company's failure to meet these commitments by the
expiration date of the licenses could impact its ability to obtain a renewal on
favorable terms, if at all, or secure additional licenses from the licensor. The
Company is in the process of negotiating extensions of the license terms and
concessions relative to the remaining guaranteed minimum royalties and the
advertising commitments. These negotiations are expected to be completed by the
end of the first quarter of calendar 2000, however, there can be no assurance
that the Company will be able to secure the extensions or concessions it is
seeking from the licensor.
Future unpaid or unaccrued guaranteed minimum royalty obligations, in the
aggregate amount of $8.4 million, are due in various amounts through fiscal
2002.
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 $2.1 million at July 31, 1999, 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.
As of July 31, 1999, the Company's Spanish subsidiary had $1.0 million
outstanding in irrevocable letters of credit.
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.
F-19
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In December 1997, a legal action was instituted against the Company by an
individual alleging claims for unfair competition (misappropriation), breach of
contract, breach of implied in fact contract, and quasi contract in connection
with alleged infringement resulting from the sale of Tornado Taz(TM). The
plaintiff seeks to recover the Company's profits on the sale of the toy in
question which could be as much as $2 million or more, or alternatively the
plaintiff may seek to recover royalties as a measure of damages. The Company
responded by denying the essential allegations of the complaint and by filing
counterclaims. The plaintiff filed motions for summary judgement for dismissal
of the claims and counterclaims. On January 21, 1999, a judge in the United
States District Court Southern District of New York granted both the defendant's
and plaintiff's motions for summary judgement dismissing the claims and
counterclaims. On February 19, 1999, the plaintiff filed a notice of appeal with
respect to the court's granting the Company's motion for summary judgement. The
Company filed a similar notice on February 25, 1999 regarding the courts
granting plaintiffs motion for summary judgement. The matter is pending
scheduling by the court of appeals. The Company is vigorously contesting the
claims and management believes that the plaintiff has no basis for its claims.
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 promotion campaign for the first time in fiscal 1997 in
conjunction with the introduction of the Talkin' Tots(TM) and Tornado Taz(TM).
In fiscal 1999, the television advertising costs were incurred principally in
conjunction with Talkin Tunes and Tornado Taz(TM), and in fiscal 1998, the
television advertising costs were incurred principally in conjunction with
Talkin' Tots(TM), Talkin' Tunes and Tornado Taz(TM). The Company's total
television advertising expenses were $1.9 million, $5.7 million and $1.3 million
during fiscal 1999, 1998 and 1997, respectively. The Company's total advertising
expenses, including television advertisement costs, were $5.8 million, $7.6
million and $2.7 million during fiscal 1999, 1998 and 1997, respectively.
F-20
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAX
Income tax provision (benefit) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Federal:
Current provision (benefit) .............................. $ (2,825,777) $ 2,914,676 $ 974,246
Deferred provision (benefit) ............................. (654,059) (503,290) 554,229
------------ ------------ ------------
Total Federal .......................................... (3,479,836) 2,411,386 1,528,475
------------ ------------ ------------
State - current ............................................ -- 441,827 255,102
------------ ------------ ------------
Foreign - current .......................................... 539,532 1,693,974 940,573
------------ ------------ ------------
Net provision (benefit) for income taxes ................. $ (2,940,304) $ 4,547,187 $ 2,724,150
------------ ------------ ------------
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,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Income taxes (benefit) computed at Federal statutory rates . $(11,276,262) $ 4,417,267 $ 3,039,641
Foreign tax differentials .................................. 427,913 (23,834) (531,107)
Valuation allowance ........................................ 8,013,863 -- --
State tax provision ........................................ -- 291,606 168,367
Other - net ................................................ (105,818) (137,852) 47,249
------------ ------------ ------------
Total provision (benefit) ................................ $ (2,940,304) $ 4,547,187 $ 2,724,150
------------ ------------ ------------
</TABLE>
The tax effects of the significant temporary differences that comprise the
deferred tax assets and liabilities are as follows:
F-21
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Assets:
Current:
Accounts receivable ............................... $ 3,640,719 $ 1,515,765 $ 707,422
Capital loss carryover ............................ 135,693 135,693 135,693
Other - net ....................................... 867,642 483,848 324,971
Non-current - net operating losses .................. 5,376,199 -- --
------------ ------------ ------------
Gross deferred tax assets ....................... 10,020,253 2,135,306 1,168,086
------------ ------------ ------------
Liabilities:
Current - inventory ................................. 36,590 1,774,885 1,528,824
Non-current - basis of property and equipmen1,834,107 1,834,107 878,787 660,918
------------ ------------ ------------
Gross deferred tax liabilities .................... 1,870,697 2,653,672 2,189,742
------------ ------------ ------------
Net deferred tax assets (liabilities) before
valuation allowance ............................... 8,149,556 (518,366) (1,021,656)
------------ ------------ ------------
Less valuation allowance .......................... (8,149,556) (135,693) (135,693)
------------ ------------ ------------
Net deferred tax liabilities .................... $ -- $ (654,059) $ (1,157,349)
------------ ------------ ------------
</TABLE>
Due to the Company's loss in fiscal 1999, the Company has recorded a
valuation allowance equal to the net deferred tax asset due to the possibility
that the net deferred tax asset may not be realized. Also during fiscal 1998 and
1997, 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.
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.
As of July 31, 1999, the Company had net operating loss carryfowards of
approximately $15.8 million that expire in fiscal 2019 and are available to
offset future taxable income.
F-22
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SHAREHOLDERS' EQUITY
SECONDARY OFFERING
On December 2, 1997, the Company sold 2,300,000 shares of its common stock
in a follow-on public offering at a price of $16.00 per share. The total number
of shares sold included 300,000 related to underwriters' over-allotment option,
which was exercised in full. The net proceeds from the issuance and sale of
common stock amounted to $34.1 million after deducting underwriters' discounts
and other expenses. In December 1997, a portion of the net proceeds was used to
repay indebtedness of approximately $21.3 million outstanding under the Old
Credit Facility and $12.8 million was used to fund the Company's operations.
STOCK OPTIONS
The Company has a Non-Qualified Stock Option Plan and a 1994 Incentive
Plan (the "Plans"). The Company has reserved 1,300,000 shares of its common
stock for issuance upon exercise of options granted or to be granted under these
Plans. The vesting period for options generally ranges from six months to five
years from the date of the grant. 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 Stock Options granted under the Plans
is generally ten years; the maximum term is five years for incentive stock
options granted to shareholders who own 10% or more of the Company's Common
Stock).
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 equally from February 1, 1997 through
February 1, 2002. The Company recognized $140,000 of compensation expense in
both fiscal 1999 and 1998 and $81,667 in fiscal 1997 and has a balance of
$338,333, $478,333 and $618,333 in unearned compensation as of July 31, 1999,
1998 and 1997, respectively, related to these options.
In fiscal 1997, 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 re-pricing, which was $11.00, or 110% of fair
market value for beneficial owners. The resolution was approved at the Annual
Meeting of Shareholders on December 11, 1997. 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 expense has been recognized for the stock plan.
F-23
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's stock options as of July 31,
1999, 1998, and 1997 and the changes during the year ended on those dates is
presented below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JULY 31,
---------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES OF AVERAGE # SHARES OF AVERAGE # SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year ................ 1,833,000 $ 15.32 959,800 $ 10.71 624,000 $ 12.29
Granted .................. 11,000 $ 7.25 1,034,000 $ 18.99 412,000 $ 9.66
Exercised ................ -- $ -- 111,900 $ 11.82 20,200 $ 12.57
Forfeited ................ 114,600 $ 17.23 24,140 $ 13.47 49,300 $ 11.28
Expired .................. 215,300 $ 15.76 24,760 $ 11.10 6,700 $ 13.73
Outstanding at end of year 1,514,100 $ 15.31 1,833,000 $ 15.32 959,800 $ 10.71
Exercisable at end of year 973,910 $ 14.87 562,640 $ 12.76 394,700 $ 12.10
</TABLE>
1999 1998 1997
---- ---- ----
Weighted-average fair value of
options granted at premium - - $1.83
Weighted-average fair value of
options granted at-the-money $3.33 $7.26 $3.62
Weighted-average fair value of
granted at a discount - - $5.81
Weighted-average fair value of
modifications to options - - $1.09
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 1999, 1998 and 1997: dividend yield of 0.00%;
risk-free interest rate of from 4.64% to 6.07%; 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 45.6%, 30.4% and 23.6% in fiscal 1999, 1998 and 1997,
respectively.
During fiscal 1997, 159,000 previously granted options were modified to
reduce the exercise price. The "Outstanding at the 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 1998 and 1997.
F-24
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SHAREHOLDERS' EQUITY (CONTINUED)
Options outstanding as of July 31, 1999 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>
$7.25 to $13.00 ............... 467,000 7.24 $ 9.48 326,600 $ 9.97
$13.01 to $15.95 .............. 235,600 5.83 $ 14.12 220,710 $ 14.06
$15.96 to $19.63 .............. 811,500 8.23 $ 19.02 426,600 $ 19.05
------------ ------------ ------------ ------------ ------------
$7.25 to $19.63 ............... 1,514,100 7.55 $ 15.32 973,910 $ 14.87
------------ ------------ ------------ ------------ ------------
</TABLE>
According to the terms of the Convertible Debenture Agreement, as amended
on October 22, 1999, the Company's ability to issue stock options to employees
is limited to the amount of options held by employees in the aggregate as of the
date of the amendment.
NON-EMPLOYEE STOCK OPTIONS
In addition to the options described above, the Company granted 3,000
non-employee stock options with an exercise price of $13.48 to a non-employee
during fiscal 1995. During fiscal year 1998, the non-employee exercised 1,800
options. As of July 31, 1999, 1,200 non-employee stock options were outstanding
with a remaining contractual term of 7.85 years.
PRO FORMA NET INCOME AND NET INCOME PER COMMON SHARE
Had the compensation cost for the Company's Plans been determined
consistent with SFAS 123, the Company's net income (loss) and net income (loss)
per common share for fiscal 1999 and 1998 would approximate the pro forma
amounts below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
7/31/99 7/31/99 7/31/98 7/31/98
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SFAS 123 charge .................. -- $ 1,538,265 -- $ 1,501,047
APB 25 charge .................... $ 140,000 $ 140,000 $ 140,000 $ 140,000
Net income (loss) ................ $(30,230,347) $(31,628,612) $ 8,444,775 $ 7,083,728
Net income (loss) per common share $ (4.12) $ (4.31) $ 1.30 $ 1.09
</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.
The Company issued to the Sellers of Ace, a warrant to purchase up to
35,000 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.
F-25
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SHAREHOLDERS' EQUITY (CONTINUED)
In connection with the execution of certain license agreements in January
1998, the Company issued to Warner Bros. Consumer Products, a division of Time
Warner Entertainment Company, L. P., a warrant (the "Warner Bros. Warrant") to
purchase up to 100,000 shares of the Company's common stock at a price per share
of $15.4375. The warrant may be exercised in full or in part between January 1,
1998 and December 31, 2000.
PREFERRED STOCK
Pursuant to the Company's Articles of Incorporation, the Board is
authorized to issue up to 10,000,000 shares of Preferred Stock, in one or more
series, and is authorized to fix the dividend rights, or rates, any conversion
rights or rights of exchange or redemption, any voting right, any rights and
terms or prices of redemption (including sinking fund provisions), the
liquidation preferences and any other rights, preferences, privileges and
restrictions of any series of Preferred Stock as well as the number of shares
and series designation. The Company has never issued any Preferred Stock and
there were no shares of Preferred Stock outstanding as of July 31, 1999 or 1998.
14. ACQUISITION
In March 1999, the Company, through a wholly-owned subsidiary, acquired
substantially all of the assets and certain liabilities of Caribe for the
purchase price of $2.5 million consisting of 80,000 shares of the Company's
common stock, and the assumption of a seller note. The shares had a fair market
value of $500,000 at the date the transaction was announced. The Company
incurred $45,500 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 the acquisition. The
excess of the purchase price over net assets acquired resulted in goodwill of
$2.8 million, which is being amortized on a straight-line basis over 20 years.
Caribe's operating results have been included in the Company's consolidated
financial statements since the date of the acquisition.
15. TRANSACTIONS WITH RELATED PARTIES
The principal shareholder leases seven land and building packages to third
parties with whom the Company incurred costs of $142,000, $436,000, and $700,000
million in the years ended July 31, 1999, 1998 and 1997, respectively, for
revenue sharing arrangements in connection with the Company's vending
operations.
One of the Company's directors is affiliated with an insurance agency that
provided certain property, casualty and liability insurance to the Company in
fiscal years 1998 and 1997. The Company paid premiums on policies issued by the
affiliated insurance agency totaling $272,600 and $956,000 during fiscal year
1998 and 1997, respectively. Such payments amounted to 50.8% and 100.0% in
fiscal 1998 and 1997, respectively, of all payment made by the Company to all
insurance agents for such coverage.
F-26
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information with respect to payments of interest
and income taxes is as follows:
YEAR ENDED JULY 31,
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
Interest paid ............... $4,377,084 $3,948,834 $3,794,534
Income taxes paid ........... 602,570 2,565,861 942,437
The Company incurred capital lease and other debt obligations of $2.4
million, $1.6 million and $1.2 million in the years ended July 31, 1999, 1998
and 1997, respectively.
The Company recorded $700,000 as deferred compensation related to the
options to purchase up to 200,000 shares of common stock, granted to an officer
in January 1997. At July 31, 1999, the unamortized balance was $338,333.
In fiscal year 1998, in connection with the Warner Bros. Warrant (see Note
13), the Company recorded $522,000 as a prepaid royalty with an offsetting
increase in additional paid-in capital. The prepaid royalty is being amortized
to expense on a straight-line basis over the life of the related licenses, which
terminate December 2000.
The Company issued 80,000 shares of the Company's common stock with a
value of $500,000 on the date of acquisition and recorded a reduction of
accounts receivable from Caribe of approximately $2.0 million in connection with
the acquisition of Caribe.
F-27
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized operating results of the Company by quarter for fiscal years
1999 and 1998 are presented as follows (in thousands, except per share data).
<TABLE>
<CAPTION>
1999
-------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ............................................ $ 55,727 28,432 35,683 36,673
Gross profit (loss) .................................. 16,774 9,019 10,725 (9,585)
Operating income (loss) .............................. 3,410 (2,363) (4,480) (25,443)
Net income (loss) .................................... 1,426 (1,912) (3,609) (26,135)
Net income (loss) per share - basic .................. 0.20 (0.26) (0.49) (3.57)
Net income (loss) per share - diluted ................ 0.20 (0.26) (0.49) (3.57)
<CAPTION>
1998
-------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Net sales ............................................ $ 58,418 $ 30,867 $ 37,262 $ 51,556
Gross profit ......................................... 20,538 10,837 12,746 17,226
Operating income ..................................... 6,505 912 3,447 6,395
Net income ........................................... 3,457 41 1,686 3,261
Net income per share - basic ......................... 0.71 0.01 0.23 0.45
Net income per share - diluted ....................... 0.58 0.01 0.22 0.41
</TABLE>
(1) Includes provisions for guaranteed minimum royalty shortfalls of $14.9
million, inventory write-down reserves of $4.5 million, and specific
allowances for doubtful accounts of $4.1 million.
F-28
<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 (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.
E-2
<PAGE>
INDEX TO EXHIBITS (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).
10.16 First Amendment to Convertible Loan Agreement made as of October 22,
1999, by and among the Company, Renaissance Capital Group, Inc., and
the Convertible Lenders party to the original Convertible Loan
Agreement.
10.17 Loan and Security Agreement dated October 25, 1999 by and among
Congress Financial Corporation (Southwest), the Company, Ace Novelty
Co., Inc., Newco Novelty, Inc., and Friends, Food & Games, Inc.
23.1 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
E-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors
of Play By Play Toys & Novelties, Inc. and Subsidiaries
Our audits of the consolidated financial statements referred to in our report
dated November 12, 1999 appearing on page F-2 of this 1999 Annual Report on Form
10-K also included an audit of the financial statement schedule listed in Item
14 (a) (2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Austin, Texas
November 12, 1999
S-1
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE ADDITIONS BALANCE
AT BEGINNING CHARGED TO COSTS AT END
OF PERIOD AND EXPENSES DEDUCTIONS* OF PERIOD
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended July 31, 1997 ............... 1,621,603 2,024,847 432,797 3,213,653
Year ended July 31, 1998 ............... 3,213,653 2,173,736 125,336 5,262,053
Year ended July 31, 1999 ............... 5,262,053 6,330,132 3,615,201 7,976,984
---------------
*Net of recoveries of $30,000, $56,987, and $24,406 in 1999, 1998, and 1997, respectively.
Reserves for slow moving inventory:
Year ended July 31, 1999 ............... 703,740 4,483,128 292,622 4,894,246
</TABLE>
S-2
FIRST AMENDMENT TO CONVERTIBLE LOAN AGREEMENT
THIS FIRST AMENDMENT TO CONVERTIBLE LOAN AGREEMENT (this "Amendment") made
as of October 22, 1999, by and among Play by Play Toys & Novelties, Inc., a
Texas corporation ("Borrower"), Renaissance Capital Group, Inc., a Texas
corporation ("Agent"), and the Lenders party to the Original Agreement defined
below ("Lenders").
R E C I T A L S
A. Borrower, Agent and Lenders entered into that certain Convertible Loan
Agreement dated as of July 3, 1997 (as amended and supplemented to the date
hereof, the "Original Agreement"), for the purpose and consideration therein
expressed, whereby Lenders became obligated to make loans to Borrower as therein
provided.
B. Borrower, Agent and Lenders desire to amend the Original Agreement and
the Debentures to waive certain Defaults existing thereunder and amend certain
terms thereof, in connection with the closing of Borrower's senior credit
facility with Congress Financial Corporation (Southwest) ("Congress").
In consideration of the premises and the mutual covenants and agreements
contained herein and in the Original Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS AND REFERENCES
1.1 TERMS DEFINED IN THE ORIGINAL AGREEMENT. Unless the context otherwise
requires or unless otherwise expressly defined herein, the terms defined in the
Original Agreement shall have the same meanings whenever used in this Amendment.
1.2 OTHER DEFINED TERMS. Unless the context otherwise requires, the
following terms when used in this Amendment shall have the meanings assigned to
them in this Section 1.2.
"Amendment" means this First Amendment to Convertible Loan
Agreement.
"Amendment Documents" means this Amendment, the Security
Agreement, the
Deed of Trust and the Subordination Agreement.
"Congress Facility" means that certain Loan and Security Agreement
dated of even date herewith by and among Borrower, Ace Novelty Co., Inc.,
Newco Novelty, Inc., as borrowers, Friends Food & Games, Inc., as
guarantor and Congress, as from time to time amended, modified or
restated.
-1-
<PAGE>
"Deed of Trust" means that certain Deed of Trust of even date
herewith made by Ace Novelty Acquisition Co., Inc., in favor of Agent for
the Lenders.
"Loan Agreement" means the Original Agreement as amended hereby.
"Security Agreement" means that certain Security Agreement dated of
even date herewith executed by Borrower in favor of Agent and Bank One
Capital Partners II, L.L.C.
"Subordination Agreement" means that certain Intercreditor and
Subordination Agreement dated of even date herewith among Congress,
Lenders and Agent.
ARTICLE II
AMENDMENTS TO LOAN DOCUMENTS
2.1 AMENDMENT OF TERMS. The Loan Documents are hereby amended as follows:
(a) DEFINITION OF CREDIT AGREEMENT. The term "Credit Agreement" is hereby
amended to mean the Congress Facility.
(b) INTEREST RATE. Section 2.03 of the Original Agreement and Section 1 of
each Debenture are amended to provide that interest on the Principal Amount
outstanding from time to time shall bear interest at the rate of 10.5% per
annum.
(c) MATURITY. Section 2.04 of the Original Agreement and Section 2 of each
Debenture are amended to provide that the Debentures shall mature on December
31, 2000.
(d) CONVERSION PRICE.
(i) Section 6(a)(v) of the Debentures is hereby amended by adding
the following to the fourth line following the word "options": "(and
stock options granted after the date of the Amendment to employees
of Borrower (other than executive officers of Borrower) in an
aggregate amount not to exceed the outstanding options held by such
employees as of the date of the Amendment.)".
(ii) Effective 31 days from the date of this Amendment, the
Conversion Price provided under Section 6(a) of the Debentures shall
be amended (the "First Reset") to equal the lesser of (i) $16 per
share and (ii) the greater of (A) $6 per share and (B) the average
closing price of the Common Stock for the trading days included in
the 30 day period beginning on the date following the date of this
Amendment. In addition, if Borrower fails to pay in full all
outstanding principal and accrued interest on the Debentures on
December 31, 2000, the Conversion Price shall be amended (the
"Second Reset") to equal the lesser of (i) the Conversion Price
determined in accordance with the preceding sentence and (ii)
-2-
<PAGE>
the average closing price of the Common Stock of Borrower for the
trading days in December 2000. Promptly following each
redetermination of the Conversion Prices as provided in this Section
2.1(e), Borrower shall give each Lender notice of the Conversion
Price as so redetermined, together with support for the calculation
thereof. The foregoing adjustment is in addition of the provisions
of Section 6(a)(i) of the Debentures.
(e) FINANCIAL COVENANTS. Section 7.01 of the Original Agreement is
hereby amended
by deleting such section in its entirety.
(f) EVENTS OF DEFAULT: Section 8.01 (a)(iii) of the Original Agreement is
hereby amended by adding the following to the second line following the word
"Documents,": "or in
Section 9.16 of the Congress Facility,"
ARTICLE III
ADDITIONAL AGREEMENTS
3.1 WAIVER OF EXISTING DEFAULTS; CONSENT TO TRANSACTIONS. Lenders hereby
irrevocably waive each Default existing under the Loan Documents as of the date
of this Amendment. Lenders further consent and agree that the transactions
contemplated by ( and the performance by the Company and its Subsidiaries of
their respective obligations under) (i) the Congress Facility and (ii) that
certain Settlement Agreement and Mutual Release of Claims dated as of October
19, 1999, attached as Appendix A hereto shall not constitute a Default under
Loan Documents.
3.2 AMENDMENT DOCUMENTS. Concurrently with the execution and delivery of
this Amendment, Lenders and Borrower have executed and delivered the other
Amendment Documents, which, together with this Amendment, shall become a part of
the
Loan Documents.
3.3 ACCRUAL AND PAYMENT OF PAST DUE INTEREST. Notwithstanding the terms of
the Loan Documents, interest on the Debentures from June 1, 1999 shall be
accrued at a rate of 10.5% per annum. Interest accrued for the period from June
1, 1999 through the date of this Amendment shall be payable as follows:
(i) One-half upon the execution and delivery of this Amendment;
(ii) One-sixth on October 31, 1999;
(iii) One-sixth on November 30, 1999; and
(iv) One-sixth on December 31, 1999.
3.4 FINANCIAL REPORTING. Borrower shall provide each Lender with monthly
financial information 45 days following the end of each month (60 days for the
months of October,
-3-
<PAGE>
November and December 1999), consisting of monthly income statements and balance
sheets, budgets and such other information as may be reasonably requested from
time to time in writing by Lenders, and quarterly cash flow statements within 45
days after the end of each fiscal quarter and 90 days after the end of each
fiscal year.
3.5 REGISTRATION OF UNDERLYING COMMON STOCK. As soon as practicable
following the determination of the First Reset and the Second Reset, Borrower
shall use its best efforts to cause all shares of Common Stock issuable upon
conversion of the Debentures to be registered under the Securities Act of 1933,
as amended.
3.6 SIZE OF BOARD OF DIRECTORS. After the date of this Amendment, without
the prior written consent of the Required Lenders, the size of Borrowers' Board
of Director shall not
exceed nine members.
3.7 OBSERVATION RIGHTS. Borrower shall give Agent the same written notice
of each meeting of its board of directors as is given to the members of the
board of directors, and Borrower shall permit two representatives designated by
Agent (the "Lender Representatives") to attend as observers all meetings of its
board of directors and comment on matters discussed at such meetings; provided,
that in the case of telephonic meetings conducted in accordance with Borrower's
bylaws and applicable law, the Lender Representatives need receive only actual
notice thereof at least 48 hours prior to any such meeting, and the Lender
Representatives shall be given the opportunity to listen to such telephonic
meetings. The Lender Representatives shall be entitled to receive all written
materials and other information (including, without limitation, copies of
meeting minutes) given to directors in connection with such meetings at the same
time such materials and information are given to the directors. If Borrower
proposes to take any action by written consent in lieu of a meeting of its board
of directors, Borrower shall give written notice thereof to the Lender
Representatives prior to the effective date of such consent describing in
reasonable detail the nature and substance of such action.
3.8 LENDER DIRECTORS. If Borrower fails to pay in full all outstanding
principal and accrued interest on the Debentures on December 31, 2000, Borrower
shall cause those persons designated from time to time by holders of a majority
of the outstanding principal amount of the Debentures (the "Lender Directors")
to be appointed as members of the Board of Directors of Borrower. The holders of
the Debentures may elect not to designate one or more of such persons, and in
such case the Company shall be free to nominate other persons to fill such
directorships. The number of Lender Directors shall be the greater of (i) three
and (ii) a proportion of the full Board of Directors as equal as possible to the
percentage of Lenders' ownership of Common Stock on an as converted basis.
Borrower shall nominate the Lender Directors for election as members of its
Board of Directors until the Debentures have been paid in full.
3.9 TITLE POLICY. Borrower shall use its best efforts to cause a CLTA Loan
policy to be issued in favor of Agent as soon as practicable after the date
hereof. Such loan policy shall cover the real property subject to the lien of
the Deed of Trust, and shall insure the title of Ace
-4-
<PAGE>
Novelty Acquisition Co., Inc. to such property and the lien in favor of Agent
created under the
Deed of Trust.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS AND WARRANTIES OF BORROWER. In order to induce each
Lender to enter into this Amendment, Borrower represents and warrants to each
Lender
that:
(a) Borrower is duly authorized to execute and deliver this Amendment and
each of the other Amendment Documents and is duly authorized to perform its
obligations under the Loan Documents. Borrower has duly taken all corporate
action necessary to authorize the execution and delivery of this Amendment and
each of the other Amendment Documents and to authorize the performance of the
obligations of Borrower hereunder and thereunder.
(b) The execution and delivery by Borrower of this Amendment and each of
the other Amendment Documents, the performance by Borrower of its obligations
hereunder and thereunder and the consummation of the transactions contemplated
hereby and thereby do not and will not conflict with any provision of law,
statute, rule or regulation or of the articles of incorporation and bylaws of
Borrower, or of any material agreement, judgment, license, order or permit
applicable to or binding upon Borrower, or, except as provided in the Security
Agreement, result in the creation of any lien, charge or encumbrance upon any
assets or properties of Borrower. Except for those which have been obtained, 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 this Amendment and each of the other Amendment Documents or to
consummate the transactions contemplated hereby and thereby.
(c) When duly executed and delivered, each of this Amendment and the other
Amendment Documents will be a legal and binding obligation of Borrower,
enforceable in accordance with its terms, except as limited by bankruptcy,
insolvency or similar laws of general application relating to the enforcement of
creditors' rights and by equitable principles of general application.
4.2 REPRESENTATIONS AND WARRANTIES OF LENDERS. Each Lender hereby
represents and warrants to Borrower that it owns and holds as of the date hereof
the Debentures purchased by it under the Original Agreement, and is duly
authorized to execute and deliver this Amendment.
ARTICLE V
MISCELLANEOUS
5.1 RATIFICATION OF AGREEMENTS. The Original Agreement as hereby amended
is hereby ratified and confirmed in all respects. The Loan Documents, as they
may be amended or
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<PAGE>
affected by the various Amendment Documents, are hereby ratified and confirmed
in all respects. Any reference to the Loan Agreement in any Loan Document shall
be deemed to be a reference to the Original Agreement as hereby amended. Any
reference to the Debentures in any Loan Document shall be deemed to be a
reference to the Debentures are hereby amended. The execution, delivery and
effectiveness of this Amendment shall not, except as expressly provided herein,
operate as a waiver of any right, power or remedy of Lenders under the Loan
Agreement, the Debentures or any other Loan Document nor constitute a waiver of
any provision of the Loan Agreement, the Debentures or any other Loan Document.
5.2 SURVIVAL OF AGREEMENTS. All representations, warranties, covenants and
agreements of Borrower herein shall survive the execution and delivery of this
Amendment and the performance hereof, and shall further survive until all of the
Obligations are paid in full. All statements and agreements contained in any
certificate or instrument delivered by Borrower hereunder or under the Credit
Agreement to any Lender shall be deemed to constitute representations and
warranties by, and/or agreements and covenants of, Borrower under this Amendment
and under the Loan Agreement.
5.3. LOAN DOCUMENTS. This Amendment and each of the other Amendment
Documents are each a Loan Document, and all provisions in the Loan Agreement
pertaining to Loan Documents apply hereto and thereto.
5.4. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance the laws of the State of Texas and any applicable laws of the United
States of America in all respects, including construction, validity and
performance.
5.5. COUNTERPARTS; FAX. This Amendment may be separately executed in
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed shall be deemed to constitute one and the same
Amendment. This Amendment and the other Amendment Documents may be validly
executed by facsimile or other electronic transmission.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT
THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, this Amendment is executed as of the date first above
written.
PLAY BY PLAY TOYS & NOVELTIES,
INC.
By:__________________________________
Name:
Title:
RENAISSANCE US GROWTH &
INCOME TRUST PLC
By:__________________________________
Name:
Title:
RENAISSANCE CAPITAL GROWTH &
INCOME FUND III, INC.
By:__________________________________
Name:
Title:
BANC ONE CAPITAL PARTNERS II,
LLC
By: Banc One Capital Partners
Holdings,
Ltd., Manager
By:__________________________________
Name:
Title:
RENAISSANCE CAPITAL GROUP,
INC., AS AGENT
By:__________________________________
Name:
Title:
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EXECUTION
LOAN AND SECURITY AGREEMENT
by and among
CONGRESS FINANCIAL CORPORATION (SOUTHWEST)
as Lender
and
PLAY BY PLAY TOYS & NOVELTIES, INC.
ACE NOVELTY CO., INC.
NEWCO NOVELTY, INC.
as Borrowers
FRIENDS, FOOD & GAMES, INC.
as Guarantor
Dated: October 25, 1999
<PAGE>
TABLE OF CONTENTS
Page
[Table of Contents will generate here]
(i)
<PAGE>
INDEX TO
EXHIBIT AND SCHEDULES
Exhibit A Information Certificate for Play By Play
Information Certificate for Ace
Information Certificate for Newco
Information Certificate for Friends
Information Certificate for PBP Europe
Information Certificate for PBP UK
Information Certificate for Caribe
Information Certificate for PBP Far East
Schedule 1.28 Customs Brokers
Schedule 1.49 Existing Lenders
Schedule 1.50 Existing Letters of Credit
Schedule 4.1(p) List of Certain Licensors
Schedule 8.4 Existing Liens
Schedule 8.5 Tax Liens
Schedule 8.7 Compliance with Agreements
Schedule 8.8 Bank Accounts
Schedule 8.9 Environmental Compliance
Schedule 8.14 List of License Agreements and Intellectual
Property
Schedule 8.16 Material Contracts
Schedule 8.17 Credit Card Agreements
Schedule 9.9 Existing Indebtedness
Schedule 9.10 Loans, Advances and Guarantees
(ii)
<PAGE>
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated October 25, 1999 is entered into by
and among Congress Financial Corporation (Southwest), a Texas corporation
("Lender"), Play By Play Toys & Novelties, Inc., a Texas corporation ("Play By
Play"), Ace Novelty Co., Inc., a Texas corporation ("Ace"), Newco Novelty, Inc.,
a Texas corporation ("Newco", and together with Play By Play, and Ace,
individually each a "Borrower" and collectively, "Borrowers"), Friends, Food &
Games, Inc., a Nevada corporation ("Friends").
