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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission file number 0-26374
PLAY BY PLAY TOYS & NOVELTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Texas 74-2623760
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4400 Tejasco
San Antonio, Texas 78218-0267
(Address of principal executive offices and zip code)
(210) 829-4666
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The aggregate number of the Registrant's shares outstanding on June 10, 1999
was 7,395,000 shares of Common Stock, no par value.
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<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of April 30, 1999 (unaudited)
and July 31, 1998 3
Consolidated Statements of Operations (unaudited) for
the Three Months and Nine Months Ended April 30, 1999
and 1998 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended April 30, 1999 and 1998 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 16
Item 6. Exhibits and reports on Form 8-K 17
SIGNATURE 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS OF
-----------------------------------
APRIL 30, 1999 JULY 31, 1998
---------------- ---------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 2,029,408 $ 3,024,028
Accounts and notes receivable, less allowance for
doubtful accounts of $6,365,226 and $5,262,053 ................. 40,170,636 48,950,055
Inventories ......................................................... 67,694,658 72,613,130
Prepaid royalties ................................................... 6,799,925 4,677,331
Other prepaid expenses .............................................. 3,211,026 4,018,712
Deferred income taxes ............................................... 224,728 224,728
Other current assets. ............................................... 2,205,155 --
------------- -------------
Total current assets ........................................... 122,335,536 133,507,984
Property and equipment, net ......................................... 23,163,442 17,914,998
Goodwill, less accumulated amortization of $1,054,085 and $754,179 .. 16,545,911 14,043,748
Other assets ........................................................ 4,342,968 2,417,166
------------- -------------
Total assets ................................................... $ 166,387,857 $ 167,883,896
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdraft ...................................................... $ 1,052,725 $ --
Notes payable to banks and others ................................... 26,833,885 14,760,950
Long-term debt subject to acceleration .............................. 19,632,214 --
Current maturities of long-term debt ................................ 3,398,356 3,393,149
Current obligations under capital leases ............................ 1,117,200 1,142,687
Accounts payable, trade ............................................. 21,701,278 28,070,980
Other accrued liabilities ........................................... 4,622,384 5,312,081
Income taxes payable ................................................ 2,184,134 4,374,249
------------- -------------
Total current liabilities ...................................... 80,542,176 57,054,096
------------- -------------
Long-term liabilities:
Long-term debt, net of current maturities ........................... -- 4,860,247
Convertible subordinated debentures ................................. -- 15,000,000
Obligations under capital leases .................................... 791,956 1,102,135
Deferred income tax payable ......................................... 896,466 878,787
------------- -------------
Total liabilities .............................................. 82,230,958 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, respectively 1,000 1,000
Additional paid-in capital .......................................... 71,486,820 70,986,820
Deferred compensation ............................................... (373,333) (478,333)
Accumulated other comprehensive income .............................. (2,889,464) (1,548,381)
Retained earnings ................................................... 15,932,236 20,027,525
------------- -------------
Total shareholders' equity ..................................... 84,157,259 88,988,631
------------- -------------
Total liabilities & shareholders' equity ....................... $ 166,387,857 $ 167,883,896
============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30, NINE MONTHS ENDED APRIL 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales ...................................... $ 35,682,688 $ 37,262,519 $ 119,841,471 $ 126,546,943
Cost of sales .................................. 24,957,430 24,691,233 83,323,604 82,987,451
------------- ------------- ------------- -------------
GROSS PROFIT .............................. 10,725,258 12,571,286 36,517,867 43,559,492
Selling, general and administrative
expenses ..................................... 15,205,283 9,123,872 39,950,943 32,695,177
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) ................... (4,480,025) 3,447,414 (3,433,076) 10,864,315
Interest expense ............................... (1,185,236) (817,898) (3,406,945) (3,269,772)
Interest income ................................ 58,232 40,566 354,943 304,715
Other income (expense) ......................... 53,908 (77,134) 184,634 76,118
------------- ------------- ------------- -------------
Income (loss) before income tax ........... (5,553,121) 2,592,948 (6,300,444) 7,975,376
Income tax benefit (provision) ................. 1,943,592 (907,297) 2,205,155 (2,791,382)
------------- ------------- ------------- -------------
NET INCOME (LOSS) ......................... $ (3,609,529) $ 1,685,651 $ (4,095,289) $ 5,183,994
============= ============= ============= =============
NET INCOME (LOSS) PER SHARE:
Basic ........................................ $ (0.49) $ 0.23 $ (0.56) $ 0.84
------------- ------------- ------------- -------------
Diluted ...................................... $ (0.49) $ 0.22 $ (0.56) $ 0.77
------------- ------------- ------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ........................................ 7,327,727 7,264,743 7,319,118 6,189,961
------------- ------------- ------------- -------------
Diluted ...................................... 7,327,727 8,597,198 7,319,118 7,533,852
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
4
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................ $ (4,095,289) $ 5,183,994
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization ......................................... 2,239,028 1,798,777
Provision for doubtful accounts receivable ............................ 4,808,431 1,735,725
Deferred income tax provision ......................................... 17,679 58,974
Stock distributed as compensation ..................................... 105,000 105,000
Gain on sale of property and equipment ................................ 38,570 --
Change in operating assets and liabilities (net of Caribe acquisition):
Accounts and notes receivable ....................................... 2,430,511 (2,930,925)
Inventories ......................................................... 6,054,120 (22,131,066)
Prepaids and other assets ........................................... (5,479,861) (3,306,852)
Accounts payable and accrued liabilities ............................ (7,553,833) (3,241,177)
Income taxes payable ................................................ (2,192,892) 124,202
