================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
4400 Tejasco
San Antonio, Texas 78218-0267
(Address of principal executive offices and zip code)
(210) 829-4666
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X} No[ ].
The aggregate number of the Registrant's shares outstanding on December 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
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements:
Consolidated Balance Sheets as of October 31, 1999 (unaudited)
and July 31, 1999 .............................................. 3
Consolidated Statements of Income (unaudited) for the
Three Months Ended October 31, 1999 and 1998 ................... 4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended October 31, 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 ...................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..... 16
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K ............................... 18
SIGNATURES ............................................................... 21
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED OCTOBER 31,
-------------------------------
1999 1998
------------ ------------
Net sales ................................... $ 48,034,832 $ 55,726,986
Cost of sales ............................... 33,583,199 38,953,298
------------ ------------
GROSS PROFIT ........................... 14,451,633 16,773,688
Selling, general and administrative expenses. 11,632,054 13,363,527
------------ ------------
OPERATING INCOME ....................... 2,819,579 3,410,161
Interest expense ............................ (1,564,655) (1,354,780)
Interest income ............................. 26,187 57,408
Other income ................................ 89,266 81,297
------------ ------------
INCOME BEFORE INCOME TAX ............... 1,370,377 2,194,086
------------ ------------
Income tax provision ........................ (216,372) (767,859)
------------ ------------
NET INCOME ............................. $ 1,154,005 $ 1,426,227
============ ============
Basic earnings per common share:
------------ ------------
Net income ............................ $ 0.15 $ 0.20
============ ============
Diluted earnings per common share:
------------ ------------
Net income ............................ $ 0.15 $ 0.20
============ ============
Weighted average shares outstanding:
Basic ..................................... 7,395,000 7,315,000
------------ ------------
Diluted ................................... 9,895,000 8,272,008
------------ ------------
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------------- PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, July 31, 1997 ........... 4,901,300 1,000 35,006,539 (618,333)
Comprehensive income:
Net income .....................
Foreign currency translation
adjustments ..................
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)
Comprehensive income (loss):
Net loss .......................
Foreign currency translation
adjustments ..................
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)
============ ============ ============ ============
Comprehensive income (loss):
Net income .....................
Foreign currency translation
adjustments ..................
Comprehensive income (loss)
Acquisition of Caribe Marketing .. -- --
Amortization of deferred
compensation ................... 35,000
------------ ------------ ------------ ------------
Balance, October 31, 1999 ........ 7,395,000 $ 1,000 $ 71,486,820 $ (303,333)
============ ============ ============ ============
ACCUMULATED
OTHER RETAINED TOTAL
COMPREHENSIVE EARNINGS SHAREHOLDERS'
INCOME(LOSSES) (DEFICIT) EQUITY
------------ ------------ ------------
<S> <C> <C> <C>
Balance, July 31, 1997 ........... (2,303,027) 11,582,750 43,668,929
Comprehensive income:
Net income ..................... 8,444,775 8,444,775
Foreign currency translation
adjustments .................. 754,646 754,646
------------
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 ........... (1,548,381) 20,027,525 88,988,631
Comprehensive income (loss):
Net loss ....................... (30,230,347) (30,230,347)
Foreign currency translation
adjustments .................. (1,457,827) (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 ........... $ (3,006,208) $(10,202,822) $ 57,940,457
============ ============ ============
Comprehensive income (loss):
Net income ..................... 1,154,005 1,154,005
Foreign currency translation
adjustments .................. (650,239) (650,239)
------------
Comprehensive income (loss) 503,766
------------
Acquisition of Caribe Marketing .. --
Amortization of deferred
compensation ................... 35,000
------------ ------------ ------------
Balance, October 31, 1999 ........ $ (3,656,447) $ (9,048,817) $ 58,479,223
============ ============ ============
</TABLE>
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 1,154,005 $ 1,426,227
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization ................................ 758,171 680,018
Provision for doubtful accounts receivable ................... 327,379 495,325
Deferred income tax provision ................................ -- 269,510
Amortization of deferred compensation ........................ 35,000 35,000
Loss on sale of property and equipment ....................... 7,031 62,507
Change in operating assets and liabilities:
Accounts and notes receivable .............................. (3,786,319) (5,204,249)
Inventories ................................................ 7,231,978 3,534,325
Prepaids and other assets .................................. 1,744,617 (572,943)
Accounts payable and accrued liabilities ................... (3,204,824) (1,619,628)
Income taxes payable ....................................... 240,651 637,276
----------- -----------
Net cash provided by (used in) operating activities ..... 1,018,455 (256,632)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .............................. (731,806) (2,403,781)