W I T N E S S E T H:
WHEREAS, Borrowers and Guarantor (as such term is defined below) have
requested that Lender enter into certain financing arrangements with Borrowers
pursuant to which Lender may make loans and provide other financial
accommodations to Borrowers; and
WHEREAS, Lender is willing to make such loans and advances and provide
such financial accommodations on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS
All terms used herein which are defined in Article 1 or Article 9 of the
Uniform Commercial Code shall have the meanings given therein unless otherwise
defined in this Agreement. All references to the plural herein shall also mean
the singular and to the singular shall also mean the plural. All references to
Borrowers pursuant to the definitions set forth in the recitals hereto, unless
the context otherwise requires, shall mean each and all of them and their
respective successors and assigns, individually and collectively, jointly and
severally. All references to Guarantor pursuant to the definition set forth in
the recitals hereto, unless the context otherwise requires, shall mean each and
all of them and their respective successors and assigns, individually and
collectively, jointly and severally. All references to Lender pursuant to the
definitions set forth in the recitals hereto, or to any other person herein,
shall include their respective successors and assigns. The words "hereof",
"herein", "hereunder", "this Agreement" and words of similar import when used in
this Agreement shall refer to this Agreement as a whole and not any particular
provision of this Agreement and as this Agreement now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced. The
word "including" when used in this Agreement shall mean "including, without
limitation". An Event of Default shall exist or continue or be continuing until
such Event of Default is waived in accordance with Section 11.3 or is cured in a
manner satisfactory to Lender if such Event of Default is capable of being cured
as determined by Lender. Any accounting term used herein unless otherwise
defined in this Agreement shall have the meanings customarily given to such term
in accordance with GAAP. For purposes of this Agreement, the following terms
shall have the respective meanings given to them below:
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<PAGE>
1.1 "ACE" shall mean Ace Novelty Co. Inc., a Texas corporation and its
successors and assigns.
1.2 "ACCOUNTS" shall mean all present and future rights of each Borrower
to payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance and including Credit
Card Receivables.
1.3 "ADJUSTED EURODOLLAR RATE" shall mean, with respect to each Interest
Period for any Eurodollar Rate Loan, the rate per annum (rounded upwards, if
necessary, to the next one-sixteenth (1/16) of one (1%) percent) determined by
dividing (a) the Eurodollar Rate for such Interest Period by (b) a percentage
equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes hereof,
"Reserve Percentage" shall mean the reserve percentage, expressed as a decimal,
prescribed by any United States or foreign banking authority for determining the
reserve requirement which is or would be applicable to deposits of United States
dollars in a non-United States or an international banking office of Reference
Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate Loan made with
the proceeds of such deposit, whether or not the Reference Bank actually holds
or has made any such deposits or loans. The Adjusted Eurodollar Rate shall be
adjusted on and as of the effective day of any change in the Reserve Percentage.
1.4 "AFFILIATE" shall mean, with respect to a specified Person, a
partnership, corpor ation or any other person which directly or indirectly,
through one or more intermediaries, controls or is controlled by or is under
common control with such Person, and without limiting the generality of the
foregoing, includes (a) any Person which beneficially owns or holds five (5%)
percent or more of any of any class of voting securities of such Person or other
equity interests in such Person; (b) any Person of which such Person
beneficially owns or holds five (5%) percent or more of any class of voting
securities or in which such Person beneficially owns or holds five (5%) percent
or more of the equity interests; and (c) any director, officer or employee of
such Person. For the purposes of this definition, the term "control" (including
with correlative meanings, the terms "controlled by" and "under common control
with"), as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities or
by contract or otherwise.
1.5 "APPLICABLE SEASONAL ADVANCE RATE PERCENTAGE" shall mean, for purposes
of Section 2.1(a)(ii) hereof, the following percentages for the periods
indicated below:
(i) fifty-five (55%) percent for the period commencing the date of
this Agreement through and including May 31, 2000;
(ii) fifty (50%) percent for the period from and including June 1
of any calendar year through and including November 30, of the same
calendar year; and
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<PAGE>
(iii)fifty-five (55%) percent for the period commencing December 1
(commencing with calendar year 2000) of any calendar year through
and including May 31of the immediately succeeding calendar year.
1.6 "AVAILABILITY RESERVES" shall mean, as of any date of determination,
such amounts as Lender, may from time to time establish and revise in good faith
reducing the amount of Loans and Letter of Credit Accommodations which would
otherwise be available to any Borrower under the lending formula(s) provided for
herein: (a) to reflect events, conditions, contingencies or risks which, as
determined by Lender in good faith, do or may affect either (i) the Collateral
or any other property which is security for the Obligations or its value, (ii)
the assets, business or prospects of any Borrower or Obligor or (iii) the
security interests and other rights of Lender in the Collateral (including the
enforceability, perfection and priority thereof) or (b) to reflect Lender's good
faith belief that any collateral report or financial information furnished by or
on behalf of any Borrower or Obligor to Lender is or may have been incomplete,
inaccurate or misleading in any material respect; or (c) to reflect outstanding
Letter of Credit Accommodations as provided in Section 2.2 hereof; or (d) to
reflect reserves for two (2) months of rental payments to lessors of real
property, and the amount of service charges or other amounts which may at any
time be payable as of the end of any calendar month to other third parties
(including, without limitation, Customs Brokers) to the extent Inventory or
Records are located in or on property or in the possession of such third party
or such Records are needed to monitor or otherwise deal with the Collateral
(except to the extent Lender may have received a Collateral Access Agreement in
form and substance satisfactory to it which provides for the waiver of any liens
or claims by the lessor or other third party); or (e) to reflect reserves for
real property taxes due to Bexar County, Texas, if Excess Availability is less
than $1,750,000; (f) to reflect Inventory shrinkage; or (g) to reflect reserves
for the difference between Value of Inventory reported on Borrowers' general
ledger and the Value of Inventory shown on perpetual reports delivered to Lender
pursuant to this Agreement; or (h) to reflect book reserves for Inventory of
divisions of Play By Play (exclusive of the one-time 1999 non-cash charge to
inventory to be set forth in the audited consolidated financial statements
included in the Form 10-K for the year ended July 31, 1999 to be filed by Play
By Play); or (i) in respect of any state of facts which Lender determines in
good faith constitutes an Event of Default or may, with notice or passage of
time or both, constitute an Event of Default; or (j) to reflect amounts owing by
a Borrower to Credit Card Issuers or Credit Card Processors in connection with
the Credit Card Agreements; or (k) to reflect Lender's good faith estimate of
any Priority Payables Reserve or Taxes due and payable or claimed due and
payable with respect to Newco's Canadian operations; or (l) to reflect any
material increase in Borrowers' Inventory of "Skins" over historical levels for
the period being measured. The amount of any Availability Reserve established by
Lender shall have a reasonable relationship to the event, condition or
circumstance which is the basis for such reserve as determined by Lender in good
faith. The term "Availability Reserves" as used herein shall also include, in
addition and without limitation, the Dilution Reserve and the Royalty Reserve.
1.7 "BANC ONE CAPITAL" shall mean Banc One Capital Partners LLC, a
Delaware limited liability company and its successors and assigns.
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1.8 "BASE CONSOLIDATED ADJUSTED NET WORTH" shall mean the Consolidated
Adjusted Net Worth as calculated by Lender from the audited financial statements
of Play By Play and its Subsidiaries for fiscal year end July 31, 1999.
1.9 "BASE DOMESTIC ADJUSTED NET WORTH" shall mean the Domestic Adjusted
Net Worth as calculated by Lender from the unaudited consolidating financial
statements of Play By Play and its Subsidiaries that were used in preparing the
audited financial statements for Play By Play and its Subsidiaries fiscal year
end July 31, 1999.
1.10 "BLOCKED ACCOUNTS" shall have the meaning set forth in Section 6.3
hereof.
1.11 "BORROWERS" shall mean the following, together with their respective
successors and assigns: (a) Play By Play Toys & Novelties, Inc., a Texas
corporation; (b) Ace Novelty Co. Inc., a Texas corporation; and (c) Newco
Novelty, Inc., a Texas corporation; each sometimes being referred to herein
individually as a "Borrower".
1.12 "BUSINESS DAY" shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks are authorized or required to close under
the laws of the State of Texas, the State of New York or the Commonwealth of
Pennsylvania, and a day on which the Reference Bank and Lender are open for the
transaction of business, except that if a determination of a Business Day shall
relate to any Eurodollar Rate Loans, the term Business Day shall also exclude
any day on which banks are closed for dealings in dollar deposits in the London
interbank market or other applicable Eurodollar Rate market.
1.13 "CANADIAN DOLLARS" AND "C$" shall each mean the lawful currency of
Canada.
1.14 "CAPITAL LEASES" shall mean, as applied to any Person, any lease of
(or any agreement conveying the right to use) any property (whether real,
personal or mixed) by such Person as lessee which in accordance with GAAP, is
required to be reflected as a liability on the balance sheet of such Person.
1.15 "CAPITAL STOCK" shall mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's capital stock, partnership interests or interests in any limited
liability company at any time outstanding, and any and all rights, warrants or
options exchangeable for or convertible into such capital stock or other
interests (but excluding any debt security that is exchangeable for or
convertible into such capital stock).
1.16 "CARIBE" shall mean Caribe Marketing & Sales Co., Inc., a company
incorporated under the laws of the Cayman Islands and its successors and
assigns.
1.17 "CASH EQUIVALENTS" shall mean, at any time, (a) any evidence of
Indebtedness with a maturity date of one hundred eighty (180) days or less
issued or directly and fully guaranteed or insured by the United States of
America or any agency or instrumentality thereof; PROVIDED, THAT, the full faith
and credit of the United States of America is pledged in support
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<PAGE>
thereof; (b) certificates of deposit or bankers' acceptances with a maturity of
one hundred eighty (180) days or less of any financial institution that is a
member of the Federal Reserve System having combined capital and surplus and
undivided profits of not less than
$250,000,000;
(c) commercial paper (including variable rate demand notes) with a maturity of
one hundred eighty (180) days or less issued or guaranteed by a corporation
(except an Affiliate of Borrower) organized under the laws of any State of the
United States of America or the District of Columbia or a bank organized under
the laws of any State of the United States of America or constituting a national
banking association under the laws of the United States of America, in each case
having a rating of at least A-1 by Standard & Poor's Ratings Service, a division
of The McGraw-Hill Companies, Inc. or at least P-1 by Moody's Investors Service,
Inc.; (d) repurchase obligations with a term of not more than thirty (30) days
for underlying securities of the types described in clause (a) above entered
into with any financial institution having combined capital and surplus and
undivided profits of not less than $250,000,000; (e) repurchase agreements and
reverse repurchase agreements relating to marketable direct obligations issued
or unconditionally guaranteed by the United States of America or issued by any
governmental agency thereof and backed by the full faith and credit to the
United States of America, in each case maturing within one hundred eighty (180)
days or less from the date of acquisition; PROVIDED, THAT, the terms of such
agreements comply with the guidelines set forth in the Federal Financial
Agreements of Depository Institutions with Securities Dealers and Others, as
adopted by the Comptroller of the Currency on October 31, 1985; and (f)
investments in money market funds and mutual funds which invest substantially
all of their assets in securities of the types described in clauses (a) through
(e) above.
1.18 "CHANGE OF CONTROL" shall mean (a) the transfer (in one transaction
or a series of related transactions) of all or substantially all of the assets
of any Borrower or Guarantor to any Person or group (as such term is used in
Section 13(d)(3) of the Exchange Act) other than to any other Borrower or
Guarantor; (b) the liquidation or dissolution of any Borrower or Guarantor or
the adoption of a plan by the stockholders of any Borrower or Guarantor relating
to the dissolution or liquidation of such Borrower or Guarantor; (c) the
acquisition by any Person or group (as such term is used in Section 13(d)(3) of
the Exchange Act) of beneficial ownership, directly or indirectly, of fifty
(50%) percent or more of the voting power of the total outstanding Voting Stock
of any Borrower or Guarantor, other than the Permitted Holder; (d) during any
period of two (2) years, individuals who at the beginning of such period
constituted the Board of Directors of any Borrower or Guarantor (together with
any new directors whose nomination for election was approved by a vote of at
least a majority of the directors then still in office who were either directors
at the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of such Borrower or Guarantor, then still in office; (e) the
failure of Play By Play to own one hundred (100%) percent of the voting power of
the total outstanding the Voting Stock of any of Ace, Newco, Guarantor; (f)
failure of Play By Play to own at least sixty-five (65%) percent of the voting
of the total Voting Stock of PBP Europe; (g) failure of Play By Play to own at
least ninety (90%) percent of the voting power of the total outstanding Voting
Stock of PBP Far East or (h) the failure of Arturo Torres to own at least
500,000 shares of the Voting Stock of Play By Play; PROVIDED, THAT, the death of
Arturo Torres shall not be deemed a "Change of Control."
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1.19 "CODE" shall mean the Internal Revenue Code of 1986, as the same now
exists or may from time to time hereafter be amended, modified, recodified or
supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
1.20 "COLLATERAl" shall have the meaning set forth in Section 5 hereof.
1.21 "COLLATERAL ACCESS AGREEMENT" shall mean an agreement in writing, in
form and substance satisfactory to Lender from any lessor of premises to a
Borrower or Guarantor, or any other person to whom any Collateral (including
Inventory, Equipment, bills of lading or other documents of title) is consigned
or who has custody, control or possession of any such Collateral or is otherwise
the owner or operator of any premises on which any of such Collateral is
located, pursuant to which such lessor, Customs Broker, consignee or other
person, INTER ALIA, acknowledges the first priority security interest of Lender
in such Collateral, agrees to waive any and all claims such lessor, consignee or
other person may, at any time, have against such Collateral, whether for
processing, storage of otherwise, and agrees to permit Lender access to, and the
right to remain on, the premises of such lessor, consignee or other person so as
to exercise Lender's rights and remedies and otherwise deal with such Collateral
and in the case of any person who at any time has custody, control or possession
of any bills of lading or other documents of title, agrees to hold such bills of
lading or other documents as bailee for Lender and to follow all instructions of
Lender with respect thereto.
1.22 "CONSOLIDATED ADJUSTED NET WORTH" shall mean as to any Person, at any
time, in accordance with GAAP (except as otherwise specifically set forth
below), on a consolidated basis for such Person and its Subsidiaries (if any),
the amount equal to: (a) the aggregate net book value of all assets (including
all prepaid assets) of such Person and its Subsidiaries, calculating the book
value of inventory on a basis consistent with the prior year, after deducting
from such book values all appropriate reserves in accordance with GAAP
(including all reserves for doubtful receivables, obsolescence, depreciation and
amortization) minus (b) the amount equal to the aggregate amount of the
Indebtedness and other liabilities of such Person and its Subsidiaries
(including tax and other proper accruals).
1.23 "CREDIT CARD ACKNOWLEDGMENTS" shall mean with respect to each
Borrower, individually and collectively, the agreements by Credit Card Issuers
or Credit Card Processors in favor of Lender acknowledging the first priority
security interest and lien of Lender in the monies due and to become due to such
Borrower (including, without limitation, credits and reserves) under the Credit
Card Agreements, and agreeing to transfer all such amounts to the Blocked
Accounts, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.24 "CREDIT CARD AGREEMENTS" shall mean with respect to each Borrower all
agreements (other than Credit Card Acknowledgments) now or hereafter entered
into by such Borrower with any Credit Card Issuer or any Credit Card Processor,
as the same now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced, including, but not limited to, the
agreements listed and schedules of terms listed on Schedule 8.17 hereto.
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<PAGE>
1.25 "CREDIT CARD ISSUER" shall mean any person (other than a Borrower)
who issues or whose members issue credit cards, including, without limitation,
MasterCard or VISA bank credit or debit cards or other bank credit or debit
cards issued through MasterCard International, Inc., VISA, U.S.A., Inc. or Visa
International and American Express, Discover, Diners Club, Carte Blanche and
other non-bank credit or debit cards, including credit cards issued by or
through American Express Travel Related Services Company, Inc. or Novus
Services, Inc.
1.26 "CREDIT CARD PROCESSOR" shall mean with respect to each Borrower any
servicing or processing agent or any factor or financial intermediary who
facilitates, services, processes or manages the credit authorization, billing
transfer and/or payment procedures with respect to any of such Borrower's sales
transactions involving credit card or debit card purchases by customers using
credit cards or debit cards issued by any Credit Card Issuer.
1.27 "CREDIT CARD RECEIVABLES" shall mean with respect to each Borrower,
collectively, (a) all present and future rights of such Borrower to payment from
any Credit Card Issuer, Credit Card Processor or other third party arising from
sales of goods or rendition of services to customers who have purchased such
goods or services using a credit or debit card and (b) all present and future
rights of such Borrower to payment from any Credit Card Issuer, Credit Card
Processor or other third party in connection with the sale or transfer of
Accounts arising pursuant to the sale of goods or rendition of services to
customers who have purchased such goods or services using a credit card or a
debit card, including, but not limited to, all amounts at any time due or to
become due from any Credit Card Issuer or Credit Card Processor under the Credit
Card Agreements or otherwise.
1.28 "CUSTOMS BROKER" shall mean the persons identified on Schedule 1.28
hereof or such other person as may be selected by Borrower after the date hereof
and after written notice by Borrower to Lender who is reasonably acceptable to
Lender, PROVIDED, THAT as to each such person, Lender has received a Collateral
Access Agreement duly authorized, executed and delivered by such person, such
agreement is binding upon such person, is in full force and effect and such
person has complied with the terms thereof.
1.29 "CURRENCY EXCHANGE CONVENTION" shall mean (a) in the calculation of
the Canadian Dollar Equivalent, a procedure used by Lender to value in Canadian
Dollars (i) the obligations or assets of any Borrower or Obligor that are
originally measured in US Dollars and (ii) any other amount expressed in US
Dollars herein or in any other currency, other than Canadian Dollars, in each
case by using the Exchange Rate and (b) in the calculation of the US Dollar
Equivalent, a procedure used by Lender to value in US Dollars (i) the
obligations or assets of any Borrower or Obligor that are originally measured in
Canadian Dollars, Pounds Sterling, Australian Dollars or Japanese Yen or any
other currency and (ii) any other amount expressed in Canadian Dollars, Pounds
Sterling, Australian Dollars or Japanese Yen or any other currency, other than
US Dollars, in each case by using the Exchange Rate for the purchase of US
Dollars with Canadian Dollars, Pounds Sterling, Australian Dollars or Japanese
Yen or such other currency, as the case may be.
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1.30 "DATED ELIGIBLE ACCOUNTS" shall mean those Eligible Accounts
described in Section 1.34(b)(iii) and (iv) which otherwise satisfy all of the
criteria set forth in Section 1.34(a) and Section 1.34 (c) through (t).
1.31 "DILUTION" shall mean, as to any Person for any period, the fraction,
expressed as a percentage, the numerator of which is the aggregate amount of
non-cash reductions in the Accounts of each Person for such period and the
denominator of which is the aggregate US Dollar Equivalent of the amount of the
sales of such Person for such period.
1.32 "DILUTION RESERVE" shall mean an Availability Reserve in amounts
established by Lender to reflect that Dilution with respect to any category of
Eligible Accounts as calculated by Lender for any period is greater than or is
reasonably anticipated to be greater than ten (10%) percent.
1.33 "DOMESTIC ADJUSTED NET WORTH" shall mean as to any Person, at any
time, in accordance with GAAP (except as otherwise specifically set forth
below), on a consolidated basis for such Person and its Subsidiaries (if any),
the amount equal to: (a) the aggregate net book value of all assets (including
all prepaid assets) of such Person and its Subsidiaries (excluding Foreign
Subsidiaries), calculating the book value of inventory for this purpose on a
basis consistent with the prior year, after deducting from such book values all
appropriate reserves in accordance with GAAP (including all reserves for
doubtful receivables, obsolescence, depreciation and amortization) minus (b) the
amount equal to the aggregate amount of the Indebtedness and other liabilities
of such Person and its Subsidiaries (including tax and other proper accruals),
minus (c) the dollar amount of the general ledger account for corporate overhead
charged to Foreign Subsidiaries by Play By Play, provided, that, for the
purposes of calculating the Domestic Adjusted Net Worth of Play By Play and it
Subsidiaries, any income of any Foreign Subsidiary or any other Subsidiary which
is not incorporated in any state of the United States of America or does not
have is chief executive office in the United States of America shall not be
included in the calculation.
1.34 "ELIGIBLE ACCOUNTS" shall mean, the Accounts created by Borrowers
which are and continue to be acceptable to Lender based on the criteria set
forth below. In general,
Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and BONA FIDE sale and
delivery of goods by such Borrower or rendition of services by such Borrower in
the ordinary course of its business which transactions are completed in
accordance with the terms and provisions contained in any documents related
thereto;
(b) (i) the original terms of payment for such Accounts are on net
thirty (30) day terms, then if such Accounts are not unpaid more than the
earlier of (A) sixty (60)days after the date of the original due date for such
Accounts or (B) ninety (90) days after the original invoice date for such
Accounts,
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(ii) the original terms of payment for such Accounts are on
net sixty (60) day terms, then if such Accounts are not unpaid more than the
earlier of (A) sixty (60) days after the date of the original due date for such
Accounts or (B) one hundred twenty (120) days after the original invoice date
for such Accounts,
(iii) the original terms of payment for such Accounts are on
net ninety (90) day terms, then if such Accounts are not unpaid more than the
earlier of (A) thirty (30) days after the date of the original due date for such
Accounts or (B) one hundred twenty (120) days after the original invoice date
for such Accounts, and
(iv) the original terms of payment for such Accounts are in
excess of ninety (90) days, then if such Accounts are not unpaid more than the
earlier of (A) thirty (30) days after the date of the original due date for such
Accounts or (B) one hundred fifty (150) days after the original invoice date for
such Accounts;
(c) such Accounts comply with the terms and conditions contained in
Section 7.2(c) of this Agreement;
(d) such Accounts do not arise from sales on consignment,
guaranteed sale, sale and return, sale on approval, or other terms under which
payment by the account debtor may be conditional or contingent;
(e) the chief executive office of the account debtor with respect
to such Accounts is located in the United States of America or Canada (PROVIDED,
that, at any time promptly upon Lender's request, Borrowers shall execute and
deliver, or cause to be executed and delivered, such other agreements, documents
and instruments as may be required by Lender to perfect the security interests
of Lender in those Accounts of an account debtor with its chief executive office
or principal place of business in Canada in accordance with the applicable laws
of the Province of Canada in which such chief executive office or principal
place of business is located and take or cause to be taken such other and
further actions as Lender may request to enable Lender as secured party with
respect thereto to collect such Accounts under the applicable Federal or
Provincial laws of Canada) or, at Lender's option, if the chief executive office
and principal place of business of the account debtor with respect to such
Accounts is located other than in the United States of America or Canada, then
if any of: (i) the account debtor has delivered to such Borrower an irrevocable
letter of credit issued or confirmed by a bank satisfactory to Lender and
payable only in the United States of America and in U.S. dollars, sufficient to
cover such Account, in form and substance satisfactory to Lender and if required
by Lender, the original of such letter of credit has been delivered to Lender or
Lender's agent and the issuer thereof notified of the assignment of the proceeds
of such letter of credit to Lender, or (ii) such Account is subject to credit
insurance payable to Lender issued by an insurer and on terms and in an amount
acceptable to Lender, or (iii) such Account is otherwise acceptable in all
respects to Lender (subject to such lending formula with respect thereto as
Lender may determine);
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(f) such Accounts do not consist of progress billings, bill and
hold invoices or retainage invoices, except as to bill and hold invoices, if
Lender shall have received an agreement in writing from the account debtor, in
form and substance satisfactory to Lender, confirming the unconditional
obligation of the account debtor to take the goods related thereto and pay such
invoice;
(g) the account debtor with respect to such Accounts has not
asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such
Accounts (but the portion of the Accounts of such account debtor in excess of
the amount at any time and from time to time owed by such Borrower to such
account debtor or claimed owed by such account debtor may be deemed Eligible
Accounts);
(h) there are no facts, events or occurrences which would impair
the validity, enforceability or collectability of such Accounts or reduce the
amount payable or delay payment thereunder;
(i) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(j) neither the account debtor nor any officer or employee of the
account debtor with respect to such Accounts is an officer, employee, agent or
other Affiliate of any
Borrower directly or indirectly;
(k) (i) the account debtors with respect to such Accounts are not
any foreign government, the United States of America, any State, Province,
political subdivision, department, agency or instrumentality thereof, unless, if
the account debtor is the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, upon Lender's
request, the Federal Assignment of Claims Act of 1940, as amended or any similar
Federal, State, Provincial or local law, if applicable, has been complied with
in a manner satisfactory to Lender or (ii) the Account Debtor is Her Majesty in
right of Canada or any provincial or local governmental entity, or any ministry,
such Borrower has assigned its rights to payment of such Account to Lender
pursuant to and in accordance with the Financial Administration Act, R.S.C. 185,
c.F-11, as amended, or any similar applicable provincial or local law,
regulation or requirement;
(l) there are no proceedings or actions which are threatened or
pending against account debtors with respect to such accounts which might result
in any material adverse change in any such account debtor's financial condition;
(m) such Accounts are not owed by an account debtor who has
Accounts unpaid more than ninety (90) days after the original invoice for them
except as permitted in Section 1.34(b) above applicable thereto, which
constitute more than fifty (50%) percent of the total Accounts of such account
debtor;
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(n) such Accounts of a single account debtor or its affiliates do
not constitute more than twenty-five (25%) percent of all otherwise Eligible
Accounts (but the portion of the Accounts not in excess of such percentage may
be deemed Eligible Accounts);
(o) such Accounts are owed by account debtors whose total
indebtedness to such Borrower does not exceed the credit limit with respect to
such account debtors as determined in good faith by Lender from time to time
(but the portion of the Accounts not in excess of such credit limit may be
deemed Eligible Accounts);
(p) as to Accounts arising from the sale of goods through or with
the assistance of any agent, Lender shall have received an agreement, in form
and substance satisfactory to Lender, from such sales agent acknowledging the
security interests of Lender, agreeing to follow the instructions of Lender with
respect to the payment and collection of such Accounts, waiving any rights of
setoff, deduction or similar rights and such other matters as Lender may
require, duly authorized, executed and delivered by such agent, and such agent
shall be in compliance with the terms thereof;
(q) such Accounts do not consist of non-trade Accounts which
represent prepaid royalties;
(r) such Accounts do not arise from cash on delivery sales;
(s) such Accounts do not constitute Credit Card Receivables; and
(t) such Accounts are owed by account debtors deemed creditworthy
at all times by Lender, as determined in good faith by Lender.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.35 "ELIGIBLE CREDIT CARD RECEIVABLES" shall mean Credit Card Receivables
created by Borrower in the ordinary course of business which are and continue to
be acceptable to Lender in the exercise of its judgment in good faith based on
the criteria set forth below. In general, Credit Card Receivables shall be
Eligible Credit Card Receivables if:
(a) such Credit Card Receivables arise from the actual and BONA
FIDE sale and delivery of goods by Borrowers in the ordinary course of the
business of Borrowers which transactions are completed in accordance with the
terms and provisions contained in any documents binding on Borrowers or the
other party or parties related thereto and Borrowers have completed the
transaction in accordance with the agreement between Borrowers and the Credit
Card Issuer with respect to such Credit Card Receivables, including obtaining
any necessary authorization of such issuer;
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(b) such Credit Card Receivables are not past due pursuant to the
terms set forth in the applicable Credit Card Agreement;
(c) such Credit Card Receivables are not unpaid more than thirty
(30) days after the original date of the delivery of the goods to the customer
the sale of which gave rise to such Credit Card Receivables;
(d) all procedures required by the Credit Card Issuer in respect of
such Credit Card Receivables shall have been followed and all applications or
other documents required for the approval of the customer using the Credit Card
for the purchase of goods giving rise to such Credit Card Receivables shall have
been taken and properly completed, including, but not limited to, the completion
of a form of credit application (substantially in the form used by the Credit
Card Issuer as of the date such Credit Card Receivables arise);
(e) such Credit Card Receivables do not arise in connection with
any deposit required to be paid by a retail customer to any Borrower for the
purchase of goods;
(f) such Credit Card Receivables comply with the applicable terms
and conditions contained in Section 7.2 hereof;
(g) such Credit Card Receivables do not constitute Credit Card
Receivables which have been or are sold by Borrower or any of its Affiliates;
(h) the Credit Card Issuer has not asserted a counterclaim, defense
or dispute and does not have, and does not engage in transactions with Borrower
which may give rise to, any right of setoff against such Credit Card Receivables
(other than in the ordinary course of business in accordance with the terms of
the Credit Card Agreement and if Lender so requires in the exercise of its
judgment in good faith, for which Lender has established Availability Reserves),
and the Credit Card Issuer has not setoff or deducted from amounts otherwise
payable to Borrower for the purpose of establishing a reserve or collateral for
obligations of Borrower to the Credit Card Issuer;
(i) there are no facts, events or occurrences which would impair
the validity, enforceability or collectability of such Credit Card Receivables
or reduce the amount payable or delay payment thereunder, other than in the
ordinary course of the business of Borrower in accordance with the terms of the
Credit Card Agreement and if Lender so requires, for which Lender has
established Availability Reserves;
(j) such Credit Card Receivables are subject to the first priority,
valid and perfected security interest of Lender and any goods giving rise
thereto are not, and were not at the time of the sale thereof, subject to any
liens except those permitted in the Loan Agreement;
(k) Lender shall have received, in form and substance satisfactory
to Lender, a Credit Card Acknowledgment duly authorized, executed and delivered
by the Credit Card Issuer,
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and such agreement shall be in full force and effect and the Credit Card Issuer
shall be in compliance with the terms thereof;
(l) there are no proceedings or actions which are threatened or
pending against the Credit Card Issuer with respect to such Credit Card
Receivables which might result in any material adverse change in the financial
condition of the Credit Card
Issuer;
(m) the Credit Card Issuer shall be deemed creditworthy at all
times by Lender;
(n) no default or event of default has occurred under the Credit
Card Agreement which default gives the Credit Card Issuer the right to cease or
suspend payments to Borrower and no event shall have occurred which gives the
Credit Card Issuer the right to setoff against amounts otherwise payable to
Borrower (other than for then current fees and chargebacks consistent with the
current practices of the Credit Card Issuer as of the date hereof) or the right
to establish reserves or demand collateral and the Credit Card Agreement is
otherwise in full force and effect; and
(o) the Credit Card Issuer has not sent any notice of default
and/or of its intention to cease or suspend payments to any Borrower in respect
of such Credit Card Receivables or to establish reserves of cash collateral for
obligations of any Borrower to the Credit Card Issuer.
General Criteria for Eligible Credit Card Receivables may be established
and revised from time to time by Lender in good faith. Lender will not establish
new criteria for Eligible Credit Card Receivables. Any Credit Card Receivables
which are not Eligible Credit Card Receivables shall nevertheless be part of the
Collateral.
1.36 "ELIGIBLE IN-TRANSIT INVENTORY" shall mean Eligible Inventory that is
In-Transit Inventory and in addition: (a) is in transit to either the premises
of a Customs Broker in the United States or premises of a Borrower in the United
States and as to premises of a Customs Broker or premises which are not owned
and controlled by a Borrower only if Lender has received a Collateral Access
Agreement duly authorized, executed and delivered by such Customs Broker or the
owner, lessor and operator of such other premises, as the case may be, (b)
Lender has a first priority perfected security interest in and control and
possession of all originals of documents of title with respect to such
In-Transit Inventory, (c) Lender has received (i) a copy of the certificate of
marine cargo insurance in connection therewith in which it has been named as an
additional insured and loss payee in a manner acceptable to Lender and (ii) a
copy of the invoice and manifest with respect thereto, and (d) such In-Transit
Inventory is not subject to any Letter of Credit Accommodation.
1.37 "ELIGIBLE INVENTORY" shall mean, as to Borrowers, consisting of
finished goods held for resale in the ordinary course of the business of such
Borrowers, in each case which are acceptable to Lender in good faith based on
the criteria set forth below. In general, Eligible Inventory shall not include
(a) work-in-process; (b) components which are not part of finished goods; (c)
spare parts for equipment; (d) packaging and shipping materials; (e) supplies
used or
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<PAGE>
consumed in the business of such Borrower including, without limitation, labels
and tags; (f) Inventory at premises other than those owned and controlled by any
Borrower, except any Inventory which would otherwise be deemed Eligible
Inventory at locations which are not owned and operated by such Borrower shall
nevertheless be considered Eligible Inventory if: (i) as to premises leased by
such Borrower, Lender shall have received a Collateral Access Agreement duly
authorized, executed and delivered by the owner and lessor of such premises and
(ii) as to premises of third parties (including sales agents, consignees and
processors), Lender shall have received a Collateral Access Agreement duly
authorized, executed and delivered by the owner and operator of such premises,
and in addition, if required by Lender: (A) the owner and operator executes
appropriate UCC-1 or PPSA financing statements in favor of such Borrower, which
are duly assigned to Lender and (B) any secured lender to the owner and operator
is properly notified of the first priority lien on such Inventory of Lender or
Lender shall have established an Availability Reserve for rent in its sole
discretion; (g) Inventory located outside the continental United States of
America or Canada except for Eligible In-Transit Inventory; (h) Inventory
subject to a security interest or lien in favor of any person other than Lender
except those permitted in this Agreement; (i) bill and hold goods; (j)
unserviceable, obsolete or discontinued Inventory; (k) slow moving or excess
Inventory (Inventory in excess to the extent such items of Inventory have not
been purchased within the past twelve months yet has generated sales within the
past twelve months) to the extent that such slow moving or excess Inventory does
not constitute Sub-Prime Inventory; (l) Inventory which is not subject to the
first priority, valid and perfected security interest or hypothec of Lender; (m)
returned, damaged and/or defective Inventory; (n) Inventory used for displays;
(o) Inventory which uses or to which is affixed or incorporated any Intellectual
Property owned by another Person other than Inventory subject to a License
Agreement set forth on Schedule 8.14 or a License Agreement which is entered
into by such Borrower in accordance with Section 9.13 hereof, so long as such
License Agreement is in full force and effect, each party thereto is in
compliance with the terms thereof, such License Agreement constitutes the legal,
valid, binding and enforceable obligations of the parties thereto and no party
has sent any notice of default or intent to terminate such agreement and,
PROVIDED, THAT, Lender shall have not received a Licensor Agreement from such
other Person in accordance with Section 4.1(p) hereof; (p) Inventory allocated
to the following divisions of Play By Play: "Val Verde Vending", and
"Woodenville Outlet Stores"; (q) non-saleable Inventory of Ace purchased from
Seller pursuant to the Asset Purchase Agreement, dated May 1, 1996, by and among
Ace, Play By Play, Seller, Specialty Manufacturing Ltd., Acme Acquisition Corp.,
Benjamin H. Mayers, Lois E. Mayers, Ronald S. Mayers, Karen Gamaran and Beth
Weisfeld; and (r) Inventory purchased or sold on consignment. General criteria
for Eligible Inventory may be established and revised from time to time by
Lender in good faith. Any Inventory which is not Eligible Inventory shall
nevertheless be part of the Collateral.