------------ ------------
Net cash used in operating activities ............................ (3,628,536) (22,603,348)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment .......................... (6,515,780) (1,650,419)
Proceeds from sale of property and equipment ............................. 73,509 36,955
Purchase of Caribe, net of cash paid .................................... 147,088 --
Payments for intangible assets ........................................... -- (49,256)
------------ ------------
Net cash used in investing activities ............................ (6,295,183) (1,662,720)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under Revolving Credit Facility .............. 12,072,935 (11,091,807)
Proceeds from public offering ............................................ -- 34,158,759
Repayment of long-term debt .............................................. (1,830,653) (1,944,170)
Repayment of capital lease obligations ................................... (1,024,825) (652,591)
Increase (decrease) in book overdraft .................................... 1,052,725 (461,220)
Proceeds from exercise of stock options .................................. -- 1,216,417
------------ ------------
Net cash provided by financing activities ........................ 10,270,182 21,225,388
------------ ------------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATES .................................. (1,341,083) 16,567
------------ ------------
Decrease in cash and cash equivalents ...................................... (994,620) (3,024,113)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................... 3,024,028 4,960,612
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ 2,029,408 $ 1,936,499
============ ============
Non-cash financing and investing-activity:
Capital leases incurred ................................................... $ 608,782 $ 891,169
Common stock issued in Caribe acquisition ................................. $ 500,000 $ --
Reduction of accounts receivable in Caribe acquisition .................... $ 1,992,794 $ --
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
5
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements and related
disclosures have been prepared in accordance with generally accepted accounting
principles applicable to interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. The year-end balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation of
the financial position and interim results of Play-By-Play Toys & Novelties,
Inc. and Subsidiaries (the "Company") as of and for the periods presented have
been included. Certain amounts in the financial statements for the prior period
have been reclassified to conform to the current year presentation. Because the
Company's business is seasonal, results for interim periods are not necessarily
indicative of those which may be expected for a full year.
The financial information included herein should be read in conjunction
with the Company's consolidated financial statements and related notes in its
Annual Report on Form 10-K for the fiscal year ended July 31, 1998, which is on
file with the United States Securities and Exchange Commission.
2. INVENTORIES
Inventories are comprised of the following:
APRIL 30, 1999 JULY 31, 1998
---------------- ---------------
Purchased for resale ............. $67,121,116 $72,325,886
Operating supplies ............... 573,542 287,244
----------- -----------
Total .................. $67,694,658 $72,613,130
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6
<PAGE>
3. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share were computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per share differs from basic earnings (loss)
per share due to the assumed exercises and conversions of dilutive options,
warrants and convertible debt that were outstanding during the period. The
calculations of basic and diluted earnings (loss) per share for the three and
nine-month periods ended April 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
----------------------------------------------------------------------------------------
1999 1998
------------------------------------------ -----------------------------------------
COMMON PER COMMON PER
LOSS SHARES SHARES INCOME SHARES SHARES
------------------------------------------ -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
As reported ...................... $(3,609,529) 7,327,727 $ (0.49) $ 1,685,651 7,264,743 $ 0.23
EFFECT OF DILUTIVE SECURITIES:
Options .......................... -- -- -- 364,329
Warrants ......................... -- -- -- 30,626
8% Convertible Debentures ........ -- -- 190,192 937,500
------------------------------------------ -----------------------------------------
DILUTED EPS: ..................... $(3,609,529) 7,327,727 $ (0.49) $ 1,875,843 8,597,198 $ 0.22
========================================== =========================================
NINE MONTHS ENDED APRIL 30,
----------------------------------------------------------------------------------------
1999 1998
------------------------------------------ -----------------------------------------
COMMON PER COMMON PER
LOSS SHARES SHARES INCOME SHARES SHARES
------------------------------------------ -----------------------------------------
BASIC EPS:
As reported ...................... $(4,095,289) 7,319,118 $ (0.56) $ 5,183,994 6,189,961 $ 0.84
EFFECT OF DILUTIVE SECURITIES:
Options .......................... -- -- -- 376,520
Warrants ......................... -- -- -- 29,871
8% Convertible Debentures ........ -- -- 583,397 937,500
------------------------------------------ -----------------------------------------
DILUTED EPS: ..................... $(4,095,289) 7,319,118 $ (0.56) $ 5,767,391 7,533,852 $ 0.77
========================================== =========================================
</TABLE>
The 937,500 shares issuable upon conversion of the 8% convertible
debentures were not included in the calculation of diluted earnings (loss) per
share for the three months ended and for the nine months ended April 30, 1999,
because the effect of adding the shares and the related interest would have been
anti-dilutive. During the three months ended and the nine months ended April 30,
1999, the Company had 1,877,600 of common stock options and warrants outstanding
which were not included in the diluted earnings (loss) per share calculation
because the options and warrants would have been anti-dilutive. During the three
months ended and the nine months ended April 30, 1998, the Company had 563,000
and 65,000, 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.
7
<PAGE>
4. ACQUISITION
In March 1999, the Company, through a wholly-owned subsidiary, acquired
substantially all of the assets and certain 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 reduction of accounts
receivable of $2.0 million. 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.
5. WRITE-OFF OF ACCOUNTS RECEIVABLE
During the third quarter of fiscal 1999, the Company wrote-off $3.3
million of accounts receivable related to the commencement of insolvency
proceedings by the Company's Mexico distributor. The write-off was included in
selling, general and administrative expenses.
6. LONG-TERM DEBT
As of April 30, 1999, the Company was not in compliance with certain
financial covenants under its 8.00% Convertible Debentures (the "Debentures").
The Company has an aggregate of $15.0 million of the Debentures outstanding.
