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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, 2000
[ ] 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 12, 2000
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, 2000 (unaudited)
and July 31, 1999 3
Consolidated Statements of Operations (unaudited) for
the Three Months and Nine Months Ended April 30, 2000
and 1999 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended April 30, 2000 and 1999 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and reports on Form 8-K 20
SIGNATURES 23
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
APRIL 30, JULY 31,
------------- -------------
2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 2,684,747 $ 2,345,634
Accounts and notes receivable, less allowance for
doubtful accounts of $5,803,603 and $7,976,984 .......... 26,930,169 36,243,047
Inventories .................................................. 54,472,453 69,116,899
Prepaid expenses ............................................. 2,458,847 2,811,776
Other current assets ......................................... -- 468,710
------------- -------------
Total current assets .................................... 86,546,216 110,986,066
Property and equipment, net ....................................... 26,088,884 25,859,145
Goodwill, less accumulated amortization
of $1,566,456 and $1,187,890 ................................. 16,064,210 16,442,777
Other assets ...................................................... 2,334,704 2,030,273
------------- -------------
Total assets ............................................ $ 131,034,014 $ 155,318,261
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdraft ............................................... $ 2,781,998 $ 2,281,447
Notes payable to banks ....................................... 26,007,930 29,982,533
Long-term debt classified as current ......................... 1,979,052 --
Current maturities of convertible subordinated debentures .... 15,000,000 298,500
Current maturities of long-term debt ......................... 820,138 1,654,987
Current obligations under capital leases ..................... 1,010,945 1,701,911
Accounts payable, trade ...................................... 23,237,965 32,081,780
Accrued royalties payable .................................... 3,395,975 7,706,423
Other accrued liabilities .................................... 1,814,389 3,172,479
Income taxes payable ......................................... 3,371,635 --
------------- -------------
Total current liabilities ............................... 79,420,027 78,880,060
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities .................... -- 2,140,418
Convertible subordinated debentures, net of current maturities -- 14,701,500
Obligations under capital leases, net of current maturities .. 1,255,460 1,655,826
------------- -------------
Total liabilities ....................................... 80,675,487 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 ........................................ (233,333) (338,333)
Accumulated other comprehensive losses ....................... (4,307,806) (3,006,208)
Accumulated deficit .......................................... (16,588,154) (10,202,822)
------------- -------------
Total shareholders' equity .............................. 50,358,527 57,940,457
------------- -------------
Total liabilities and shareholders' equity .............. $ 131,034,014 $ 155,318,261
============= =============
</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 NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales .......................... $ 31,644,968 $ 35,649,543 $ 107,181,028 $ 119,754,986
Cost of sales ...................... 22,916,955 24,957,430 74,424,941 83,323,604
------------- ------------- ------------- -------------
GROSS PROFIT .................. 8,728,013 10,692,113 32,756,087 36,431,382
Selling, general and administrative
expenses ......................... 11,708,867 15,205,274 35,021,920 39,950,933
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) ....... (2,980,854) (4,513,161) (2,265,833) (3,519,551)
Interest expense ................... (1,467,919) (1,185,235) (4,565,011) (3,406,945)
Interest income .................... 26,723 58,222 65,186 354,933
Other income (expense) ............. (26,161) 87,053 380,327 271,119
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAX ....... (4,448,211) (5,553,121) (6,385,331) (6,300,444)
Income tax benefit ................. -- 1,943,592 -- 2,205,155
------------- ------------- ------------- -------------
NET LOSS ...................... $ (4,448,211) $ (3,609,529) $ (6,385,331) $ (4,095,289)
============= ============= ============= =============
LOSS PER SHARE:
Basic ............................ $ (0.60) $ (0.49) $ (0.86) $ (0.56)
------------- ------------- ------------- -------------
Diluted .......................... $ (0.60) $ (0.49) $ (0.86) $ (0.56)
------------- ------------- ------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ............................ 7,395,000 7,327,727 7,395,000 7,319,118
------------- ------------- ------------- -------------
Diluted .......................... 7,395,000 7,327,727 7,395,000 7,319,118
------------- ------------- ------------- -------------
</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)
NINE MONTHS ENDED APRIL 30,
-----------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................... $ (6,385,331) $ (4,095,289)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization ............. 2,333,584 2,239,028
Provision for doubtful accounts receivable 740,641 4,808,431
Deferred income tax provision (benefit) ... -- 17,679
Amortization of deferred compensation ..... 105,000 105,000
Loss on sale of property and equipment .... 5,316 38,570
Change in operating assets and liabilities
(net of Caribe acquisition):
Accounts and notes receivable ........... 8,572,238 2,430,511
Inventories ............................. 14,644,446 6,054,120
Prepaids and other assets ............... 478,227 (5,479,861)
Accounts payable and accrued liabilities (14,531,305) (7,553,833)
Income taxes payable .................... 3,371,635 (2,192,892)
------------ ------------
Net cash provided by (used in)
operating activities ............... 9,334,451 (3,628,536)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........... (2,147,093) (6,515,780)
Proceeds from the sale of property
and equipment .............................. 75,046 73,509
Purchase of Caribe, net of cash paid ......... -- 147,088
------------ ------------
Net cash used in investing activities (2,072,047) (6,295,183)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under Revolving
Credit Agreements .......................... (3,974,603) 12,072,935
Proceeds of long-term debt ................... 297,693 --
Repayment of long-term debt .................. (1,293,909) (1,830,653)
Repayment of capital lease obligations ....... (1,151,425) (1,024,825)
Increase in book overdraft ................... 500,551 1,052,725
------------ ------------
Net cash provided by (used in)
financing activities ............... (5,621,693) 10,270,182
------------ ------------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATES ...... (1,301,598) (1,341,083)
------------ ------------
Increase (decrease) in cash and
cash equivalents ........................... 339,113 (994,620)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,345,634 3,024,028
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..... $ 2,684,747 $ 2,029,408
============ ============
Non-cash financing and investing-activity:
Capital leases incurred ...................... $ 60,092 $ 608,782
============ ============
Common stock issued in Caribe acquisition .... $ -- $ 500,000
============ ============
Reduction of accounts receivable in
Caribe acquisition ......................... $ -- $ 1,992,794
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
5
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements and related
disclosures have been prepared in accordance with generally accepted accounting
principles applicable to interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. The year-end balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation of
the financial position and interim results of PlayoByoPlay 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 that 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. 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 is currently evaluating
SFAS No. 133 to determine its impact on the financial statements and related
disclosures, if any.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." In SAB No. 101, the SEC staff expresses its views regarding the
appropriate recognition of revenue with regard to a variety of circumstances,
some of which are of particular relevance to the Company. The Company will
be required to adopt SAB No. 101 for the quarter beginning August 1, 2000.