1.38 "ELIGIBLE PRIME INVENTORY" shall mean Prime Inventory which otherwise
meets the criteria of Eligible Inventory, as determined by Lender in good faith.
1.39 "ELIGIBLE SUB-PRIME INVENTORY" shall mean Sub-Prime Inventory which
otherwise meets the criteria for Eligible Inventory, as determined by Lender
in good faith.
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1.40 "ENVIRONMENTAL LAWS" shall mean all foreign, Federal, State,
Provincial, district, and local laws (including common law), legislation, rules,
codes, licenses, permits (including any conditions imposed therein),
authorizations, judicial or administrative decisions, injunctions or agreements
between each Borrower and any Governmental Authority, (a) relating to pollution
and the protection, preservation or restoration of the environment (including
air, water vapor, surface water, ground water, drinking water, drinking water
supply, surface land, subsurface land, plant and animal life or any other
natural resource), or to human health or safety, (b) relating to the exposure
to, or the use, storage, recycling, treatment, generation, manufacture,
processing, distribution, transportation, handling, labeling, production,
release or disposal, or threatened release, of Hazardous Materials, or (c)
relating to all laws with regard to record keeping, notification, disclosure and
reporting requirements respecting Hazardous Materials. The term "Environmental
Laws" includes (i) the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Federal Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Water Act, the Federal Clean Air Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic
Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act,
and the Federal Safe Drinking Water Act of 1974, (ii) applicable state,
Provincial or local counterparts to such laws, and (iii) any common law or
equitable doctrine that may impose liability or obligations for injuries or
damages due to, or threatened as a result of, the presence of or exposure to any
Hazardous Materials.
1.41 "EQUIPMENT" shall mean all of each Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.42 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, as the same now exists or may hereafter from time to time
be amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.
1.43 "ERISA AFFILIATE" shall mean any person required to be aggregated
with any Borrower or Guarantor or any Subsidiary of any Borrower or Guarantor
under Sections 414(b), 414(c), 414(m) or 414(o) of the Code.
1.44 "EURODOLLAR RATE" shall mean with respect to the Interest Period for
a Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic
average of the rates of interest per annum (rounded upwards, if necessary, to
the next one-sixteenth (1/16) of one (1%) percent) at which Reference Bank is
offered deposits of United States dollars in the London interbank market (or
other Eurodollar Rate market selected by a Borrower on behalf of such Borrower
and approved by Lender) on or about 9:00 a.m. (New York time) two (2) Business
Days prior to the commencement of such Interest Period in amounts substantially
equal to the principal amount of the Eurodollar Rate Loans requested by and
available to such Borrower in accordance with this
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Agreement, with a maturity of comparable duration to the Interest Period
selected by or on behalf of such Borrower.
1.45 "EURODOLLAR RATE LOANS" shall mean any Loans or portion thereof on
which interest is payable based on the Adjusted Eurodollar Rate in accordance
with the terms hereof.
1.46 "EVENT OF DEFAULT" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.47 "EXCESS AVAILABILITY" shall mean, as to Borrowers, the US Dollar
Equivalent of the amount as determined by Lender, calculated at any time, equal
to: (a) the lesser of (i) the amount of the Revolving Loans available to
Borrowers as of such time based on the applicable lending formulas multiplied by
the Net Amount of Eligible Accounts and the Value of Eligible Inventory and
subject to the sublimits and Availability Reserves from time to time established
by Lender hereunder and (ii) the Revolving Loan Limit, MINUS (b) the sum of: (i)
the amount of all then outstanding and unpaid Obligations of Borrowers, plus
(ii) the aggregate amount of all trade payables of Borrowers (exclusive of trade
payables of Borrowers owing to vendors outside of the United States of America
and Canada) which are more than sixty (60) days past due as of such time and
other obligations of Borrowers which are past due longer than is consistent with
the current practices of Borrowers as of the date hereof plus (iii) the amount
of checks issued by Borrowers to pay trade payables and other obligations which
are more than sixty (60) days past due, but not yet sent (without duplication of
amounts included in clause (b)(ii) of this definition).
1.48 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as the
same now exists or may from time to time hereafter be amended, modified,
recodified or supplemented, together with all rules, regulations and
interpretations thereunder or related thereto.
1.49 "EXISTING LENDERS" shall mean the lenders to Borrowers listed on
Schedule 1.49 hereto (and including The Chase Manhattan Bank in its capacity as
agent acting for such lenders).
1.50 "EXISTING LETTERS OF CREDIT" shall mean, collectively, the letters of
credit issued for the account of a Borrower or Guarantor or for which such
Borrower or Guarantor is otherwise liable listed on Schedule 1.50 hereto, as the
same now exist or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced.
1.51 "FINANCING AGREEMENTS" shall mean, collectively, this Agreement and
all notes, guarantees, security agreements and other agreements, documents and
instruments now or at any time hereafter executed and/or delivered by any
Borrower or Obligor in connection with this Agreement, as the same now exist or
may hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
1.52 "FOREIGN SUBSIDIARIES" shall mean, collectively, Play By Play Toys &
Novelties Europe, S.A., a company incorporated under the laws of Spain; Play By
Play Toys & Novelties
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UK, Limited, a company incorporated under the laws of the United Kingdom; Play
By Play Far East Ltd., a company incorporated under the laws of Hong Kong, the
People's Republic of China; and Caribe Marketing & Sales Co., Inc., a company
incorporated under the laws of the Cayman Islands and their respective
successors and assigns; each sometimes being referred to herein individually as
a "Foreign Subsidiary".
1.53 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Section 9.16 hereof, GAAP shall be determined on the basis of
such principles in effect on the date hereof and consistent with those used in
the preparation of the audited financial statements delivered to Lender prior to
the date hereof.
1.54 "GOVERNMENTAL AUTHORITY" shall mean any nation or government, any
state, province, or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled, through stock or capital ownership or otherwise, by any of the
foregoing.
1.55 "GUARANTOR" shall mean Friends, Food & Games, Inc., a Nevada
corporation and its successors and assigns.
1.56 "HAZARDOUS MATERIALS" shall mean any hazardous, toxic or dangerous
substances, materials and wastes, including hydrocarbons (including naturally
occurring or man-made petroleum and hydrocarbons), flammable explosives,
asbestos, urea formaldehyde insulation, radioactive materials, biological
substances, polychlorinated biphenyls, pesticides, herbicides and any other kind
and/or type of pollutants or contaminants (including materials which include
hazardous constituents), sewage, sludge, industrial slag, solvents and/or any
other similar substances, materials, or wastes and including any other
substances, materials or wastes that are or become regulated under any
Environmental Law (including any that are or become classified as hazardous or
toxic under any Environmental Law).
1.57 "INDEBTEDNESS" shall mean, with respect to any Person, without
duplication, any liability, whether or not contingent, (a) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of such Person or only to a portion thereof) or evidenced by bonds,
notes, debentures or similar instruments; (b) representing the balance deferred
and unpaid of the purchase price of any property or services (except any such
balance that constitutes an account payable to a trade creditor (whether or not
an Affiliate) created, incurred, assumed or guaranteed by such Person in the
ordinary course of business of such Person in connection with obtaining goods or
materials that is not overdue by more than ninety (90) days or in connection
with obtaining services that is not overdue by more than the number of days that
is consistent with the current practices of Borrowers as of the date hereof,
unless the trade payable is being contested in good faith); (c) all obligations
as lessee under leases which
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have been, or should be, in accordance with GAAP recorded as Capital Leases; (d)
any contractual obligation, contingent or otherwise, of such Person to pay or be
liable for the payment of any indebtedness described in this definition of
another Person, including, without limitation, any such indebtedness, directly
or indirectly guaranteed, or any agreement to purchase, repurchase, or otherwise
acquire such indebtedness, obligation or liability or any security therefor, or
to provide funds for the payment or discharge thereof, or to maintain solvency,
assets, level of income, or other financial condition; (e) all obligations with
respect to mandatorily redeemable stock and redemption or repurchase obligations
under any Capital Stock or other equity securities issued by such Person which
redemption and repurchase obligations are mandatory or are exercisable at the
election of the holder thereof; (f) all reimbursement obligations and other
liabilities of such Person with respect to surety bonds (whether bid,
performance or otherwise), letters of credit, banker's acceptances or similar
documents or instruments issued for such Person's account; and (g) all
indebtedness of such Person in respect of indebtedness of another Person for
borrowed money or indebtedness of another Person otherwise described in this
definition which is secured by any consensual lien, security interest,
collateral assignment, conditional sale, mortgage, deed of trust, or other
encumbrance on any asset of such Person, whether or not such obligations,
liabilities or indebtedness are assumed by or are a personal liability of such
Person, all as of such time.
1.58 "INFORMATION CERTIFICATE" shall mean the Information Certificates
with respect to each Borrower and Guarantor constituting Exhibit A hereto
containing material information with respect to such Borrower and Guarantor, its
business and assets provided by or on behalf of Borrowers or Guarantor to Lender
in connection with the preparation of this Agreement and the other Financing
Agreements and the financing arrangements provided for herein.
1.59 "INTELLECTUAL PROPERTY" shall mean all of each Borrower's now owned
and hereafter arising or acquired: patents, patent rights, patent applications,
copyrights, works which are the subject matter of copyrights, copyright
registrations, trademarks, trade names, trade styles, trademark and service mark
applications, and licenses and rights to use any of the foregoing; all
extensions, renewals, reissues, divisions, continuations, and
continuations-in-part of any of the foregoing; all rights to sue for past,
present and future infringement of any of the foregoing; inventions, trade
secrets, formulae, processes, compounds, drawings, designs, blueprints, surveys,
reports, manuals, and operating standards; goodwill; customer and other lists in
whatever form maintained; and trade secret rights, copyright rights, rights in
works of authorship, and contract rights relating to computer software programs,
in whatever form created or maintained.
1.60 "INTEREST PERIOD" shall mean for any Eurodollar Rate Loan, a period
of approximately one (1), two (2), or three (3) months duration as a Borrower
may elect, the exact duration to be determined in accordance with the customary
practice in the applicable Eurodollar Rate market; PROVIDED, THAT, such Borrower
may not elect an Interest Period which will end after the last day of the
then-current term of this Agreement.
1.61 "INTEREST RATE" shall mean, as to Prime Rate Loans, a rate of
one-quarter (1/4%) percent per annum in excess of the Prime Rate and, as to
Eurodollar Rate Loans, a rate of two
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and three-quarters (2 3/4%) percent per annum in excess of the Adjusted
Eurodollar Rate (based on the Eurodollar Rate applicable for the Interest Period
selected by a Borrower as in effect three (3) Business Days after the date of
receipt by Lender of the request of a Borrower for such Eurodollar Rate Loans in
accordance with the terms hereof, whether such rate is higher or lower than any
rate previously quoted to a Borrower); PROVIDED, THAT, the Interest Rate shall
mean the rate of two and one-quarter percent (2 1/4%) per annum in excess of the
Prime Rate as to Prime Rate Loans and the rate of four and three-quarters (4
3/4%) percent per annum in excess of the Adjusted Eurodollar Rate as to
Eurodollar Rate Loans, at Lender's option, without notice, (a) for the period
(i) from and after the date of termination or non-renewal hereof until Lender
has received full and final payment of all obligations hereof (notwithstanding
entry of a judgment against a Borrower) and (ii) from and after the date of the
occurrence of an Event of Default for so long as such Event of Default is
continuing as determined by Lender, and (b) on the Loans to a Borrower at any
time outstanding in excess of the amounts available to such Borrower under
Section 2 (whether or not such excess(es), arise or are made with or without
Lender's knowledge or consent and whether made before or after an Event of
Default).
1.62 "IN-TRANSIT INVENTORY" shall mean Inventory outside the United States
and in transit to either the premises of a Customs Broker in the United States
or premises of a Borrower
in the United States.
1.63 "INVENTORY" shall mean all of each Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.64 "LENDER" shall mean Congress Financial Corporation (Southwest), a
Texas corporation, and its successors and assigns.
1.65 "LETTER OF CREDIT ACCOMMODATIONS" shall mean the letters of credit,
merchandise purchase or other guaranties which are from time to time either (a)
issued or opened by Lender for the account of any Borrower or Obligor or (b)
with respect to which Lender has agreed to indemnify the issuer or guaranteed to
the issuer the performance by any Borrower of its obligations to such issuer
(including without limitation, the Existing Letters of Credit).
1.66 "LICENSE AGREEMENTS" shall mean the agreements listed on Schedule
8.14.
1.67 "LOANS" shall mean the Revolving Loans and the Term Loans.
1.68 "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (a)
the condition (financial or otherwise), business, performance, operations or
properties of any Borrower or Guarantor; (b) the legality, validity or
enforceability of this Agreement or any of the other Financing Agreements; (c)
the legality, validity, enforceability, perfection or priority of the security
interests and liens of Lender upon the Collateral or any other property which is
security for the Obligations; (d) the Collateral or any other property which is
security for the Obligations, or the value of the Collateral or such other
property; (e) the ability of any Borrower or Guarantor to repay the Obligations
or of any Borrower or Guarantor to perform its Obligations under this
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Agreement or any of the other Financing Agreements; or (f) the ability of Lender
to enforce the Obligations or realize upon the Collateral or otherwise with
respect to the rights and remedies of Lender under this Agreement or any of the
other Financing Agreements.
1.69 "MATERIAL CONTRACT" shall mean (a) any contract or other agreement
(other than the Financing Agreements), written or oral, of any Borrower
involving monetary liability of or to any Person in an amount in excess of
$200,000 in any fiscal year and (b) any other contract or other agreement (other
than the Financing Agreements), whether written or oral, to which any Borrower
is a party as to which the breach, nonperformance, cancellation or failure to
renew by any party thereto would have a material adverse effect.
1.70 "MAXIMUM CREDIT" shall mean the amount of $60,000,000.
1.71 "MAXIMUM INTEREST RATE" shall mean the maximum non-usurious rate of
interest under applicable Federal or State law as in effect from time to time
that may be contracted for, taken, reserved, charged or received in respect of
indebtedness of Borrowers to Lender.
1.72 "MORTGAGEs" shall mean the Mortgage, Security Agreement and Fixture
Filing by Ace in favor of Lender with respect to the Real Property and related
assets of Ace located in Chicago, Illinois, (as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced).
1.73 "NET AMOUNT OF ELIGIBLE ACCOUNTS" shall mean, as to each Borrower,
the gross amount of the Eligible Accounts of such Borrower less (a) sales,
excise or similar taxes included in the amount thereof and (b) returns,
discounts, claims, credits and allowances of any nature at any time issued,
owing, granted, outstanding, available or claimed with respect thereto.
1.74 "NET AMOUNT OF ELIGIBLE CREDIT CARD RECEIVABLES" shall mean the gross
amount of Eligible Credit Card Receivables less discounts and fees payable by
any Borrower to the Credit Card Issuer, if any, in respect of such Eligible
Credit Card
Receivables.
1.75 "NET RECOVERY PERCENTAGE" shall mean the fraction, expressed as a
percentage, (a) the numerator of which is the amount equal to the amount of the
recovery in respect of the Inventory at such time on a liquidation basis as set
forth in the most recent acceptable appraisal of Inventory received by Lender in
accordance with Section 7.3, net of operating expenses, liquidation expenses and
commissions, and (b) the denominator of which is the original cost of the
aggregate amount of the Inventory subject to such appraisal.
1.76 "NEWCO" shall mean Newco Novelty, Inc., a Texas corporation and its
successors and assigns.
1.77 "NEW SELLER NOTE" shall mean the Promissory Note, dated October 25,
1999, issued by Play By Play in favor of Expo Management International, Inc. in
the original principal amount of $637,000, as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
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1.78 "OBLIGATIONS" shall mean any and all Loans, Letter of Credit
Accommodations and all other obligations, liabilities and indebtedness of every
kind, nature and description owing by any or all of Borrowers to Lender and/or
its Affiliates, including principal, interest, charges, fees, costs and
expenses, however evidenced, whether as principal, surety, endorser, guarantor
or otherwise, whether arising under this Agreement or otherwise, whether now
existing or hereafter arising, whether arising before, during or after the
initial or any renewal term of this Agreement or after the commencement of any
case with respect to any Borrower under the United States Bankruptcy Code, the
Bankruptcy and Insolvency Act (Canada), the Companies' Creditors Arrangement Act
(Canada), the Insolvency Act 1986 or any similar statute (including, without
limitation, the payment of interest and other amounts which would accrue and
become due but for the commencement of such case), whether direct or indirect,
absolute or contingent, joint or several, due or not due, primary or secondary,
liquidated or unliquidated, secured or unsecured, and however acquired by
Lender.
1.79 "OBLIGOR" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations (including the Guarantor),
other than Borrowers.
1.80 "OTHER TAXES" shall mean 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 from the execution, delivery or
registration of, or otherwise with respect to, this Agreement or any of the
other Financing Agreements.
1.81 "PBP EUROPE" shall mean Play By Play Toys & Novelties Europe, S.A., a
company incorporated under the laws of Spain and its successors and assigns.
1.82 "PBP FAR EAST" shall mean Play By Play Far East Limited, a company
incorporated under the laws of the Hong Kong, the People's Republic of China and
its successors and assigns.
1.83 "PBP UK" shall mean Play By Play Toys & Novelties UK, Ltd., a company
incorporated under the laws of the United Kingdom and its successors and
assigns.
1.84 "PERSON" or "person" shall mean any individual, sole proprietorship,
partnership, corporation (including, without limitation, any corporation which
elects subchapter S status under the Code), limited liability company, limited
liability partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.
1.85 "PERMITTED HOLDER" shall mean (a) Mr. Arturo Torres, any of his
lineal descendants (by blood or adoption), spouses of the foregoing, (b) any
corporations, partnerships or other entities controlled by, controlling or under
common control with any or all of the Persons set forth in Sections 1.85(a), (c)
or (d) hereof; (c) the heirs, executors, administrators, testamentary trustees,
legatees or beneficiaries of the Persons set forth in Sections 1.85(a) hereof;
(d) a trust, the beneficiaries of which (ignoring remote contingent interests),
or a corporation,
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partnership or other entities, the stockholders, members, general or limited
partners or owners of which, include only any or all of the Persons set forth in
Section 1.85(a), (c) or (d) hereof. For purposes of this definition, the term
"control" (including the correlative meanings, the terms "controlled by" and
"under common control with"), as used with respect to any Person shall mean the
possession, directly, or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of Voting Stock or by contract or otherwise.
1.86 "PLAY BY PLAY" shall mean Play By Play Toys & Novelties, Inc., a
Texas
corporation and its successors and assigns.
1.87 "PPSA" shall mean the Personal Property Security Act as in effect in
the Province of Ontario, the Civil Code of Quebec as in effect in the Province
of Quebec or any other Canadian Federal or Provincial statute pertaining to the
granting, perfecting, priority or ranking of security interests, liens,
hypothecs on personal property, and any successor statutes, together with any
regulations thereunder, in each case as in effect from time to time.
References to
sections of the PPSA shall be construed to also refer to any successor
sections.
1.88 "PRIME INVENTORY" shall mean all finished goods Inventory of
Borrowers which Lender determines satisfies all of the following conditions:
(a) such Inventory is either (i) located in the continental United
States or at Newco's distribution centers located in Burnaby, British Columbia
and
Mississauga, Ontario, (ii)
is in transit to Borrowers (A) on a vessel on the open seas; (B) on a vessel in
a port of entry to the continental United States or Canada awaiting customs
clearance; (C) in a truck en route to any of Borrowers' locations located within
the continental United States or Canada; or (iii) on a receiving dock at one of
Borrowers' warehouse locations located in the continental United States or
Canada, PROVIDED, THAT, Lender has received a Collateral Access Agreement
executed by the owners of such locations, in form and substance satisfactory to
Lender, AND
(b) such Inventory, on any date of determination by Lender as to
whether such Inventory is Prime Inventory, has either been (i) initially
purchased or reordered within the past twelve (12) months regardless of whether
any sales have been generated by the item or items during that period; or (ii)
has not been purchased or reordered during the last twelve (12) months but which
finished goods Inventory generated consistent sales within the past twelve (12)
months.
1.89 "PRIME RATE" shall mean the rate from time to time publicly announced
by First Union National Bank or its successors, as its prime rate, whether or
not such announced rate is
the best rate available at such bank.
1.90 "PRIME RATE LOANS" shall mean any Loans or portion thereof on which
interest is payable based on the Prime Rate in accordance with the terms
thereof.
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1.91 "PRIORITY PAYABLES RESERVE" shall mean, at any time, the full amount
of the liabilities at such time which have a trust imposed to provide for
payment or a security interest, lien or charge ranking or capable of ranking
senior to or pari passu with security interests, liens or charges securing the
Obligations on any of the Collateral under Federal, Provincial, State, county,
district, municipal, or local law in Canada or have a right imposed to provide
for payment ranking or capable of ranking senior to or pari passu with the
Obligations under local, national or supranational law, regulation or directive,
including, but not limited to, claims for unremitted and/or accelerated rents,
taxes (including claims for debts due to Inland Revenue or Customs and Excise),
wages, employee withholdings or deductions and vacation pay, workers'
compensation obligations, government royalties or pension fund obligations,
together with the aggregate value, determined in accordance with GAAP, of all
Eligible Inventory which Agent, in good faith, considers may be or may become
subject to retention of title by a supplier or a right of a supplier to recover
possession thereof, where such supplier's right may have priority over the
security interests, liens or charges securing the Obligations, including,
without limitation, Eligible Inventory subject to a right of a supplier to
repossess goods pursuant to Section 81.1 of the Bankruptcy and Insolvency Act
(Canada) or any applicable provincial laws granting revendication or similar
rights to unpaid suppliers or any laws of the United Kingdom.
1.92 "PROVINCIAL" shall mean of or pertaining to a Province of Canada.
1.93 "QUALIFIED PUBLIC OFFERING" shall mean any bona fide, firm
commitment, underwritten offering by Play By Play of its Capital Stock or by
Play By Play of high yield notes or bonds to the public pursuant to an effective
registration statement under the Securities Act, as then in effect, or any
comparable statement under any similar federal statute then in force, or sale of
any such securities pursuant to any offering pursuant to Rule 144A (or any
successor statute or comparable rule or regulation), in any case, the net cash
proceeds of which are not less than the amounts required to pay all then
outstanding Obligations and to provide cash collateral to Lender as required
pursuant to Section 12.1(a) hereof upon termination of the Financing Agreements,
after deducting underwriting discounts and commissions, and all offering
expenses and other expenses related thereto.
1.94 "REAL PROPERTY" shall mean all now owned and hereafter acquired real
property of each Borrower and Guarantor, including leasehold interests, together
with such Borrower's or Guarantor's interests in all buildings, structures, and
other improvements located thereon and all licenses, easements and appurtenances
relating thereto, wherever located, including the real property and related
assets located in Chicago, Illinois and more particularly described in the
Mortgage.
1.95 "RECORDS" shall mean all of each Borrower's present and future books
of account of every kind or nature, purchase and sale agreements, invoices,
ledger cards, bills of lading and other shipping evidence, statements,
correspondence, memoranda, credit files and other data relating to the
Collateral or any account debtor, together with the tapes, disks, diskettes and
other data and software storage media and devices, file cabinets or containers
in or on which the foregoing are stored (including any rights of Borrowers with
respect to the foregoing maintained with or by any other person).
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1.96 "REFERENCE BANK" shall mean First Union National Bank, or such other
bank as Lender may from time to time designate.
1.97 "RENAISSANCE CAPITAL" shall mean Renaissance Capital Growth & Income
Fund III, Inc., a Texas Corporation and its successors and assigns.
1.98 "RENAISSANCE US GROWTH" shall mean Renaissance US Growth & Income
Trust PLC, a public limited company in the United Kingdom and its successors and
assigns.
1.99 "RENEWAL DATE" shall have the meaning set forth in Section 12.1(a)
hereof.
1.100 "RESTAURANTS" shall mean Restaurants International, Inc., a Texas
corporation and its successors and assigns.
1.101 "REVOLVING LOAN LIMIT" shall mean $57,590,000.
1.102 "REVOLVING LOANS" shall mean the loans now or hereafter made by
Lender to or for the benefit of Borrowers on a revolving basis (involving
advances, repayments and readvances) as set forth in Section 2.1 and 2.2 hereof.
1.103 "ROYALTY RESERVE" shall mean an Availability Reserve established by
Lender to reflect amounts must be paid by Borrowers as royalties, fees or other
charges in respect of licenses or other agreements to use Intellectual Property
owned by third parties. The Royalty Reserve will be $500,000, subject to the
Lender's ability to increase such reserve from time to time in its sole
discretion.
1.104 "SELLER" shall mean, collectively, Expo Management International,
Inc., a Washington corporation, f/k/a Ace Novelty Co., Inc., a Washington
corporation, Specialty Manufacturing Ltd., a British Columbia, Canada
corporation, Acme Acquisition Corp., a Washington corporation, Benjamin H.
Mayers, Lois E. Mayers, Ronald S. Mayers, Karen Gamoren, and Beth Weisfield, and
their respective successors and assigns, heirs, executors and administrators, as
the case may be.
1.105 "SUBORDINATED CREDITOR AGREEMENTS" shall mean, collectively, the
Subordinated Loan Agreement, the Subordinated Notes, the General Security
Agreement executed by Borrowers and Guarantors dated the date hereof, the Deed
of Trust, dated the date hereof made by Ace for the benefit of the holders of
the Subordinated Notes which covers all of the now owned and hereafter acquired
real property of Ace located at 1855 Industrial Street and 660 Mateo Street, Los
Angeles, California, together with its interests in all buildings, structures,
and other improvements located thereon and all licenses, easements and
appurtenances relating thereto and all agreements, documents and instruments at
any time executed and/or delivered by Borrowers, Guarantor or any other person
to, with or in favor of the holders of the Subordinated Notes or the
Subordinated Note Agent, for the benefit of the holders of the Subordinated
Notes in connection therewith or related thereto, as all of the foregoing now
exist or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.
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1.106 "SUBORDINATED LOAN AGREEMENT" shall mean the Convertible Loan
Agreement, dated as of July 3, 1997, by and among Play By Play, as borrower,
Renaissance Capital, Renaissance US Growth, Banc One Capital, each as lenders
and the Subordinated Note Agent, as amended by the First Amendment to
Subordinated Loan Agreement dated as of the date hereof (the "October
Amendment") by and among Play By Play, Subordinated Note Agent and holders of
the Subordinated Notes, as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
1.107 "SUBORDINATED NOTE AGENT" shall mean Renaissance Capital Group,
Inc., a Texas corporation, in its capacity as agent for Renaissance Capital and
Renaissance US Growth and its
successors and assigns.
1.108 "SUBORDINATED NOTES" shall mean, collectively, (a) the 8%
Convertible Debenture, dated July 3, 1997, issued by Play By Play to Renaissance
Capital and due on June 30, 2004 in the original principal amount $2,500,000;
(b) the 8% Convertible Debenture, dated July 3,1997, issued by Play By Play to
Renaissance US Growth and due on June 30, 2004 in the original principal amount
of $2,500,000; and (c) the 8% Convertible Debenture, dated July 3, 1997, issued
by Play By Play to Banc One Capital and due on June 30, 2004 in the original
principal amount of $10,000,000, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced.
1.109 "SUBORDINATED NOTE PAST DUE INTEREST" shall mean the interest
accrued on the Subordinated Notes from June 1, 1999 through the date of the
October Amendment; the
aggregate amount of which is equal to $536,000.
1.110 "SUBORDINATED SELLER NOTE" shall mean the Promissory Note, dated
June 20, 1996, issued by Ace to Seller in the original principal amount of
$2,900,000, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.111 "SUB-PRIME INVENTORY" shall mean all finished goods Inventory of
Borrowers which satisfies all of the following conditions as determined by
Lender:
(a) such Inventory is not Prime Inventory,
(b) such Inventory, on any date of determination by Lender as to
whether such Inventory is Sub-Prime Inventory, is finished goods Inventory that
either has not (A) been purchased within the past twelve (12) months and has not
generated any sales within the past year, (B) has not been purchased within the
past two (2) years and has not generated any sales within the same period, or
(C) has not been purchased in the last twelve months but has generated sales in
the last twelve months, and
(c) which is located in the continental United States or at Newco's
distribution centers located in Burnaby, British Columbia and Mississauga,
Ontario, PROVIDED, THAT, Lender
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has received a Collateral Access Agreement executed by the owners of such
centers, in form and substance satisfactory to Lender.
1.112 "SUBSIDIARY" or "subsidiary" shall mean, with respect to any Person,
any corporation, limited or general partnership, trust, association or other
business entity of which an aggregate of at least a majority of the outstanding
Capital Stock or other interests entitled to vote in the election of the board
of directors of such corporation (irrespective of whether, at the time, Capital
Stock of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency), managers, trustees
or other controlling persons, or an equivalent controlling interest therein, of
such Person is, at the time, directly or indirectly, owned by such Person and/or
one or more subsidiaries of such Person.
1.113 "TAXES" shall mean any and all present or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities with respect
thereto, excluding, in the case of Lender, such taxes (including income taxes,
capital taxes or franchise taxes) as are imposed on or measured by Lender's net
income by any jurisdiction (or any political subdivision thereof).
1.114 "TERM LOANS" shall mean the term loans made by Lender to Borrowers
as
provided for in Section 2.3 hereof.
1.115 "TERM NOTES" shall mean, individually and collectively, Term
Promissory Note A and Term Promissory Note B, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
1.116 "TERM PROMISSORY NOTE A" shall mean the Term Promissory Note A,
dated of even date herewith issued by Play By Play payable to Lender in the
original principal amount of $817,000.
1.117 "TERM PROMISSORY NOTE B" shall mean the Term Promissory Note B,
dated of even date herewith issued by Ace payable to Lender in the original
principal amount of $1,593,000.
1.118 "US DOLLAR EQUIVALENT" shall mean at any time (a) as to any amount
denominated in US Dollars, the amount thereof at such time, and (b) as to any
amount denominated in Canadian Dollars or any other currency, the equivalent
amount in US Dollars calculated by Lender at such time using the Currency
Exchange Convention in effect on the Business Day of determination.
1.119 "US DOLLARS", "US$" AND "$" shall each mean lawful currency of the
United
States of America.
1.120 "VALUE" shall mean the US Dollar Equivalent, as determined by Lender
in good faith, with respect to Inventory, equal to the lower of (a) cost
computed on a first-in-first-out basis in accordance with GAAP or (b) market
value, PROVIDED, THAT, for purposes of the calculation of the lending formula
set forth in Section 2.1 (a)(ii), the Value of the Inventory shall
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not include: (i) the portion of the value of Inventory equal to the profit
earned by any Affiliate on
the sale thereof to a Borrower or (ii) write-ups in value with respect to
currency exchange rates.
1.121 "VOTING STOCK" shall mean with respect to any Person, (a) one (1) or
more classes of Capital Stock of such Person having general voting powers to
elect at least a majority of the board of directors, managers or trustees of
such Person, irrespective of whether at the time Capital Stock of any other
class or classes have or might have voting power by reason of the happening of
any contingency, and (b) any Capital Stock of such Person convertible or
exchangeable without restriction or further investment at the option of the
holder thereof into Capital Stock of such Person described in clause (a) of this
definition.