Pursuant to the terms of the Debentures, the holders of the Debentures do not
have the right to accelerate the maturity of the principal of such debt until
180 days from the date of notice to the lenders under the Credit Facility (the
"Senior Lenders"). The Company was advised by its Senior Lenders that they had
received notification dated April 1, 1999 from the holder of $5.0 million of the
Debentures of its intention to accelerate the maturity of the principal due to
it. Additionally, the Senior Lenders may require an additional 90 days of
forbearance providing the Company is not in default of any interest or principal
payments under the Credit Facility. As of June 14, 1999, the Company was not in
default of any interest or principal payments under the Credit Facility or the
Debentures. The Company is currently in negotiations with the holders of the
Debentures to modify or refinance the Debentures. Additionally, the Company is
also in negotiations with other lenders, including the Senior Lenders, to
refinance the Debentures. The Company is also in default of certain financial
and cross-default covenants of its Credit Facility. The Company is currently
under negotiations with the Senior Lenders to extend or refinance the Credit
Facility, which matures July 31, 1999. As a result of the forgoing,
the Company has classified all debt as current until such time as the Company
completes its refinancing and either receives appropriate waivers from the
Debenture holders or becomes compliant with the financial covenants. The Company
hes been advised that prior to extending the maturity of the Credit Facility,
the Senior Lender would require the Company either to obtain a waiver of the
defaults under, or to refinance, the Debentures. There is no assurance that the
Company will be able ro modify or refinance the indebtedness under the
Debentures. Furthermore, any such modification or refinancing is likely to be on
terms less favorable than currently in place with respect to the Debentures.
7. COMPREHENSIVE INCOME
In fiscal year 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "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. Prior to
the adoption of SFAS No. 130, foreign currency translation adjustments were
reported separately in the statement of shareholders' equity.
The components of comprehensive income, net of related tax, are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30, NINE MONTHS ENDED APRIL 30,
---------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) ......................... $(3,609,529) $ 1,685,651 $(4,095,289) $ 5,183,994
Foreign currency translation adjustment ... (1,979,867) 562,389 (1,341,083) 16,567
----------- ----------- ----------- -----------
Comprehensive income (loss) ............... $(5,589,396) $ 2,248,040 $(5,436,372) $ 5,200,561
=========== =========== =========== ===========
</TABLE>
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Restated Information,"
which establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS 131 is effective for fiscal years beginning after December 15,
1997. SFAS 131 need not be applied to interim financial statements in the
initial year of application; however, comparative information for interim
periods in the initial year of application are required to be reported in
financial statements for interim periods in the second year of application.
Management is currently determining the impact that SFAS 131 will have on its
financial statement disclosures.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY, INCLUDING,
WITHOUT LIMITATION, RELATIONSHIPS WITH LICENSORS AND CUSTOMERS, REALIZATION OF
ROYALTY ADVANCES, NEW PRODUCT INTRODUCTION, LIQUIDITY AND CAPITAL RESOURCES, AND
CAPABILITY TO MANAGE GROWTH, ABILITY TO SOURCE PRODUCTS, CONCENTRATION OF CREDIT
RISK, INTERNATIONAL TRADE RELATIONS AND MANAGEMENT OF QUARTER TO QUARTER
RESULTS, AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S SEC
REPORTS, INCLUDING THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED JULY 31, 1998 (SEE "RISK FACTORS" IN SUCH FORM 10-K). UPDATED INFORMATION
WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY THE SECURITIES
EXCHANGE ACT OF 1934.
RESULTS OF OPERATIONS
The following unaudited table sets forth the Company's results of
operations as a percentage of net sales for the periods indicated below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
APRIL 30, APRIL 30,
------------------ -----------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales .................................... 69.9 66.3 69.5 65.6
----- ----- ----- -----
Gross profit ..................................... 30.1 33.7 30.5 34.4
Selling, general and administrative expenses ..... 42.6 24.5 33.3 25.8
----- ----- ----- -----
Operating income (loss) .......................... (12.5) 9.2 (2.8) 8.6
Interest expense ................................. (3.3) (2.2) (2.8) (2.6)
Interest income .................................. 0.2 0.1 0.3 0.2
Other income (expense) ........................... 0.2 (0.2) 0.2 0.1
Income tax benefit (provision) ................... 5.4 (2.4) 1.8 (2.2)
----- ----- ----- -----
Net income (loss) ................................ (10.0%) 4.5% (3.3%) 4.1%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED APRIL 30, 1999 AND 1998
NET SALES. Net sales for the three months ended April 30, 1999 were $35.7
million, a decrease of 4.2%, or $1.6 million, from $37.3 million in the
comparable period in fiscal 1998. The decrease in net sales was attributable to
a decrease in amusement net sales of 4.5%, or $1.4 million, to $30.1 million and
a decrease in retail net sales of 3.1%, or $157,000, to $4.9 million over the
comparable period in fiscal 1998. Domestic amusement sales decreased 1.8%, or
$426,000, to $23.9 million and international amusement sales decreased 13.7%, or
$1.0 million, to $6.2 million over the comparable period in fiscal 1998. For the
three months ended April 30, 1999, international retail sales were up 94.7% or
$1.6 million to $3.3 million, while domestic retail sales were down 52.8%, or
$1.7 million, to $1.6 million over the comparable period in fiscal 1998.
Domestic retail sales were negatively impacted by a weak retail environment for
traditional toys in the U.S. and by continued weakness in Latin America.
Domestic net toy sales for the third quarter of fiscal 1999 compared to the
comparable period of fiscal 1998 decreased 7.9%, or $2.1 million, to $25.5
million, and international net toy sales increased 6.9%, or $610,000, to $9.5
million.