The Company is currently evaluating SAB No. 101 to determine its impact on
the financial statements, if any.
3. INVENTORIES
Inventories are comprised of the following:
APRIL 30, 2000 JULY 31, 1999
-------------- -------------
Purchased for resale $54,005,050 $68,592,189
Operating supplies.. 467,403 524,710
-------------- -------------
Total ......... $54,472,453 $69,116,899
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6
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4. CONTINGENCIES
In December 1997, a legal action was instituted against the Company by an
individual alleging claims for unfair competition (misappropriation), breach of
contract, breach of implied in fact contract, and quasi contract in connection
with alleged infringement resulting from the sale of Tornado Taz(TM). The
plaintiff seeks to recover the Company's profits on the sale of the toy in
question which could be as much as two million dollars or more, or alternatively
the plaintiff may seek to recover royalties as a measure of damages. The Company
responded by denying the essential allegations of the complaint and by filing
counterclaims and by filing a motion for summary judgement. The plaintiff filed
motions for summary judgement for dismissal of the claims and counterclaims. On
January 21, 1999, a judge in the United States District Court Southern District
of New York granted both the defendant's and plaintiff's motions for summary
judgement dismissing the claims and counterclaims. On February 19, 1999, the
plaintiff filed a notice of appeal with respect to the court's granting the
Company's motion for summary judgement. The Company filed a similar notice on
February 25, 1999 regarding the granting of the plaintiff's motion for summary
judgement. The Court of Appeals reversed the grant of summary judgement against
the plaintiff and affirmed the grant of summary judgement against the Company,
thus dismissing all of the Company's counterclaims against the plaintiff. The
Company and plaintiff are currently engaged in settlement discussions.
In April 2000, the Company commenced arbitration before the American
Arbitration Association against a software vendor seeking to recover certain
amounts advanced by the Company to the vendor, to terminate the contract and
cancel remaining amounts due to the software vendor under the contract, and to
recover damages. The Company contends in the arbitration matter that the
software and services provided to the Company are unsuitable for their intended
use and that the capabilities of the software were misrepresented by the
software vendor and cannot be used by the Company in its operations. The
software vendor has filed a counter claim to the arbitration contending it
completed the project in accordance with the terms of the contract and seeks to
recover full payment of the contract price. To date, the Company has paid the
software vendor approximately $878,000 and the software vendor is seeking to
recover remaining amounts due under the contract totaling approximately
$500,000. Management has retained counsel and is currently evaluating the
matter.
5. FORWARD CONTRACTS
During the quarter ended April 30, 2000, the Company's European subsidiary
entered into a foreign exchange hedging contract relative to certain payments
arising out of its foreign operations and denominated in a currency other than
its functional currency. The Company does not enter into these contracts for
speculative purposes. At April 30, 2000, the Company had one forward exchange
contract outstanding, which settled in June 2000. The notional value of the
contract at issuance was approximately $1.3 million. At April 30, 2000, there
was an unrealized gains of $68,000 under the contract. There were no realized
hedging gains or losses from settlement of contracts in the third quarter or the
nine months of fiscal 2000.
6. LICENSES
Two of the Company's significant entertainment character licenses, which
originally expired on March 31, 2000, were extended to May 31, 2000. The Company
is in discussions with the licensor for the renewal and extension of these two
agreements; however, the licensor is allowing the Company to sell licensed
merchandise under these agreements while negotiations for the renewals and
extensions are being conducted. As a percentage of total net sales, the combined
sales under these two agreements were 19.2%, 26.4% and 30.9% for the nine months
of fiscal year 2000 and fiscal years 1999 and 1998, respectively. In addition, a
significant portion of the Company's inventory is comprised of merchandise based
on characters licensed under these agreements. Currently, the Company has failed
to make payment of certain royalties required to be paid to the Licensor under
these and related licenses for which the Company is in negotiations to extend
the license agreements, including the payment terms. Negotiations on these
licenses are in the process of being completed; however, there can be no
assurance that the Company will be able to renew these license agreements or
whether payment terms will be
7
<PAGE>
extended or, if renewals or payment term extensions are obtained that the terms
will be as favorable to the Company as those contained in the expiring license
agreements.
7. LONG-TERM DEBT
Monthly principal payments on the Company's outstanding $15 million of
Convertible Debentures commence on June 30, 2000, at a rate of 1% of the
outstanding principal balance, and the remaining unpaid balance is due at
maturity on December 31, 2000. The Company currently expects that, by itself,
cash flow from operations will be insufficient to enable the Company to retire
the unsatisfied obligations under the Convertible Debentures due at maturity.
Accordingly, unless the debentures are converted into the Company's common stock
before the scheduled maturity, the Company will need to refinance in order to
satisfy its repayment obligations thereunder. There can be no assurance that the
Company will be able to refinance the Convertible Debentures or, if such
refinancing is obtained that the terms will be as favorable to the Company as
those contained in the Convertible Debentures.