SECTION 2. CREDIT FACILITIES
2.1 LOANS.
(a) Subject to and upon the terms and conditions contained herein,
Lender agrees to make Revolving Loans to Borrowers from time to time in amounts
requested by any Borrower or on its behalf by Play By Play up to the amount
equal to:
(i) eighty (80%) percent of the US Dollar Equivalent of
the sum of (A) the Net Amount of Eligible Accounts
of Borrowers and (B) the Net Amount of Eligible
Credit Card Receivables of Borrowers, PLUS;
(ii) the least of: (A) the Applicable Seasonal Advance
Rate
Percentage of the US Dollar Equivalent of the
Value of
Eligible Prime Inventory PLUS twenty-five (25%)
----
percent of the
US Dollar Equivalent of the Value of Eligible
Sub-Prime
Inventory, or (B) eighty-five (85%) percent of
the Net
Recovery Cost Percentage multiplied by the US
Dollar
Equivalent of the Value of Eligible Prime
Inventory, or (C)
$30,000,000;
MINUS
(iii) any Availability Reserves.
(b) Lender may, in its discretion, from time to time, upon not less
than five (5) days' prior notice to Play By Play, as agent for Borrowers, (i)
reduce the lending formula with respect to Eligible Accounts to the extent that
Lender determines in good faith that the general creditworthiness of account
debtors has declined or (ii) reduce the lending formula with respect to Eligible
Prime Inventory or Eligible Sub-Prime Inventory to the extent that Lender
determines in good faith that: (A) the number of days of the turnover of the
Prime Inventory or Sub-Prime Inventory for any period has increased or (B) the
liquidation value of the Eligible Prime Inventory or Eligible Sub-Prime
Inventory, or any category thereof, has decreased, or (C) the
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nature, quality and mix of the Prime Inventory or Sub-Prime Inventory has
deteriorated. In determining whether to reduce the Lending formula(s), Lender
may consider events, conditions, contingencies or risks which are also
considered in determining Eligible Accounts, Eligible Inventory or in
establishing Availability Reserves.
(c) Except in Lender's discretion, (i) the aggregate amount of the
Loans and the Letter of Credit Accommodations outstanding at any time shall not
exceed the Maximum Credit, (ii) the aggregate amount of the Revolving Loans
outstanding at any time shall not exceed the Revolving Loan Limit, and (iii) the
aggregate amount of Revolving Loans based on the Net Amount of Eligible Accounts
consisting of Dated Eligible Accounts outstanding at any time shall not exceed
eighty percent (80%) of the total amount of outstanding Revolving Loans
attributed to the Net Amount of Eligible Accounts, and (iv) the aggregate amount
of Revolving Loans at any time outstanding based on Eligible Sub-Prime Inventory
shall not exceed $3,000,000. In the event that the outstanding amount of any
component of the Revolving Loans, or the aggregate amount of the outstanding
Loans and Letter of Credit Accommodations, exceed the amounts available under
the lending formulas, the sublimit for Eligible Inventory set forth in Section
2.1(a)(ii) above, the sublimits for Letter of Credit Accommodations set forth in
Section 2.2(d) or the Maximum Credit, as applicable, such event shall not limit,
waive or otherwise affect any rights of Lender in that circumstance or on any
future occasions and Borrowers shall, upon demand by Lender, which may be made
at any time or from time to time, immediately repay to Lender the entire amount
of any such excess(es) for which payment is demanded.
(d) For purposes only of applying the sublimit on Revolving Loans
based on Eligible Inventory pursuant to Sections 2.1(a)(ii) hereof, Lender may
treat the then undrawn amounts of outstanding Letter of Credit Accommodations
for the purpose of purchasing Eligible Prime Inventory as Revolving Loans to the
extent Lender is in effect relying on the Eligible Prime Inventory being
purchased with such Letter of Credit Accommodations. In determining the actual
amounts of such Letter of Credit Accommodations to be so treated for purposes of
the sublimit, the outstanding Revolving Loans and Availability Reserves shall be
attributed first to any components of the lending formulas in Section 2.1 that
are not subject to such sublimit, before being attributed to the components of
the lending formulas subject to such sublimit.
2.2 LETTER OF CREDIT ACCOMMODATIONS.
(a) Subject to and upon the terms and conditions contained herein,
at the request of a Borrower, Lender agrees to provide or arrange for Letter of
Credit Accommodations for the account of such Borrower containing terms and
conditions acceptable to Lender and the issuer thereof. Any payments made by
Lender to any issuer thereof and/or related parties in connection with the
Letter of Credit Accommodations shall constitute additional Revolving Loans to
Borrowers pursuant to this Section 2.
(b) In addition to any charges, fees or expenses charged by any
bank or issuer in connection with the Letter of Credit Accommodations, Borrowers
shall pay to Lender a letter of credit fee at a rate equal to one and one-half
percent (1 1/2%) per annum on the daily outstanding balance of the Letter of
Credit Accommodations for the immediately preceding
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month (or part thereof), payable in arrears as of the first day of each
succeeding month, except that Borrowers shall pay to Lender such letter of
credit fee, at Lender's option, without notice, at a rate equal to three and
one-half percent (3 1/2%) per annum or such daily outstanding balance for: (i)
the period from and after the date of termination or non-renewal hereof until
Lender has received full and final payment of all Obligations (notwithstanding
entry of a judgment against any Borrower) and (ii) the period from and after the
date of the occurrence of an Event of Default and for so long as such Event of
Default is continuing. Such letter of credit fee shall be calculated on the
basis of a three hundred sixty (360) day year and actual days elapsed and the
obligation of Borrowers to pay such fee shall survive the termination or
non-renewal of this Agreement.
(c) No Letter of Credit Accommodations shall be available unless on
the date of the proposed issuance of any Letter of Credit Accommodations, the
Revolving Loans available to Borrowers (subject to the Maximum Credit and any
Availability Reserves) are equal to or greater than: (i) if the proposed Letter
of Credit Accommodation is for the purpose of purchasing Eligible Prime
Inventory, the sum of (A) the percentage equal to one hundred (100%) percent of
the US Dollar Equivalent thereof minus the then applicable percentage set forth
in Section 2.1(a)(ii)(A)(1) or (2), as the case may be, above multiplied by the
US Dollar Equivalent of the Value of such Eligible Prime Inventory, plus (B)
freight, taxes, duty and other amounts that Lender estimates must be paid in
connection with such Inventory upon arrival and for delivery to one of such
Borrower's locations for Eligible Prime Inventory within the United States of
America or Canada and (ii) if the proposed Letter of Credit Accommodation is for
any other purpose, an amount equal to one hundred (100%) percent of the face
amount thereof and all other commitments and obligations made or incurred by
Lender with respect thereto. Effective on the issuance of each Letter of Credit
Accommodation, an Availability Reserve shall be established in the applicable
amount set forth in Section 2.2(c)(i) or Section 2.2(c)(ii).
(d) Except in Lender's discretion, the amount of all outstanding
Letter of Credit Accommodations and all other commitments and obligations made
or incurred by Lender in connection therewith shall not at any time exceed
$15,000,000. At any time an Event of Default exists or has occurred, upon
Lender's request, Borrowers will either furnish cash collateral to secure the
reimbursement obligations to the issuer in connection with any Letter of Credit
Accommodations or furnish cash collateral to Lender for the Letter of Credit
Accommodations, and in either case, the Loans otherwise available to Borrowers
shall not be reduced as provided in Section 2.2(c) to the extent of such cash
collateral.
(e) Each Borrower shall indemnify and hold Lender harmless from and
against any and all losses, claims, damages, liabilities, costs and expenses
which Lender may suffer or incur in connection with any Letter of Credit
Accommodations and any documents, drafts or acceptances relating thereto,
including, but not limited to, any losses, claims, damages, liabilities, costs
and expenses due to any action taken by any issuer or correspondent with respect
to any Letter of Credit Accommodation. Each Borrower assumes all risks with
respect to the acts or omissions of the drawer under or beneficiary of any
Letter of Credit Accommodation and for such purposes the drawer or beneficiary
shall be deemed such Borrower's agent. Each Borrower assumes all risks for, and
agrees to pay, all foreign, Federal, State and local taxes, duties and
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levies relating to any goods subject to any Letter of Credit Accommodations or
any documents, drafts or acceptances thereunder. Each Borrower hereby releases
and holds Lender harmless from and against any acts, waivers, errors, delays or
omissions, whether caused by such Borrower, by any issuer or correspondent or
otherwise with respect to or relating to any Letter of Credit Accommodation
except for Lender's own gross negligence or wilful misconduct as determined
pursuant to a final non-appealable order of a court of competent jurisdiction.
The provisions of this Section 2.2(e) shall survive the payment of Obligations
and the termination or non-renewal of this Agreement.
(f) Nothing contained herein shall be deemed or construed to grant
Borrowers or Guarantor any right or authority to pledge the credit of Lender in
any manner. Lender shall have no liability of any kind with respect to any
Letter of Credit Accommodation provided by an issuer other than Lender unless
Lender has duly executed and delivered to such issuer the application or a
guarantee or indemnification in writing with respect to such Letter of Credit
Accommodation. Borrowers and Guarantor shall be bound by any interpretation made
in good faith by Lender, or any other issuer or correspondent under or in
connection with any Letter of Credit Accommodation or any documents, drafts or
acceptances thereunder, notwithstanding that such interpretation may be
inconsistent with any instructions of Borrowers and Guarantor. Lender shall have
the sole and exclusive right and authority to, and Borrowers and Guarantor shall
not: (i) at any time an Event of Default exists or has occurred and is
continuing, (A) approve or resolve any questions of non-compliance of documents,
(B) give any instructions as to acceptance or rejection of any documents or
goods or (C) execute any and all applications for steamship or airway
guaranties, indemnities or delivery orders, and (ii) at all times, (A) grant any
extensions of the maturity of, time of payment for, or time of presentation of,
any drafts, acceptances, or documents, and (B) agree to any amendments,
renewals, extensions, modifica tions, changes or cancellations of any of the
terms or conditions of any of the applications, Letter of Credit Accommodations,
or documents, drafts or acceptances thereunder or any letters of credit included
in the Collateral. Lender may take such actions either in its own name or in any
Borrower's or Guarantor's name.
(g) Any rights, remedies, duties or obligations granted or
undertaken by any Borrower to any issuer or correspondent in any application for
any Letter of Credit Accommoda tion, or any other agreement in favor of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall be
deemed to have been granted or undertaken by such Borrower or Guarantor to
Lender. Any duties or obligations undertaken by Lender to any issuer or
correspondent in any application for any Letter of Credit Accommodation, or any
other agreement by Lender in favor of any issuer or correspondent relating to
any Letter of Credit Accommodation, shall be deemed to have been undertaken by
Borrowers and Guarantor to Lender and to apply in all respects to Borrowers and
Guarantor.
2.3 TERM LOANS. Lender is making the Term Loans to Play By Play and Ace in
the aggregate original principal amount of $2,410,000. The Term Loans shall be
(a) evidenced by the Term Promissory Note A in the original principal amount of
$817,000 and the Term Promissory Note B, in the original principal amount of
$1,593,000, each duly executed and delivered by Play By Play and Ace,
respectively, to Lender concurrently herewith, (b) repaid,
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together with interest and other amounts, in accordance with this Agreement, the
Term Notes, and the other Financing Agreements, and (c) secured by all of the
Collateral.
2.4 AVAILABILITY RESERVES. All Loans otherwise available to Borrowers
pursuant to the lending formulas and subject to the Maximum Credit and other
applicable limits hereunder shall be subject to Lender's continuing right to
establish and revise
Availability Reserves.
2.5 JOINT AND SEVERAL LIABILITY. Borrowers shall be liable for all amounts
due to Lender under this Agreement, regardless of which Borrower actually
receives the Loans or other extensions of credit hereunder or the amount of such
Loans received or the manner in which Lender accounts for such Loans, Letter of
Credit Accommodations or other extensions of credit on its books and records.
The Obligations with respect to Loans made to a Borrower, and the Obligations
arising as a result of the joint and several liability of a Borrower hereunder,
with respect to Loans made to the other Borrowers hereunder, shall be separate
and distinct obligations, but all such other Obligations shall be primary
obligations of all Borrowers. The Obligations arising as a result of the joint
and several liability of a Borrower hereunder with respect to Loans, Letter of
Credit Accommodations or other extensions of credit made to the other Borrowers
hereunder shall, to the fullest extent permitted by law, be unconditional
irrespective of (a) the validity or enforceability, avoidance or subordination
of the Obligations of the other Borrowers or of any promissory note or other
document evidencing all or any part of the Obligations of the other Borrowers,
(b) the absence of any attempt to collect the Obligations from the other
Borrowers, any Guarantor or any other security therefor, or the absence of any
other action to enforce the same, (c) the waiver, consent, extension,
forbearance or granting of any indulgence by Lender with respect to any
provisions of any instrument evidencing the Obligations of the other Borrowers,
or any part thereof, or any other agreement now or hereafter executed by the
other Borrowers and delivered to Lender, (d) the failure by Lender to take any
steps to perfect and maintain its security interest in, or to preserve its
rights and maintain its security or collateral for the Obligations of the other
Borrowers, (e) the election of Lender in any proceeding instituted under the
Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy
Code, (f) the disallowance of all or any portion of the claim(s) of Lender for
the repayment of the Obligations of the other Borrowers under Section 502 of the
Bankruptcy Code, or (g) any other circumstances which might constitute a legal
or equitable discharge or defense of a Guarantor or of the other Borrowers,
other than the wilful misconduct, gross negligence or bad faith of Lender as
determined pursuant to a final, non-appealable order of a court of competent
jurisdiction. With respect to the Obligations arising as a result of the joint
and several liability of a Borrower hereunder with respect to Loans, Letter of
Credit Accommodations or other extensions of credit made to the other Borrowers
hereunder, each Borrower waives, until the Obligations shall have been paid in
full and this Agreement shall have been terminated, any right to enforce any
right of subrogation or any remedy which Lender now has or may hereafter have
against Borrowers, any endorser or any guarantor of all or any part of the
Obligations, and any benefit of, and any right to participate in, any security
or collateral given to Lender. Upon any Event of Default and for so long as the
same is continuing, Lender may proceed directly and at once, without notice,
against any Borrower to collect and recover the full amount, or any portion of
the Obligations, without first proceeding against the other Borrowers or any
other Person, or against any security or collateral for the Obligations. Each
Borrower consents and agrees that
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Lender shall be under no obligation to marshall any assets in favor of
Borrower(s) or against or in payment of any or all of the Obligations.
SECTION 3. INTEREST AND FEES
3.1 INTEREST.
(a) Borrowers shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at the Interest Rate. All
interest accruing hereunder on and after the date of any Event of Default or
termination or non-renewal hereof shall be payable on demand.
(b) Borrowers may from time to time request that Prime Rate Loans
be converted to Eurodollar Rate Loans or that any existing Eurodollar Rate Loans
continue for an additional Interest Period. Such request from or on behalf of
Borrower shall specify the amount of the Prime Rate Loans which will constitute
Eurodollar Rate Loans (subject to the limits set forth below) and the Interest
Period to be applicable to such Eurodollar Rate Loans. Subject to the terms and
conditions contained herein, three (3) Business Days after receipt by Lender of
such a request from or on behalf of a Borrower, such Prime Rate Loans shall be
converted to Eurodollar Rate Loans or such Eurodollar Rate Loans shall continue,
as the case may be, PROVIDED, THAT, (i) no Event of Default, or act, condition
or event which with notice or passage of time or both would constitute an Event
of Default shall exist or have occurred and be continuing, (ii) no party hereto
shall have sent any notice of termination or non-renewal of this Agreement,
(iii) Borrower shall have complied with such customary procedures as are
established by Lender and specified by Lender to Borrower from time to time for
requests by Borrower for Eurodollar Rate Loans, (iv) no more than four (4)
Interest Periods may be in effect at any one time, (v) the aggregate amount of
the Eurodollar Rate Loans must be in an amount not less than $5,000,000 or an
integral multiple of $1,000,000 in excess thereof, (vi) the maximum amount of
Eurodollar Rate Loans at any time requested by Borrower shall not exceed the
amount equal to (A) eighty (80%) percent of the aggregate principal amount of
the Term Loans which it is anticipated will be outstanding as of the last day of
the applicable Interest Period plus (B) eighty (80%) percent of the lowest
principal amount of Revolving Loans which it is anticipated will be outstanding
during the applicable Interest Period, in each case as determined by Lender (but
with no obligations of Lender to make such Revolving Loans) in consultation with
Borrower and (vii) Lender shall have determined that the Interest Period or
Adjusted Eurodollar Rate is available to Lender through the Reference Bank and
can be readily determined as of the date of the request for such Eurodollar Rate
Loan by Borrower. Any request by Borrower to convert Prime Rate Loans to
Eurodollar Rate Loans or to continue any existing Eurodollar Rate Loans shall be
irrevocable. Notwithstanding anything to the contrary contained herein, Lender
and Reference Bank shall not be required to purchase United States Dollar
deposits in the London interbank market or other applicable Eurodollar Rate
market to fund any Eurodollar Rate Loans, but the provisions hereof shall be
deemed to apply as if Lender and Reference Bank had purchased such deposits to
fund the Eurodollar Rate Loans.
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(c) Any Eurodollar Rate Loans shall automatically convert to Prime
Rate Loans upon the last day of the applicable Interest Period, unless Lender
has received and approved a request to continue such Eurodollar Rate Loan at
least three (3) Business Days prior to such last day in accordance with the
terms hereof. Any Eurodollar Rate Loans to a Borrower shall, at Lender's option,
upon notice by Lender to convert to Prime Rate Loans in the event that (i) upon
an Event of Default or act, condition or event which, with the notice or passage
of time, or both, would constitute an Event of Default shall exist or have
occurred and be continuing, (ii) this Agreement shall terminate or not be
renewed, or (iii) the aggregate principal amount of the Prime Rate Loans which
have previously been converted to Eurodollar Rate Loans or existing Eurodollar
Rate Loans continued, as the case may be, at the beginning of an Interest Period
shall at any time during such Interest Period exceed either (A) the aggregate
principal amount of the Loans then outstanding, or (B) the then outstanding
principal amount of Loans then available to such Borrower under Section 2
hereof. Borrowers shall pay to Lender, upon demand by Lender (or Lender may, at
its option, charge any loan account of a Borrower) any amounts required to
compensate Lender, the Reference Bank or any participant with Lender for any
loss, (including loss of anticipated profits) cost or expense incurred by such
person, as a result of the conversion of Eurodollar Rate Loans to Prime Rate
Loans pursuant to any of the foregoing.
(d) Interest shall be calculated and payable by Borrowers to Lender
monthly in arrears not later than the first day of each calendar month and shall
be calculated on the basis of a three hundred sixty (360) day year and actual
days elapsed. The interest rate on the Prime Rate Loans shall increase or
decrease by an amount equal to each increase or decrease in the Prime Rate
effective on the first day of the month after any change in such Prime Rate is
announced based on the Prime Rate in effect on the last day of the month in
which any such change occurs. No agreements, conditions, provisions or
stipulations contained in this Agreement or any of the other Financing
Agreements or any Event of Default, or the exercise by Lender of the right to
accelerate the payment or the maturity of all or any portion of the Obligations,
or the exercise by Lender of any option whatsoever contained in this Agreement
or any of the other Financing Agreements, or the prepayment by Borrowers of any
of the Obligations, or the occurrence of any event or contingency whatsoever,
shall entitle Lender to contract for, charge or receive, in any event, interest
exceeding the Maximum Interest Rate. In no event shall Borrowers be obligated to
pay interest exceeding such Maximum Interest Rate. All agreements, conditions or
stipulations, if any, which may in any event or contingency whatsoever operate
to bind, obligate or compel Borrowers to pay a rate of interest exceeding the
Maximum Interest Rate shall be without binding force or effect, at law or in
equity, to the extent of the excess of interest over such Maximum Interest Rate.
In the event any interest is contracted for, charged or received in excess of
the Maximum Interest Rate ("Excess"), Borrowers acknowledge and stipulate that
any such contract, charge or receipt shall be the result of an accident and BONA
FIDE error, and that any Excess received by Lender shall be applied, first, to
the payment of the then outstanding and unpaid principal hereunder; second, to
the payment of the other Obligations then outstanding and unpaid; and third,
returned to Borrowers, it being the intent of the parties hereto not to enter at
any time into a usurious or otherwise illegal relationship. Borrowers recognize
that, with fluctuations in the rate of interest set forth in Section 3.1 of this
Agreement and the Maximum Interest Rate, such an unintentional result could
inadvertently occur. By the execution of this Agreement, Borrowers agree that
(i) the credit or return of any Excess shall constitute the
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acceptance by Borrowers of such Excess, and (ii) Borrowers shall not seek or
pursue any other remedy, legal or equitable, against Lender, based in whole or
in part upon contracting for, charging or receiving of any interest in excess of
the Maximum Interest Rate. For the purpose of determining whether or not any
Excess has been contracted for, charged or received by Lender, all interest at
any time contracted for, charged or received by Lender in connection with this
Agreement or any of the other Financing Agreements shall be amortized, prorated,
allocated and spread during the entire term of this Agreement.
3.2 CLOSING FEE. Borrowers shall pay to Lender as a closing fee the amount
of $300,000, which shall be fully earned and payable as of the date hereof.
3.3 SERVICING FEE. Borrowers shall pay to Lender monthly a servicing fee
in an amount equal to $3,000 in respect of Lender's services for each month (or
part thereof) while this Agreement remains in effect and for so long thereafter
as any of the Obligations are outstanding which fee shall be fully earned as of
and payable in advance on the date hereof and on the first day of each month
hereafter.
3.4 UNUSED LINE FEE. Borrowers shall pay to Lender monthly an unused line
fee at a rate equal to one-quarter (1/4 %) percent per annum calculated upon the
amount by which the Maximum Credit exceeds the average daily principal balance
of the outstanding Loans and Letter of Credit Accommodations during the
immediately preceding month (or part thereof) while this Agreement is in effect
and for so long thereafter as any of the Obligations are outstanding, which fee
shall be payable on the first day of each month in arrears.
3.5 CHANGES IN LAWS AND INCREASED COSTS OF LOANS.
(a) Notwithstanding anything to the contrary contained herein, all
Eurodollar Rate Loans shall, upon notice by Lender to a Borrower, convert to
Prime Rate Loans in the event that (i) any change in applicable law or
regulation (or the interpretation or administration thereof) shall either (A)
make it unlawful for Lender, Reference Bank or any participant to make or
maintain Eurodollar Rate Loans or to comply with the terms hereof in connection
with the Eurodollar Rate Loans, or (B) shall result in the increase in the costs
to Lender, Reference Bank or any participant of making or maintaining any
Eurodollar Rate Loans by an amount deemed by Lender to be material, or (C)
reduce the amounts received or receivable by Lender in respect thereof, by an
amount deemed by Lender to be material or (ii) the cost to Lender, Reference
Bank or any participant of making or maintaining any Eurodollar Rate Loans shall
otherwise increase by an amount deemed by Lender to be material. Borrowers shall
pay to Lender, upon demand by Lender (or Lender may, at its option, charge any
loan account of a Borrower) any amounts required to compensate Lender, the
Reference Bank or any participant with Lender for any loss (including loss of
anticipated profits), cost or expense incurred by such person as a result of the
foregoing, including, without limitation, any such loss, cost or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by such person to make or maintain the Eurodollar Rate Loans or any
portion thereof. A certificate of Lender setting forth the basis for the
determination of such amount necessary to compensate Lender as aforesaid shall
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be delivered to a Borrower (or on behalf of Borrowers) and shall be
conclusive, absent manifest
error.
(b) If any payments or prepayments in respect of the Eurodollar
Rate Loans are received by Lender other than on the last day of the applicable
Interest Period (whether pursuant to acceleration, upon maturity or otherwise),
including any payments pursuant to the application of collections under Section
6.3 or any other payments made with the proceeds of Collateral, Borrowers shall
pay to Lender upon demand by Lender (or Lender may, at its option, charge any
loan account of a Borrower) any amounts required to compensate Lender, the
Reference Bank or any participant with Lender for any additional loss (including
loss of anticipated profits), cost or expense incurred by such person as a
result of such prepayment or payment, including, without limitation, any loss,
cost or expense incurred by reason of the liquidation or reemployment of
deposits or other funds acquired by such person to make or maintain such
Eurodollar Rate Loans or any portion thereof.
SECTION 4. CONDITIONS PRECEDENT
4.1 CONDITIONS PRECEDENT TO INITIAL LOANS AND LETTER OF CREDIT
ACCOMMODATIONS. Each of the following is a condition precedent to Lender making
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(a) Lender shall have received, in form and substance reasonably
satisfactory to Lender, all releases, terminations and such other documents as
Lender may reasonably request to evidence and effectuate the termination by the
Existing Agent and Existing Lenders to Borrowers of their respective financing
arrangements with Borrowers and the termination and release by it or them, as
the case may be, of any interest in and to any assets and properties of
Borrowers and any Obligor in connection with such financing arrangements, duly
authorized, executed and delivered by it or each of them, including, but not
limited to, UCC termination statements for all UCC financing statements and
terminations or PPSA financing change statements for any Canadian financing
statements previously filed by it or any of them or their predecessors, as
secured party and any Borrower or Obligor, as debtor and satisfactions for any
mortgages or deeds of trust filed in favor of Existing Agent or Existing Lenders
or their predecessors;
(b) Lender shall have received evidence, in form and substance
satisfactory to Lender, that Lender has valid perfected and first priority
security interests in and liens upon the Collateral and any other property which
is intended to be security for the Obligations or the liability of any Obligor
in respect thereof, subject only to the security interests and liens permitted
herein or in the other Financing Agreements;
(c) all requisite corporate action and proceedings in connection
with this Agreement and the other Financing Agreements shall be satisfactory in
form and substance to Lender, and Lender shall have received all information and
copies of all documents, including, without limitation, records of requisite
corporate action and proceedings which Lender may have
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reasonably requested in connection therewith, such documents where requested by
Lender or its counsel to be certified by appropriate corporate officers or
Governmental Authorities;
(d) no material adverse change shall have occurred in the assets or
business of Borrowers since the date of Lender's latest field examination and no
change or event shall have occurred which would impair the ability of any
Borrower or Obligor to perform its obligations hereunder or under any of the
other Financing Agreements to which it is a party or of Lender to enforce the
Obligations or realize upon the Collateral;
(e) Lender shall have completed a field review of the Records and
such other information with respect to the Collateral as Lender may require to
determine the amount of Loans available to Borrowers (including, without
limitation, current perpetual inventory records and/or roll-forwards of Accounts
and Inventory through the date of closing and test counts of the Inventory in a
manner satisfactory to Lender, together with such supporting documentation as
may be necessary or appropriate, and other documents and information that will
enable Lender to accurately identify and verify the Collateral), the results of
which in each case shall be reasonably satisfactory to Lender, not more than
three (3) Business Days prior to the date hereof;
(f) Lender shall have received originals of the shares of the stock
certificates representing all of the issued and outstanding shares of the
Capital Stock of the Subsidiaries of Play By Play incorporated under the laws of
any State of the United States of America and stock certificates representing at
least sixty-five (65%) percent of the issued and outstanding shares of Capital
Stock of the Foreign Subsidiaries, in each case together with stock powers duly
executed in blank with respect thereto;
(g) Lender shall have received, in form and substance satisfactory
to Lender, all consents, waivers, acknowledgments and other agreements from
third persons which Lender may deem necessary or desirable in order to permit,
protect and perfect its security interests in and liens upon the Collateral or
to effectuate the provisions or purposes of this Agreement and the other
Financing Agreements, including, without limitation, Collateral Access
Agreements by lessors, mortgagees, warehousemen, consignees, processors, customs
brokers and agreements from sales agents used by any Borrower;
(h) the aggregate amount of the Excess Availability of Borrowers
shall be not less than $3,000,000, as of the date hereof, after giving effect to
the initial Loans made or to be made and Letter of Credit Accommodations issued
or to be issued in connection with the initial transactions hereunder;
(i) Lender shall have received, in form and substance satisfactory
to Lender, a valid and effective title insurance policy issued by a company and
agent reasonably acceptable to Lender (i) insuring the priority, amount and
sufficiency of the Mortgages, (ii) insuring against matters that would be
disclosed by surveys and (iii) containing any endorsements, assurances or
affirmative coverage requested by Lender for protection of its interests;
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(j) Lender shall have received environmental audits with respect to
the Real Property subject to the Mortgages conducted by an independent
environmental engineering firm acceptable to Lender, and in form, scope and
methodology satisfactory to Lender, confirming Ace is in compliance with all
material applicable Environmental Laws with respect to such Real Property and
the absence of any material environmental problems with respect to such Real
Property;
(k) Lender shall have received, in form and substance satisfactory
to Lender, (i) current or ALTA-Standard survey certified to Lender and (ii)
evidence of legal occupancy and municipal compliance;
(l) Lender shall have received, in form and substance satisfactory
to Lender, an agreement with each of the depository banks at which bank accounts
and/or lockboxes are maintained establishing such Blocked Account as Lender may
require pursuant to Section 6.3 hereof, duly authorized, executed and delivered
by such depository banks and Borrower;
(m) Lender shall have received, in form and substance satisfactory
to Lender, an Intercreditor and Subordination Agreement duly authorized,
executed and delivered by each of the holders of the Subordinated Notes, the
Subordinated Note Agent and acknowledged by Borrower, providing for, INTER,
ALIA, the subordination in right of payment of indebtedness of Play By Play to
each of the holders of the Subordinated Notes to the prior indefeasible payment
and satisfaction in full of the Obligations and for such parties' relative
rights with respect to the assets and properties of Play By Play and related
matters;
(n) Lender shall have received, in form and substance satisfactory
to Lender, (i) a Settlement Agreement by and among Play By Play, Ace and the
Seller and any other necessary parties thereto, (ii) all releases, terminations
and such other documents as Lender may reasonably request to evidence and
effectuate the termination and release by it or them, as the case may be, of any
interest in and to any assets and properties of Borrowers and any Obligor in
connection with the Subordinated Seller Note, duly authorized, executed and
delivered by it or each of them, including, but not limited to UCC termination
statements for all UCC financing statements and terminations or PPSA financing
change statements for any Canadian financing statements previously filed by it
or any of them or their predecessors, as secured party and any Borrower or
Obligor, as debtor and satisfactions for any mortgages or deeds of trust filed
in favor of Seller or their predecessors and (iii) a copy of the New
Subordinated Seller Note duly executed and delivered by Play By Play;
(o) Lender shall have received evidence of insurance and loss payee
endorsements required hereunder and under the other Financing Agreements, in
form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(p) Lender shall have received, Licensor Agreements, in form and
substance satisfactory to Lender, from the licensors listed on Schedule 4.1(p),
duly authorized, executed and delivered by such parties and Play By Play;
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(q) Lender shall have received and reviewed UCC and PPSA search
results for all jurisdictions in which assets of Borrowers are located in the
United States and Canada, which search results shall be in a form and substance
satisfactory to Lender;
(r) Lender shall have received, in form and substance satisfactory
to Lender, evidence that the existing events of default with respect to the
Subordinated Notes have been waived or cured;
(s) Lender shall have received, in form and substance satisfactory
to Lender, such opinion letters of counsel(s) to Borrowers and Guarantor with
respect to the Financing Agreements and the security interests and liens of
Lender with respect to the Collateral and such other matters as Lender may
request and, including opinion letters of counsel to Play By Play and its
Subsidiaries in Spain, the United Kingdom, Hong Kong and the Cayman Islands with
respect to the effectiveness of the pledge of the Capital Stock of certain of
its Subsidiaries to Lender; and
(t) the other Financing Agreements and all instruments and
documents hereunder and thereunder shall have been duly executed and delivered
to Lender, in form and
substance satisfactory to Lender.
4.2 CONDITIONS PRECEDENT TO ALL LOANS AND LETTER OF CREDIT ACCOMMODATIONS.
Each of the following is an additional condition precedent to Lender making
Loans and/or providing Letter of Credit Accommodations to Borrowers, including
the initial Loans and Letter of Credit Accommodations and any future Loans and
Letter of Credit Accommodations:
(a) all representations and warranties contained herein and in the
other Financing Agreements shall be true and correct in all material respects
with the same effect as though such representations and warranties had been made
on and as of the date of the making of each such Loan or providing each such
Letter of Credit Accommodation and after giving effect thereto;
(b) no law, regulation, order, judgment or decree of any
Governmental Authority shall exist, and no action, suit, investigation,
litigation or proceeding shall be pending or threatened in any court or before
any arbitrator or Governmental Authority, which (i) purports to enjoin,
prohibit, restrain or otherwise affect (A) the making of the Loans or providing
the Letter of Credit Accommodations, or (B) the consummation of the transactions
contemplated pursuant to the terms hereof or the other Financing Agreements or
(ii) has or could reasonably be expected to have a material adverse effect on
the assets or business of Borrowers, taken as a whole, or would impair the
ability of any Borrower or Obligor to perform its obligations hereunder or under
any of the other Financing Agreements or of Lender to enforce any Obligations or
realize upon any of the Collateral;
(c) no requirement of the Minister of National Revenue for payment
pursuant to Section 224, or any successor section, of the Income Tax Act
(Canada) or Section 317, or any successor section of the Excise Act (Canada) or
any comparable provision of similar legislation
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shall have been received by Lender or any other Person in respect of any
Borrower or otherwise issued in respect of any Borrower; and
(d) no Event of Default and no act, condition or event which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of the date of the making of
such Loan or providing each such Letter of Credit Accommodation and after giving
effect thereto.