9
<PAGE>
Net sales of licensed products for the third quarter of fiscal 1999 were
$26.9 million, an increase of 2.0%, or $514,000, from $26.3 million in the
comparable period of fiscal 1998. The increase in licensed product sales was
primarily attributable to increased sales of licensed plush toys of 10.2%, or
$1.7 million, to $18.4 million, offset by a decrease in sales of PLAY-FACES(R)
of approximately $430,000, while sales of licensed electronic toys, including
items such as Talkin' Tunes and Singin' & Swingin' Tweety were relatively flat
for the quarter over the comparable period in fiscal 1998. Within licensed
products, sales of Looney Tunes' characters were $16.5 million, a decrease of
19.3%, or $4.0 million, for the third quarter of fiscal 1999 from $20.5 million
in the comparable period of fiscal 1998. Sales of Scooby-Doo(R) characters
accounted for 7.3% of net sales, or $2.6 million, and sales of Garfield(R)
characters accounted for 7.9% of net sales, or $2.8 million, for the third
quarter of fiscal 1999. Net sales of non-licensed products for the third quarter
of fiscal 1999 and 1998 accounted for 22.8%, or $8.1 million, and 27.4%, or
$10.2 million, respectively, of the Company's net sales.
Net toy sales to retail customers for the third quarter of fiscal 1999 and
fiscal 1998 were $4.9 million and $5.0 million, which accounted for 13.5% and
13.4%, respectively, of the Company's net sales. The decrease in net sales to
retail customers is attributable to a decrease in sales of PLAY-FACES(R) of
43.6%, or $493,000, to $638,000, from $1.1 million in the comparable period in
fiscal 1998. This decrease is offset by an increase in sales to retail customers
of licensed plush toys of 14.3%, or $360,000, to $2.9 million, from $2.5 million
in the comparable period in fiscal 1998.
Net toy sales to amusement customers for the third quarter of fiscal 1999
and fiscal 1998 were $30.1 million and $31.5 million, which accounted for 84.4%
and 84.6%, respectively, of the Company's net sales. The decrease of 4.5%, or
$1.4 million, is primarily attributable to decreased sales of non-licensed plush
of 22.2%, or $1.6 million, to $5.6 million, and decreased sales of novelty items
of 17.5%, or $521,000, to $2.4 million. This decrease was offset by an increase
in sales to amusement customers of licensed plush of 3.4%, or $718,000.
GROSS PROFIT. Gross profit decreased 14.7%, or $1.8 million, to $10.7
million for the third quarter of fiscal 1999 from $12.5 million, in the
comparable period of fiscal 1998. This decrease is a result of the overall
decline in sales and from increased licensing costs in domestic retail and in
Europe, sales of closeout merchandise at reduced margins in retail and sales
within amusement of carryover merchandise at reduced margins early in the
quarter. As a result, gross profit as a percentage of net sales decreased to
30.1% for the third quarter of fiscal 1999 from 33.7% in the comparable period
in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately 66.7%, or $6.1 million, to $15.2
million for the third quarter of fiscal 1999 from $9.1 million in the comparable
period in fiscal 1998. This increase is primarily attributable to increased
payroll costs, bad debt expense, advertising expenses, tradeshow expenses and
product development expenses. Included in the selling, general and
administrative expenses for the third quarter of fiscal 1999 is the write-off of
$3.3 million of accounts receivable related to the commencement of insolvency
proceedings by the Company's Mexico distributor and approximately $362,000 of
severance costs related to recent management restructuring initiatives and
personnel reductions. Excluding this write-off, selling, general and
administrative expenses would have increased 30.7% or $2.8 million, to $11.9
million over the comparable period in fiscal 1998. As a percentage of net sales,
selling, general and administrative expenses increased to 42.6% for the third
quarter of fiscal 1999 from 24.5% in the comparable period in fiscal 1998.
Excluding the write-off, selling, general and administrative expenses, as a
percentage of net sales, would have increased to 33.4% for the third quarter of
fiscal 1999.
INTEREST EXPENSE. Interest expense increased $367,000, to $1.2 million,
for the third quarter of fiscal 1999 from $818,000, in the comparable period of
fiscal 1998. The increase is principally attributable to the increase in
borrowings outstanding under the Company's Credit Facility.
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INCOME TAX EXPENSE. The net loss for the third quarter of fiscal 1999
resulted in an income tax benefit compared to a tax expense in the third quarter
of fiscal 1998 which reflects an effective tax rate of approximately 35%.
NINE MONTHS ENDED APRIL 30, 1999 AND 1998
NET SALES. Net sales for the nine months ended April 30, 1999 were $119.8
million, a decrease of 5.3%, or $6.7 million, from $126.5 million in the
comparable period of fiscal 1998. The decrease in net sales was primarily
attributable to a decrease in retail net sales of 30.0%, or $12.1 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 toy inventories by retailers, and the economic
weakness in Latin America during the first nine months of fiscal 1999. This
decrease is offset by an increase in amusement sales of 6.8%, or $5.6 million.
Domestic net toy sales for the nine months of fiscal 1999 compared to the nine
months of fiscal 1998 decreased 11.4%, or $11.6 million, to $90.0 million from
$101.5 million, and international net toy sales increased 22.0%, or $5.0
million, to $27.8 million, from $22.8 million.