On March 20, 2000, the Company obtained a loan in the principal amount of
$2.5 million from its Chairman of the Board. The loan provided for interest at
8% per annum and was secured by a first lien on the Company's 1999 Federal
income tax refund of approximately $2.8 million. The tax refund was received and
the loan from the Chairman plus accrued interest was repaid shortly thereafter.
On March 20, 2000, the Company's Credit Facility was amended to reduce the
maximum credit commitment from $60 million to $35 million and the revolving loan
limit to $32.6 million and provided for a supplemental loan under the revolving
line of credit in the principal amount of $500,000. The supplemental loan was
repaid in weekly installments and matured in May 2000. See also Note 11.
Subsequent Events, relating to the Company's Credit Facility.
8. COMPREHENSIVE LOSS
The Company's comprehensive loss is comprised of net loss and foreign
currency translation adjustments.
The components of comprehensive loss are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30, NINE MONTHS ENDED APRIL 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss .................. $(4,448,211) $(3,609,529) $(6,385,331) $(4,095,289)
Foreign currency
translation adjustment .. (172,468) (1,979,867) (1,301,598) (1,341,083)
----------- ----------- ----------- -----------
Comprehensive loss ........ $(4,620,679) $(5,589,396) $(7,686,929) $(5,436,372)
=========== =========== =========== ===========
</TABLE>
9. LOSS PER SHARE
Basic loss per common share was computed by dividing net loss 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
exercises and conversions of dilutive options, warrants and convertible debt
that were outstanding during the period.
8
<PAGE>
The calculations of basic and diluted loss per share for the three and
nine month periods ended April 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
------------------------------------------------------------------------------
2000 1999
------------------------------------- -------------------------------------
Common Per Common Per
Loss Shares Share Loss Shares Share
----------- ----------- ------ ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
As reported ................................... $(4,448,211) 7,395,000 $(0.60) $(3,609,529) 7,327,727 $(0.49)
EFFECT OF DILUTIVE SECURITIES:
Options ....................................... -- -- -- --
Warrants ...................................... -- -- -- --
Convertible Subordinated Debentures ........... -- -- -- --
----------- ----------- ------ ----------- ----------- ------
DILUTED EPS: .................................. $(4,448,211) 7,395,000 $(0.60) $(3,609,529) 7,327,727 $(0.49)
=========== =========== ====== =========== =========== ======
<CAPTION>
NINE MONTHS ENDED APRIL 30,
------------------------------------------------------------------------------
2000 1999
------------------------------------- -------------------------------------
Common Per Common Per
Loss Shares Share Loss Shares Share
----------- ----------- ------ ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
As reported ................................... $(6,385,331) 7,395,000 $(0.86) $(4,095,289) 7,319,118 $(0.56)
EFFECT OF DILUTIVE SECURITIES:
Options ....................................... -- -- -- --
Warrants ...................................... -- -- -- --
Convertible Subordinated Debentures ........... -- -- -- --
----------- ----------- ------ ----------- ----------- ------
DILUTED EPS: .................................. $(6,385,331) 7,395,000 $(0.86) $(4,095,289) 7,319,118 $(0.56)
=========== =========== ====== =========== =========== ======
</TABLE>
During the three months ended April 30, 2000 and 1999 and nine months
ended April 30, 2000 and 1999, 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.
9
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10. 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 distribution channels.
Information about revenue segments is presented below.
<TABLE>
<CAPTION>
REVENUE SEGMENTS
AMUSEMENT RETAIL OTHER TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED
APRIL 30, 2000
Net sales ........ $ 24,836,204 $ 6,075,662 $ 733,102 $ 31,644,968
Cost of sales .... 17,563,421 4,761,966 591,568 22,916,955
------------ ------------ ------------ ------------
Gross profit ..... 7,272,783 1,313,696 141,534 8,728,013
THREE MONTHS ENDED
APRIL 30, 1999
Net sales ........ $ 30,101,542 $ 4,832,193 $ 715,808 $ 35,649,543
Cost of sales .... 21,140,310 3,497,222 319,898 24,957,430
------------ ------------ ------------ ------------
Gross profit ..... 8,961,232 1,334,971 395,910 10,692,113
NINE MONTHS ENDED
APRIL 30, 2000
Net sales ........ $ 74,815,759 $ 30,274,625 $ 2,090,644 $107,181,028
Cost of sales .... 50,989,492 22,209,587 1,225,862 74,424,941
------------ ------------ ------------ ------------
Gross profit ..... 23,826,267 8,065,038 864,782 32,756,087
NINE MONTHS ENDED
APRIL 30, 1999
Net sales ........ $ 89,205,176 $ 28,536,459 $ 2,013,351 $119,754,986
Cost of sales .... 60,874,178 21,462,575 986,851 83,323,604
------------ ------------ ------------ ------------
Gross profit ..... 28,330,998 7,073,884 1,026,500 36,431,382
<CAPTION>
The following are net sales by geographic areas for the three and nine months
ended April 30:
THREE MONTHS ENDED APRIL 30, NINE MONTHS ENDED APRIL 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Domestic ......... $ 21,239,441 $ 24,548,547 $ 69,943,080 $ 82,910,790
International .... 8,708,010 9,471,839 26,275,421 27,776,193
Latin America .... 1,697,517 1,629,157 10,962,527 9,068,003
------------ ------------ ------------ ------------
$ 31,644,968 $ 35,649,543 $107,181,028 $119,754,986
</TABLE>
11. SUBSEQUENT EVENTS
On June 1, 2000, the Company's Credit Facility was amended to temporarily
extend the seasonal advance rate percentage applicable to inventory and to waive
the Company's non-compliance with a financial covenant at April 30, 2000, under
the Credit Facility. The Company anticipates that it will not be in compliance
with the financial covenant at July 31, 2000, based on current projections for
the fourth quarter. Accordingly, the Company has reclassified all long-term debt
to current as of April 30, 2000. Under the terms of the amendment, the inventory
advance rate percentage decreases from 55% to 50% based on a series of scheduled
weekly
10
<PAGE>
reductions in the advance rate percentage during the period from July to
September 2000. In addition, the Credit Facility was further amended to increase
the interest rate for borrowings outstanding under the Credit Facility from the
prime rate plus .25 percent (.25%) to the prime rate plus one percent (1%) for
prime rate loans and from two and three-quarters percent (2.75%) per annum in
excess of the adjusted eurodollar rate to three and one-half percent (3.5%) per
annum in excess of the adjusted eurodollar rate for eurodollar rate loans.