SECTION 5. GRANT OF SECURITY INTEREST
To secure payment and performance of all Obligations, each Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and each Borrower hereby assigns to Lender as security the
following property and interests in property, whether now owned or hereafter
acquired or existing, and wherever located (together with all other collateral
security for the Obligations at any time granted to or held or acquired by
Lender, collectively, the "Collateral"):
5.1 Accounts;
5.2 all present and future contract rights, general intangibles
(including, but not limited to, tax and duty refunds, registered and
unregistered patents, trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, chooses
in action and other claims and existing and future leasehold interests in
equipment, real estate and fixtures), chattel paper, documents, instruments,
investment property, letters of credit, bankers' acceptances and guaranties;
5.3 all present and future monies, securities and other investment
property, credit balances, deposits, deposit accounts and other property of such
Borrower now or hereafter held or received by or in transit to Lender or its
Affiliates or at any other depository or other institution from or for the
account of such Borrower, whether for safekeeping, pledge, custody,
transmission, collection or otherwise, and all present and future liens,
security interests, rights, remedies, title and interest in, to and in respect
of Accounts and other Collateral, including, without limitation, (a) rights and
remedies under or relating to guaranties, contracts of surety ship, letters of
credit and credit and other insurance related to the Collateral, (b) rights of
stoppage in transit, replevin, repossession, reclamation and other rights and
remedies of an unpaid vendor, lienor or secured party, (c) goods described in
invoices, documents, contracts or instruments with respect to, or otherwise
representing or evidencing, Accounts or other Collateral, including, without
limitation, returned, repossessed and reclaimed goods, and (d) deposits by and
property of account debtors or other persons securing the obligations of account
debtors;
5.4 Inventory;
5.5 Equipment;
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5.6 Real Property;
5.7 Records; and
5.8 all products and proceeds of the foregoing, in any form, including,
without limitation, insurance proceeds and all claims against third parties for
loss or damage to or destruction of any or all of the foregoing.
SECTION 6. COLLECTION AND ADMINISTRATION
6.1 BORROWERS' LOAN ACCOUNTS. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans, Letter of
Credit Accommodations and other Obligations and the Collateral, (b) all payments
made by or on behalf of Borrowers and (c) all other appropriate debits and
credits as provided in this Agreement, including, without limitation, fees,
charges, costs, expenses and interest. All entries in the loan account(s) shall
be made in accordance with Lender's customary practices as in effect from time
to time.
6.2 STATEMENTS. Lender shall render to Play By Play, as agent for
Borrowers, each month a statement setting forth the balance in Borrowers' loan
account(s) maintained by Lender for Borrowers pursuant to the provisions of this
Agreement, including principal, interest, fees, costs and expenses. Each such
statement shall be subject to subsequent adjustment by Lender but shall, absent
fraud, mistake or manifest errors or omissions, be considered correct and deemed
accepted by Borrowers and Guarantor and conclusively binding upon Borrowers and
Guarantor as an account stated except to the extent that Lender receives a
written notice from Borrowers of any specific exceptions of Borrowers thereto
within thirty (30) days after the date such statement has been mailed by Lender.
Until such time as Lender shall have rendered to Borrowers a written statement
as provided above, the balance in a Borrower's loan account(s) shall be
presumptive evidence of the amounts due and owing to Lender by such Borrower.
6.3 COLLECTION OF ACCOUNTS.
(a) Borrowers shall establish and maintain, at their expense,
blocked accounts or lockboxes and related blocked accounts (in either case,
"Blocked Accounts"), as Lender may specify, with such banks as are acceptable to
Lender into which Borrowers shall promptly deposit and direct its account
debtors to directly remit all payments on Accounts and all payments constituting
proceeds of Inventory or other Collateral in the identical form in which such
payments are made, whether by cash, check or other manner. The banks at which
the Blocked Accounts are established shall enter into an agreement, in form and
substance satisfactory to Lender, providing that all items received or deposited
in the Blocked Accounts are the property of Lender, that the depository bank has
no lien upon, or right to setoff against, the Blocked Accounts, the items
received for deposit therein, or the funds from time to time on deposit therein
and that the depository bank will wire, or otherwise transfer, in immediately
available funds, on a daily basis, all funds received or deposited into the
Blocked Accounts to such bank account of Lender as Lender may from time to time
designate for such purpose ("Payment Account"). Borrowers agree that all
payments made to such Blocked Accounts or other funds
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received and collected by Lender, whether on the Accounts or as proceeds of
Inventory or other Collateral or otherwise shall be the property of Lender.
(b) For purposes of calculating the amount of the Loans available
to Borrowers, such payments will be applied (conditional upon final collection)
to the Obligations on the Business Day of receipt by Lender of immediately
available funds in the Payment Account provided such payments and notice thereof
are received in accordance with Lender's usual and customary practices as in
effect from time to time and within sufficient time to credit such Borrower's
loan account on such day, and if not, then on the next Business Day. For the
purposes of calculating interest on the Obligations, such payments or other
funds received will be applied (conditional upon final collection) to the
Obligations one (1) Business Day following the date of receipt of immediately
available funds by Lender in the Payment Account provided such payments or other
funds and notice thereof are received in accordance with Lender's usual and
customary practices as in effect from time to time and within sufficient time to
credit such Borrower's loan account on such day, and if not, then on the next
Business Day.
(c) Each Borrower and all of its directors, employees, agents,
Subsidiaries and other Affiliates shall, acting as trustee for Lender, receive,
as the property of Lender, any monies, checks, notes, drafts or any other
payment relating to and/or proceeds of Accounts or other Collateral which come
into their possession or under their control and immediately upon receipt
thereof, shall deposit or cause the same to be deposited in the Blocked
Accounts, or remit the same or cause the same to be remitted, in kind, to
Lender. In no event shall the same be commingled with a Borrower's own funds.
Each Borrower agrees to reimburse Lender on demand for any amounts owed or paid
to any bank at which a Blocked Account is established or any other bank or
person involved in the transfer of funds to or from the Blocked Accounts arising
out of Lender's payments to or indemnification of such bank or person. The
obligation of Borrowers to reimburse Lender for such amounts pursuant to this
Section 6.3 shall survive the termination or non-renewal of this Agreement.
6.4 PAYMENTS. All Obligations shall be payable to the Lender as provided
in Section 6.3 to such account or place as Lender may designate from time to
time. Lender may apply payments received or collected from Borrowers or for the
account of Borrowers (including, without limitation, the monetary proceeds of
collections or of realization upon any Collateral) to such of the Obligations,
whether or not then due, in such order and manner as Lender determines. At
Lender's option, all principal, interest, fees, costs, expenses and other
charges provided for in this Agreement or the other Financing Agreements may be
charged directly to the loan account(s) of Borrowers. Borrowers shall make all
payments to Lender on the Obligations free and clear of, and without deduction
or withholding for or on account of, any setoff, counterclaim, defense, duties,
taxes, levies, imposts, fees deductions, withholdings, restrictions or
conditions of any kind. If after receipt of any payment of, or proceeds of
Collateral applied to the payment of, any of the Obligations, Lender is required
to surrender or return such payment or proceeds to any Person for any reason,
then the Obligations intended to be satisfied by such payment or proceeds shall
be reinstated and continue and this Agreement shall continue in full force and
effect as if such payment or proceeds had not been received by Lender. Borrowers
shall be liable to pay to Lender, and do hereby indemnify and hold Lender
harmless for, the amount of any payments or
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proceeds surrendered or returned. This Section 6.4 shall remain effective
notwithstanding any contrary action which may be taken by Lender in reliance
upon such payment or proceeds. This Section 6.4 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
6.5 TAXES.
(a) Any and all payments by each Borrower and Guarantor to Lender
under this Agreement and any of the other Financing Agreements shall be made
free and clear of, and without deduction or withholding for any Taxes. In
addition, Borrowers shall pay all Other Taxes (or Lender may, at its option, pay
such Other Taxes and charge the loan account of any Borrower for such amounts so
paid).
(b) Each Borrower and Guarantor shall indemnify and hold harmless
Lender for the full amount of Taxes or Other Taxes paid by Lender (including any
Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this
Section, but not including Other Taxes that arise as a result of Lender's
arrangements with the applicable taxing jurisdiction, if any, and not as a
result of this Agreement) and any liability (including penalties, interest and
expenses (including reasonable attorney's fees and expenses) other than those
resulting solely from a failure by Lender to pay any Taxes or Other Taxes which
it is required to pay and for which it received an indemnity payment) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes were
correctly or legally asserted by the relevant Governmental Authority. Payment
under this indemnification shall be made within ten (10) days after the date
Lender makes written demand therefor. If such Taxes or Other Taxes were not
correctly or legally asserted, Lender shall, upon Play By Play's request and at
Borrowers' expense, provide such documents to Play By Play, in form and
substance satisfactory to Lender, as Play By Play may reasonably request, to
enable Borrowers to contest such Taxes or Other Taxes pursuant to appropriate
proceedings then available to such Borrower (so long as providing such documents
shall not, in the good faith determination of Lender, have a reasonable
likelihood of resulting in any liability of Lender).
(c) If any Borrower or Guarantor shall be required by law to deduct
or withhold any Taxes or Other Taxes from or in respect of any sum payable
hereunder to Lender, then:
(i) the sum payable shall be increased as necessary so that
after making all required deductions and withholdings (including deductions and
withholdings applicable to additional sums payable under this Section) Lender
receives an amount equal to the sum it would have received had no such
deductions or withholdings been made;
(ii) such Borrower or Guarantor shall make such deductions and
withholdings;
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(iii) such Borrower or Guarantor shall pay the full amount
deducted or withheld to the relevant taxing authority or other authority in
accordance with applicable law; and
(iv) such Borrower or Guarantor shall also pay to Lender, at
the time interest is paid, all additional amounts which Lender specifies as
necessary to preserve the after-tax yield such Lender would have received if
such Taxes or Other Taxes had not been imposed.
(d) Within thirty (30) days after the date of any payment by any
Borrower or Guarantor of Taxes or Other Taxes, such Borrower or Guarantor shall
furnish to Lender the original or a certified copy of a receipt evidencing
payment thereof, or other evidence of payment satisfactory to Lender.
(e) If any Borrower or Guarantor otherwise would be required to pay
additional amounts to Lender pursuant to subsection (c) of this Section, then
upon Play By Play's written request Lender shall use reasonable efforts at
Borrowers' expense (consistent with legal and regulatory restrictions) to file
such forms or documents and take such other action, including changing the
jurisdiction of its lending office so as to eliminate any such additional
payment by such Borrower or Guarantor which may thereafter accrue.
6.6 AUTHORIZATION TO MAKE LOANS. Lender is authorized to make the Loans
and provide the Letter of Credit Accommodations based upon telephonic or other
instructions received from anyone purporting to be an officer of any Borrower or
other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of Credit
Accommodations hereunder shall specify the date on which the requested advance
is to be made or Letter of Credit Accommodations established (which day shall be
a Business Day) and the amount of the requested Loan. Requests received after
12:00 p.m. Dallas time on any day shall be deemed to have been made as of the
opening of business on the immediately following Business Day. All Loans and
Letter of Credit Accommodations under this Agreement shall be conclusively
presumed to have been made to, and at the request of and for the benefit of,
Borrowers when deposited to the credit of any Borrower or otherwise disbursed or
established in accordance with the instructions of Play By Play or in accordance
with the terms and conditions of this Agreement.
6.7 APPOINTMENT OF AGENT FOR REQUESTING LOANS AND RECEIPTS OF LOANS
AND STATEMENTS.
(a) Each Borrower hereby irrevocably appoints and constitutes Play
By Play, as its agent to request and receive Loans and Letter of Credit
Accommodations pursuant to this Agreement and the other Financing Agreements
from Lender in the name or on behalf of such Borrower. Lender may disburse the
Loans to such bank account of a Borrower or Play By Play or otherwise make such
Loans to a Borrower and provide such Letter of Credit Accommodations to a
Borrower as Play By Play may designate or direct, without notice to any other
Borrower or Obligor.
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(b) Play By Play hereby accepts the appointment by Borrowers to act
as the agent of Borrowers pursuant to this Section 6.6. Play By Play shall
ensure that the disbursement of any Loans to each Borrower requested by or paid
to Play By Play or the issuance of any Letter of Credit Accommodations for a
Borrower hereunder shall be paid to or for the account of such Borrower.
(c) Each Borrower hereby irrevocably appoints and constitutes Play
By Play as its agent to receive statements on account and all other notices from
Lender with respect to the Obligations or otherwise under or in connection with
this Agreement and the other Financing Agreements.
(d) No purported termination of the appointment of Play By Play as
agent as aforesaid shall be effective, except after ten (10) days' prior written
notice to Lender.
6.8 USE OF PROCEEDS. Borrowers shall use the initial proceeds of the Loans
provided by Lender to Borrowers hereunder only for: (a) payments to each of the
persons listed in the disbursement direction letter furnished by Borrowers to
Lender on or about the date hereof and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Financing Agreements. All other Loans made or Letter of
Credit Accommodations provided by Lender to Borrowers pursuant to the provisions
hereof shall be used by Borrowers only for general operating, working capital
and other proper corporate purposes of Borrowers not otherwise prohibited by the
terms hereof. None of the proceeds will be used, directly or indirectly, for the
purpose of purchasing or carrying any margin security or for the purposes of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of Regulation U
of the Board of Governors of the Federal Reserve System, as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 COLLATERAL REPORTING.
(a) Borrowers shall provide Lender with the following documents in
a form reasonably satisfactory to Lender:
(i) on a weekly basis or more frequently as Lender may
reasonably request, a schedule of sales made, credits issued and cash received,
(ii) on a monthly basis or more frequently as Lender may
reasonably request, (A) ages of accounts payable (including the status of
payments to Customs Broker, owners and lessors of the leased premises of
Borrowers, sales agent, warehouses and processors used by Borrowers), (B) ages
of accounts receivable (together with a reconciliation to the previous month's
aging and to its general ledger), (C) perpetual inventory reports by category
and location, including such information and sufficient detail for Lender to
determine Inventory mix by product, (D) total sales and royalty reserves for
each Borrower and division thereof, (E) a
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statement of the outstanding loans and payments made, and Accounts owing to,
Affiliates as of the last day of the immediately preceding month, (F) reports of
sales for each category of Inventory, (G) reports on sales and use tax
collections, deposits and payments, including monthly sales and use tax accruals
(H) copies of the marine survey reports and port of entry summaries for each
shipment of Inventory received by each Borrower in the immediately preceding
month and (I) copies of evidence, in form and substance satisfactory to Lender,
that payment of all real property taxes is current (the reports referred to in
Section 7.1(a)(ii)(A) and (I) shall be accompanies by a certification by the
chief financial officer of Play by Play that Borrowers are current in their
payment of all real estate taxes);
(iii) upon Lender's request, copies of (A) customer statements
and credit memos, remittance advices and reports, and deposit slips and bank
statements, (B) shipping and delivery documents, and (C) purchase orders,
invoices and delivery documents for Inventory and Equipment acquired by
Borrowers; and
(iv) on a quarterly basis or more frequently, as Lender may
reasonably request, the status of payments of royalties or other amounts owing
to licensors of Intellectual Property used by Borrowers with respect to those
licenses which represent at least five (5%) percent or more of the estimated
total amount of Borrowers' annual sales of licensed merchandise together with a
certification by the chief financial officer of Play By Play that Borrowers are
current in their payment of such royalties and other amounts;
(v) such other reports as to the Collateral as Lender shall
reasonably request from time to time.
(b) If any of Borrower's or Guarantor's records or reports of the
Collateral are prepared or maintained by an accounting service, contractor,
shipper or other agent, each Borrower hereby irrevocably authorizes such
service, contractor, shipper or agent to deliver such records, reports, and
related documents to Lender and to follow Lender's instructions with respect to
further services at any time that an Event of Default exists or has occurred and
is continuing.
(c) All of the documents, reports and schedules provided by
Borrowers to Lender hereunder for Accounts payable in any currency other than US
Dollars and Inventory located outside the United States of America shall set
forth the US Dollar Equivalent for the amount of the Accounts and Value of the
Inventory included in any such documents, reports or schedules.
7.2 ACCOUNTS COVENANTS.
(a) Each Borrower shall notify Lender promptly of: (i) any material
delay in such Borrower's performance of any of its obligations to any account
debtor (including any Credit Card Issuer or Credit Card Processor) which could
reasonably expected to have a material adverse effect on the business,
properties or financial conditions of such Borrower or the assertion of any
material claims, offsets, defenses or counterclaims by any account debtor
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(including any Credit Card Issuer or Credit Card Processor), or any material
disputes with account debtors, or any settlement, adjustment or compromise
thereof, (ii) all material adverse information relating to the financial
condition of any account debtor (including any Credit Card Issuer or Credit Card
Processor) and which could reasonably expected to have a material adverse effect
on the business, properties or financial conditions of such Borrower and (iii)
any event or circumstance which, to such Borrower's or Guarantor's knowledge,
would cause Lender to consider any then existing Accounts as no longer
constituting Eligible Accounts. No credit, discount, allowance, extension, or
agreement for any of the foregoing shall be granted, to any account debtor
(including any Credit Card Issuer or Credit Card Processor) without Lender's
consent, EXCEPT in the ordinary course of such Borrower's business in accordance
with practices and policies previously disclosed in writing to Lender. So long
as no Event of Default exists or has occurred and is continuing, each Borrower
shall settle, adjust or compromise any claim, offset, counterclaim or dispute
with any account debtor (including any Credit Card Issuer or Credit Card
Processor). At any time that an Event of Default exists or has occurred and is
continuing, Lender shall, at its option, have the exclusive right to settle,
adjust or compromise any claim, offset, counterclaim or dispute with account
debtors (including any Credit Card Issuer or Credit Card Processor)or grant any
credits, discounts or allowances.
(b) Each Borrower shall notify Lender promptly of: (i) any notice
of a material default by such Borrower under any of the Credit Card Agreements
or of any default which might result in the Credit Card Issuer or Credit Card
Processor ceasing to make payments or suspending payments to such Borrower, (ii)
any notice from any Credit Card Issuer or Credit Card Processor that such person
is ceasing or suspending, or will cease or suspend, any present or future
payments due or to become due to such Borrower from such person, or that such
person is terminating or will terminate any of the Credit Card Agreements, and
(iii) the failure of such Borrower to comply with any material terms of the
Credit Card Agreements or any terms thereof which has a reasonable likelihood of
resulting in the Credit Card Issuer or Credit Card Processor ceasing or
suspending payments to such Borrower.
(c) Without limiting the obligation of Borrowers to deliver any
other information to Lender, Borrowers shall promptly report to Lender any
return of Inventory by any one account debtor if the Inventory so returned in
such case has a value in excess of $75,000. At any time that Inventory is
returned, reclaimed or repossessed, the Account (or portion thereof) which arose
from the sale of such returned, reclaimed or repossessed Inventory shall not be
deemed an Eligible Account. In the event any account debtor returns Inventory
when an Event of Default exists or has occurred and is continuing, Borrowers
shall, upon Lender's request, (i) hold the returned Inventory in trust for
Lender, (ii) segregate all returned Inventory from all of its other property,
(iii) dispose of the returned Inventory solely according to Lender's
instructions, and (iv) not issue any credits, discounts or allowances with
respect thereto without Lender's prior written consent.
(d) With respect to each Account: (i) the amounts shown on any
invoice delivered to Lender or schedule thereof delivered to Lender shall be
true and complete, (ii) no payments shall be made thereon except payments
immediately delivered to Lender pursuant to the terms of this Agreement, (iii)
no credit, discount, allowance or extension or agreement for
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any of the foregoing shall be granted to any account debtor (including any
Credit Card Issuer or Credit Card Processor) except as reported to Lender in
accordance with this Agreement and except for credits, discounts, allowances or
extensions made or given in the ordinary course of business of Borrowers in
accordance with practices and policies previously disclosed to Lender, (iv)
there shall be no setoffs, deductions, contras, defenses, counterclaims or
disputes existing or asserted with respect thereto except as reported to Lender
in accordance with the terms of this Agreement, (v) none of the transactions
giving rise thereto will violate any applicable Federal, State, Provincial or
local laws or regulations, all documentation relating thereto will be legally
sufficient under such laws and regulations and all such documentation will be
legally enforceable in accordance with its terms.
(e) Lender shall have the right at any time or times, in Lender's
name or in the name of a nominee of Lender, to verify the validity, amount or
any other matter relating to any Account or other Collateral, by mail,
telephone, facsimile transmission or otherwise.
(f) Each Borrower shall deliver or cause to be delivered to Lender,
with appropriate endorsement and assignment, with full recourse to such
Borrower, all chattel paper and instruments which such Borrower now owns or may
at any time acquire, immediately upon such Borrower's receipt thereof, except as
Lender may otherwise agree.
(g) Lender may, at any time or times that an Event of Default
exists or has occurred and is continuing, (i) notify any or all account debtors
(including any Credit Card Issuer or Credit Card Processor) that the Accounts
have been assigned to Lender and that Lender has a security interest therein and
Lender may direct any or all accounts debtors (including any Credit Card Issuer
or Credit Card Processor) to make payment of Accounts directly to Lender, (ii)
extend the time of payment of, compromise, settle or adjust for cash, credit,
return of merchandise or otherwise, and upon any terms or conditions, any and
all Accounts or other obligations included in the Collateral and thereby
discharge or release the account debtor (including any Credit Card Issuer or
Credit Card Processor) or any other party or parties in any way liable for
payment thereof without affecting any of the Obligations, (iii) demand, collect
or enforce payment of any Accounts or such other obligations, but without any
duty to do so, and Lender shall not be liable for its failure to collect or
enforce the payment thereof nor for the negligence of its agents or attorneys
with respect thereto and (iv) take whatever other action Lender may deem
necessary or desirable for the protection of its interests. At any time that an
Event of Default exists or has occurred and is continuing, at Lender's request,
all invoices and statements sent to any account debtor shall state that the
Accounts and such other obligations have been assigned to Lender and are payable
directly and only to Lender and each Borrower shall deliver to Lender such
originals of documents evidencing the sale and delivery of goods or the
performance of services giving rise to any Accounts as Lender may require.
7.3 INVENTORY COVENANTS. With respect to the Inventory: (a) each Borrower
shall at all times maintain inventory records reasonably satisfactory to Lender,
keeping in all material respects correct and accurate records itemizing and
describing the kind, type, quality and quantity of Inventory, the cost therefor
and daily withdrawals therefrom and additions thereto; (b) each Borrower shall
conduct cycle counting of Inventory, PROVIDED, THAT, at the request of Lender, a
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physical count of the Inventory of such Borrower at least once each year, but at
any time or times as Lender may request on or after an Event of Default, and
promptly following such physical inventory shall supply Lender with a report in
the form and with such specificity as may be reasonably satisfactory to Lender
concerning such physical count; (c) each Borrower shall not remove any Inventory
from the locations set forth or permitted herein, without the prior written
consent of Lender, except for sales of Inventory in the ordinary course of such
Borrower's business and except to move Inventory directly from one location of
such Borrower set forth or permitted herein to another such location of such
Borrower or any other Borrower (so long as a financing statement between Lender,
as secured party and such other Borrower, as debtor, covering such Inventory has
previously been recorded in the appropriate governmental offices of the
jurisdiction of such location); (d) upon Lender's request, Borrowers shall, at
their expense, (i) no more than once every six (6) months, deliver or cause to
be delivered to Lender a "desk top" inventory appraisal, in form, scope and
methodology acceptable to Lender and by an appraiser acceptable to Lender,
addressed to Lender and upon which Lender is expressly permitted to rely and
(ii) no more than once in any twelve (12) month period, but at any time or times
as Lender may request on or after an Event of Default, deliver or cause to be
delivered to Lender written reports or appraisals as to the Inventory in form,
scope and methodology acceptable to Lender and by an appraiser acceptable to
Lender, addressed to Lender and upon which Lender is expressly permitted to
rely; (e) each Borrower shall produce, use, store and maintain the Inventory,
with all reasonable care and caution and in accordance with applicable standards
of any insurance and in conformity with applicable laws (including, but not
limited to, the requirements of the Federal Fair Labor Standards Act of 1938, as
amended and all rules, regulations and orders related thereto); (f) each
Borrower assumes all responsibility and liability arising from or relating to
the production, use, sale or other disposition of the Inventory; (g) each
Borrower shall not sell Inventory to any customer on approval, or any other
basis which entitles the customer to return or may obligate such Borrower to
repurchase such Inventory and except for the right of return given to customers
of such Borrower in the ordinary course of business of such Borrower in
accordance with the then current return policy of such Borrower; (h) each
Borrower shall keep the Inventory in good and marketable condition; and (i) each
Borrower shall not, without prior written notice to Lender, acquire or accept
any Inventory on consignment or approval.
7.4 EQUIPMENT COVENANTS. With respect to the Equipment: (a) upon
Lender's request, Borrowers shall, at their expense, no more than once in any
twelve (12) month period, but at any time or times as Lender may request on or
after an Event of Default, deliver or cause to be delivered to Lender written
reports or appraisals as to the Equipment in form, scope and methodology
acceptable to Lender and by an appraiser acceptable to Lender, addressed to
Lender and upon which Lender is expressly permitted to rely; (b) each Borrower
shall keep the Equipment in good order, repair, running and marketable condition
(ordinary wear and tear); (c) each Borrower shall use the Equipment with all
reasonable care and caution and in accordance with applicable standards of any
insurance and in conformity with all applicable laws; (d) the Equipment is and
shall be used in Borrowers' business and not for personal, family, household or
farming use; (e) each Borrower shall not remove any Equipment from the locations
set forth or permitted herein, except to the extent necessary to have any
Equipment repaired or maintained in the ordinary course of the business of such
Borrower or to move Equipment directly from one
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location of a Borrower set forth or permitted herein to another such location of
such or any other Borrower (so long as a financing statement between Lender, as
secured party, and such other Borrower, as debtor, covering such Equipment has
previously been recorded in the appropriate governmental offices of the
jurisdiction of such location) and except for the movement of motor vehicles
used by or for the benefit of such Borrower in the ordinary course of business;
(f) the Equipment is now and shall remain personal property and each Borrower
shall not permit any of the Equipment to be or become part of or affixed to real
property unless Lender has recorded a fixture filing in the appropriate
governmental offices of the jurisdiction in which such real property is located
and such fixture filing evidences Lender's first priority security interest in
such Equipment; and (g) each Borrower assumes all responsibility and liability
arising from the use of the Equipment.
7.5 POWER OF ATTORNEY. Each Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as Borrower's true and
lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name,
to: (a) at any time an Event of Default or event which with notice or passage of
time or both would constitute an Event of Default exists or has occurred and is
continuing, (i) demand payment on Accounts or other proceeds of Inventory or
other Collateral, (ii) enforce payment of Accounts by legal proceedings or
otherwise, (iii) exercise all of Borrower's rights and remedies to collect any
Account or other Collateral, (iv) sell or assign any Account upon such terms,
for such amount and at such time or times as the Lender deems advisable, (v)
settle, adjust, compromise, extend or renew an Account, (vi) discharge and
release any Account, (vii) prepare, file and sign Borrower's name on any proof
of claim in bankruptcy or other similar document against an account debtor
(including any Credit Card Issuer or Credit Card Processor), (viii) notify the
post office authorities to change the address for delivery of Borrower's mail to
an address designated by Lender, and open and dispose of all mail addressed to
Borrowers, and (ix) do all acts and things which are necessary, in Lender's
determination, to fulfill Borrower's obligations under this Agreement and the
other Financing Agreements and (b) at any time to (i) take control in any manner
of any item of payment or proceeds thereof, (ii) have access to any lockbox or
postal box into which Borrower's mail is deposited, (iii) endorse Borrower's
name upon any items of payment or proceeds thereof and deposit the same in the
Lender's account for application to the Obligations, (iv) endorse Borrower's
name upon any chattel paper, document, instrument, invoice, or similar document
or agreement relating to any Account or any goods pertaining thereto or any
other Collateral, (v) clear Inventory the purchase of which was financed with
Letter of Credit Accommodations through US Customs, Canadian Customs or U.K.
Customs, as applicable, in such Borrower's name, Lender's name or the name of
Lender's designee, and to sign and deliver to customs officials powers of
attorney in such Borrower's name for such purpose (vi) sign Borrower's name on
any verification of Accounts and notices thereof to account debtors and (vii)
execute in Borrower's name and file any PPSA financing statements or UCC
financing statements or amendments thereto. Borrowers hereby release Lender and
its officers, employees and designees from any liabilities arising from any act
or acts under this power of attorney and in furtherance thereof, whether of
omission or commission, including, without limitation, as a result of Lender's
own negligence, except as a result of Lender's own gross negligence or wilful
misconduct as determined pursuant to a final non-appealable order of a court of
competent jurisdiction.
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7.6 RIGHT TO CURE. Lender may, at its option, (a) cure any default by
Borrower under any agreement with a third party, (b) pay or bond on appeal any
judgment entered against any Borrower or Guarantor, (c) discharge taxes, liens,
security interests or other encumbrances at any time levied on or existing with
respect to the Collateral and (d) pay any amount, incur any expense or perform
any act which, in Lender's judgment, is necessary or appropriate to preserve,
protect, insure or maintain the Collateral and the rights of Lender with respect
thereto. Lender may add any amounts so expended to the Obligations and charge
any Borrower's account therefor, such amounts to be repayable by any Borrower on
demand. Lender shall be under no obligation to effect such cure, payment or
bonding and shall not, by doing so, be deemed to have assumed any obligation or
liability of Borrowers. Any payment made or other action taken by Lender under
this Section shall be without prejudice to any right to assert an Event of
Default hereunder and to proceed accordingly.
7.7 ACCESS TO PREMISES. From time to time as requested by Lender, at the
cost and expense of Borrowers, (a) Lender or its designee shall have complete
access to all premises of Borrowers and Guarantor during normal business hours
and after reasonable notice to Borrowers, or at any time and without notice to
Borrowers if an Event of Default exists or has occurred and is continuing, for
the purposes of inspecting, verifying and auditing the Collateral and all of
such Borrower's and Guarantor's books and records, including, without
limitation, the Records, and (b) each Borrower and Guarantor shall promptly
furnish to Lender such copies of such books and records or extracts therefrom as
Lender may request, and (c) Lender or its designee may use during normal
business hours such of each Borrower's and Guarantor's personnel, equipment,
supplies and premises as may be reasonably necessary for the foregoing and if an
Event of Default exists or has occurred and is continuing for the collection of
Accounts and realization of other Collateral.
7.8 BILL OF LADING AND OTHER DOCUMENTS OF TITLE. Borrowers shall cause all
bills of lading and other documents of title relating to goods being purchased
by Borrowers which are outside the Untied States and in transit to the premises
of any Borrower or the premises of a Customs Broker in the United States to name
such Borrower as consignee, unless and until Lender may direct otherwise. At
such time as Lender may direct, Borrowers shall cause Lender or such financial
institution or other person as Lender may specify to be named as consignee.
Without limiting any other rights of Lender hereunder, Lender shall have the
right to endorse and negotiate on behalf of, and as attorney-in-fact for, such
Borrower any bill of lading or other documents of title with respect to such
goods naming such Borrower as consignee to Lender. There shall be three (3)
originals of each of such bill of lading or other document of title which unless
and until Lender shall direct otherwise shall be delivered as follows: (a) one
(1) original to such Customs Broker as such Borrower may specify, and (b) two
(2) originals to Lender or to such other person as Lender may designate for such
purpose. Borrowers shall obtain a copy (but not the originals) of such bill of
lading or other documents of title from the Customs Broker. Borrowers shall
cause all bills of lading or other documents of title relating to goods
purchased by Borrowers which are outside the United States and in transit to the
premises of any Borrower or a Customs Broker in the United States to be issued
in a form so as to constitute negotiable documents as such term is defined in
the Uniform Commercial Code.