Net sales of licensed products for the nine months of fiscal 1999 were
$83.2 million, an increase of 10.0%, or $7.6 million, from $75.6 million in the
comparable period of fiscal 1998. The increase in licensed product sales was
primarily attributable to the growth of sales of the Company's licensed products
to international customers, which accounted for $22.6 million, or 18.8%, of the
Company's net sales. Within licensed products, sales of Looney Tunes' characters
were $59.5 million, a decrease of 0.5%, or $272,000, for the nine months of
fiscal 1999 from $59.7 million in the comparable period of fiscal 1998. Sales of
Scooby-Doo(R) characters accounted for 4.2% of net sales, or $5.0 million, and
sales of Garfield(R) characters accounted for 3.1% of net sales, or $3.7
million, for the nine months of fiscal 1999. Net sales of licensed electronic
toys accounted for $10.5 million, or 8.8%, of the Company's net toy sales for
the nine months of fiscal 1999, up $967,000 over the comparable period in fiscal
1998. Net sales of non-licensed products for the nine months of fiscal 1999
decreased 29.0%, or $14.2 million, to $34.6 million from $48.7 million in the
comparable period of fiscal 1998. This decrease is primarily attributable to a
decrease in sales of non-licensed electronic toys, principally Talkin' Tots(TM)
of $10.8 million offset by sales of Penny and Patches(TM) of $1.3 million and a
decrease in sales of non-licensed stuffed toys of $7.4 million, offset by a $2.9
million increase in sales of non-licensed novelty items.
Net toy sales to retail customers for the nine months of fiscal 1999 and
fiscal 1998 were $28.5 million, or 23.7%, and $40.7 million, or 32.1%,
respectively, of the Company's net sales. The 29.9%, or $12.1 million decrease
in sales to retail customers from the nine months of fiscal 1998 to the nine
months of fiscal 1999 reflects the decrease in sales of non-licensed electronic
toys of $9.7 million, the decrease in sales of PLAY-FACES(R) of $1.4 million and
a decrease in sales of licensed plush toys of $2.1 million, offset by an
increase in sales of licensed electronic toys of $967,000.
Net toy sales to amusement customers for the nine months of fiscal 1999
and fiscal 1998 were $89.2 million, or 74.5%, and $83.6 million, or 66.1%,
respectively, of the Company's net sales. The 6.7%, or $5.6 million increase in
dollar volume is primarily attributable to the increase in domestic sales of
licensed plush toys to amusement customers which accounted for $47.4 million of
the Company's net sales, a 21.2% increase from the comparable period in fiscal
1998, offset by a 26.2%, or $6.0 million, decrease in domestic sales of
non-licensed plush.
GROSS PROFIT. Gross profit decreased 16.2% to $36.5 million for the nine
months of fiscal 1999 from $43.6 million in the comparable period in fiscal
1998, due to lower overall sales and margins on products sold within the retail
sector due to higher discounting of prices and sales at reduced margins of
certain older retail products, and higher licensing costs contrasted by
significantly higher margins in 1998 from sales of Talkin' Tots(TM), which were
television advertised products. Gross profit as a percentage of net sales
decreased to 30.5% for the nine months of fiscal 1999 from 34.4% in the
comparable period in fiscal 1998.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately 22.2%, or $7.3 million, to $40.0
million for the nine months of fiscal 1999 from $32.7 million in the comparable
period in fiscal 1998. This increase is primarily attributable to increased
payroll costs, bad debt expense, advertising expenses, tradeshow expenses and
product development expenses. Included in the selling, general and
administrative expenses for the nine months of fiscal 1999 is a write-off taken
in the third quarter of $3.3 million of accounts receivable related to the
commencement of insolvency proceedings by the Company's Mexico distributor and
approximately $362,000 of severance costs related to recent management
restructuring initiatives and personnel reductions. Excluding this write-off,
selling, general and administrative expenses would have increased 12.2% or $4.0
million, to $36.7 million over the comparable period in fiscal 1998. As a
percentage of net sales, selling, general and administrative expenses increased
to 33.3% for the nine months of fiscal 1999 from 25.8% in the comparable period
of fiscal 1998. Excluding the write-off, as a percentage of net sales, selling,
general and administrative expenses would have increased to 30.6% for the nine
months of fiscal 1999.
INTEREST EXPENSE. Interest expense increased 4.2%, or approximately
$137,000, to $3.4 million for the nine months of fiscal 1999 from $3.3 million
in the comparable period in fiscal 1998. The increase is attributable to
increased borrowings outstanding under the Company's Credit Facility offset by
lower overall borrowing rates.
INCOME TAX EXPENSE. The net loss for the nine months of fiscal 1999
resulted in an income tax benefit compared to a tax expense in the nine months
of fiscal 1998 which reflects an effective tax rate of approximately 35%.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, the Company's working capital was $41.8 million
compared to $74.4 million at April 30, 1998. The decrease is primarily
attributable to the classification of long-term debt obligations to current
liabilities as a result of the Company not being in compliance with certain
financial covenants (see "Default Upon Senior Securities").
The Company satisfies its capital requirements and seasonal working
capital needs with cash flow primarily from borrowings and operations. The
Company's primary capital needs have consisted of funding for business
acquisitions, inventory, property, plant and equipment, customer receivables,
letters of credit, entertainment character or corporate trademark licenses and
international expansion. The Company has significantly underperformed relative
to desired milestones toward the future minimum guaranteed royalty obligation
for a particular entertainment character license. The Company is currently in
negotiations and may receive some concessions from the licensor. However, the
Company is unable to determine if the concessions, if any, would be sufficient
to prevent the Company from incurring a loss from its inability to meet the
minimum guaranteed royalties. Management is unable at this time to estimate the
range of the loss.
As of April 30, 1999, the balance on the revolving line of credit was
$26.8 million, the balance outstanding on the term loan was $5.4 million, and
the amount of convertible subordinated debt outstanding was $15 million. As of
June 10, 1999, the Company had $1.2 million of additional borrowing capacity
available under its Revolving Credit Term Loan with Letter of Credit Facility
with The Chase Manhattan Bank ("Credit Facility"). The Credit Facility has been
extended through July 31, 1999 and the Company expects to either extend or
refinance the Credit Facility prior to that date. However, there is no assurance
that the Company will be able to refinance or secure a new credit facility, or
that if obtained, it will be on terms at least as favorable as those on the
existing Credit Facility.