Proceeds from sale of property and equipment .................... 36,146 5,989
----------- -----------
Net cash used in investing activities ................... (695,660) (2,397,792)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing (repayments) under Revolving Credit Agreements .... (1,673,221) 5,918,552
Repayment of long-term debt ..................................... (323,307) (608,243)
Repayment of capital lease obligations .......................... (446,018) (219,529)
Increase in book overdraft ...................................... 2,935,053 1,086,060
----------- -----------
Net cash provided by financing activities ............... 492,507 6,176,840
----------- -----------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATES ......................... (650,239) 1,568,637
----------- -----------
Increase in cash and cash equivalents ................... 165,063 5,091,053
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................. 2,345,634 3,024,028
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................ $ 2,510,697 $ 8,115,081
=========== ===========
Non-cash financing and investing activity - capital leases incurred $ 293,306 $ 105,817
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1999 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................... $ 2,510,697 $ 2,345,634
Accounts and notes receivable, less allowance for
doubtful accounts of $7,280,601 and $7,976,984 39,701,987 36,243,047
Inventories ........................................ 61,884,921 69,116,899
Prepaid expenses ................................... 3,957,945 2,811,776
Other current assets ............................... -- 468,710
------------- -------------
Total current assets .......................... 108,055,550 110,986,066
Property and equipment, net ........................ 26,228,593 25,859,145
Goodwill, less accumulated amortization
of $1,318,724 and $1,187,890 .................. 16,311,942 16,442,777
Other assets ....................................... 3,084,465 2,030,273
------------- -------------
Total assets .................................. $ 153,680,550 $ 155,318,261
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdraft ..................................... $ 5,216,500 $ 2,281,447
Notes payable to banks ............................. 28,309,312 29,982,533
Current maturities of long-term debt ............... 1,636,945 1,953,487
Current obligations under capital leases ........... 1,465,307 1,701,911
Accounts payable, trade ............................ 29,979,480 32,081,780
Accrued royalties payable .......................... 6,646,286 7,706,423
Other accrued liabilities .......................... 2,931,808 3,172,479
Income taxes payable ............................... 440,818 --
------------- -------------
Total current liabilities ..................... 76,626,456 78,880,060
------------- -------------
Long-term liabilities:
Long-term debt, net of current maturities .......... 2,133,653 2,140,418
Convertible subordinated debentures ................ 14,701,500 14,701,500
Obligations under capital leases ................... 1,739,718 1,655,826
------------- -------------
Total liabilities ............................. 95,201,327 97,377,804
------------- -------------
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 shares issued ........... 1,000 1,000
Additional paid-in capital ......................... 71,486,820 71,486,820
Deferred compensation .............................. (303,333) (338,333)
Accumulated other comprehensive losses ............. (3,656,447) (3,006,208)
Accumulated deficit ................................ (9,048,817) (10,202,822)
------------- -------------
Total shareholders' equity .................... 58,479,223 57,940,457
------------- -------------
Total liabilities and shareholders' equity .... $ 153,680,550 $ 155,318,261
============= =============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
<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 periods
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, 1999, which is on
file with the United States Securities and Exchange Commission.
2. INVENTORIES
Inventories are comprised of the following:
OCTOBER 31, 1999 JULY 31, 1999
---------------- -------------
Purchase for resale ........... $61,431,676 $68,592,189
Operating supplies ............ 453,245 524,710
----------- -----------
Total ...................... $61,884,921 $69,116,899
=========== ===========
6
<PAGE>
3. EARNINGS PER SHARE
Basic earnings per common share were computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share differs from basic earnings per share due to the
assumed conversions of dilutive options, warrants and convertible debt
outstanding during the period. The calculations of basic and diluted earnings
per share for the three-month periods ended October 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31,
--------------------------------------------------------------------------------
1999 1998
------------------------------------- -------------------------------------
COMMON PER COMMON PER
INCOME SHARES SHARE INCOME SHARES SHARE
---------- ---------- ----- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
As reported ....................... $1,154,005 7,395,000 $0.15 $1,426,227 7,315,000 $0.20
Effect of Dilutive Securities:
Options ........................... -- -- -- -- 19,508
Warrants .......................... -- -- -- -- --
Convertible Subordinated Debentures 329,844 2,500,000 $0.15 194,466 937,500
---------- ---------- ----- ---------- ---------- -----
DILUTED EPS: $1,483,849 9,895,000 $0.15 $1,620,693 8,272,008 $0.20
========== ========== ===== ========== ========== =====
</TABLE>
During the three month periods ended October 31, 1999 and 1998, the
Company had various amounts of common stock options and warrants outstanding
which were not included in the diluted earnings per share calculation because
the options and warrants would have been anti-dilutive.