The Company's Latin American subsidiary, Caribe Marketing and Sales
Company, Inc., has a credit facility with a lender that provides for an
aggregate commitment of $5.0 million for the issuance of letters of credit and a
$1.5 million sublimit for cash advances. The credit facility will expire on June
30, 2000, and Caribe is pursuing renewal with the lender, as well as replacement
with other lenders. Caribe had $1.5 million outstanding under the line of credit
and $57,000 in outstanding letters of credit under the credit facility as of
April 30, 2000. The Company recently received verbal approval from the lender
for an amendment and extension of the credit facility, which includes the
conversion of the credit facility to an asset-based facility, however specific
terms have not been determined. While the company expects that the details will
be forthcoming, there can be no assurance that Caribe will be able to complete
the transaction or, that the terms, if obtained, will be as favorable to Caribe
as those contained in the existing credit facility.
11
<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, LIQUIDITY AND CAPITAL RESOURCES, RELATIONSHIPS WITH
LICENSORS AND CUSTOMERS, REALIZATION OF ROYALTY ADVANCES, NEW PRODUCT
INTRODUCTION, CAPABILITY OF MANAGING 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
APRIL 30, APRIL 30,
--------------- ---------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 72.4 70.0 69.4 69.6
------ ------ ------ ------
Gross profit ............................... 27.6 30.0 30.6 30.4
Selling, general and administrative expenses 37.0 42.7 32.7 33.4
------ ------ ------ ------
Operating loss ............................. (9.4) (12.7) (2.1) (3.0)
Interest expense ........................... (4.6) (3.3) (4.3) (2.8)
Interest income ............................ 0.1 0.2 0.1 0.3
Other income ............................... (0.1) 0.2 0.4 0.2
Income tax benefit ......................... 0.0 5.5 0.0 1.8
------ ------ ------ ------
Net loss ................................... (14.0)% (10.1)% (5.9)% (3.5)%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED APRIL 30, 2000 AND 1999
NET SALES. Net sales for the three months ended April 30, 2000 were $31.6
million, a decrease of 11.2%, or $4.0 million, from $35.6 million in the
comparable period in fiscal 1999. The decrease in net sales was primarily
attributable to a decrease in the Company's worldwide amusement net sales of
17.5%, or $5.3 million, to $24.8 million, offset by an increase in the Company's
worldwide retail net sales of 25.7%, or $1.2 million, to $6.1 million over the
comparable period in fiscal 1999. Amusement sales for the third quarter were
down in part due to the Company being contractually prohibited from commencing
sales of Pokemon merchandise until April 1, 2000, as well as lower sales of
novelty items due to lower fulfillment rates. Domestic net toy sales for the
third quarter of fiscal 2000 compared to the third quarter of fiscal 1999
decreased 14.0%, or $3.3 million, to $20.5 million. International net toy sales
decreased 8.1%, or $764,000, to $8.7 million, and Latin America net toy sales
increased 4.2%, or $68,000, to $1.7 million.
Net toy sales to retail customers for the third quarter of fiscal 2000 and
fiscal 1999 were $6.1 million and $4.8 million, respectively, which accounted
for 19.2% and 13.6%, respectively, of the Company's net sales. The 25.7%, or
$1.2 million, increase in net sales to retail customers from the third quarter
of fiscal 1999 to the third quarter of fiscal 2000 is attributable to an
increase in sales of licensed plush of 39.0%, or $1.1 million, to $4.0 million,
from $2.9 million, and an increase in sales of licensed electronic toys of
52.9%, or $664,000, to $1.9 million, from $1.3 million. This increase was offset
by a decrease in sales of PLAYOFACES(R) of 78.2%, or $499,000, to $139,000, from
$638,000, in the comparable period in fiscal 1999. The increase in retail sales
is in part reflective of the Company's inventory reduction initiatives.
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Net toy sales to amusement customers for the third quarter of fiscal 2000
and fiscal 1999 were $24.8 million and $30.1 million, respectively, which
accounted for 79.4% and 84.4%, respectively, of the Company's net sales. The
decrease of 17.5%, or $5.3 million, is primarily attributable to decreased sales
of licensed plush of 17.8%, or $3.9 million, to $18.1 million, from $22.0
million, decreased sales of novelty items of 34.0%, or $835,000, to $1.6
million, and decreased sales of non-licensed plush toys of 9.0%, or $504,000, to
$5.1 million from the comparable period in fiscal 1999.
Net sales of licensed products for the third quarter of fiscal 2000 were
$24.2 million, a decrease of 9.9%, or $2.6 million, from $26.8 million in the
comparable period of fiscal 1999. The decrease in licensed product sales was
primarily attributable to a decrease of net sales of the Company's licensed
plush toys of 11.3%, or $2.8 million, to $22.1 million, from $24.9 million in
the comparable period of fiscal 1999. Net sales of the licensed electronic toys
accounted for $1.9 million, or 6.2% of the Company's net toy sales for the third
quarter of fiscal 2000 compared to $1.3 million in the comparable period of
fiscal 1999. Within licensed products, sales of Looney Tunes' characters
accounted for $10.6 million, or 34.4%, of the Company's net toy sales for the
third quarter of fiscal 2000 compared to $16.5 million in the comparable period
of fiscal 1999.
Net sales of non-licensed products for the third quarter of fiscal 2000
decreased 16.9%, or $1.4 million, to $6.8 million from $8.1 million in the
comparable period of fiscal 1999. This decrease is primarily attributable to a
decrease in sales of novelty items of $835,000 and a decrease in sales of
non-licensed stuffed toys of $504,000.