The Company's operating activities used net cash of $3.6 and $22.6 million
in the first nine months of fiscal 1999 and 1998, respectively. The cash flow
from operations in the first nine months of fiscal 1999 was primarily affected
by the net loss, decreases in inventory and decreases in accounts payable.
During the third quarter of fiscal 1999, the Company incurred a write-off of
$3.3 million of accounts receivable related to the commencement of insolvency
proceedings by the Company's Mexico distributor.
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Net cash used in investing activities during the first nine months of
fiscal 1999 and 1998 was $6.3 million and $1.7, respectively. 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 reduction of
accounts receivable of $2.0 million. (See Footnote 4 -- "Acquisition") In the
first nine months of fiscal 1999, net cash used in investing activities
consisted principally of the purchase of property and equipment of $6.5 million,
and was composed of expenditures of $2.5 million for equipment, $3.4 million for
costs incurred related to the management information system implementation, real
property of $227,000 and $354,000 for leasehold improvements for the San Antonio
facility. In the first nine months of fiscal 1998, net cash used in investing
activities consisted principally of the purchase of property and equipment of
$1.7 million.
Net cash provided by financing activities during the first nine months of
fiscal 1999 and 1998 was $10.3 million and $21.2 million, respectively. During
the first nine months of fiscal 1999, the Company received aggregate advances of
$105.4 million, and made repayments of $93.3 million, on the Credit Facility,
and reduced the principal on the term loan by $1.8 million. During the nine
months of fiscal 1998, $115.9 million was used in repayment of borrowings on the
Credit Facility, offset by aggregate advances of $127.0 million.
The Company believes that its current available cash, net cash provided by
operating activities and available borrowings under the Company's Credit
Facility will be sufficient to meet the Company's cash requirements through July
31, 1999. The Company believes that it will be able to extend or refinance the
Credit Facility by July 31, 1999; however, there is no assurance that the
Company will be able to refinance or obtain a new credit facility, or that if
obtained, it will be on terms at least as favorable as those on the existing
line of credit.
DEFAULT UPON SENIOR SECURITIES
As of April 30, 1999, the Company was not in compliance with certain
financial covenants under its 8.00% Convertible Debentures (the "Debentures").
The Company has an aggregate of $15.0 million of the Debentures outstanding.
Pursuant to the terms of the Debentures, the holders of the Debentures do not
have the right to accelerate the maturity of the principal of such debt until
180 days from the date of notice to the lenders under the Credit Facility (the
"Senior Lenders"). The Company was advised by its Senior Lenders that they had
received notification dated April 1, 1999 from the holder of $5.0 million of the
Debentures of its intention to accelerate the maturity of the principal due to
it. Additionally, the Senior Lenders may require an additional 90 days of
forbearance providing the Company is not in default of any interest or principal
payments under the Credit Facility. As of June 14, 1999, the Company was not in
default of any interest or principal payments under the Credit Facility or the
Debentures. The Company is currently in negotiations with the holders of the
Debentures to modify or refinance the Debentures. Additionally, the Company is
also in negotiations with other lenders, including the Senior Lenders, to
refinance the Debentures. The Company is also in default of certain financial
and cross-default covenants of its Credit Facility. The Company is currently
under negotiations with the Senior Lenders to extend or refinance the Credit
Facility, which matures July 31, 1999. As a result of the forgoing, the Company
has classified all debt as current until such time as the Company completes its
refinancing and either receives appropriate waivers from the Debenture holders
or becomes compliant with the financial covenants. The Company has been advised
that prior to extending the maturity of the Credit Facility, the Senior Lender
would require the Company either to obtain a waiver of the defaults under, or to
refinance, the Debentures. There is no assurance that the Company will be able
to modify or refinance the indebtedness under the Debentures. Furthermore, any
such modification or refinancing is likely to be on terms less favorable than
currently in place with respect to the Debentures.
YEAR 2000 COMPLIANCE
Similar to many business entities, the Company will be impacted by the
inability of computer application software programs to distinguish between the
year 1900 and 2000 due to a commonly-used programming convention. Until such
programs are modified or replaced prior to 2000, calculations and
interpretations based on date-based arithmetic or logical operations performed
by such programs may be incorrect.
Management's plan addressing the impact on the Company of the Year 2000
issue focuses on the following areas: application systems, process control
systems (embedded chips), technology infrastructure, and third party business
partners and suppliers with which the Company has significant relationships.
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Management's analysis and review of these areas is comprised primarily of five
phases: developing an inventory of hardware, software and embedded chips;
assessing the degree to which each area is currently in compliance with Year
2000 requirements; performing renovations and repairs as needed to attain
compliance; testing to ensure compliance; and developing a contingency plan if
repair and renovation efforts are either unsuccessful or untimely.
Management has substantially completed the inventory and assessment phases
regarding application systems, process control systems and technology
infrastructure, and is performing upgrades, repairs and testing of the former
two categories. The review of physical infrastructure and business partners and
merchandise suppliers is in the inventory stage. The Company anticipates that
any additional assessment and remediation efforts will be substantially
completed by the end of calendar year 1999. Costs incurred to date, which total
$6.4 million 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 $7.0 million
for these Year 2000 compliance efforts and management information system
upgrades; 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 management information and
operating systems with new applications that are Year 2000 compliant. The
Company has formed a contingency team to develop a work plan in the event that
such programs are not fully operational by July of calendar year 1999. The
Company does not presently anticipate a material business interruption as a
result of the Year 2000.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Company's current and planned
activities with respect to the Year 2000 problem are expected to significantly
reduce the Company's level of uncertainty about the problem and, in particular,
about the Year 2000 compliance and readiness of its material customers and
suppliers. The Company believes that, with the implementation of new business
systems and completion of the planned activities as scheduled, the possibility
of significant interruptions of normal operations should be reduced.