4. COMPREHENSIVE INCOME
The Company's comprehensive income is comprised of net income and foreign
currency translation adjustments. The components of comprehensive income are as
follows:
THREE MONTHS ENDED OCTOBER 31,
-----------------------------
1999 1998
----------- -----------
Net income ................. $ 1,154,005 $ 1,426,227
Foreign currency
translation adjustment ... (650,239) 1,568,637
----------- -----------
Comprehensive income ....... $ 503,766 $ 2,994,864
=========== ===========
7
<PAGE>
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
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
are recorded each period in the current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is the type of hedge transaction. 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.
6. 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
between retail and amusement customers.
Information about revenue segments is presented below.
<TABLE>
<CAPTION>
AMUSEMENT RETAIL OTHER TOTAL
=========== =========== =========== ===========
<S> <C> <C> <C> <C>
Q1 FY 2000
Net operating revenue $31,185,535 $16,187,531 $ 661,766 $48,034,832
Cost of sales ....... 21,299,708 11,905,319 378,172 33,583,199
----------- ----------- ----------- -----------
Gross profit ........ 9,885,827 4,282,212 283,594 14,451,633
Q1 FY 1999
Net operating revenue $37,107,624 $17,958,093 $ 661,269 $55,726,986
Cost of sales ....... 25,045,502 13,594,803 312,993 38,953,298
----------- ----------- ----------- -----------
Gross profit ........ 12,062,122 4,363,290 348,276 16,773,688
</TABLE>
The following are sales by geographic areas for the three months ended
October 31:
OCTOBER 31,
-----------------------------------
1999 1998
----------- -----------
Domestic ................. $31,850,942 $39,753,794
Europe ................... 9,992,451 9,329,630
Latin America ............ 6,191,439 6,643,562
----------- -----------
$48,034,832 $55,726,986
8
<PAGE>
7. 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.
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 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. The Company incurred $1.2 million in costs
related to obtaining the New Credit Facility, which is being amortized over the
three-year term of the credit facility on a straight-line basis, which
approximates the interest method. In addition, the Company expensed $90,000 in
unamortized deferred costs related to the Old Credit Facility.
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 8.0% 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 to $6 per share of common stock. In addition, 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. 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. The First Amendment also includes limitations on
the
9
<PAGE>
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 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 Los Angeles distribution center from the Chairman
pursuant to the terms of the existing lease agreement.
10
<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, 1999 (SEE "RISK FACTORS" IN SUCH FORM 10-K). UPDATED INFORMATION
WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY THE SECURITIES
EXCHANGE ACT OF 1934.
RESULTS OF OPERATIONS
The following unaudited table sets forth the Company's results of
operations as a percentage of net sales for the periods indicated below:
THREE MONTHS ENDED
--------------------------
OCTOBER 31,
--------------------------
1999 1998
------- -------
Net sales ....................... 100.0% 100.0%
Cost of sales ................... 69.9 69.9
------- -------
Gross profit .................... 30.1 30.1
Selling, general, and
administrative expenses ...... 24.2 24.0
------- -------
Operating income ................ 5.9 6.1
Interest expense, net ........... (3.0) (2.2)
Income tax provision ............ (0.5) (1.4)
------- -------
Net income ...................... 2.4% 2.5%
======= =======
THREE MONTHS ENDED OCTOBER 31, 1999 AND 1998
NET SALES. Net sales for the fiscal quarter ended October 31, 1999
decreased 13.8%, or $7.7 million, to $48.0 million from $55.7 million in the
comparable period in fiscal 1999. The decrease in net sales was primarily
attributable to the decrease in domestic net toy sales of 20.2% or $7.9 million
to $31.2 million comprised principally of a $4.8 million decrease in domestic
retail sales and a $3.6 million decrease in domestic amusement sales from the
comparable period in fiscal 1999. Latin America net toys sales decreased 6.8%,
or $450,000, to $6.2 million, for the first quarter of fiscal 2000 from the
comparable period of fiscal 1999. This decrease was partially offset by an
increase in European net toy sales of 7.1%, or $663,000 million, to $10.0
million for the first quarter of fiscal 2000 over to the comparable period of
fiscal 1999.