GROSS PROFIT. Gross profit decreased 18.4%, or $2.0 million, to $8.7
million for the third quarter of fiscal 2000 from $10.7 million in the
comparable period of fiscal 1999. This decrease was principally a result of
lower overall sales for the third quarter of fiscal 2000, as well as reduced
margins on sales made within the Company's international amusement division and
the Company's worldwide retail division in connection with the Company's
inventory reduction initiatives. Additionally, the Company recorded a $1.1
million inventory writedown relative to a physical inventory taken by the
Company's European subsidiary in the third quarter of fiscal 2000. As a result,
gross profit as a percentage of net sales decreased to 27.6% for the third
quarter of fiscal 2000 from 30.0% in the comparable period in fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately 23.0%, or $3.5 million, to $11.7
million for the third quarter of fiscal 2000 from $15.2 million in the
comparable period in fiscal 1999. This decrease is primarily attributable to
decreased advertising expenses of $510,000 and reduced payroll costs of $384,000
offset by increased bad debt expense of $511,000 recorded by the Company's
European subsidiary in the third quarter of fiscal 2000. In addition, included
in selling, general and administrative expenses for the third quarter of fiscal
1999 is the write-off of $3.3 million of uncollectible accounts receivable from
the Company's former Mexico distributor and approximately $362,000 of severance
costs related to management restructuring initiatives and personnel reductions.
As a percentage of net sales, selling, general and administrative expenses
decreased to 37.0% for the third quarter of fiscal 2000 from 42.7% in the
comparable period in fiscal 1999.
INTEREST EXPENSE. Interest expense increased $283,000, to $1.5 million,
for the third quarter of fiscal 2000 from $1.2 million in the comparable period
of fiscal 1999. The increase is attributable to increased borrowing costs,
including increases in the interest rates on the Company's Credit Facility and
Convertible Debentures and the amortization of costs incurred and capitalized in
October 1999 in connection with obtaining the Credit Facility.
INCOME TAX BENEFIT. The Company was unable to record an income tax benefit
as a result of the net loss for the third quarter of fiscal 2000 as all
available net operating loss carrybacks were exhausted by the Company in the
previous fiscal year and the Company's ability to record a tax benefit based on
available net operating loss carryforwards is deferred until future periods, if
any, in which the Company generates taxable income. As a result, the Company has
provided a full valuation allowance for deferred tax assets resulting from net
operating losses. The Company realized a tax benefit in the third quarter of
fiscal 1999 to the extent of available net operating loss carrybacks. The
Company recorded no tax expense for the third quarter of fiscal 2000 due to the
net loss for the
13
<PAGE>
period and the utilization of available net operating loss carryforwards to
offset tax on taxable income in certain foreign jurisdictions.
NINE MONTHS ENDED APRIL 30, 2000 AND 1999
NET SALES. Net sales for the nine months ended April 30, 2000 were $107.2
million, a decrease of 10.5%, or $12.6 million, from $119.8 million in the
comparable period of fiscal 1999. The decrease in net sales was primarily
attributable to a decrease in the Company's worldwide amusement net sales of
16.1%, or $14.4 million, to $74.8 million, offset by an increase in the
Company's worldwide retail net sales of 6.1%, or $1.7 million, to $30.3 million.
Amusement sales for the nine months were down in part due to the Company being
contractually prohibited from commencing sales of Pokemon merchandise until
April 1, 2000, and merchandise delivery delays within the Company's fundraising
business unit. Domestic net toy sales for the nine months of fiscal 2000
compared to the nine months of fiscal 1999 decreased 16.1%, or $13.0 million, to
$67.9 million from $80.9 million. International net toy sales decreased 5.4%, or
$1.5 million, to $26.3 million, from $27.8 million and Latin American net toy
sales increased 20.9%, or $1.9 million, to $11.0 million, from $9.1 million.
Net toy sales to retail customers for the nine months of fiscal 2000 and
fiscal 1999 were $30.3 million, or 28.2%, and $28.5 million, or 23.8%,
respectively, of the Company's net sales. The 6.1%, or $1.7 million, increase in
sales to retail customers for the nine months of fiscal 2000 over the comparable
period a year ago reflects an increase in sales of licensed plush toys of 92.5%,
or $9.0 million, to $18.8 million offset by decreases in sales of licensed
electronic toys of 24.9%, or $2.6 million, PLAY-FACES(R) of 78.2%, or $3.8
million and non-licensed electronic toys of 26.7%, or $902,000. The increase in
retail sales is in part reflective of the Company's inventory reduction
initiatives.
Net toy sales to amusement customers for the nine months of fiscal 2000
and fiscal 1999 were $74.8 million, or 69.8%, and $89.2 million, or 74.5%,
respectively, of the Company's net sales. The 16.1%, or $14.4 million, decrease
from the comparable period in fiscal 1999 is primarily attributable to a
decrease of $15.0 million, or 25.9%, in sales of licensed plush toys, and a
decrease in sales of non-licensed plush toys of $1.1 million, or 5.3%, to
amusement customers, offset by an increase in sales of novelty items of $1.8
million, or 19.0%, from the comparable period in fiscal 1999.
Net sales of licensed products for the nine months of fiscal 2000 were
$70.8 million, a decrease of 14.9%, or $12.4 million, from $83.2 million in the
comparable period of fiscal 1999. The decrease in licensed product sales was
attributable to a decrease in domestic, Latin American and international net
sales of licensed products of 16.5%, or $9.0 million, of 21.6%, or $1.3 million,
and of 9.2%, or $2.1 million, respectively. Within licensed products, sales of
Looney Tunes' characters accounted for $37.2 million, or 35.4%, of the Company's
net toys sales for the nine months of fiscal 2000. Net sales of licensed
electronic toys accounted for $7.9 million, or 7.5%, of the Company's net toy
sales for the nine months of fiscal 2000. Net sales of PLAY-FACES(R) accounted
for $1.1 million, or 1.0% of the Company net toy sales for the nine months of
fiscal 2000.