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SECTION 8. REPRESENTATIONS AND WARRANTIES
Each Borrower and Guarantor hereby jointly and severally represents and
warrants to Lender the following (which shall survive the execution and delivery
of this Agreement), the truth and accuracy of which are a continuing condition
of the making of Loans and providing Letter of Credit Accommodations by Lender
to Borrowers:
8.1 CORPORATE EXISTENCE, POWER AND AUTHORITY; SUBSIDIARIES. Each Borrower
and Guarantor is a corporation duly organized and in good standing under the
laws of its state or other jurisdiction of incorporation and is duly qualified
as a foreign corporation and in good standing in all states, provinces or other
jurisdictions where the nature and extent of the business transacted by it or
the ownership of assets makes such qualification necessary, except for those
jurisdictions in which the failure to so qualify would not have a material
adverse effect on such Borrower's or Guarantor's financial condition, results of
operation or business or the rights of Lender hereunder or under any of the
other Financing Agreements or the rights of Lender in or to any of the
Collateral. The execution, delivery and performance of this Agreement and the
other Financing Agreements to which it is a party and the transactions
contemplated hereunder and thereunder are all within each Borrower's or
Guarantor's corporate powers, have been duly authorized and are not in
contravention of law or the terms of such Borrower's or Guarantor's certificate
of incorporation, by-laws, or other organizational documentation, or any
indenture, agreement or undertaking to which such Borrower is a party or by
which such Borrower or Guarantor or its property are bound. This Agreement and
the other Financing Agreements to which any Borrower is a party constitute
legal, valid and binding obligations of such Borrower enforceable in accordance
with their respective terms except as may be limited by bankruptcy, insolvency
or similar laws of general application relating to the enforcement of creditors
rights. Borrowers and Guarantor do not have any Subsidiaries except as set forth
on the Information Certificate.
8.2 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. All financial
statements relating to Borrowers and Guarantor which have been or may hereafter
be delivered by Borrowers or Guarantor to Lender have been prepared in
accordance with GAAP (except as to any interim financial statements, to the
extent such statements are subject to normal year-end adjustments and do not
include any notes), and fairly present the financial condition and the results
of operation of Borrowers and Guarantor as at the dates and for the periods set
forth therein. Except as disclosed in any interim financial statements furnished
by Borrowers or Guarantor to Lender prior to the date of this Agreement, there
has been no material adverse change in the assets, liabilities, prospects and
condition, financial or otherwise of Borrowers, since the date of the most
recent audited financial statements furnished by Borrowers or Guarantor to
Lender prior to the date of this Agreement.
8.3 CHIEF EXECUTIVE OFFICE; COLLATERAL LOCATIONS. The chief executive
office of each Borrower and Guarantor and each Borrower's and Guarantor's
Records concerning Accounts are located only at the addresses set forth in the
Information Certificate and its only other places of business and the only other
locations of Collateral, if any, are the addresses set forth in the Information
Certificate, subject to the right of each Borrower and Guarantor to establish
new
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locations in accordance with Section 9.2 below. The Information Certificate
correctly identifies any of such locations which are not owned by Borrowers or
Guarantor and sets forth the owners and/or operators thereof.
8.4 PRIORITY OF LIENS; TITLE TO PROPERTIES. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 8.4
hereto and the other liens permitted under Section 9.8 hereof. Each Borrower and
Guarantor has good and marketable title to all of its properties and assets
subject to no liens, mortgages, pledges, security interests, encumbrances or
charges of any kind, except those granted to Lender and such others as are
specifically listed on Schedule 8.4 hereto or permitted under Section 9.8
hereof.
8.5 TAX RETURNS. Except as set forth on Schedule 8.5, each Borrower and
Guarantor has filed, or caused to be filed, in a timely manner all tax returns,
reports and declarations which are required to be filed by it (without requests
for extensions except as previously disclosed in writing to Lender). All
information in such tax returns, reports and declarations is complete and
accurate. Except as set forth on Schedule 8.5, each Borrower and Guarantor has
paid or caused to be paid all Taxes due and payable or claimed due and payable
in any assessment received by it, except taxes the validity of which are being
contested in good faith by appropriate proceedings diligently pursued and
available to such Borrower or Guarantor and with respect to which adequate
reserves have been set aside on its books. Adequate provision has been made for
the payment of all accrued and unpaid Federal, State, Provincial, county, local,
foreign and other Taxes of each Borrower and Guarantor whether or not yet due
and payable and whether or not disputed.
8.6 LITIGATION. There is no present investigation by any Governmental
Authority pending, or to the best of each Borrower's and Guarantor's knowledge
threatened, against or affecting any Borrower, its assets or business and there
is no action, suit, proceeding or claim by any Person pending, or to the best of
each Borrower's and Guarantor's knowledge threatened, against any Borrower or
Guarantor or its assets or goodwill, or against or affecting any transactions
contemplated by this Agreement, which if adversely determined against such
Borrower or Guarantor would result in any material adverse change in the assets
or businesses of such Borrower or Guarantor or would impair the ability of such
Borrower or Guarantor to perform its obligations hereunder or under any of the
other Financing Agreements to which such Borrower or Guarantor is a party or of
Lender to enforce any Obligations or realize upon any Collateral.
8.7 COMPLIANCE WITH OTHER AGREEMENTS AND APPLICABLE LAWS.
(a) Except as set forth on Schedule 8.7 hereto, each Borrower and
Guarantor is not in default in any material respect under, or in violation in
any material respect of any of the terms of, any agreement, contract,
instrument, lease or other commitment to which it is a party or by which it or
any of its assets are bound. Each Borrower and Guarantor is in compliance in all
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material respects with all applicable provisions of laws, rules, regulations,
licenses, permits, approvals and orders of any foreign, Federal, State or local
Governmental Authority.
(b) Each Borrower and Guarantor has obtained all material permits,
licenses, approvals, consents, certificates, orders or authorizations of any
Governmental Authority required for the lawful conduct of its business (the
"Permits"). The Permits constitute all permits, licenses, approvals, consents,
certificates, orders or authorizations necessary for each Borrower and Guarantor
to own and operate its business as presently conducted or proposed to be
conducted where the failure to have such Permits would have a Material Adverse
Effect. All of the Permits are valid and subsisting and in full force and
effect. There are no actions, claims or proceedings pending or threatened that
seek the revocation, cancellation, suspension or modification of any of the
Permits.
8.8 BANK ACCOUNTS. All of the deposit accounts, investment accounts or
other accounts in the name of or used by any Borrower or Guarantor maintained at
any bank or other financial institution are set forth on Schedule 8.8 hereto,
subject to the right of each Borrower or Guarantor to establish new accounts in
accordance with Section 9.14 below.
8.9 ENVIRONMENTAL COMPLIANCE.
(a) Except as set forth on Schedule 8.9 hereto, each Borrower and
Guarantor has not, and has not permitted any Subsidiary to, generate, use,
store, treat, transport, manufacture, handle, produce or dispose of any
Hazardous Materials, on or off its premises (whether or not owned by it) in any
manner which at any time violates any applicable Environmental Law or any
license, permit, certificate, approval or similar authorization thereunder and
the operations of each Borrower and Guarantor and such Subsidiary complies in
all material respects with all Environmental Laws and all licenses, permits,
certificates, approvals and similar authorizations thereunder.
(b) Except as set forth on Schedule 8.9 hereto, to the actual
knowledge of Borrowers, there has been no investigation, proceeding, complaint,
order, directive, claim, citation or notice by any Governmental Authority or any
other person nor is any pending or to the best of each Borrower's and
Guarantor's knowledge threatened, with respect to any non-compliance with or
violation of the requirements of any Environmental Law by any Borrower or
Guarantor or the release, spill or discharge, threatened or actual, of any
Hazardous Material or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials or any
other environmental, health or safety matter, which affects any Borrower or
Guarantor or its business, operations or assets or any properties at which any
Borrower or Guarantor has transported, stored or disposed of any Hazardous
Materials.
(c) To the actual knowledge of Borrower, no Borrower or Guarantor
has material liability (contingent or otherwise) in connection with a release,
spill or discharge, threatened or actual, of any Hazardous Materials or the
generation, use, storage, treatment, transportation, manufacture, handling,
production or disposal of any Hazardous Materials.
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(d) To the actual knowledge of Borrower, each Borrower and
Guarantor has all licenses, permits, certificates, approvals or similar
authorizations required to be obtained or filed in connection with the
operations of such Borrower or Guarantor under any Environmental Law and all of
such licenses, permits, certificates, approvals or similar authorizations are
valid and in full force and effect.
8.10 EMPLOYEE BENEFITS.
(a) No Borrower or Guarantor has engaged in any transaction in
connection with which any Borrower, Guarantor or ERISA Affiliate could be
subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA
or a tax imposed by Section 4975 of the Code, including any accumulated funding
deficiency described in Section 8.10(c) hereof and any deficiency with respect
to vested accrued benefits described in Section 8.10(d) hereof.
(b) No liability to the Pension Benefit Guaranty Corporation has
been, or is expected by any Borrower or Guarantor to be, incurred with respect
to any employee benefit plan of any Borrower, Guarantor or ERISA Affiliate.
There has been no reportable event (within the meaning of Section 4043(b) of
ERISA), or any other event or condition, with respect to any employee pension
benefit plan of any Borrower, Guarantor or ERISA Affiliate which presents a risk
of termination of any such plan by the Pension Benefit Guaranty Corporation.
(c) Full payment has been made of all amounts which any Borrower,
Guarantor or ERISA Affiliate is required under Section 302 of ERISA and Section
412 of the Code to have paid under the terms of each employee benefit plan as of
the last day of the most recent fiscal year of such plan ended prior to the date
hereof. No accumulated funding deficiency (as defined in Section 302 of ERISA
and Section 412 of the Code), whether or not waived, exists with respect to any
employee benefit plan, including any penalty or tax described in Section 8.10(a)
hereof and any deficiency with respect to vested accrued benefits described in
Section 8.10(d) hereof.
(d) The current value of all vested accrued benefits under each
employee benefit plan maintained by a Borrower or Guarantor that is subject to
Title IV of ERISA does not exceed the current value of the assets of such plans
allocable to such vested accrued benefits, including any penalty or tax
described in Section 8.10(a) hereof and any accumulated funding deficiency
described in Section 8.10(c) hereof. The terms "current value" and "accrued
benefit" have the meanings specified in ERISA.
(e) No Borrower, Guarantor, or any ERISA Affiliate, is or has ever
been obligated to contribute to any "multiemployer plan" (as such term is
defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA.
8.11 CAPITALIZATION.
(a) All of the issued and outstanding: (i) shares of Capital Stock
of Ace, Restaurants and Friends are directly and beneficially owned and held by
Play By Play, (ii) shares
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of Capital Stock of Newco are directly and beneficially owned and held by Ace,
(iii) shares of Capital Stock of PBP UK are directly and beneficially owned and
held by PBP Europe, and (iv) shares of Capital Stock of Caribe are directly and
beneficially owned and held by PBP Far East and in each case all of such shares
referred to in clauses (i), (ii), (iii) and (iv) above have been duly authorized
and are fully paid and non-assessable, free and clear of all claims, liens,
pledges and encumbrances of any kind.
(b) At least (i) seventy (70%) percent of all of the issued and
outstanding shares of the Capital Stock of PBP Europe and (ii) ninety-nine (99%)
percent of the issued and outstanding Capital Stock of PBP Far East is directly
and beneficially owned by Play By Play and in each case all of such shares
referred to in clauses (i) and (ii) above have been duly authorized and are
fully paid and non-assessable, free and clear of all claims, liens, pledges and
encumbrances of any kind
(c) Each Borrower is, as of the date hereof, solvent after the
creation of the Obligations, the security interests of Lender and the other
transactions contemplated hereunder, is able to pay its debts as they mature and
has (and has reason to believe it will continue to have) sufficient capital (and
not unreasonably small capital) to carry on its business consistent with its
current practices as of the date hereof. The assets and properties of each
Borrower at a fair valuation and at their present fair salable value are greater
than the indebtedness of such Borrower, and including subordinated and
contingent liabilities computed at the amount which, to the best of each
Borrowers' knowledge, represents an amount which can reasonably be expected to
become an actual or matured liability.
8.12 ACCURACY AND COMPLETENESS OF INFORMATION. All information furnished
by or on behalf of any Borrower or Guarantor in writing to Lender in connection
with this Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including, without limitation, all information
on the Information Certificate is true and correct in all material respects on
the date as of which such information is dated or certified and does not omit
any material fact necessary in order to make such information not misleading. No
event or circumstance has occurred which has had or could reasonably be expected
to have a material adverse affect on the businesses, assets or prospects of any
Borrower or Guarantor which has not been accurately disclosed to Lender in
writing.
8.13 SURVIVAL OF WARRANTIES; CUMULATIVE. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrowers or Guarantor shall now or hereafter give, or cause to be given, to
Lender.
8.14 INTELLECTUAL PROPERTY. Schedule 8.14 sets forth all of the
agreements or other
arrangements of each Borrower and Guarantor pursuant to which such Borrower
or Guarantor
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has a license or other right to use any Intellectual Property owned by another
person as in effect on the date hereof (collectively, together with any such
agreements or arrangements entered into by any Borrower or Guarantor after the
date hereof, the "License Agreements", sometimes being referred to herein
individually as a "License Agreement") and the dates of the expiration of such
agreements or other arrangements of such Borrower or Guarantor as in effect on
the date hereof. Schedule 8.14 also sets forth all Intellectual Property of each
Borrower and Guarantor which is registered with the U.S. Patent and Trademark
Office, Canadian Intellectual Property Office or any other Governmental
Authority. No Intellectual Property at any time used by any Borrower or
Guarantor which is owned by another person or owned by such Borrower subject to
any security interest, lien, charge, collateral assignment, pledge, hypothec or
other encumbrance in favor of any person other than Lenders is used in
connection with the billing or collection of the Accounts or any other
Collateral or affixed to or otherwise used in connection with the sale of any
Inventory. No software or other Intellectual Property owned and used by any
Borrower in the billing and collection of Accounts or other Collateral is of the
type that may be subject to registration by such Borrower as a copyright with
the U.S. Copyright Office which has not been so registered. Each Borrower owns
or licenses all Intellectual Property and other rights with respect thereto,
which are necessary for the operation of its business as presently conducted or
proposed to be conducted. To the best of the knowledge of each Borrower and
Guarantor, no product, process, method, substance, or other Intellectual
Property or goods bearing or using any Intellectual Property presently
contemplated to be sold by or employed by any Borrower infringes any patent,
trademark, service-mark, tradename, copyright, license or other Intellectual
Property owned by any other Person and no claim or litigation is pending or
threatened against or affecting any Borrower or Guarantor contesting its right
to sell or use any such product, process, method, substance or other
Intellectual Property.
8.15 RESTAURANTS INTERNATIONAL, INC. Restaurants is an inactive Subsidiary
of Play By Play and does not conduct or maintain any business operations and
does not own assets except for a promissory note dated April 12, 1996 with an
outstanding principal amount of $944,467.49 made by Croitex, S.A. in favor of
Restaurants the collection of which Borrowers and Guarantor represent is
doubtful. The proceeds of such Note have been assigned by Restaurants to PBP
Europe.
8.16 MATERIAL CONTRACTS. Schedule 8.16 hereto sets forth all Material
Contracts to which any Borrower or Guarantor is a party or is bound as of the
date hereof. Borrowers have delivered true, correct and complete copies of such
Material Contracts to Lender on or before the date hereof. Except as set forth
in Schedule 8.16 hereto, no Borrower or Guarantor is in breach of or in default
under any Material Contract or has received any notice of the intention of any
other party thereto to terminate any Material Contract.
8.17 CREDIT CARD AGREEMENTS. Set forth in Schedule 8.17 hereto is a
correct and complete list of (a) all of the Credit Card Agreements and all other
agreements, documents and instruments existing as of the date hereof between or
among each Borrower, any of its Affiliates, Credit Card Issuers, the Credit Card
Processors and any of their respective Affiliates; (b) the percentage of each
sale payable to the Credit Card Issuer or Credit Card Processor under the terms
of such Credit Card Agreements; (c) all other fees and charges payable by such
Borrower
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under or in connection with such Credit Card Agreements; and (d) the term of
such Credit Card Agreements. The Credit Card Agreements constitute all of such
agreements necessary for each Borrower to operate its business as presently
conducted with respect to credit cards and debit cards and no Credit Card
Receivables of such Borrower arise from purchases by customers of Inventory with
credit cards or debit cards, other than those that are issued by Credit Card
Issuers with whom such Borrower has entered into one of the Credit Card
Agreements set forth on Schedule 8.17 hereto or with whom Borrower has entered
into a Credit Card Agreement in accordance with Section 9.20 hereof. Each of the
Credit Card Agreements constitutes the legal, valid and binding obligations of
Borrowers and to the best of each Borrower's knowledge, the other parties
thereto, enforceable in accordance with their respective terms (except as such
enforceability may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium or similar laws of general applicability affecting the enforcement of
creditors' rights and (ii) the application of general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law)) and are in full force and effect. No default or event of
default, or act, condition or event which after notice or passage of time or
both, would constitute a default or an event of default under any of the Credit
Card Agreements exists or has occurred and is continuing. Borrowers and the
other parties thereto have complied with all of the terms and conditions of the
Credit Card Agreements to the extent necessary for Borrower to be entitled to
receive all payments thereunder. Each Borrower has delivered, or caused to be
delivered to Lender, true, correct and complete copies of all of the Credit Card
Agreements.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
9.1 MAINTENANCE OF EXISTENCE. Each Borrower and Guarantor shall at all
times preserve, renew and keep in full force and effect its corporate existence
and rights and franchises with respect thereto and maintain in full force and
effect all permits, licenses, trademarks, trade names, approvals,
authorizations, leases and contracts necessary to carry on its business as
presently or proposed to be conducted. Each Borrower and Guarantor shall give
Lender thirty (30) days' prior written notice of any proposed change in its
corporate name, which notice shall set forth the new name and such Borrower or
Guarantor shall deliver to Lender a copy of the amendment to the Certificate of
Incorporation of such Borrower or Guarantor providing for the name change
certified by the Secretary of State of the jurisdiction of incorporation of such
Borrower or Guarantor as soon as it is available.
9.2 NEW COLLATERAL LOCATIONS. Each Borrower and Guarantor may open any new
location within the continental United States or Canada provided such Borrower
or Guarantor (a) gives Lender thirty (30) days' prior written notice of the
intended opening of any such new location and (b) executes and delivers, or
causes to be executed and delivered, to Lender such agreements, documents, and
instruments as Lender may deem reasonably necessary or desirable to protect its
interests in the Collateral at such location, including UCC financing
statements, PPSA financing statements, debentures, hypothec or other security
instruments, as Lender may require for the perfection of Lender's first priority
security interests and liens.
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9.3 COMPLIANCE WITH LAWS, REGULATIONS, ETC.
(a) Each Borrower and Guarantor shall, and shall cause any
Subsidiary to, at all times, comply in all material respects with all laws,
rules, regulations, licenses, permits, approvals and orders applicable to it and
duly observe all material requirements of any foreign, Federal, State,
Provincial or local Governmental Authority, including ERISA, the Code, the
Occupational Safety and Health Act of 1970, as amended, the Fair Labor Standards
Act of 1938, The Occupational Health & Safety Act (Ontario) as amended, and all
statutes, rules, regulations, orders, permits and stipulations relating to
environmental pollution and employee health and safety, including all of the
Environmental Laws.
(b) At the reasonable request of Lender and in any event, to the
extent required by applicable law, each Borrower and Guarantor shall establish
and maintain, at its expense, a system to assure and monitor its continued
compliance with all Environmental Laws in all of its operations, which system
shall include annual reviews of such compliance by employees or agents of each
Borrower and Guarantor who are familiar with the requirements of the
Environmental Laws. Copies of all environmental surveys, audits, assessments,
feasibility studies and results of remedial investigations shall be promptly
furnished, or caused to be furnished, by each Borrower and Guarantor to Lender.
Borrowers and Guarantor shall take prompt and appropriate action to respond to
any non-compliance with any of the Environmental Laws and shall regularly report
to Lender on such response.
(c) Borrowers and Guarantor shall give both oral and written notice
to Lender immediately upon a Borrower's or Guarantor's receipt of any notice of,
or a Borrower's or Guarantor's otherwise obtaining knowledge of, (i) the
occurrence of any event involving the release, spill or discharge, threatened or
actual, of any Hazardous Material or (ii) any investigation, proceeding,
complaint, order, directive, claims, citation or notice with respect to: (A) any
non-compliance with or violation of any Environmental Law by a Borrower or
Guarantor or (B) the release, spill or discharge, threatened or actual, of any
Hazardous Material or (C) the generation, use, storage, treatment,
transportation, manufacture, handling, production or disposal of any Hazardous
Materials or (D) any other environmental, health or safety matter, which affects
a Borrower or Guarantor or its business, operations or assets or any properties
at which a Borrower or Guarantor transported, stored or disposed of any
Hazardous Materials.
(d) Without limiting the generality of the foregoing, whenever
Lender reasonably determines that there is non-compliance that would have a
material adverse effect on Borrowers' properties, business or financial
condition, or any condition which requires any action by or on behalf of any
Borrower or Guarantor in order to avoid any non-compliance that would have a
material adverse effect on Borrowers' properties, business or financial
condition, with any Environmental Law, such Borrower or Guarantor shall, at
Lender's request and such Borrower's or Guarantor's expense: (i) cause an
independent environmental engineer acceptable to Lender to conduct such tests of
the site where such Borrower's or Guarantor's non-compliance or alleged
non-compliance with such Environmental Laws has occurred as to such
non-compliance and prepare and deliver to Lender a report as to such
non-compliance setting forth the results of such tests, a proposed plan for
responding to any environmental problems described
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therein, and an estimate of the costs thereof and (ii) provide to Lender a
supplemental report of such engineer whenever the scope of such non-compliance,
or such Borrower's or Guarantor's response thereto or the estimated costs
thereof, shall change in any material
respect.
(e) Each Borrower and Guarantor shall indemnify and hold harmless
Lender, its directors, officers, employees, agents, invites, representatives,
successors and assigns, from and against any and all losses, claims, damages,
liabilities, costs, and expenses (including attorneys' fees and legal expenses)
directly or indirectly arising out of or attributable to the use, generation,
manufacture, reproduction, storage, release, threatened release, spill,
discharge, disposal or presence of a Hazardous Material, including the costs of
any required or necessary repair, cleanup or other remedial work with respect to
any property of any Borrower or Guarantor and the preparation and implementation
of any closure, remedial or other required plans; provided, however, that no
Borrower shall indemnify Lender, its directors, officers, employees, agents,
invites, representatives, successors and assigns from such losses, claims,
damages, liabilities, costs and expenses resulting from their gross negligence
or willful misconduct as determined pursuant to a final, non-appealable order of
a court of competent jurisdiction. All representations, warranties, covenants
and indemnifications in this Section 9.3 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
9.4 PAYMENT OF TAXES AND CLAIMS. Each Borrower and Guarantor shall, and
shall cause any Subsidiary to, duly pay and discharge all taxes, assessments,
contributions and governmental charges upon or against it or its properties or
assets, except for taxes the validity of which are being contested in good faith
by appropriate proceedings diligently pursued and available to such Borrower or
Guarantor and with respect to which adequate reserves have been set aside on its
books. Newco shall file or cause to be filed, within sixty (60) days from the
date hereof, all tax returns, reports and declarations which are required to be
filed by it with respect to its Canadian operations and shall pay and discharge
all Taxes payable thereunder and shall provide Lender with satisfactory evidence
thereof. Borrowers and Guarantor shall be liable for any tax or penalties
imposed on Lender as a result of the financing arrangements provided for herein
and except as otherwise may be provided in Section 6.5 hereof, each Borrower and
Guarantor agrees to indemnify and hold Lender harmless with respect to the
foregoing, and to repay to Lender on demand the amount thereof, and until paid
by Borrowers such amount shall be added and deemed part of the Loans, PROVIDED,
THAT, nothing contained herein shall be construed to require Borrowers or
Guarantor to pay any income or franchise taxes attributable to the income of
Lender from any amounts charged or paid hereunder to Lender. The foregoing
indemnity shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
9.5 INSURANCE. Each Borrower and Guarantor shall, at all times, maintain
with financially sound and, reputable insurers insurance with respect to the
Collateral against loss or damage and all other insurance of the kinds and in
the amounts customarily insured against or carried by corporations of
established reputation engaged in the same or similar businesses and similarly
situated. Said policies of insurance shall be satisfactory to Lender as to form,
amount and insurer. Each Borrower and Guarantor shall furnish certificates,
policies or endorsements to Lender as Lender shall require as proof of such
insurance, and, if any Borrower or Guarantor fails
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to do so, Lender is authorized, but not required, to obtain such insurance at
the expense of Borrowers. All such policies shall provide for at least thirty
(30) days' prior written notice to Lender of any cancellation or reduction of
coverage and that Lender may act as attorney for any Borrower or Guarantor in
obtaining, and at any time an Event of Default exists or has occurred and is
continuing, adjusting, settling, amending and canceling such insurance. Each
Borrower and Guarantor shall cause Lender to be named as a loss payee and an
additional insured (but without any liability for any premiums) under such
insurance policies and each Borrower and Guarantor shall obtain non-contributory
lender's loss payable endorsements to all insurance policies in form and
substance satisfactory to Lender. Such lender's loss payable endorsements shall
specify that the proceeds of such insurance shall be payable to Lender as its
interests may appear and further specify that Lender shall be paid regardless of
any act or omission by Borrowers, Guarantor or any of their Affiliates. At its
option, Lender may apply any insurance proceeds received by Lender at any time
to the cost of repairs or replacement of Collateral and/or to payment of the
Obligations, whether or not then due, in any order and in such manner as Lender
may determine or hold such proceeds as cash collateral for the Obligations.
9.6 FINANCIAL STATEMENTS AND OTHER INFORMATION.
(a) Each Borrower and Guarantor shall, and shall cause any
Subsidiary to, keep proper books and records in which true and complete entries
shall be made of all dealings or transactions of or in relation to the
Collateral and the businesses of Borrowers and Guarantor and their Subsidiaries
in accordance with GAAP and Borrowers and Guarantor shall furnish or cause to be
furnished to Lender: (i) within sixty (60) days after the end of each of
October, November and December 1999 and within thirty (30) days after the end of
each fiscal month (other than the last month of each fiscal quarter) thereafter,
monthly unaudited consolidated financial statements and unaudited consolidating
financial statements (including in each case balance sheets, statements of
income and loss) all in reasonable detail, fairly presenting the financial
position and the results of the operations of each of Borrowers, Guarantor and
their respective Subsidiaries as of the end of and through such fiscal month,
(ii) within forty-five (45) days after the end of each fiscal quarter (other
than at the end of the fiscal year), unaudited consolidated financial statements
and unaudited consolidating financial statements (including in each case balance
sheets, statements of income and loss, statements of cash flow, and statements
of shareholders' equity), and (iii) within ninety (90) days after the end of
each fiscal year, audited consolidated financial statements and unaudited
consolidating financial statements of Borrowers and their respective
Subsidiaries (including in each case balance sheets, statements of income and
loss, statements of cash flow and statements of shareholders' equity), and the
accompanying notes thereto, all in reasonable detail, fairly presenting the
financial position and the results of the operations of Borrowers and their
Subsidiaries as of the end of and for such fiscal year, together with the
unqualified opinion of independent certified public accountants, which
accountants shall be an independent accounting firm selected by Borrowers and
reasonably acceptable to Lender, that such financial statements have been
prepared in accordance with GAAP, and present fairly the results of operations
and financial condition of Borrowers and their Subsidiaries as of the end of and
for the fiscal year then ended.
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(b) Borrowers and Guarantor shall promptly notify Lender in writing
of the details of (i) any material loss, damage, investigation, action, suit,
proceeding or claim relating to the Collateral or any other property which is
security for the Obligations or which would result in a material adverse change
in the business, properties, assets, goodwill or condition, financial or
otherwise of Borrowers and Guarantor and (ii) the occurrence of any Event of
Default or act, condition or event which, with the passage of time or giving of
notice or both, would constitute an Event of Default.
(c) Borrower and Guarantor shall promptly notify Lender in writing
of the details of (i) any loss, damage, investigation, action, suit, proceeding
or claim relating to the Collateral or any other property which is security for
the Obligations or which would result in any material adverse change in the
business, properties, assets, goodwill or condition, financial or otherwise of
any Borrower or Guarantor, (ii) any Material Contract of any Borrower or
Guarantor being terminated or amended or any new Material Contract entered into
(in which event such Borrower or Guarantor shall provide Lender with a copy of
such Material Contract), (iii) any order, judgment or decree in excess of
$100,000 shall have been entered against any Borrower or Guarantor or any of its
properties or assets, (iv) any notification of violation of laws or regulations
received by any Borrower or Guarantor, which could reasonably be expected to
have a material adverse effect on the properties, business, financial condition
of Borrowers and (vi) the occurrence of any Event of Default or act, condition
or event which, with notice or the passage of time or giving of notice or both,
would constitute an Event of Default.
(d) Borrowers and Guarantor shall promptly after the sending or
filing thereof furnish or cause to be furnished to Lender copies of all reports
which any Borrower or Guarantor sends to its stockholders generally and copies
of all reports and registration statements which any Borrower files with the
Securities and Exchange Commission.
(e) Borrowers and Guarantor shall furnish or cause to be furnished
to Lender such budgets, forecasts, projections and other information respecting
the Collateral and the businesses of Borrowers and Guarantor, as Lender may,
from time to time, reasonably request. Lender is hereby authorized to deliver a
copy of any financial statement or any other information relating to the
businesses of Borrowers and Guarantor to any court or other Governmental
Authority or to any participant or assignee or prospective participant or
assignee. Each Borrower and Guarantor hereby irrevocably authorizes and directs
all accountants or auditors to deliver to Lender, at Borrowers' expense, copies
of the financial statements of Borrowers and Guarantor and any reports or
management letters prepared by such accountants or auditors on behalf of
Borrowers and Guarantor and to disclose to Lender such information as they may
have regarding the businesses of Borrowers and Guarantor. Any documents,
schedules, invoices or other papers delivered to Lender may be destroyed or
otherwise disposed of by Lender one (1) year after the same are delivered to
Lender, except as otherwise designated by Borrowers to Lender in writing.
9.7 SALE OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ETC. Each
Borrower and Guarantor shall not, and shall not permit any Subsidiary to,
directly or indirectly:
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(a) merge into or with or consolidate with any other Person or
permit any other Person to merge into or with or consolidate with it, except
that any Foreign Subsidiary may merge into or with or consolidate into any other
Foreign Subsidiary, provided, THAT, each of the following conditions is
satisfied as determined by Lender in good faith: (i) Lender shall have received
not less than thirty (30) days prior written notice of the intention of the
parties, to so merge and such information with respect thereto as Lender may
reasonably request, (ii) as of the effective date of the merger and after giving
effect thereto, no Event of Default or act, condition or event which with notice
of passage of time or both is reasonably likely in the good faith judgment of
Lender to constitute an Event of Default, shall exist or have occurred and be
continuing, (iii) Lender shall have received originals of the shares of the
stock certificates representing sixty-five (65%) percent of the issued and
outstanding shares of Capital Stock of the Foreign Subsidiary which is the
survivor of such merger or consolidation, together with stock powers duly
executed in blank with respect thereto and such opinions of counsel and such
other documentation as Lender shall require, and (iv) Lender shall have received
true, correct and complete copies of all agreements, documents and instruments
relating to such merger, including but not limited to, the certificate or
certificates of merger as filed with the appropriate Governmental Authority; or
(b) sell, assign, lease, transfer, abandon or otherwise dispose of
any Capital Stock or Indebtedness to any other Person or any of its assets
(including, without limitation, any
Real Property) to any other Person EXCEPT, FOR,
(i) sales of Inventory in the ordinary course of
business,
(ii) the sale or other disposition of worn-out or obsolete
Equipment or Equipment no longer used in the business of any Borrower or
Guarantor so long as (A) any proceeds are paid to Lender and (B) such sales do
not have an adverse effect on the operations or business of any Borrower or
Guarantor,
(iii) the sale or other disposition of Equipment not subject
to Section 9.7(b)(ii) above so long as (A) any proceeds are paid to Lender, (B)
such sales do not involve Equipment having an aggregate fair market value in
excess of $50,000 for all such Equipment disposed of in any fiscal year of
Borrowers, and (C) such sales do not have an adverse effect on the Real Property
or other Equipment or the operations or business of any Borrower or Guarantor;
(iv) the issuance and sale by Play By Play of its Capital
Stock after the date hereof, PROVIDED, THAT, (A) Lender shall have received not
less than five (5) Business Days' prior written notice of such issuance and sale
by Play By Play, which notice shall specify the parties to whom such shares are
to be sold (if issued in a private offering), the anticipated terms of such
sale, the total amount which it is anticipated will be realized from the
issuance and sale of such stock and the net cash proceeds which it is
anticipated will be received by Play By Play from such sale, (B) Play By Play
shall not be required to pay any dividends or repurchase or redeem such Capital
Stock or make any other payments in respect thereof, unless otherwise permitted
in Section 9.11 hereof, (C) the terms of such Capital Stock, and the terms and
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conditions of the purchase and sale thereof, shall not include any terms that
limit the right of Play By Play to request or receive Loans or Letter of Credit
Accommodations or to amend or modify any of the terms and conditions of this
Agreement or any of the other Financing Agreements or otherwise in any way
relate to or affect the arrangements of any Borrower or Guarantor with Lender or
are more restrictive or burdensome to such Borrower or Guarantor than the terms
of any Capital Stock in effect on the date hereof, and (D) as of the date of
such issuance and sale and after giving effect thereto, no Event of Default or
act, condition or event which with notice or passage of time or both would
constitute an Event of Default shall exist or have occurred and be continuing,
(c) form or acquire any Subsidiaries other than those listed on the
Information
Certificate;
(d) wind up, liquidate or dissolve; or
(e) agree to do any of the foregoing.