Although there is a risk that the Company's plans for achieving Year 2000
compliance may not be completed on time, failure to meet critical milestones
identified in our plans would provide advance notice such that appropriate steps
could be taken to mitigate the risk of failure. Management believes that its
customers and suppliers would also receive advance notice allowing them to
implement alternate plans.
EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Union introduced the euro, which has become the common currency among the
participating member countries. The participating members' sovereign currency
has been converted to the euro at the exchange rates in effect on the
introduction date. Spain is one of the participating members, which is the
country in which Play-By-Play Toys & Novelties, Europa, S.A. ("Play-By-Play
Europe") is located. Play-By-Play Europe intends to keep its books in Spain's
sovereign currency, the peseta, through the substantial portion of the
three-year introductory period, at the end of which all companies in
participating member countries must adopt the euro. As Play-By-Play Europe's
accounting system is currently capable of performing the euro conversion, the
Company does not anticipate that the costs related to the conversion will be
significant. In addition, as Play-By-Play Europe operates primarily in Spain and
in non-European Union countries, management does
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not anticipate that the introduction of the euro will have a material effect on
Play-By-Play Europe's results of operations, financial position, or cash flows
for the forseeable future.
SEASONALITY
Both the retail and amusement toy industries are inherently seasonal.
Generally, in the past, the Company's sales to the amusement industry have been
highest during the third and fourth fiscal quarters, and collections for those
sales have been highest during the succeeding fiscal quarters. The Company's
sales to the retail toy industry have been highest during its first and fourth
fiscal quarters, and collections from those sales have been highest during the
succeeding fiscal quarters. The Company's working capital needs and borrowings
to fund those needs have been highest during the third and fourth fiscal
quarters. As a result of the Company's increased sales to the amusement industry
and increased penetration of the retail market, the Company anticipates that its
sales, collections and borrowings to fund working capital needs may become more
significant in the third and fourth fiscal quarters.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 7 to the consolidated financial statements included elsewhere
herein for a discussion of new pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the areas of changes in United States and
international borrowing rates (i.e. prime rate or LIBOR), and changes in foreign
currency exchange rates as measured against the United States ("U.S.") dollar
and functional currencies of its subsidiaries (i.e. British pound, Spanish
peseta, Hong Kong dollar, Canadian dollar). 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 or Latin America. The Company
purchases substantially all of its inventory from suppliers in China; therefore,
the Company is subject to the risk that such suppliers will be unable to provide
merchandise at competitive prices. While the Company believes that if such an
event were to occur it would be able to find alternate sources of merchandise at
competitive prices, there can be no assurance that the Company would be
successful. At April 30, 1999, the Company had $2.8 million of accounts
receivable outstanding, payable in U.S. dollars from companies based in Latin
America, principally Brazil. If the currencies of these countries were to fall
significantly against the U.S. dollar, there can be no assurance that such
companies would be able to repay the receivables in full. These exposures are
directly related to its normal operating and funding activities. Historically
and as of April 30, 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 is variable based on LIBOR and/or the prime rate, and therefore, affected
by changes in market interest rates. At April 30, 1999, approximately $26.8
million and $5.4 million was outstanding on the revolving line of credit and the
term loan, respectively. The Credit Facility matures July 31, 1999 and the
Company expects to either extend or refinance the Credit Facility prior to that
date. However, there is no assurance that the Company will be able to refinance
or obtain a new credit facility, or that if obtained, it will be on terms at
least as favorable as those on the existing line of credit. See "Liquidity and
Capital Resources."
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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 Peseta/U.S. Dollar exchange rate and
British Pound/U.S. Dollar exchange rate may positively or negatively affect the
Company's sales, gross margins, net income 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 merchandise by
the Company's European toy subsidiary from its suppliers in the Far East are
generally denominated in U.S. dollars and are thus subject to currency risk to
the extent that there are fluctuations in the exchange rate between the United
States dollar and the Spanish peseta. Certain of this European subsidiary's
license agreements call for payment of royalties in a currency different from
their functional currency, and these arrangements subject the Company to
currency risk to the extent that exchange rates fluctuate from the date that
royalty obligations are incurred until the date royalties are actually paid to
the licensor.
PART II. OTHER INFORMATION
ITEM 3. DEFAULT UPON SENIOR SECURITIES
As of April 30, 1999, the Company was not in compliance with certain
financial covenants under its 8.00% Convertible Debentures (the "Debentures").
The Company has an aggregate of $15.0 million of the Debentures outstanding.
Pursuant to the terms of the Debentures, the holders of the Debentures do not
have the right to accelerate the maturity of the principal of such debt until
180 days from the date of notice to the lenders under the Credit Facility (the
"Senior Lenders"). The Company was advised by its Senior Lenders that they had
received notification dated April 1, 1999 from the holder of $5.0 million of the
Debentures of their intentions to accelerate the maturity of the principal due
to them. Additionally, the Senior Lenders may require an additional 90 days of
forbearance providing the Company is not in default of any interest or principal
payments under the Credit Facility. As of June 14, 1999, the Company was not in
default of any interest or principal payments under the Credit Facility or the
Debentures. The Company is currently in negotiations with the holders of the
Debentures to modify or refinance the Debentures. Additionally, the Company is
also in negotiations with other lenders, including the Senior Lenders, to
refinance the Debentures. The Company is also in default of certain financial
and cross-default covenants of its Credit Facility. The Company is currently
under negotiations with the Senior Lenders to refinance the Credit Facility,
which matures July 31, 1999. As a result of the forgoing, the Company has
classified all debt as current until such time as the Company completes its
refinancing and either receives appropriate waivers from the Debenture holders
or becomes compliant with the financial covenants. The Company has been advised
that prior to extending the maturity of the Credit Facility, the Senior Lender
would require the Company either to obtain a waiver of the defaults under, or to
refinance, the Debentures. There is no assurance that the Company will be able
to modify or refinance the indebtedness under the Debentures. Furthermore, any
such modification or refinancing is likely to be on terms less favorable than
currently in place with respect to the Debentures.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS. The following exhibits are included or incorporated by reference
below.