Net sales of non-licensed products for the nine months of fiscal 2000
decreased 0.7%, or $258,000, to $34.3 million from $34.6 million in the
comparable period of fiscal 1999. This decrease is primarily attributable to a
decrease in sales of non-licensed stuffed toys of $1.1 million and a decrease in
sales of non-licensed electronic toys of $902,000 offset by an increase in sales
of novelty items of $1.8 million.
GROSS PROFIT. Gross profit decreased 10.1% to $32.8 million for the nine
months of fiscal 2000 from $36.4 million in the comparable period in fiscal
1999, due to lower overall sales for the nine months of fiscal 2000, as well as,
reduced margins on sales made within the Company's international amusement
division offset by improved margins on sales within the Company's domestic
amusement and Latin American divisions. Margins were negatively impacted by
sales within the Company's amusement and retail divisions in connection with the
Company's inventory reduction initiatives. Gross profit as a percentage of net
sales increased to 30.6% for the nine months of fiscal 2000 from 30.4% in the
comparable period in fiscal 1999.
14
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately 12.3%, or $4.9 million, to $35.0
million for the nine months of fiscal 2000 from $40.0 million in the comparable
period in fiscal 1999. This decrease is primarily attributable to decreased
payroll and related costs of $2.3 million and a $1.5 million decrease in
domestic media advertising costs, offset by a $1.7 million increase in
advertising and catalog preparation and distribution costs related principally
to the Company's direct marketing division and increased bad debt expense of
$511,000 recorded by the Company's European subsidiary in the third quarter of
fiscal 2000. Additionally, included in the selling, general and administrative
expenses for the nine months of fiscal 1999 is the write-off of $3.3 million of
uncollectible accounts receivable from the Company's former Mexico distributor
and approximately $362,000 of severance costs related to management
restructuring initiatives and personnel reductions. As a percentage of net
sales, selling, general and administrative expenses decreased to 32.7% for the
nine months of fiscal 2000 from 33.4% in the comparable period of fiscal 1999.
INTEREST EXPENSE. Interest expense increased $1.2 million to $4.6 million
for the nine months of fiscal 2000 from $3.4 million in the comparable period of
fiscal 1999. The increase is attributable to increased borrowings outstanding
under the Company's revolving lines of credit, and increased borrowing costs,
including increases in the interest rates on the Company's Credit Facility and
Convertible Debentures and the amortization of costs incurred and capitalized in
October 1999 in connection with obtaining the Company's new credit facility.
INCOME TAX BENEFIT. The Company was unable to record an income tax benefit
as a result of the net loss for the nine months of fiscal 2000 as all available
net operating loss carrybacks were exhausted by the Company in the previous
fiscal year and the Company's ability to record a tax benefit based on available
net operating loss carryforwards is deferred until future periods, if any, in
which the Company generates taxable income. As a result, the Company has
provided a full valuation allowance for deferred tax assets resulting from net
operating losses. The Company realized a tax benefit for the nine months of
fiscal 1999 to the extent of available net operating loss carrybacks. The
Company recorded no tax expense for the third quarter of fiscal 2000 due to the
net loss for the period and the utilization of available net operating loss
carryforwards to offset tax on taxable income in certain foreign jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2000, the Company's working capital was $7.1 million compared
to $32.1 million at July 31, 1999. This decrease is principally attributable to
the reclassification of the Convertible Debentures from long term debt to
current at April 30, 2000, as the debentures mature on December 31, 2000, and
the net loss incurred during the nine months of fiscal 2000.
Generally, 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 repayment of indebtedness,
funding for business acquisitions, inventory, property, plant and equipment,
customer receivables, letters of credit, licensing agreements and international
expansion.
The Company's operating activities provided net cash of $9.3 million in
the nine months of fiscal 2000 and used net cash of $3.6 million in the
comparable period of fiscal 1999. The cash flow from operations in the nine
months of fiscal 2000 was primarily affected by the net loss, decreases in
inventory and accounts receivable, increases in prepaids, and decreases in
accounts payable and accrued liabilities. During the third quarter of fiscal
1999, the Company wrote-off $3.3 million in uncollectible accounts receivable
from the Company's former Mexico distributor.
Net cash used in investing activities during the nine months of fiscal
2000 and 1999 was $2.1 million and $6.3 million, respectively. For the nine
months of fiscal 2000, net cash used in investing activities consisted of $2.1
million of expenditures for property and equipment, including $1.2 million for
costs related to implementation of the Company's enterprise resource planning
system and $293,000 for vending equipment. 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. In the nine months of fiscal 1999, net cash used in
15
<PAGE>
investing activities consisted principally of the purchase of property and
equipment including $2.5 million for computer equipment, $3.4 million for costs
incurred related to implementation of the Company's enterprise resource planning
system, and real property and improvements of $581,000.
Financing activities used net cash of $5.6 million during the nine months
of fiscal 2000 and provided net cash of $10.3 million during the nine months of
fiscal 1999. During the nine months of fiscal 2000, the Company received
aggregate advances of $59.0 million under, and made repayments of $62.9 million
on, its credit facility, and reduced the principal on its long-term loans by
$1.3 million. During the nine months of fiscal 1999, the Company received
aggregate advances of $105.4 million under, and made repayments of $93.3 million
on, its credit facility, and reduced the principal on its long-term loans by
$1.8 million.
The Company has borrowed substantially all of its available capacity under
its 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 or, if so, on terms favorable to the
Company. Any equity financing could result in dilution to existing shareholders.
Monthly principal payments on the Company's outstanding $15 million of
Convertible Debentures commence on June 30, 2000, at a rate of 1% of the
outstanding principal balance, and the remaining unpaid balance is due at
maturity on December 31, 2000. The Company currently expects that, by itself,
cash flow from operations will be insufficient to enable the Company to retire
the unsatisfied obligations under the Convertible Debentures due at maturity.