Net sales of licensed products for the first quarter of fiscal 2000
decreased 16.0%, or $5.9 million, to $31.0 million from $36.9 million in the
comparable period of fiscal 1999. The decrease in licensed product sales was
primarily attributable to the decrease in sales of the Company's licensed
electronic products of
11
<PAGE>
38.1%, or $2.7 million, to $4.4 million. Net sales of PLAY-FACES(R) decreased
81.0%, or $3.1 million, to $730,000, from the comparable period in fiscal 1999.
Within licensed products, sales of Looney Tunes' characters decreased 39.1%, or
$11.3 million, to $17.6 million for the first quarter of fiscal 2000 from $28.9
million in the comparable period of fiscal 1999. Net sales of non-licensed
products for the first quarter of fiscal 2000 and 1999 accounted for 34.0%, or
$16.3 million, and 32.5%, or $18.1 million, respectively, of the Company's net
sales.
Net toy sales to retail customers for the first quarter of fiscal 2000 and
fiscal 1999 accounted for 33.7%, or $16.2 million, and 32.2%, or $17.9 million,
respectively, of the Company's net sales. The $1.7 million decrease in net sales
to retail customers from the first quarter of fiscal 1999 to the first quarter
of fiscal 2000 is attributable to a decrease in sales of non-licensed electronic
toys of 47.3%, or $1.5 million, to $1.7 million, from $3.2 million, a decrease
in sales of licensed electronic toys of 38.1%, or $2.7 million, to $4.4 million,
and a decrease in sales of licensed PLAY-FACES(R) of 81.0%, or $3.1 million, to
$730,000, offset by an increase in sales of licensed plush toys of 146.7%, or
$5.6 million, to $9.4 million, from $3.8 million, over the comparable period of
fiscal 1999.
Net toy sales to amusement customers for the first quarter of fiscal 2000
and fiscal 1999 accounted for 64.9%, or $31.2 million, and 66.6%, or $37.1
million, respectively, of the Company's net sales. The 16.0%, or $5.9 million,
decrease is primarily attributable to a decrease in sales of licensed plush of
25.4%, or $5.6 million, to $16.5 million, a decrease in sales of novelty items
of 20.4%, or $980,000, offset by an increase in sales of non-licensed plush toys
of 6.8%, or $691,000, from the comparable period of 1999.
GROSS PROFIT. Gross profit decreased 13.8%, or $2.3 million, to $14.5
million for the first quarter of fiscal 2000 from $16.8 million in the
comparable period of fiscal 1999, principally due to lower overall sales. Gross
profit as a percentage of net sales for the first quarter of fiscal years 2000
and 1999 was 30.1%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately 13.0%, or $1.7 million, to $11.6
million for the first quarter of fiscal 2000 from $13.3 million in the
comparable period in fiscal 1999. This decrease is primarily attributable to
decreases in payroll, advertising, bad debt and professional fee expenses. This
decrease is partially offset by increases in inventory storage, detention costs
and direct marketing catalog fulfillment costs. As a percentage of net sales,
selling, general and administrative expenses increased to 24.2% for the first
quarter of fiscal 2000 from 24.0% in the comparable period in fiscal 1999
principally due to lower overall sales.
INTEREST EXPENSE. Interest expense increased $210,000, or 15.4% to $1.6
million for the first quarter of fiscal 2000 from $1.4 million for the
comparable period in fiscal 1999. The increase is attributable to the increase
in the interest rate on the Company's convertible debentures from 8.0% to 10.5%
and increased borrowings on the Company's revolving line of credit.
INCOME TAX EXPENSE. Income tax expense for the first quarter of fiscal
2000 reflects an effective tax rate of approximately 16% as a result of the
utilization of domestic net operating loss carryforwards incurred in the
previous fiscal year offset by income taxes on the earnings of certain of the
Company's foreign subsidiaries. Income tax expense for the first quarter of
fiscal 1999 reflects an effective tax rate of approximately 35%.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1999, the Company's working capital was $31.4 million
compared to $77.4 million at October 31, 1998. This decrease is attributable to
the significant operating losses incurred during fiscal 1999, including 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
12
<PAGE>
inventory and bad debt provisions on certain non-performing trade and non-trade
receivables and notes receivables recorded during the fourth quarter of fiscal
1999.