9.8 ENCUMBRANCES. Each Borrower and Guarantor shall not, and shall not
permit any Subsidiary (excluding Foreign Subsidiaries) to, create, incur, assume
or suffer to exist any security interest, mortgage, pledge, lien, charge or
other encumbrance of any nature whatsoever on any of its assets or properties,
including, without limitation, the Collateral, EXCEPT:
(a) liens, security interests and hypothecs of Lender;
(b) liens securing the payment of taxes, either not yet overdue or
the validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to such Borrower, Guarantor or
Subsidiary and with respect to which adequate reserves have been set aside on
its books;
(c) non-consensual statutory liens (other than liens securing the
payment of taxes) arising in the ordinary course of such Borrower's or
Guarantor's or Subsidiary's business (including carriers', warehousemen's,
materialmen's and mechanics' liens) to the extent: (i) such liens secure
Indebtedness or obligations which are not overdue or (ii) such liens secure
Indebtedness relating to claims or liabilities which are fully insured and being
defended at the sole cost and expense and at the sole risk of the insurer or
being contested in good faith by appropriate proceedings diligently pursued and
available to such Borrower or Guarantor, in each case prior to the commencement
of foreclosure or other similar proceedings and with respect to which adequate
reserves have been set aside on its books;
(d) pledges and deposits of cash by any Borrower, Guarantor or
Subsidiary after the date hereof in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security benefits consistent with the current practices of Borrowers,
Guarantor or such Subsidiary as of the date hereof;
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(e) zoning restrictions, easements, licenses, covenants and other
restrictions or encumbrances affecting the use of Real Property which do not
interfere in any material respect with the use of such Real Property or ordinary
conduct of the businesses of Borrowers as presently conducted thereon or
materially impair the value of the Real Property which may be subject thereto;
(f) purchase money security interests in Equipment (including
Capital Leases) and purchase money mortgages on Real Property in the aggregate
for all Borrowers, Guarantor and their respective Subsidiaries not to exceed
$5,000,000 in the aggregate at any time outstanding so long as such security
interests and mortgages do not apply to any property of Borrowers, Guarantor or
such Subsidiaries other than the Equipment or real estate so acquired, and the
Indebtedness secured thereby does not exceed the cost of the Equipment or real
estate so acquired, as the case may be;
(g) security interests and liens upon the Collateral granted by
Play By Play in favor of the holders of the Subordinated Notes pursuant to the
terms of the Subordinated Creditor Agreements (as in effect on the date hereof),
respectively, to secure the Indebtedness of Borrower to the holders of the
Subordinated Notes permitted under Section 9.9 (f) hereof, which security
interests and liens on the Collateral shall be, in all respects, subject and
subordinated in priority to the security interests and liens of Lender as set
forth in the Intercreditor and Subordination Agreement, in form and substance
satisfactory to Lender;
(h) security interests and liens in existence on the date hereof
which are set forth on Schedule 8.4 hereto;
(i) pledges and deposits of cash by any Borrower to secure the
performance of tenders, bids, leases, trade contracts (other than for the
repayment of Indebtedness), statutory obligations and other similar obligations
in each case in the ordinary course of business consistent with the current
practices of Borrowers as of the date hereof; PROVIDED, THAT, in connection with
any performance bonds issued by a surety or other person, the issuer of such
bond shall have waived in writing any rights in or to, or other interest in, any
of the Collateral in an agreement, in form and substance satisfactory to Lender;
and
(j) rights of setoff of any Credit Card Issuer or Credit Card
Processor against amounts owing to any Borrower, Guarantor or Subsidiary or
credit balances of any Borrower, Guarantor or Subsidiary with any Credit Card
Issuer or Credit Card Processor, but not liens on or rights of setoff against
any other property or assets of such Borrower, Guarantor or Subsidiary pursuant
to the Credit Card Agreements (as in effect on the date hereof) to secure the
obligations of such Borrower, Guarantor or Subsidiary to such Credit Card Issuer
or Credit Card Processor as a result of fees and chargebacks.
9.9 INDEBTEDNESS. Each Borrower and Guarantor shall not, and shall not
permit any Subsidiary to, incur, create, assume, become or be liable in any
manner with respect to, or permit to exist, any obligations or indebtedness
except for:
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(a) the Obligations;
(b) trade obligations and normal accruals in the ordinary course of
business;
(c) purchase money Indebtedness (including Capital Leases) to the
extent incurred or secured by liens (including Capital Leases) permitted under
Section 9.8(f) hereof;
(d) Indebtedness of any Subsidiary of a Borrower (other than a
Borrower) and Guarantor or any of their respective Subsidiaries (other than a
Borrower) to a Borrower arising pursuant to loans permitted under Section 9.10
hereof;
(e) Indebtedness of Play By Play evidenced by or arising under the
New Seller
Note as in effect on the date hereof, PROVIDED, THAT:
(i) the aggregate principal amount of such Indebtedness shall
not exceed $637,000 less the aggregate amount of all repayments, repurchases or
redemptions, whether optional or mandatory, in respect thereof, plus interest
thereon at the rate provided for in the New Subordinated Seller Note as in
effect on the date hereof,
(ii) Borrowers and Guarantor shall not, directly or
indirectly, make any payments in respect of such Indebtedness, EXCEPT, THAT,
Play By Play may make regularly scheduled payments of principal and, interest in
respect of such Indebtedness when due in accordance with the terms of the New
Subordinated Seller Note as in effect on the date hereof, PROVIDED, THAT, on the
date of any such payment and after giving effect thereto, no Event of Default,
or act, condition or event which with notice or passage of time or both would
constitute an Event of Default, shall exist or have occurred and be continuing,
(iii) Borrowers and Guarantor shall not, directly or
indirectly, (A) amend, modify, alter or change in any material respect any terms
of such Indebtedness or the New Seller Note, or any related agreements,
documents or instruments, EXCEPT THAT Play By Play may, after prior written
notice to Lender, amend, modify, alter or change the terms thereof so as to
extend the maturity thereof or defer the timing of any payments in respect
thereof, or to forgive or cancel any portion of such Indebtedness other than
pursuant to payments thereof, or to reduce the interest rate or any fees in
connection therewith, or (B) redeem, retire, defease, purchase or otherwise
acquire such Indebtedness, or set aside or otherwise deposit or invest any sums
for such purpose, and
(iv) Borrowers and Guarantor shall furnish to Lender all
notices of default or demands concerning such Indebtedness received by any
Borrower or Guarantor or on
its behalf, promptly after receipt thereof;
(f) Indebtedness of Play By Play evidenced by or arising under the
Subordinated Notes as in effect on the date hereof, PROVIDED, THAT:
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(i) the principal amount of such Indebtedness shall not exceed
$15,000,000 less the aggregate amount of all repayments, repurchases or
redemptions, whether optional or mandatory in respect thereof, plus interest
thereon at the rate provided for in the Subordinated Notes as in effect on the
date hereof,
(ii) Borrowers and Guarantor shall not, directly or indirectly
make any payments in respect of such indebtedness, EXCEPT, THAT, Play By Play
may make regularly scheduled payments of interest (but not Subordinated Note
Past Due Interest) and principal (commencing no earlier than June 30, 2000) in
respect of the Subordinated Notes as provided for therein, PROVIDED, THAT, on
the date of any such payment and after giving effect thereto, no Event of
Default, or act, condition or event which with notice or passage of time or both
would constitute an Event of Default, shall exist or have occurred and be
continuing,
(iii) Borrowers and Guarantor shall not, directly or
indirectly make any payments of Subordinated Note Past Due Interest as provided
for in the Subordinated Creditor Agreements, as in effect on the date hereof
unless each of the following conditions is satisfied as determined by Lender:
(A) the average of the Excess Availability for the immediately preceding thirty
(30) consecutive day period shall not be less than $3,000,000 and as of the date
of any such payment and after giving effect thereto, the Excess Availability
shall not be less than $3,000,000, and (B) as of the date of any such payment of
Subordinated Note Past Due Interest and after giving effect thereto, no Event of
Default, or act, condition or event which with notice or passage of time or both
would constitute an Event of Default, shall have occurred and be continuing,
(iv) Borrowers and Guarantor shall not, directly or
indirectly, (A) amend, modify, alter or change the terms of such Indebtedness or
any agreement, document or instrument related thereto, EXCEPT, THAT, Play By
Play may, after prior written notice to Lender, amend, modify, alter or change
the terms thereof so as to extend the maturity thereof, or defer the timing of
any payments in respect thereof, or to forgive or cancel any portion of such
Indebtedness (other than pursuant to payments thereof), or to reduce the
interest rate or any fees in connection therewith, or (B) make any principal
payments in respect of, redeem, retire, defease, purchase or otherwise acquire
such Indebtedness (except pursuant to regularly scheduled payments of interest
and principal permitted in clause 9.9 (f)(ii) above), or set aside or otherwise
deposit or invest any sums for such purpose, and
(v) Borrowers and Guarantor shall furnish to Lender all
notices or demands in connection with such Indebtedness either received by
Borrower or on its behalf promptly after the receipt thereof, or sent by
Borrower or on its behalf concurrently with the sending thereof, as the case may
be;
(g) unsecured Indebtedness of Guarantor to any Borrower or any
Subsidiary of any Borrower (other than a Borrower) to any Borrower or Guarantor
arising after the date hereof pursuant to loans by such Borrower to Guarantor or
such Subsidiary (other than any Borrower) , PROVIDED, THAT, such loans are
permitted under Section 9.10 hereof;
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(h) unsecured Indebtedness of any Borrower to any other Borrower
arising after the date hereof pursuant to loans by any such Borrower to another
Borrower;
(i) Indebtedness arising pursuant to guarantees permitted under
Section 9.10
hereof;
(j) contingent obligations of Borrowers as in effect on the date
hereof to reimburse Existing Agent in the event of any draw under any Existing
Letters of Credit which obligations are unsecured;
(k) Indebtedness of any Borrower or Guarantor (or any of their
respective Subsidiaries) set forth on Schedule 9.9 hereto; PROVIDED, THAT, (i)
such Borrower, Guarantor or Subsidiary (as the case may be) may only make
regularly scheduled payments of principal, interest and fees, if any, in respect
of such Indebtedness in accordance with the terms of the agreement or instrument
evidencing or giving rise to such Indebtedness as in effect on the date hereof,
except as otherwise provided in clause (ii)(B) below, (ii) such Borrower,
Guarantor or Subsidiary (as the case may be) shall not, directly or indirectly,
(A) amend, modify, alter or change in any material respect the terms of such
Indebtedness or any agreement, document or instrument related thereto as in
effect on the date hereof, EXCEPT, THAT, such Borrower, Guarantor or Subsidiary
may, after prior written notice to Lender, amend, modify, alter or change the
terms thereof so as to extend the maturity thereof, or defer the timing of any
payments in respect thereof, or to forgive or cancel any portion of such
Indebtedness (other than pursuant to payments thereof), or to reduce the
interest rate or any fees in connection therewith, or to make any covenants
contained therein less restrictive or burdensome as to Borrowers and Guarantor
or otherwise more favorable to Borrowers and Guarantor or (B) redeem, retire,
defease, purchase or otherwise acquire such Indebtedness, or set aside or
otherwise deposit or invest any sums for such purpose, and (iii) Borrowers and
Guarantor shall furnish to Lender all notices of default or demands in
connection with such Indebtedness received by any Borrower or Guarantor or on
its behalf, promptly after the receipt thereof;
(l) rights of setoff of any Credit Card Issuer or Credit Card
Processor against amounts owing to any Borrower, Guarantor or Subsidiary or
credit balances of any Borrower, Guarantor or Subsidiary with any Credit Card
Issuer or Credit Card Processor, but not liens on or rights of setoff against
any other property or assets of such Borrower, Guarantor or Subsidiary pursuant
to the Credit Card Agreements (as in effect on the date hereof) to secure the
obligations of such Borrower, Guarantor or Subsidiary to such Credit Card Issuer
or Credit Card Processor as a result of fees and chargebacks; and
(m) Indebtedness of any Foreign Subsidiary to any Person; provided,
that, none of Borrowers or Guarantor shall have any liability therefor.
9.10 LOANS, INVESTMENTS, GUARANTEES, ETC. Each Borrower and Guarantor
shall not, and shall not permit any Subsidiary to, directly or indirectly, make
any loans or advance money or property to any Person, or invest in (by capital
contribution, dividend or otherwise) or purchase or repurchase the Capital Stock
or Indebtedness or all or a substantial part of the assets
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or property of any person, or guarantee, assume, endorse, or otherwise become
responsible for (directly or indirectly) the Indebtedness, performance,
obligations or dividends of any Person, or form or acquire any Subsidiaries or
agree to do any of the foregoing, EXCEPT:
(a) the endorsement of instruments for collection or deposit in
the ordinary
course of business;
(b) investments in (i) cash or Cash Equivalents, PROVIDED, that,
(i) no Loans are outstanding and (ii) as to any of the foregoing, unless waived
in writing by Lender, each Borrower and Guarantor shall take such actions as are
deemed necessary by Lender to perfect the security interest of Lender in such
investments;
(c) the guarantee by each Borrower and Guarantor of the Obligations
in favor of Lender;
(d) the guarantee by Play By Play of the obligations (i) of Mr.
Connor Kim owing to Bank of America in an amount not to exceed $75,000, and (ii)
of Caribe to Hamilton
National Bank, as it exists on the date hereof;
(e) loans by Guarantor to any Borrower after the date hereof;
PROVIDED, THAT, as to any such loan, (i) each month Guarantor shall provide to
Lender a report in form and substance reasonably satisfactory to Lender of the
amount of such loans made in the immediately preceding month and any repayments
in connection therewith, (ii) the Indebtedness arising pursuant to any such loan
shall not be evidenced by a promissory note or other instrument, unless, if the
loan is made by any Guarantor, the single original of such note or other
instrument is delivered to Lender to hold as part of the Collateral, with such
endorsement and/or assignment by the payee of such note or other instrument as
Lender may reasonably require and (iii) the Indebtedness arising pursuant to
such loans is permitted under Section 9.9 hereof;
(f) (i) loans by any Borrower to any Subsidiary (which is not a
Borrower) or to Guarantor or (ii) loans made by any Borrower to Guarantor to the
extent permitted under Section 9.12 hereof; PROVIDED, THAT, as to any such loan,
(A) each month Borrowers shall provide to Lender a report in form and substance
reasonably satisfactory to Lender of the amount of such loans made in the
immediately preceding month and any repayments in connection therewith, (B) the
Indebtedness arising pursuant to any such loan shall not be evidenced by a
promissory note or other instrument, unless the single original of such note or
other instrument is delivered to Lender to hold as part of the Collateral, with
such endorsement and/or assignment by the payee of such note or other instrument
as Lender may reasonably require, (C) the Indebtedness arising pursuant to such
loans is permitted under Section 9.9 hereof, (D) as of the date of the making of
any such loan and after giving effect thereto, no Event of Default or act,
condition or event which with notice or passage of time or both would constitute
an Event of Default shall exist or have occurred, and (E) the aggregate
principal amount of all such loans, outstanding at anytime shall not exceed
$2,000,000;
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(g) any Borrower or Guarantor (or any of their respective
Subsidiaries) may acquire and hold receivables owing to them in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms;
(h) the existing loans, advances and guarantees set forth on
Schedule 9.10 hereto, PROVIDED, THAT, as to such loans, advances and guarantees,
(i) Borrowers, Guarantor, or their respective Subsidiaries, as the case may be,
shall not, directly or indirectly, (A) amend, modify, alter or change the terms
of such loans, advances or guarantees or any agreement, document or instrument
related thereto, or (B) as to such guarantees, redeem, retire, defease, purchase
or otherwise acquire such guarantee or set aside or otherwise deposit or invest
any sums for such purpose and (ii) Borrowers shall furnish to Lender all notices
of default or demands in connection with such loans, advances or guarantees
either received by a Borrower, Guarantor or Subsidiary or on its behalf,
promptly after the receipt thereof or sent by a Borrower or on its behalf,
concurrently with the sending thereof, as the case may be;
(i) the existing equity investment of Borrowers in their
respective Subsidiaries as of the date hereof.
9.11 DIVIDENDS AND REDEMPTIONS. Each Borrower and Guarantor shall not, and
shall not permit any of their respective Subsidiaries to, directly or
indirectly, declare or pay any dividends on account of any shares of class of
Capital Stock of such Borrower or Guarantor (or Subsidiary) now or hereafter
outstanding, or set aside or otherwise deposit or invest any sums for such
purpose, or redeem, retire, defease, purchase or otherwise acquire any shares of
any class of Capital Stock (or set aside or otherwise deposit or invest any sums
for such purpose) for any consideration other than common stock or apply or set
apart any sum, or make any other distribution (by reduction of capital or
otherwise) in respect of any such shares or agree to do any of the foregoing,
EXCEPT, THAT, Subsidiaries of Borrowers (other than Borrowers) may make payments
of cash dividends, common stock or distributions from legally available funds
therefor in respect or their Capital Stock.
9.12 TRANSACTIONS WITH AFFILIATES. Each Borrower and Guarantor shall not,
and shall not permit any Subsidiary to, directly or indirectly,
(a) purchase, acquire or lease any property from, or sell, transfer
or lease any property to, any officer, director, agent or other Affiliate of any
Borrower or Guarantor, except in the ordinary course of and pursuant to the
reasonable requirements of such Borrower's, Guarantor's or Subsidiary's business
and upon fair and reasonable terms no less favorable to such Borrower, Guarantor
or Subsidiary, as the case may be, than such Borrower, Guarantor or Subsidiary,
as the case may be, would obtain in a comparable arm's length transaction with a
person who is not an Affiliate, or
(b) make any payments of management, consulting or other fees for
management or similar services, or of any Indebtedness owing to any officer,
employee, shareholder, director or other Affiliate of Borrowers or Guarantor,
EXCEPT:
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(i) compensation to officers, employees and directors for
services rendered to Borrowers, Guarantor or any of their respective
Subsidiaries in the ordinary course of business of Borrowers, Guarantor or any
of their respective Subsidiaries as of the date hereof,
(ii) a Borrower may repay the Indebtedness of such Borrower to
Guarantor arising pursuant to loans made by Guarantor permitted under
Section 9.10 hereof,
(iii) any Subsidiary of any Borrower or Guarantor (other than
Borrowers) may repay the Indebtedness of such Subsidiary to Guarantor, any other
Subsidiary or to any Borrower, and
(iv) loans or advances permitted by Sections 9.10(e) and
Section 9.10(f)
hereof.
9.13 LICENSE AGREEMENTS.
(a) Each Borrower shall (i) promptly and faithfully observe and
perform all of the material terms, covenants, conditions and provisions of the
material License Agreements to be observed and performed by it, at the times set
forth therein, if any, (ii) not do, permit, suffer or refrain from doing
anything, as a result of which there could be a default under or breach of any
of the terms of any material License Agreement, (iii) not cancel, surrender,
modify, amend, waive or release any material License Agreement in any material
respect or any term, provision or right of the licensee thereunder in any
material respect, or consent to or permit to occur any of the foregoing; EXCEPT,
THAT, subject to Section 9.13(b) below, such Borrower may cancel, surrender or
release any material License Agreement in the ordinary course of the business of
such Borrower; PROVIDED, THAT, such Borrower shall give Lender not less than
sixty (60) days prior written notice of its intention to so cancel, surrender
and release any such License Agreement, (iv) give Lender immediate written
notice of any material License Agreement entered into by such Borrower after the
date hereof, together with a true, correct and complete copy thereof and such
other information with respect thereto as Lender may request, (v) give Lender
immediate written notice of any breach of any obligation, or any default, by any
party under any License Agreement, and deliver to Lender (promptly upon the
receipt thereof by such Borrower in the case of a notice to such Borrower, and
concurrently with the sending thereof in the case of a notice from such
Borrower) a copy of each notice of default and every other notice and other
communication received or delivered by such Borrower in connection with any
material License Agreement which relates to the right of Borrower to continue to
use the property subject to such License Agreement, and (vi) furnish to Lender,
promptly upon the request of Lender, such information and evidence as Lender and
any Lender may require from time to time concerning the observance, performance
and compliance by such Borrower or the other party or parties thereto with the
terms, covenants or provisions of any material License Agreement.
(b) Each Borrower will either exercise any option to renew or
extend the term of each material License Agreement in such manner as will cause
the term of such material License Agreement to be effectively renewed or
extended for the period provided by such option and give immediate written
notice thereof to Lender or give Lender prior written notice that such
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Borrower does not intend to renew or extend the term of any such material
License Agreement or that the term thereof shall otherwise be expiring, not less
than ninety (90) days prior to the date of such non-renewal or expiration. In
the event of the failure of any Borrower to extend or renew such any material
License Agreement, Lender shall have, and is hereby granted, the irrevocable
right and authority, at its option, to renew or extend the term of such material
License Agreement, whether in its own name and behalf, or in the name and behalf
of a designee or nominee of Lender or in the name and behalf of such Borrower,
as Lender shall determine at any time that either: (i) an Event of Default shall
exist or have occurred and be continuing or (ii) if after the Inventory on which
the trademarks, logos, designs, representations or other Intellectual Property
subject to such material License Agreement appears or to which such material
License Agreement otherwise relates is not considered Eligible Inventory, there
is no Excess Availability. Lender may, but shall not be required to, perform any
or all of such obligations of any Borrower under any of the License Agreements,
including, but not limited to, the payment of any or all sums due from Borrower
thereunder. Any sums so paid by Lender or any Lender shall constitute part of
the Obligations.
9.14 ADDITIONAL BANK ACCOUNTS. Each Borrower and Guarantor shall not,
directly or indirectly, open, establish or maintain any deposit account,
investment account or any other account with any bank or other financial
institution, other than the Blocked Accounts and the accounts set forth in
Schedule 8.8 hereto, except: (a) as to any new or additional Blocked Accounts
and other such new or additional accounts which contain any Collateral or
proceeds thereof, with the prior written consent of Lender and subject to such
conditions thereto as Lender may establish and (b) as to any accounts used by
such Borrower or Guarantor to make payments of payroll, taxes or other
obligations to third parties, after prior written notice to Lender.
9.15 COMPLIANCE WITH ERISA.
(a) No Borrower or Guarantor shall, with respect to any "employee
benefit plan" maintained by such Borrower or Guarantor: (i) terminate any
employee benefit plan so as to incur any liability to the Pension Benefit
Guaranty Corporation established pursuant to ERISA, (ii) allow or suffer to
exist any prohibited transaction involving such employee benefit plan or any
trust created thereunder which would subject any Borrower, Guarantor or ERISA
Affiliate to a tax, penalty or other liability on prohibited transactions
imposed under Section 4975 of the Code or Section 502(i) of ERISA, (iii) fail to
pay to any employee benefit plan any contribution which it is obligated to pay
under Section 302 of ERISA, Section 412 of the Code or the terms of such plan,
(iv) allow or suffer to exist any accumulated funding deficiency whether or not
waived, with respect to any such employee benefit plan, (v) allow or suffer to
exist any occurrence of a reportable event or any other event or condition which
presents a material risk of termination by the Pension Benefit Guaranty
Corporation of any such employee benefit plan that is a single employer plan,
which termination could result in any liability to the Pension Benefit Guaranty
Corporation or (vi) incur any withdrawal liability with respect to any
multiemployer pension plan.
(b) As used in this Section 9.14, the terms "employee benefit
plan", "accumulated funding deficiency" and "reportable event" shall have the
respective meanings
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assigned to them in ERISA, and the term "prohibited transaction" shall have the
meaning assigned to it in Section 4975 of the Code and ERISA.
9.16 ADJUSTED NET WORTH. (a) Play by Play and its Subsidiaries, on a
consolidated basis shall, at all times, maintain minimum Consolidated Adjusted
Net Worth of not less than the following for the periods indicated below:
Minimum Consolidated
PERIOD ADJUSTED NET WORTH
------ --------------------
(i) for the period commencing the date Base Consolidated Adjusted Net
hereof through and including Worth LESS $1,500,000
October
31, 1999
(ii) for the period commencing November 1, Base Consolidated Adjusted Net 1
1999 through and including January 31, Worth LESS $3,000,000
2000
(iii) for the period commencing February Base Consolidated Adjusted Net 1
2000 through and including April 30, Worth LESS $2,000,000
2000
(iv) for the period commencing May 1, 2000 Base Consolidated Adjusted Net
through and including July 31, Worth LESS $1,500,000; and
for the period commencing August 1, 2000 and at all times thereafter, Play By
Play and its Subsidiaries shall maintain a Consolidated Adjusted Net Worth at
least equal to the sum of (i) Base Consolidated Adjusted Net Worth, and (ii)
fifty (50%) percent of Play By Play and its Subsidiaries' actual net income
shown on their quarterly unaudited financial statements for the relevant fiscal
quarter or for the last fiscal quarter of any fiscal year, as shown on the
audited financial statements for the applicable fiscal year end.
(b) Play by Play and its Subsidiaries shall, at all times, maintain
maintain minimum Domestic Adjusted Net Worth of not less than the following for
the periods indicated below:
Minimum Consolidated
PERIOD ADJUSTED NET WORTH
------ --------------------
(i) for the period commencing the Base Domestic Adjusted Net
date hereof through and Worth LESS $2,000,000
including October 31, 1999
(ii) for the period commencing Base Domestic Adjusted Net
November 1, 1999 through and Worth LESS $3,750,000
including January 31, 2000
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Minimum Consolidated
PERIOD ADJUSTED NET WORTH
------ --------------------
(iii) for the period commencing Base Domestic Adjusted Net
February 1, 2000 through and Worth LESS $2,000,000
including April 30, 2000
(iv) for the period commencing May Base Domestic Adjusted Net
1, 2000 through and including Worth LESS $1,500,000; and
July 31, 2000
for the period commencing August 1, 2000 and at all times thereafter, Play By
Play and the Subsidiaries shall maintain a minimum Domestic Adjusted Net Worth
at least equal to the sum of (i) Base Domestic Adjusted Net Worth, and (ii)
fifty (50%) percent of Play By Play and its Subsidiaries' (exclusive of Foreign
Subsidiaries) actual net income (before the allocation of overhead by Play By
Play to the Foreign Subsidiaries) shown on their quarterly unaudited financial
statements for the relevant fiscal quarter for the last fiscal quarter of any
fiscal year, as shown on the audited financial statements for the applicable
fiscal year end.
For purposes of determining compliance with Section 9.16(b), the
calculation of minimum Domestic Adjusted Net Worth shall exclude the allocation
of overhead by Play By
Play to the Foreign Subsidiaries.
(c) To the extent that the covenant set forth in Section 9.16(b) is
not satisfied, Play By Play shall receive cash or other immediately available
funds without restrictions or conditions from a Person (including without
limitation, a Foreign Subsidiary) in an amount equal to the difference between
the actual Domestic Adjusted Net Worth and the minimum Domestic Adjusted Net
Worth required, within fifteen (15) days of Lender's receipt of the financial
statements (the "Cash Cure Period"). In the event Play By Play does not receive
the cash or other immediately available funds within the Cash Cure Period, it
shall be deemed an immediate Event of Default hereunder.
9.17 YEAR 2000 COMPLIANCE. Borrowers and Guarantor shall take all action
which may be required so that its computer-based information systems, including,
without limitation, all of its proprietary computer hardware and software all
computer hardware and software leased or licensed from third parties (and
whether supplied by others or with which Borrowers' or Guarantor' systems
interface) are able to operate effectively and correctly process data using
dates on or after January 1, 2000. Compliance with the foregoing shall mean that
the systems will operate and correctly process data without human intervention
such that (a) there is correct century recognition, (b) calculations properly
accommodate same century and multi-century formulas and date values, (c) all
leap years shall be calculated correctly and (d) the information systems shall
otherwise comply with applicable industry standards and regulatory guidelines
regarding the change of the century and year 2000 compliance. Borrowers and
Guarantor shall, by no later than November 30, 1999, certify to Lender in
writing that its information systems
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have been modified, updated and programmed as required by this Section. On and
after November 30, 1999, the computer-based information systems of Borrowers and
Guarantor shall be, and with ordinary course upgrading and maintenance, will
continue to be sufficient to permit Borrower to conduct its business without any
adverse effect as a result of the year 2000.
9.18 COSTS AND EXPENSES. Borrowers and Guarantor shall pay to Lender on
demand all costs, expenses, filing fees and taxes paid or payable in connection
with the preparation, negotiation, execution, delivery, recording,
administration, collection, liquidation, enforcement and defense of the
Obligations, Lender's rights in the Collateral, this Agreement, the other
Financing Agreements and all other documents related hereto or thereto,
including any amendments, supplements or consents which may hereafter be
contemplated (whether or not executed) or entered into in respect hereof and
thereof, including, but not limited to: (a) all costs and expenses of filing or
recording (including Uniform Commercial Code and PPSA financing statement filing
taxes and fees, documentary taxes, intangibles taxes and mortgage recording
taxes and fees, if applicable); (b) costs and expenses and fees for insurance
premiums, environmental audits, surveys, assessments, engineering reports and
inspections, appraisal fees and search fees; (c) all title insurance and other
insurance premiums, appraisal fees and search fees; (d) costs and expenses of
remitting loan proceeds, collecting checks and other items of payment, and
establishing and maintaining the Blocked Accounts, together with Lender's
customary charges and fees with respect thereto; (e) charges, fees or expenses
charged by any bank or issuer in connection with the Letter of Credit
Accommodations; (f) costs and expenses of preserving and protecting the
Collateral; (g) costs and expenses paid or incurred in connection with obtaining
payment of the Obligations, enforcing the security interests and liens of
Lender, selling or otherwise realizing upon the Collateral, and otherwise
enforcing the provisions of this Agreement and the other Financing Agreements or
defending any claims made or threatened against Lender arising out of the
transactions contemplated hereby and thereby (including, without limitation,
preparations for and consultations concerning any such matters); (h) all
out-of-pocket expenses and costs heretofore and from time to time hereafter
incurred by Lender during the course of periodic field examinations of the
Collateral and Borrowers' and Guarantor's operations, plus a per diem charge at
the rate of $650 per person per day for Lender's examiners in the field and
office; and (i) the reasonable fees and disbursements of counsel (including
legal assistants) to Lender in connection with any of the foregoing.
9.19 FURTHER ASSURANCES. At the request of Lender at any time and from
time to time, each Borrower and Guarantor shall, at its expense, duly execute
and deliver, or cause to be duly executed and delivered, such further
agreements, documents and instruments, and do or cause to be done such further
acts as may be necessary or proper to evidence, perfect, maintain and enforce
the security interests and the priority thereof in the Collateral and to
otherwise effectuate the provisions or purposes of this Agreement or any of the
other Financing Agreements. Lender may at any time and from time to time request
a certificate from an officer of Borrowers representing that all conditions
precedent to the making of Loans and providing Letter of Credit Accommodations
contained herein are satisfied. In the event of such request by Lender, Lender
may, at its option, cease to make any further Loans or provide any further
Letter of Credit Accommodations until Lender has received such certificate and,
in addition, Lender has determined that such conditions are satisfied. Where
permitted by law, each Borrower hereby
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authorizes Lender to execute and file one or more UCC or PPSA financing
statements signed only by Lender.