Accordingly, unless the debentures are converted into the Company's common stock
before the scheduled maturity, the Company will need to refinance in order to
satisfy its repayment obligations thereunder. There can be no assurance that the
Company will be able to refinance the Convertible Debentures or, if such
refinancing is obtained that the terms will be as favorable to the Company as
those contained in the Convertible Debentures.
On March 20, 2000, the Company obtained a loan in the principal amount of
$2.5 million from its Chairman of the Board. The loan provided for interest at
8% per annum and was secured by a first lien on the Company's 1999 Federal
income tax refund of approximately $2.8 million. The tax refund was received and
the loan from the Chairman plus accrued interest was repaid shortly thereafter.
On March 20, 2000, the Company's Credit Facility was amended to reduce the
maximum credit commitment from $60 million to $35 million and the revolving loan
limit to $32.6 million and provided for a supplemental loan under the revolving
line of credit in the principal amount of $500,000. The supplemental loan was
repaid in weekly installments and matured in May 2000. See also Note 11.
Subsequent Events, relating to the Company's Credit Facility, as contained in
the Company's financial statements included elsewhere herein.
Two of the Company's significant entertainment character licenses, which
originally expired on March 31, 2000, were extended to May 31, 2000. The Company
is in discussions with the licensor for the renewal and extension of these two
agreements; however, the licensor is allowing the Company to sell licensed
merchandise under these agreements while negotiations for the renewals and
extensions are being conducted. As a percentage of total net sales, the combined
sales under these two agreements were 19.2%, 26.4% and 30.9% for the nine months
of fiscal year 2000 and fiscal years 1999 and 1998, respectively. In addition, a
significant portion of the Company's inventory is comprised of merchandise based
on characters licensed under these agreements. Currently, the Company has failed
to make payment of certain royalties required to be paid to the Licensor under
these and related licenses for which the Company is in negotiations to extend
the license agreements, including the payment terms. Negotiations on these
licenses are in the process of being completed; however, there can be no
assurance that the Company will be able to renew these license agreements or
whether payment terms will be extended or, if renewals or payment term
extensions are obtained that the terms will be as favorable to the Company as
those contained in the expiring license agreements.
16
<PAGE>
On June 1, 2000, the Company's Credit Facility was amended to temporarily
extend the seasonal advance rate percentage applicable to inventory and to waive
the Company's non-compliance with a financial covenant at April 30, 2000, under
the Credit Facility. The Company anticipates that it will not be in compliance
with the financial covenant at July 31, 2000, based on current projections for
the fourth quarter. Accordingly, the Company has reclassified all long-term debt
to current as of April 30, 2000. Under the terms of the amendment, the inventory
advance rate percentage decreases from 55% to 50% based on a series of scheduled
weekly reductions in the advance rate percentage during the period from July to
September 2000. In addition, the Credit Facility was further amended to increase
the interest rate for borrowings outstanding under the Credit Facility from the
prime rate plus .25 percent (.25%) to the prime rate plus one percent (1%) for
prime rate loans and from two and three-quarters percent (2.75%) per annum in
excess of the adjusted eurodollar rate to three and one-half percent (3.5%) per
annum in excess of the adjusted eurodollar rate for eurodollar rate loans.
The Company's Latin American subsidiary, Caribe Marketing and Sales
Company, Inc., has a credit facility with a lender that provides for an
aggregate commitment of $5.0 million for the issuance of letters of credit and a
$1.5 million sublimit for cash advances. The credit facility will expire on June
30, 2000, and Caribe is pursuing renewal with the lender, as well as replacement
with other lenders. Caribe had $1.5 million outstanding under the line of credit
and $57,000 in outstanding letters of credit under the credit facility as of
April 30, 2000. The Company recently received verbal approval from the lender
for an amendment and extension of the credit facility, which includes the
conversion of the credit facility to an asset-based facility, however specific
terms have not been determined. While the company expects that the details will
be forthcoming, there can be no assurance that Caribe will be able to complete
the transaction or, that the terms, if obtained, will be as favorable to Caribe
as those contained in the existing credit facility.
The Company's European subsidiary previously had credit facilities with
three separate banks in Europe that recently merged into a single entity
resulting in a greater concentration of Company's credit arrangements within the
surviving bank ("Bank"). To reduce this increased concentration of credit risk,
the Bank has advised the Company that it is progressively reducing its credit
commitment to the Company from 1.1 billion pesetas (approximately $6.0 million)
at March 31, 2000, to 575 million pesetas (approximately $3.2 million) by
October 15, 2000. The Company is in discussion with additional lenders to
replace the portion of the Company's credit requirements that the Bank is
reducing. The credit commitment from the Bank consists of letter of credit,
discounting and revolving loan facilities that mature in November 2000. There
can be no assurance that the Company will be able to obtain financing from
alternate lenders or if such financing is obtained that the terms will be as
favorable to the Company as those contained in the current credit arrangements.
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 by converting to the euro at the exchange rates
in effect on the introduction date. One of the participating members is Spain,
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. PlayoByoPlay Europe's
accounting system is currently capable of performing the euro conversion, and
the Company does not anticipate that the costs related to the conversion will be
significant. In addition, because Play-By-Play Europe operates primarily in
Spain and in non-European Union countries, currently management does not
anticipate that the introduction of the euro will have a material adverse effect
on Play-By-Play Europe's results of operations, financial position, or cash
flows for the forseeable future.
17
<PAGE>
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.
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 Company's plan is comprised
of five phases, all of which are complete: (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.