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, licensing agreements and international expansion.
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. 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 7 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 8.0% 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 to $6 per share of common stock. 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 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.
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
13
<PAGE>
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 those 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 issuance
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.
As of October 31, 1999, the revolving line of credit balance under the new
credit facility was $25 million, the term loan balance was $2.4 million, and the
amount of convertible debt outstanding was $15 million.
The Company's operating activities provided net cash of $21.0 million in
the first quarter of fiscal 2000 and used net cash of $257,000 in the comparable
period of fiscal 1999. The cash flow from operations in the first quarter of
fiscal 2000 was primarily affected by the decrease in inventory, and increases
in accounts receivable, prepaid and accounts payable.
Net cash used in investing activities during the first quarter of fiscal
2000 and 1999 was $696,000 and $2.4 million, respectively. For the first quarter
fiscal 2000, net cash used in investing activities of $732,000 consisted of
expenditures for property and plant. In the first quarter of fiscal 1999, net
cash used in investing activities consisted principally of the purchase of
property and equipment including $1.4 million for computer equipment, $785,000
for costs incurred related to implementation of the Company's enterprise
resource planning system, and $186,000 for leasehold improvements.
Net cash provided by financing activities during the first quarter of
fiscal 2000 and 1999 was $493,000 and $6.2 million, respectively. During the
first quarter of fiscal 2000, the Company received aggregate advances of $59.0
million, and made repayments of $60.6 million on the Credit Facility and reduced
the principal on the term loan by $2.4 million. During the first quarter of
fiscal 1999, the Company received aggregate advances of $40.9 million, and made
repayments of $35.0 million on the Credit Facility, and reduced the principal on
the term loan by $600,000.
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.
YEAR 2000 COMPLIANCE
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
14
<PAGE>
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.
The Company feels that all phases will be completed by the end of calendar
year 1999. Costs incurred to date have primarily consisted of labor from the
redeployment of existing information technology, legal and operational resources
as well as computer hardware and software costs. The Company has budgeted
approximately $5.2 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.
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 Toys & Novelties Europa, S.A. ("Play By Play Europe") is located. Play By
Play Europe intends to keep its books in Spain's sovereign currency, the peseta,
through the substantial portion of the three-year introductory period, at the
end of which all companies in participating member countries must adopt the
euro. As Play By Play Europe's accounting system is currently capable of
performing the euro conversion, the Company does not anticipate that the costs
related to the conversion will be significant. In addition, as Play By Play
Europe operates primarily in Spain and in non-European Union countries,
management does not anticipate that the introduction of the euro will have a
material effect on Play By Play Europe's results of operations, financial
position, or cash flows for the forseeable future.
15
<PAGE>
SEASONALITY
Both the retail and amusement toy industries are inherently seasonal.
Generally, in the past, the Company's sales to the amusement industry have been
highest during the third and fourth fiscal quarters, and collections for those
sales have been highest during the succeeding fiscal quarters. The Company's
sales to the retail toy industry have been highest during its first and fourth
fiscal quarters, and collections from those sales have been highest during the
succeeding fiscal quarters. The Company's working capital needs and borrowings
to fund those needs have been highest during the third and fourth fiscal
quarters. As a result of the Company's increased sales to the amusement industry
and increased penetration of the retail market, the Company anticipates that its
sales, collections and borrowings to fund working capital needs may become more
significant in the third and fourth fiscal quarters.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 5 to the consolidated financial statements included elsewhere
herein for a discussion of new pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the areas of changes in United States and
international borrowing rates (i.e. prime rate or LIBOR), and changes in foreign
currency exchange rates as measured against the United States ("U.S.") dollar
and functional currencies of its subsidiaries (i.e. British pound/Spanish
peseta). In addition, the Company is exposed to market risk in certain
geographic areas that have experienced or are likely to experience an economic
downturn, such as China and Latin America. The Company purchases substantially
all of its inventory from companies in China; therefore, the Company is subject
to the risk that such suppliers will be unable to provide inventory at
competitive prices. 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 October 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
loans under the New Credit Facility entered into on October 25, 1999 is variable
based on the lender's prime rate or adjusted Euro dollar rate, and therefore,
affected by changes in market interest rates. At October 31, 1999, approximately
$27.4 million was outstanding under the New Credit Facility and term loans with
a weighted average interest of 8.18%.
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
16
<PAGE>
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.