9.20 CREDIT CARD AGREEMENTS. Each Borrower shall (a) observe and perform
all material terms, covenants, conditions and provisions of the Credit Card
Agreements to be observed and performed by it at the times set forth therein;
(b) not do, permit, suffer or refrain from doing anything, as a result of which
there could be a material default under or breach of any of the terms of any of
the Credit Card Agreements and (c) at all times maintain in full force and
effect the Credit Card Agreements and not terminate, cancel, surrender, modify,
amend, waive or release any of the Credit Card Agreements, or consent to or
permit to occur any of the foregoing; except, that, (i) a Borrower may terminate
or cancel any of the Credit Card Agreements in the ordinary course of the
business of such Borrower; PROVIDED, THAT, such Borrower shall give Lender not
less than fifteen (15) days prior written notice of its intention to so
terminate or cancel any of the Credit Card Agreements; (d) not enter into any
new Credit Card Agreements with any new Credit Card Issuer or Credit Card
Processor unless (i) Lender shall have received not less than fifteen (15) days
prior written notice of the intention of such Borrower to enter into such
agreement (together with such other information with respect thereto as Lender
may request) and (ii) such Borrower delivers, or causes to be delivered to
Lender, a Credit Card Acknowledgment in favor of Lender and Lenders duly
authorized, executed and delivered by the new Credit Card Issuer or Credit Card
Processor, as the case may be; (e) give Lender immediate written notice of any
Credit Card Agreement entered into by such Borrower after the date hereof,
together with a true, correct and complete copy thereof and such other
information with respect thereto as Lender may request; and (f) furnish to
Lender, promptly upon the request of Lender, such information and evidence as
Lender may require from time to time concerning the observance, performance and
compliance by a Borrower or the other party or parties thereto with the terms,
covenants or provisions of the Credit Card Agreements.
9.21 CHANGES IN BUSINESS. Play By Play and its Subsidiaries shall not
engage in any business other than the businesses of Play By Play and its
Subsidiaries on the date hereof and any businesses reasonably related, ancillary
or complementary to the businesses in which Play By Play and its Subsidiaries
are engaged on the date hereof.
9.22 APPLICATIONS UNDER INSOLVENCY STATUTES. Each Borrower acknowledges
that its business and financial relationships with Lender is unique from its
relationship with any other of its creditors, and agrees that it shall not file
any plan of arrangement under the Companies' Creditors Arrangement Act (Canada)
or make any proposal under the Bankruptcy and Insolvency Act (Canada) which
provides for, or would permit directly or indirectly, Lender to be classified
with any other creditor for purposes of such plan or proposal or otherwise.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
10.1 EVENTS OF DEFAULT. The occurrence or existence of any one or more of
the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
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(a) (i) any Borrower fails to pay when due any of the Obligations
or (ii) any Borrower or Guarantor fails to perform any of the covenants
contained in Sections 9.3, 9.4, 9.14, 9.15, 9.17, and 9.20 of this Agreement and
such failure shall continue for ten (10) days; PROVIDED THAT, such ten (10) day
period shall not apply in the case of any failure to observe any such covenant
which is not capable of being cured at all or within such ten (10) day period or
which has been the subject of a prior failure within a six (6) month period or
(iii) any Borrower or Obligor fails to perform any of the terms, covenants or
provisions contained in this Agreement or any of the other Financing Agreements
other than those described in Section 10.1(a)(i) and 10.1(a)(ii) above;
(b) any representation, warranty or statement of fact made by any
Borrower or Obligor to Lender in this Agreement, the other Financing Agreements
or any other agreement, schedule, confirmatory assignment or otherwise shall
when made or deemed made be false or misleading in any material respect;
(c) any Obligor revokes, terminates or fails to perform any of the
material terms, covenants, conditions or provisions of any guarantee,
endorsement or other agreement of such party in favor of Lender;
(d) any judgment for the payment of money is rendered against, or
any certificate with respect to unpaid Taxes is issued by Minister of Revenue
Canada in respect of any Borrower or Obligor in excess of $100,000 in any one
case or in excess of $100,000 in the aggregate and shall remain undischarged or
unvacated for a period in excess of thirty (30) days or execution or Tax
collection proceedings by Minister of Revenue shall at any time not be
effectively stayed, or any judgment other than for the payment of money, or
injunction, attachment, garnishment or execution is rendered against any
Borrower or Obligor or any of their assets;
(e) any Borrower dissolves or suspends or discontinues doing
business;
(f) any Borrower or Obligor becomes insolvent (however defined or
evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its creditors or principal
creditors;
(g) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against any Borrower or Obligor or all or any part of its
properties and such petition or application is not dismissed within thirty (30)
days after the date of its filing or any Borrower or Obligor shall file any
answer admitting or not contesting such petition or application or indicates its
consent to, acquiescence in or approval of, any such action or proceeding or the
relief requested is granted sooner;
(h) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership,
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readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction now or hereafter in effect (whether at a law or equity) is filed by
any Borrower or Obligor or for all or any part of its property; or
(i) any default by any Borrower or Obligor under any agreement,
document or instrument relating to any indebtedness for borrowed money owing to
any person other than Lender, or any capitalized lease obligations, contingent
indebtedness in connection with any guarantee, letter of credit, indemnity or
similar type of instrument in favor of any person other than Lender, in any case
in an amount in excess of $200,000, which default continues for more than the
applicable cure period, if any, with respect thereto, or any default by any
Borrower or Obligor under any Material Contract with any person other than
Lender, which default continues for more than the applicable cure period, if
any, with respect thereto and which default would have a Material Adverse
Effect; or any Credit Card Issuer or Credit Card Processor withholds payments of
amount otherwise payable to any Borrower to fund a reserve account or for such
Credit Card Issuer or Credit Card Processor to otherwise hold as collateral, or
any Borrower shall provide a letter of credit, guarantee, indemnity or similar
instrument to or in favor of such Credit Card Issuer or Credit Card Processor
such that in the aggregate of all such funds in the reserve account, other
amounts held as collateral and the amounts of such letters of credit,
guarantees, indemnities or similar instruments shall exceed $200,000 or any
Credit Card Issuer or Credit Card Processor shall debit or deduct any amounts
from any deposit account of any Borrower or any default or breach by any Credit
Card Issuer or Credit Card Processor of any Credit Card Acknowledgment or by any
bank at which a Blocked Account is maintained of any agreement of such bank with
Lender in connection with the financing arrangements provided for herein;
(j) any Credit Card Issuer or Credit Card Processor shall send
notice to any Borrower that it is ceasing to make or suspending payments to any
Borrower of amounts due or to become due to such Borrower or shall cease or
suspend such payments, or shall send notice to any Borrower that it is
terminating its arrangements with such Borrower (other than at the end of the
term thereof) or such arrangements shall terminate as a result of any event of
default under such arrangements;
(k) any Change of Control;
(l) the indictment or threatened indictment, of any Borrower or
Obligor under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings by any Governmental Authority, governmental
unit or agency by any governmental unit or agency against any Borrower or
Obligor, pursuant to which statute or proceedings by any governmental unit or
agency the penalties or remedies sought or available include forfeiture of any
of the Collateral or property of such Borrower or Obligor;
(m) a requirement from the Minister of National Revenue for payment
pursuant to Section 224 or any successor section of the Income Tax Act
(Canada) or Section 317,
or any successor section in respect of any Borrower or Obligor of the Excise Tax
Act (Canada) or any comparable provision of similar legislation shall have been
received by Agent or any Lender
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or any other Person in respect of any Borrower or Obligor or otherwise issued
in respect of any
Borrower or Obligor;
(n) there shall be a material adverse change in the business or
assets of any Borrower or Obligor after the date hereof; or
(o) there shall be an event of default under any of the other
Financing
Agreements.
10.2 REMEDIES.
(a) At any time an Event of Default exists or has occurred and is
continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by Borrowers or any Obligor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or other applicable law, are
cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by any Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against any Borrower or Obligor to collect the
Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of Default
exists or has occurred and is continuing, Lender may, in its discretion and
without limitation, (i) accelerate the payment of all Obligations and demand
immediate payment thereof to Lender (PROVIDED, THAT, upon the occurrence of any
Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations
shall automatically become immediately due and payable), (ii) with or without
judicial process or the aid or assistance of others, enter upon any premises on
or in which any of the Collateral may be located and take possession of the
Collateral or complete processing, manufacturing and repair of all or any
portion of the Collateral, (iii) require any Borrower, at Borrowers' expense, to
assemble and make available to Lender any part or all of the Collateral at any
place and time designated by Lender, (iv) collect, foreclose, receive,
appropriate, setoff and realize upon any and all Collateral, (v) remove any or
all of the Collateral from any premises on or in which the same may be located
for the purpose of effecting the sale, foreclosure or other disposition thereof
or for any other purpose, (vi) sell, lease, transfer, assign, deliver or
otherwise dispose of any and all Collateral (including, without limitation,
entering into contracts with respect thereto, public or private sales at any
exchange, broker's board, at any office of Lender or elsewhere) at such prices
or terms as Lender may deem reasonable, for cash, upon credit or for future
delivery, with the Lender having the right to purchase the whole or any part of
the Collateral at any such public sale, all of the foregoing being free from any
right or equity of redemption of Borrowers, which right or equity of redemption
is hereby expressly waived and released by Borrowers and/or (vii) terminate this
Agreement. If any of the Collateral is sold or
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leased by Lender upon credit terms or for future delivery, the Obligations shall
not be reduced as a result thereof until payment therefor is finally collected
by Lender. If notice of disposition of Collateral is required by law, five (5)
days' prior notice by Lender to Borrowers designating the time and place of any
public sale or the time after which any private sale or other intended
disposition of Collateral is to be made, shall be deemed to be reasonable notice
thereof and each Borrower waives any other notice. In the event Lender
institutes an action to recover any Collateral or seeks recovery of any
Collateral by way of prejudgment remedy, each Borrower waives the posting of any
bond which might otherwise be required.
(c) For the purpose of enabling Lender to exercise the rights and
remedies hereunder, each Borrower and Guarantor hereby grants to Lender, to the
extent assignable, an irrevocable, non-exclusive license (exercisable without
payment of royalty or other compensation to Borrowers or Guarantors) to use,
assign, license or sublicense any of the trademarks, service- marks, trade
names, business names, trade styles, designs, logos and other source of business
identifiers and other Intellectual Property now owned or hereafter acquired by
any Borrower or Guarantor, wherever the same may be located, including in such
license reasonable access to all media in which any of the licensed items may be
recorded or stored and to all computer programs used for the compilation or
printout thereof.
(d) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or in part and in such order
as Lender may elect, whether or not then due. Each Borrower shall remain liable
to Lender for the payment of any deficiency with interest at the highest rate
provided for herein and all costs and expenses of collection or enforcement,
including attorneys' fees and legal expenses.
(e) Without limiting the foregoing, (i) upon the occurrence of an
Event of Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice, cease
making Loans or arranging for Letter of Credit Accommodations or reduce the
lending formulas or amounts of Loans and Letter of Credit Accommodations
available to Borrowers and/or (ii) terminate any provision of this Agreement
providing for any future Loans or Letter of Credit Accommodations to be made by
Lender to Borrowers.
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
11.1 GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS; JURY TRIAL
WAIVER.
(a) The validity, interpretation and enforcement of this Agreement
and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of Texas (without
giving effect to principles of conflicts of law) unless otherwise expressly
provided in a Financing Agreement, as to interpretation, enforcement, validity,
construction, effect, choice of law, and in all other respects, including, but
not limited to, the legality of the
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interest rate and other charges, but excluding perfection of security interests
and liens which shall be governed and controlled by the laws of the relevant
jurisdiction.
(b) Borrowers, Guarantor and Lender irrevocably consent and submit
to the non-exclusive jurisdiction of the District Court of the State of Texas
and the United States District Court for the Northern District of Texas and
waive any objection based on venue or FORUM NON CONVENIENS with respect to any
action instituted therein arising under this Agreement or any of the other
Financing Agreements or in any way connected with or related or incidental to
the dealings of the parties hereto in respect of this Agreement or any of the
other Financing Agreements or the transactions related hereto or thereto, in
each case whether now existing or hereafter arising, and whether in contract,
tort, equity or otherwise, and agree that any dispute with respect to any such
matters shall be heard only in the courts described above (except that Lender
shall have the right to bring any action or proceeding against any Borrower,
Guarantor or its property in the courts of any other jurisdiction which Lender
deems necessary or appropriate in order to realize on the Collateral or to
otherwise enforce its rights against any Borrower, Guarantor or its property).
(c) Each Borrower and Guarantor hereby waives personal service of
any and all process upon it and consents that all such service of process may be
made by certified mail (return receipt requested) directed to its address set
forth on the signature pages hereof and service so made shall be deemed to be
completed five (5) days after the same shall have been so deposited in the U.S.
mails, or, at Lender's option, by service upon any Borrower or Guarantor in any
other manner provided under the rules of any such courts. Within thirty (30)
days after such service, such Borrower or Guarantor shall appear in answer to
such process, failing which such Borrower or Guarantor shall be deemed in
default and judgment may be entered by Lender against such Borrower or Guarantor
for the amount of the claim and other relief requested.
(d) BORROWERS, GUARANTOR AND LENDER EACH HEREBY WAIVES ANY RIGHT TO
TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER
THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN
RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE
TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE.
BORROWERS, GUARANTOR AND LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT
A JURY AND THAT BORROWERS, GUARANTOR OR LENDER MAY FILE AN ORIGINAL COUNTERPART
OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF
THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Borrowers or Guarantor
(whether in tort, contract, equity or otherwise) for losses suffered by
Borrowers or Guarantor in connection
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with, arising out of, or in any way related to the transactions or relationships
contemplated by this Agreement, or any act, omission or event occurring in
connection herewith, unless it is determined by a final and non-appealable
judgment or court order binding on Lender, that the losses were the result of
acts or omissions constituting gross negligence or willful misconduct. In any
such litigation, Lender shall be entitled to the benefit of the rebuttable
presumption that it acted in good faith and with the exercise of ordinary care
in the performance by it of the terms of this Agreement.
11.2 WAIVER OF NOTICES. Each Borrower and Guarantor hereby expressly
waives demand, presentment, notice of intent to accelerate, notice of
acceleration, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on Borrower or Guarantor which Lender may elect to give shall
entitle Borrowers to any other or further notice or demand in the same, similar
or other circumstances.
11.3 AMENDMENTS AND WAIVERS. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender, and as to amendments, as also signed by an authorized officer of
Borrowers and Guarantor. Lender shall not, by any act, delay, omission or
otherwise be deemed to have expressly or impliedly waived any of its rights,
powers and/or remedies unless such waiver shall be in writing and signed by an
authorized officer of Lender. Any such waiver shall be enforceable only to the
extent specifically set forth therein. A waiver by Lender of any right, power
and/or remedy on any one occasion shall not be construed as a bar to or waiver
of any such right, power and/or remedy which Lender would otherwise have on any
future occasion, whether similar in kind or otherwise.
11.4 WAIVER OF COUNTERCLAIMS. Each Borrower and Guarantor waives all
rights to interpose any claims, deductions, setoffs or counterclaims of any
nature (other then compulsory counterclaims) in any action or proceeding with
respect to this Agreement, the Obligations, the Collateral or any matter arising
therefrom or relating hereto or thereto.
11.5 INDEMNIFICATION. Borrowers and Guarantor shall indemnify and hold
Lender, and its directors, agents, employees and counsel, harmless from and
against any and all losses, claims, damages, liabilities, costs or expenses
imposed on, incurred by or asserted against any of them in connection with any
litigation, investigation, claim or proceeding commenced or threatened related
to the negotiation, preparation, execution, delivery, enforcement, performance
or administration of this Agreement, any of the other Financing Agreements, or
any undertaking or proceeding related to any of the transactions contemplated
hereby or any act, omission, event or transaction related or attendant thereto,
including, without limitation, any and all losses, claims, damages, liabilities,
costs or expenses caused by the negligence (but not the gross negligence or
willful misconduct) of Lender and Lender's directors, agents, employees and
counsel, and further including, without limitation, amounts paid in settlement,
court costs, and the fees and expenses of counsel. To the extent that the
undertaking to indemnify, pay and hold
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harmless set forth in this Section may be unenforceable because it violates any
law or public policy, Borrowers and Guarantor shall pay the maximum portion
which it is permitted to pay under applicable law to Lender in satisfaction of
indemnified matters under this Section. The foregoing indemnity shall survive
the payment of the Obligations and the termination or non-renewal of this
Agreement.
11.6 CURRENCY INDEMNITY. If, for the purposes of obtaining judgment in any
court in any jurisdiction with respect to this Agreement or any of the other
Financing Agreements, it becomes necessary to convert into the currency of such
jurisdiction (the "Judgment Currency") any amount due under this Agreement or
under any of the other Financing Agreements in any currency other than the
Judgment Currency (the "Currency Due"), then conversion shall be made at the
Exchange Rate at which Lender is able, on the relevant date, to purchase the
Currency Due with the Judgment Currency prevailing on the Business Day before
the day on which judgment is given. In the event that there is a change in the
rate of Exchange Rate prevailing between the Business Day before the day on
which the judgment is given and the date of receipt by Lender of the amount due,
Borrowers will, on the date of receipt by Lender, pay such additional amounts,
if any, or be entitled to receive reimbursement of such amount, if any, as may
be necessary to ensure that the amount received by Lender on such date is the
amount in the Judgment Currency which when converted at the rate of exchange
prevailing on the date of receipt by Lender is the amount then due under this
Agreement or such other of the Financing Agreements in the Currency Due. If the
amount of the Currency Due which Lender is able to purchase is less than the
amount of the Currency Due originally due to it, Borrowers shall indemnify and
save Lender harmless from and against loss or damage arising as a result of such
deficiency. The indemnity contained herein shall constitute an obligation
separate and independent from the other obligations contained in this Agreement
and the other Financing Agreements, shall give rise to a separate and
independent cause of action, shall apply irrespective of any indulgence granted
by Lender from time to time and shall continue in full force and effect
notwithstanding any judgment or order for a liquidated sum in respect of an
amount due under this Agreement or any of the other Financing Agreements or
under any judgment or order.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
12.1 TERM.
(a) This Agreement and the other Financing Agreements shall become
effective as of the date set forth on the first page hereof and shall continue
in full force and effect for a term ending on the date three (3) years from the
date hereof ("Renewal Date"), and from year to year thereafter, unless sooner
terminated pursuant to the terms hereof; PROVIDED, THAT, Lender may, at its
option, extend the Renewal Date to the date four (4) years from the date hereof
by giving Play By Play notice at least sixty (60) days prior to the third (3rd )
anniversary of the date of this Agreement. Lender or Borrowers (subject to
Lender's right to extend the Renewal Date as provided above) may terminate this
Agreement and the other Financing Agreements effective on the Renewal Date or on
the anniversary of the Renewal Date in any year by giving to the other party at
least sixty (60) days prior written notice; PROVIDED, that, this Agreement and
all other Financing Agreements must be terminated simultaneously. Upon the
effective date of
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termination or non-renewal of the Financing Agreements, Borrowers shall pay to
Lender, in full, all outstanding and unpaid Obligations and shall furnish cash
collateral, to Lender in such amounts as Lender determines are necessary to
secure Lender from loss, cost, damage or expense, including attorneys' fees and
legal expenses, in connection with any contingent Obligations, including issued
and outstanding Letter of Credit Accommodations and checks or other payments
provisionally credited to the Obligations and/or as to which Lender has not yet
received final and indefeasible payment. Such payments in respect of the
Obligations and cash collateral shall be remitted by wire transfer in Federal
funds to such bank account of Lender, as Lender may, in its discretion,
designate in writing to Play By Play for such purpose. Interest shall be due
until and including the next Business Day, if the amounts so paid by Borrowers
to the bank account designated by Lender are received in such bank account later
than 12:00 noon, Dallas time.
(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge any Borrower or Guarantor of its
respective duties, obligations and covenants under this Agreement or the other
Financing Agreements until all Obligations have been fully and finally
discharged and paid, and Lender's continuing security interest in the Collateral
and the rights and remedies of Lender hereunder, under the other Financing
Agreements and applicable law, shall remain in effect until all such Obligations
have been fully and finally discharged and paid.
(c) If for any reason this Agreement is terminated prior to the end
of the then current term or renewal term of this Agreement, in view of the
impracticality and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Lender's lost
profits as a result thereof, Borrowers agree to pay to Lender, upon the
effective date of such termination, an early termination fee in the amount set
forth below if such termination is effective in the period indicated:
AMOUNT PERIOD
------ ------
(i) Two (2%) percent of From the date hereof to and including
Maximum Credit October 25, 2000; and
(ii) One (1%) percent of From October 26, 2000 to and including
Maximum Credit October 25, 2002 or if the term hereof is
extended, at any time prior to the end of the
then current term.
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrowers agree
that it is reasonable under the circumstances currently existing. In addition,
Lender shall be entitled to such early termination fee upon the occurrence of
any Event of Default described in Section 10.1(g) and 10.(1)(h) hereof; even if
Lender does not exercise its rights to terminate this Agreement, but elects, at
its option, to provide financing to a Borrower or permit the use of cash
collateral under the United States Bankruptcy Code. The early termination fee
provided for in this Section 12.1 shall be deemed included in the Obligations.
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(d) Notwithstanding anything to the contrary contained in Section
12.1(c) above, in the event of the termination of this Agreement by Borrowers
prior to the end of the then current term of renewal term of this Agreement and
the full and final repayment of all of the Obligations and the receipt by Lender
of cash collateral all as provided in Section 12.1(a) above with the proceeds of
initial loans and advances by First Union National Bank to Borrowers pursuant to
a credit facility provided by First Union National Bank to Borrowers, to replace
the financing arrangements provided for herein, Borrowers shall not be required
to pay the early termination fee provided for above.
(e) Notwithstanding anything to the contrary contained in Section
12.1(c) above, in the event of the termination by Borrowers of the financing
arrangements provided for herein upon the consummation of a Qualified Public
Offering, Borrowers shall not be required to pay the early termination fee
provided for in Section 12.1(c) above, provided, THAT, the proceeds of such
Qualified Public Offering shall be used to repay all of the Obligations and
provide cash collateral to Lender in accordance with the terms hereof.
12.2 NOTICES. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at its address set forth below and to Play By
Play as agent for Borrowers at its chief executive office set forth below, or to
such other address as either party may designate by written notice to the other
in accordance with this provision, and (b) deemed to have been given or made: if
delivered in person, immediately upon delivery; if by telex, telegram or
facsimile transmission, immediately upon sending and upon confirmation of
receipt; if by nationally recognized overnight courier service with instructions
to deliver the next Business Day, one (1) Business Day after sending; and if by
certified mail, return receipt requested, five (5) days after mailing.
12.3 PARTIAL INVALIDITY. If any provision of this Agreement is held to be
invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
12.4 SUCCESSORS. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrowers, Guarantor and their
respective successors and assigns, except that Borrowers and Guarantor may not
assign their rights under this Agreement, the other Financing Agreements and any
other document referred to herein or therein without the prior written consent
of Lender. Lender may, after notice to any Borrower, assign its rights and
delegate its obligations under this Agreement and the other Financing Agreements
and further may assign, or sell participations in, all or any part of the Loans,
the Letter of Credit Accommodations or any other interest herein to another
financial institution or other person, in which event, the assignee or
participant shall have, to the extent of such assignment or participation, the
same rights and benefits as it would have if it were the Lender hereunder,
except as otherwise provided by the terms of such assignment or participation.
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12.5 CONFIDENTIALITY.
(a) Lender shall use all reasonable efforts to keep confidential,
in accordance with its customary procedures for handling confidential
information and safe and sound lending practices, any non-public information
supplied to it by Borrowers, Guarantor and their respective Subsidiaries
pursuant to this Agreement which is clearly and conspicuously marked as
confidential at the time such information is furnished by any Borrower,
Guarantor, or any Subsidiary to Lender, PROVIDED, THAT, nothing contained herein
shall limit the disclosure of any such information: (i) to the extent required
by statute, rule, regulation, subpoena or court order, (ii) to bank examiners
and other regulators, auditors and/or accountants, (iii) in connection with any
litigation to which Lender is a party, (iv) to any assignee or participant (or
prospective assignee or participant) so long as such assignee or participant (or
prospective assignee or participant) shall have first agreed in writing to treat
such information as confidential in accordance with this Section 12.5, or (v) to
counsel for Lender or any participant or assignee (or prospective participant or
assignee).
(b) In no event shall this Section 12.5 or any other provision of
this Agreement or applicable law be deemed: (i) to apply to or restrict
disclosure of information that has been or is made public by any Borrower,
Guarantor or any of their respective Subsidiaries or any third party without
breach of this Section 12.5 or otherwise become generally available to the
public other than as a result of a disclosure in violation hereof, (ii) to apply
to or restrict disclosure of information that was or becomes available to Lender
on a non-confidential basis from a person other than a Borrower or any of their
respective Subsidiaries, (iii) require Lender to return any materials furnished
by any Borrower or any of their respective Subsidiaries to Lender or (iv)
prevent Lender from responding to routine informational requests in accordance
with the CODE OF ETHICS FOR THE EXCHANGE OF CREDIT INFORMATION promulgated by
The Robert Morris Associates or other applicable industry standards relating to
the exchange of credit information. The obligations of Lender under this Section
12.5 shall supersede and replace the obligations of Lender under any
confidentiality letter signed prior to the date hereof.
12.6 INTERPRETATIVE PROVISIONS.
(a) All terms used herein which are defined in Article 1 or Article
9 of the UCC shall have the meanings given therein unless otherwise defined in
this
Agreement.
(b) All references to the plural herein shall also mean the
singular and to the singular shall also mean the plural unless the context
otherwise requires.
(c) All references to any person herein shall include their
respective
successors and assigns.
(d) The words "hereof", "herein", "hereunder", "this Agreement" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not any particular provision of this Agreement and as
this Agreement now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
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(e) The word "including" when used in this Agreement shall mean
"including, without limitation".
(f) An Event of Default shall exist or continue or be continuing
until such Event of Default is waived in accordance with Section 11.3 or is
cured in a manner satisfactory to Lender, if such Event of Default is capable of
being cured as determined by Lender.
(g) For all purposes of this Agreement (but not for purposes of the
preparation of any financial statements delivered pursuant hereto), the
equivalent in Canadian Dollars, or other currency of any amount in US Dollars,
and the equivalent in US Dollars of any amount in Canadian Dollars or other
currency, shall be determined pursuant to the Currency Exchange Convention.
(h) Any accounting term used in this Agreement shall have, unless
otherwise specifically provided herein, the meaning customarily given in
accordance with GAAP, and all financial computations hereunder shall be computed
unless otherwise specifically provided herein, in accordance with GAAP as
consistently applied and using the same method for inventory valuation as used
in the preparation of the financial statements of Borrowers most recently
received by Lender prior to the date hereof.
(i) In the computation of periods of time from a specified date to
a later specified date, the word "from" means "from and including", the words
"to" and "until" each mean "to but excluding" and the word "through" means "to
and including".
(j) Unless otherwise expressly provided herein, (i) references
herein to any agreement, document or instrument shall be deemed to include all
subsequent amendments, modifications, supplements, extensions, renewals,
restatements or replacements with respect thereto, but only to the extent the
same are not prohibited by the terms hereof or of any other Financing Agreement,
and (ii) references to any statute or regulation are to be construed as
including all statutory and regulatory provisions consolidating, amending,
replacing, recodifying, supplementing or interpreting the statute or regulation.
(k) The captions and headings of this Agreement are for convenience
of reference only and shall not affect the interpretation of this Agreement.
(l) This Agreement and other Financing Agreements may use several
different limitations, tests or measurements to regulate the same or similar
matters. All such limitations, tests and measurements are cumulative and shall
each be performed in accordance with their terms.
(m) This Agreement and the other Financing Agreements are the
result of negotiations among and have been reviewed by counsel to Lender and the
other parties, and are the products of all parties. Accordingly, this Agreement
and the other Financing Agreements shall not be construed against Lender merely
because of Lender's involvement in their preparation.
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12.7 ENTIRE AGREEMENT. This Agreement, the other Financing Agreements, any
supplements hereto or thereto, and any instruments or documents delivered or to
be delivered in connection herewith or therewith represents the entire agreement
and understanding concerning the subject matter hereof and thereof between the
parties hereto, and supersede all other prior agreements, understandings,
negotiations and discussions, representations, warranties, commitments,
proposals, offers and contracts concerning the subject matter hereof, whether
oral or written. In the event of any inconsistency between the terms of this
Agreement and any schedule or exhibit hereto, the terms of this Agreement shall
govern.
12.8 NONAPPLICABILITY OF CHAPTER 346; SELECTION OF OPTIONAL INTEREST RATE
CEILINGS. Borrowers, Guarantor and Lender hereby agree that, except for Section
346.004 thereof, the provisions of Chapter 346 of the Texas Finance Code
(Vernon's Texas Code Annotated), as amended from time to time (as amended, the
"Texas Finance Code") shall not apply to this Agreement or any of the other
Financing Agreements. To the extent that any of the optional interest rate
ceilings provided in Chapter 303 of the Texas Finance Code may be available for
application to any loan(s) or extension(s) of credit under this Agreement for
the purpose of determining the maximum allowable interest hereunder pursuant to
the Texas Finance Code, the applicable "monthly ceiling" (as such term is
defined in Chapter 303 of the Texas Finance Code) from time to time in effect
shall be used to the extent that it is so available, and if such "monthly
ceiling" at any time is not so available then the applicable "weekly ceiling"
(as such term is defined in Chapter 303 of the Texas Finance Code) from time to
time in effect shall be used to the extent that it is so available.
12.9 DTPA WAIVER. BORROWERS AND GUARANTOR HEREBY WAIVE
ALL PROVISIONS OF THE DECEPTIVE TRADE PRACTICES -- CONSUMER PROTECTION ACT (TEX.
BUS. & COM. CODE ANN. ss. 17.41 ET SEQ. AND EXPRESSLY WARRANTS AND REPRESENTS
THAT BORROWERS AND GUARANTOR EACH (a) HAVE KNOWLEDGE AND EXPERIENCE IN FINANCIAL
AND BUSINESS MATTERS THAT ENABLE BORROWER TO EVALUATE THE MERITS AND RISKS OF
THIS TRANSACTION, (b) ARE NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION
RELATIVE TO LENDER, AND (c) HAVE BEEN REPRESENTED BY LEGAL COUNSEL IN CONNECTION
WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
12.10 ORAL AGREEMENTS INEFFECTIVE. THIS AGREEMENT AND THE OTHER FINANCING
AGREEMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES, AND THE SAME MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
- 87 -
<PAGE>
IN WITNESS WHEREOF, Lender, Borrowers and Guarantor have caused these
presents to be duly executed as of the day and year first above written.
LENDER
CONGRESS FINANCIAL CORPORATION
(SOUTHWEST)
By:_______________________________
Title:____________________________
ADDRESS:
1201 Main Street, Suite 1625
Dallas, Texas 75202
BORROWERS
PLAY BY PLAY TOYS ACE NOVELTY CO., INC.
& NOVELTIES, INC.
By:_______________________________ By:_______________________________
Title:____________________________ Title:____________________________
CHIEF EXECUTIVE OFFICE: CHIEF EXECUTIVE OFFICE:
4400 Tejasco 4400 Tejasco
San Antonio, Texas 78218 San Antonio, Texas 78218
NEWCO NOVELTY, INC.
By:_______________________________
Title:____________________________
CHIEF EXECUTIVE OFFICE:
4400 Tejasco
San Antonio, Texas 78218
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
- 88 -
<PAGE>
[SIGNATURES CONTINUED FROM PRIOR PAGE]
GUARANTOR:
FRIENDS, FOOD & GAMES, INC.
By:_______________________________
Title:____________________________
CHIEF EXECUTIVE OFFICE:
4400 Tejasco
San Antonio, Texas 78218
- 89 -
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements on
Form S-8 (File No. 333-07031) and Form S-3 (File No. 333-55849) of our reports,
both dated November 12, 1999, 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, 1999 and 1998, and for each of the three
years in the period ended July 31, 1999, which reports are included in this
Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Austin, Texas
November 12, 1999
<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
M,ONTHS ENDED JULY 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 2,345,834
<SECURITIES> 0
<RECEIVABLES> 46,620,719
<ALLOWANCES> 10,377,672
<INVENTORY> 69,116,899
<CURRENT-ASSETS> 110,986,066
<PP&E> 33,493,309
<DEPRECIATION> 7,634,164
<TOTAL-ASSETS> 155,318,261
<CURRENT-LIABILITIES> 78,880,660
<BONDS> 0
1,000
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 155,318,261
<SALES> 156,515,361
<TOTAL-REVENUES> 158,515,361
<CGS> 129,582,244
<TOTAL-COSTS> 129,582,244
<OTHER-EXPENSES> 55,808,965
<LOSS-PROVISION> 7,833,697
<INTEREST-EXPENSE> 4,831,276
<INCOME-PRETAX> (33,170,651)
<INCOME-TAX> 4,547,187
<INCOME-CONTINUING> (30,230,347)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,230,347)
<EPS-BASIC> (4.12)
<EPS-DILUTED> (4.12)
</TABLE>