To date, the Company has experienced no material adverse effects from Year
2000 issues. In its domestic operations, the Company's accounts receivable,
inventory and warehouse management legacy systems have been successfully
modified to achieve Year 2000 compliance, and the Company successfully
implemented the accounts payable, general ledger and purchasing modules from its
Oracle enterprise resource planning system (ERP), which system is Year 2000
compliant, prior to end of calendar 1999. The Company plans to implement the
remaining Oracle ERP modules, including accounts receivable, inventory, as well
as a warehouse management system, prior to the end of calendar year 2001, in
order to replace the existing legacy systems. Year 2000 compliance 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.
In the Company's international operations, existing information systems
were already substantially Year 2000 compliant, and no material modifications
were necessary. In addition, the Company has experienced no material adverse
effects from Year 2000 issues in its international operations.
Currently, the Company does not anticipate any material adverse effects
related to Year 2000 issues. However, 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 ultimately
will have a material impact on the Company's results of operations, liquidity or
financial condition.
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 2 to the consolidated financial statements included elsewhere
herein for a discussion of new pronouncements.
18
<PAGE>
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, LIBOR or other Eurodollar
rates), 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 inventory at competitive prices. The Company
believes that if such an 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.
INTEREST RATE RISK
The interest payable on the Company's revolving line-of-credit and term
loans under the Credit Facility is variable based on its Lender's prime rate or
adjusted eurodollar rate, and therefore, affected by changes in market interest
rates. At April 30, 2000, approximately $24.5 million was outstanding under the
Credit Facility with a weighted average interest rate of 9.05%.
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 Peseta/U.S. Dollars exchange
rate and British Pounds/U.S. Dollars exchange rate may positively or negatively
affect the Company's sales, gross margins, net income and retained earnings.
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.
19
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1997, a legal action was instituted against the Company by an
individual alleging claims for unfair competition (misappropriation), breach of
contract, breach of implied in fact contract, and quasi contract in connection
with alleged infringement resulting from the sale of Tornado Taz(TM). The
plaintiff seeks to recover the Company's profits on the sale of the toy in
question which could be as much as two million dollars or more, or alternatively
the plaintiff may seek to recover royalties as a measure of damages. The Company
responded by denying the essential allegations of the complaint and by filing
counterclaims and by filing a motion for summary judgement. The plaintiff filed
motions for summary judgement for dismissal of the claims and counterclaims. On
January 21, 1999, a judge in the United States District Court Southern District
of New York granted both the defendant's and plaintiff's motions for summary
judgement dismissing the claims and counterclaims. On February 19, 1999, the
plaintiff filed a notice of appeal with respect to the court's granting the
Company's motion for summary judgement. The Company filed a similar notice on
February 25, 1999 regarding the granting of the plaintiff's motion for summary
judgement. The Court of Appeals reversed the grant of summary judgement against
the plaintiff and affirmed the grant of summary judgement against the Company,
thus dismissing all of the Company's counterclaims against the plaintiff. The
Company and plaintiff are currently engaged in settlement discussions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------------------------------------------------------
2.1 Asset Purchase Agreement dated May 1, 1996, by and among Ace Novelty
Acquisition Co., Inc. a Texas corporation ("Buyer"), Play By Play Toys
& Novelties, Inc., a Texas corporation and the parent corporation of
Buyer ("PBYP"), Ace Novelty Co., Inc., a Washington corporation
("ACE"), Specialty Manufacturing Ltd., a British Columbia, Canada
corporation ("Specialty"), ACME Acquisition Corp., a Washington
corporation ("ACME"), and Benjamin H. Mayers and Lois E. Mayers,
husband and wife, Ronald S. Mayers, a married individual, Karen
Gamoran, a married individual, and Beth Weisfield, a married individual
(collectively, "Stockholders") (filed as Exhibit 2.1 to Form 8-K, Date
of Event: May 1, 1996), incorporated herein by reference.
2.2 Amendment No. 1 to Asset Purchase Agreement dated June 20, 1996 by, and
among Buyer, PBYP, ACE, Specialty, ACME and Stockholders. (filed as
Exhibit 2.2 to Form 8-K, Date of Event: May 1, 1996), incorporated
herein by reference.
3.1 Amended Articles of Incorporation of the Company (filed as Exhibit 3.1
to the Registration Statement on Form S-1, File No. 33-92204),
incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to the
Registration Statement on Form S-1, File No. 33-92204), incorporated
herein by reference.
4.1 Specimen of Common Stock Certificate (filed as Exhibit 4.1 to the
Registration Statement on Form S-1, File No. 33-92204), incorporated
herein by reference.
4.2 Form of Warrant Agreement and Form of Warrant (filed as Exhibit 4.2 to
the Registration Statement on Form S-1, File No. 33-92204),
incorporated herein by reference.
4.3 Form of Play By Play Toys & Novelties, Inc. Grant of Incentive Stock
Option (filed as Exhibit 4.3 to the Registration Statement on Form S-1,
File No. 33-92204), incorporated herein by reference.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------------------------------------------------------
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.
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.
10.8 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.
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.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------------------------------------------------------
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 (filed as Exhibit 10.16 to Form 10-Q for the quarter ended
October 31, 1999, and incorporated herein by reference).
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. (filed
as Exhibit 10.17 to Form 10-Q for the quarter ended October 31, 1999,
and incorporated herein by reference).
10.18* Amendment No. 1 to Loan and Security Agreement dated March 20, 2000 by
and among Congress Financial Corporation (Southwest), the Company, Ace
Novelty Co., Inc., Newco Novelty, Inc., and Friends, Food & Games, Inc.
10.19* Amendment No. 2 to Loan and Security Agreement dated May 31, 2000 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
-------------------
* Included herewith
(B) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K, date of event February 23, 2000,
regarding the resignation of Tomas Duran, member of the Board of Directors and
Chairman of the Audit Committee. The Company also filed a report on Form 8-K,
date of event March 21, 2000, regarding the Company securing a short term loan
from the Company's Chairman and curing the default on senior debt and
convertible debentures.
22
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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 2000.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By: /s/ JOE M. GUERRA
Joe M. Guerra
CHIEF FINANCIAL OFFICER,
SECRETARY AND TREASURER
23