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
--------- -------------------------
10.3 Promissory Note dated June 20, 1996, of Ace Novelty Acquisition Co.,
Inc. payable to the order of Ace Novelty Co., Inc. in the principal
sum of $2,900,000 (filed as Exhibit 10.5 to Form 8-K, Date of Event:
May 1, 1996), incorporated herein by reference.
10.4 Employment agreement dated November 4, 1996, between the Company and
Raymond G. Braun, as amended by Amendment No.1 to Employment
agreement dated August 29, 1997 (filed as Exhibit 10.4 to Form 10-K
for the fiscal year ended July 31, 1997), incorporated herein by
reference.
10.5 Non-Qualified Stock Option agreement dated November 4, 1996, between
the Company and Raymond G. Braun, as amended by Amendment No. 1 to
Non-Qualified Stock Option agreement dated August 29, 1997 (filed as
Exhibit 10.5 to Form 10-K for the fiscal year ended July 31, 1997),
incorporated herein by reference.
10.6 Employment agreement dated May 2, 1996, between the Company and Saul
Gamoran, as amended by Amendment No. 1 dated May 16, 1996 (filed as
Exhibit 10.6 to Form 10-K for the fiscal year ended July 31, 1997),
incorporated herein by reference.
10.7 Employment agreement dated June 20, 1997, between the Company and
James A. Weisfield (filed as Exhibit 10.7 to Form 10-K for the fiscal
year ended July 31, 1997), incorporated herein by reference.
10.8 Subordinated Convertible Debenture Agreements dated July 3, 1997,
between the Company and each of Renaissance Capital Growth and Income
Fund III, Inc., Renaissance U.S. Growth and Income Trust PLC and Banc
One Capital Partners II, Ltd. (the "Convertible Lenders") (filed as
Exhibit 10.8 to Form 10-K for the fiscal year ended July 31, 1997),
incorporated herein by reference.
10.9 Convertible Loan Agreement dated July 3, 1997, among the Company, the
Convertible Lenders and Renaissance Capital Group, Inc. (filed as
Exhibit 10.9 to Form 10-K for the fiscal year ended July 31, 1997),
incorporated herein by reference
10.10 License Agreement dated March 22, 1994 by and between Warner Bros., a
division of Time Warner Entertainment, L.P., and the Company (as
successor by assignment to Ace Novelty, Inc.) (filed as Exhibit 10.10
to Form 10-K for the fiscal year ended July 31, 1997), incorporated
herein by reference.
10.11 License Agreement dated March 22, 1996 by and between Warner Bros., a
division of Time Warner Entertainment, L.P., and the Company (as
successor by assignment to Ace Novelty, Inc.) (filed as Exhibit 10.11
to Form 10-K for the fiscal year ended July 31, 1997), incorporated
herein by reference.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
--------- -------------------------
10.12 License Agreement dated September 10, 1997 by and between Warner
Bros., a division of Time Warner Entertainment, L.P., and the Company
(as successor by assignment to Ace Novelty, Inc.) (filed as Exhibit
10.12 to Form 10-K for the fiscal year ended July 31, 1997),
incorporated herein by reference.
10.13 License Agreement dated January 1, 1998 by and between Warner Bros.,
a division of Time Warner Entertainment, L.P. and the Registrant
(filed as Exhibit 10.13 to Form 10-Q for the quarter ended January
31, 1998, and incorporated herein by reference).
10.14 License Agreement dated January 1, 1998 by and between Warner Bros.,
a division of Time Warner Entertainment, L.P. and the Registrant
(filed as Exhibit 10.14 to Form 10-Q for the quarter ended January
31, 1998, and incorporated herein by reference).
10.15 Amendment dated January 14, 1998 to License Agreement dated September
10, 1997 by and between Warner Bros., a division of Time Warner
Entertainment, L.P. and the Registrant (filed as Exhibit 10.15 to
Form 10-Q for the quarter ended January 31, 1998, and incorporated
herein by reference).
27 Financial Data Schedule
(b) REPORTS OF FORM 8-K. No reports on Form 8-K were filed during the quarter
ended April 30, 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 14th day of June 1999.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By: /s/ JOE M. GUERRA
Joe M. Guerra
CHIEF FINANCIAL OFFICER
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED STATEMENTS OF
OPERATIONS FOUND ON PAGES F-3 AND F-4 OF THE COMPANY'S FORM 10-Q FOR THE NINE
MONTHS ENDED APRIL 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> APR-30-1999
<CASH> 2,029,408
<SECURITIES> 0
<RECEIVABLES> 48,918,608
<ALLOWANCES> 6,365,226
<INVENTORY> 67,694,658
<CURRENT-ASSETS> 122,335,563
<PP&E> 30,165,307
<DEPRECIATION> 7,001,865
<TOTAL-ASSETS> 166,387,857
<CURRENT-LIABILITIES> 80,542,176
<BONDS> 0
<COMMON> 1,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 166,387,857
<SALES> 119,841,471
<TOTAL-REVENUES> 119,841,471
<CGS> 83,323,604
<TOTAL-COSTS> 83,323,604
<OTHER-EXPENSES> 39,950,943
<LOSS-PROVISION> 4,808,431
<INTEREST-EXPENSE> 3,406,945
<INCOME-PRETAX> (6,300,444)
<INCOME-TAX> 2,205,155
<INCOME-CONTINUING> (4,095,289)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,095,289)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