17
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
2.1 Asset Purchase Agreement dated May 1, 1996, by and among Ace Novelty
Acquisition Co., Inc. a Texas corporation ("Buyer"), Play By Play Toys
& Novelties, Inc., a Texas corporation and the parent corporation of
Buyer ("PBYP"), Ace Novelty Co., Inc., a Washington corporation
("ACE"), Specialty Manufacturing Ltd., a British Columbia, Canada
corporation ("Specialty"), ACME Acquisition Corp., a Washington
corporation ("ACME"), and Benjamin H. Mayers and Lois E. Mayers,
husband and wife, Ronald S. Mayers, a married individual, Karen
Gamoran, a married individual, and Beth Weisfield, a married individual
(collectively, "Stockholders") (filed as Exhibit 2.1 to Form 8-K, Date
of Event: May 1, 1996), incorporated herein by reference.
2.2 Amendment No. 1 to Asset Purchase Agreement dated June 20, 1996 by, and
among Buyer, PBYP, ACE, Specialty, ACME and Stockholders. (filed as
Exhibit 2.2 to Form 8-K, Date of Event: May 1, 1996), incorporated
herein by reference.
3.1 Amended Articles of Incorporation of the Company (filed as Exhibit 3.1
to the Registration Statement on Form S-1, File No. 33-92204)
incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to the
Registration Statement on Form S-1, File No. 33-92204), incorporated
herein by reference.
4.1 Specimen of Common Stock Certificate (filed as Exhibit 4.1 to the
Registration Statement on Form S-1, File No. 33-92204) incorporated
herein by reference.
4.2 Form of Warrant Agreement and Form of Warrant (filed as Exhibit 4.2 to
the Registration Statement on Form S-1, File No. 33-92204),
incorporated herein by reference.
4.3 Form of Play By Play Toys & Novelties, Inc. Grant of Incentive Stock
Option (filed as Exhibit 4.3 to the Registration Statement on Form S-1,
File No. 33-92204) incorporated herein by reference.
4.4 Form of Play By Play Toys & Novelties, Inc. Non-qualified Stock Option
Agreement (filed as Exhibit 4.4 to the Registration Statement on Form
S-1, File No. 33-92204) incorporated herein by reference.
4.5 Play By Play Toys & Novelties, Inc. Warrant to Purchase Common Stock
(filed as Exhibit 4 to Form 8-K, Date of Event: May 1, 1996),
incorporated herein by reference.
10.1 Play By Play Toys & Novelties, Inc. 1994 Incentive Plan (filed as
Exhibit 10.1 to the Registration Statement on Form S-1, File No.
33-92204), incorporated herein by reference.
10.2 Credit Agreement dated June 20, 1996, by and among Play By Play Toys &
Novelties, Inc., Ace Novelty Acquisition Co., Inc., Newco Novelty, Inc.
and Chemical Bank, a New York banking corporation as agent for the
lenders (filed as Exhibit 10.1 to Form 8-K, Date of Event: May 1,
1996), incorporated herein by reference.
18
<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.
19
<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.
27 Financial Data Schedule
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 15th day of December 1999.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By: /s/ JOE M. GUERRA
Joe M. Guerra
CHIEF FINANCIAL OFFICER
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED STATEMENTS OF
OPERATIONS FOUND ON PAGES F-3 AND F-4 OF THE COMPANY'S FORM 10-Q FOR THE THREE
MONTHS ENDED OCTOBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-END> OCT-31-1999
<CASH> 2,510,697
<SECURITIES> 0
<RECEIVABLES> 46,982,588
<ALLOWANCES> (7,280,601)
<INVENTORY> 61,884,921
<CURRENT-ASSETS> 108,055,550
<PP&E> 34,454,812
<DEPRECIATION> 8,226,219
<TOTAL-ASSETS> 153,680,550
<CURRENT-LIABILITIES> 76,626,456
<BONDS> 0
<COMMON> 1,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 153,680,550
<SALES> 48,034,832
<TOTAL-REVENUES> 48,034,832
<CGS> 33,583,199
<TOTAL-COSTS> 33,583,199
<OTHER-EXPENSES> 11,632,054
<LOSS-PROVISION> 327,379
<INTEREST-EXPENSE> 1,564,655
<INCOME-PRETAX> 1,370,377
<INCOME-TAX> 216,372
<INCOME-CONTINUING> 1,154,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,154,005
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.15
</TABLE>
