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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 OCTOBER 31, 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 December 11,
2000 was 7,395,000 shares of Common Stock, no par value.
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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 October 31, 2000 (unaudited)
and July 31, 2000 .............................................. 3
Consolidated Statements of Operations (unaudited) for the
Three Months Ended October 31, 2000 and 1999 ................... 4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended October 31, 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 ..................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk .... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 19
Item 3. Default Upon Senior Securities .................................. 19
Item 6. Exhibits and reports on Form 8-K ................................ 20
SIGNATURES ............................................................... 23
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
------------- -------------
2000 2000
------------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,862,124 $ 4,898,838
Accounts and notes receivable, less allowance for
doubtful accounts of $7,497,153 and $7,649,799 28,695,064 32,243,309
Inventories, net 47,904,703 56,223,075
Prepaid expenses 3,147,080 2,512,308
------------- -------------
Total current assets 84,608,971 95,877,530
Property and equipment, net 24,743,267 25,272,499
Goodwill, less accumulated amortization
of $1,823,330 and $1,700,187 15,807,336 15,930,479
Other assets 1,714,667 2,001,363
------------- -------------
Total assets $ 126,874,241 $ 139,081,871
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdraft $ 878,743 $ 1,036,523
Notes payable to banks 26,010,617 29,556,028
Long-term debt classified as current 1,713,934 1,840,114
Current maturities of convertible subordinated debentures 14,702,985 14,850,000
Current maturities of long-term debt 532,610 644,217
Current obligations under capital leases 605,309 1,173,571
Accounts payable, trade 20,686,807 27,612,837
Accrued royalties payable 4,424,162 4,052,896
Other accrued liabilities 3,012,206 3,402,027
Income taxes payable 2,931,423 2,906,103
------------- -------------
Total current liabilities 75,498,796 87,074,316
------------- -------------
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities -- --
Convertible subordinated debentures, net of current maturities -- --
Obligations under capital leases, net of current maturities 944,619 734,571
------------- -------------
Total liabilities 76,443,415 87,808,887
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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 (163,333) (198,333)
Accumulated other comprehensive losses (4,145,609) (4,279,982)
Accumulated deficit (16,748,052) (15,736,521)
------------- -------------
Total shareholders' equity 50,430,826 51,272,984
------------- -------------
Total liabilities and shareholders' equity $ 126,874,241 $ 139,081,871
============= =============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED,
OCTOBER 31,
-------------------------------
2000 1999
------------ ------------
Net sales $ 41,577,075 $ 48,034,832
Cost of sales 28,949,339 33,583,199
------------ ------------
GROSS PROFIT 12,627,736 14,451,633
Selling, general and administrative
expenses 11,510,049 11,632,054
------------ ------------
OPERATING INCOME 1,117,687 2,819,579
Interest expense (1,684,089) (1,564,655)
Interest income 44,833 26,187
Other income 207,666 89,266
------------ ------------
(LOSS) INCOME BEFORE INCOME TAX (313,903) 1,370,377
Income tax provision (697,628) (216,372)
------------ ------------
NET (LOSS) INCOME $ (1,011,531) $ 1,154,005
============ ============
(LOSS) EARNINGS PER SHARE:
Basic $ (0.14) $ 0.15
------------ ------------
Diluted $ (0.14) $ 0.15
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 7,395,000 7,395,000
------------ ------------
Diluted 7,395,000 9,895,000
------------ ------------
The accompanying notes are an integral part
of the consolidated financial statements.
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,011,531) $ 1,154,005
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,004,630 758,171
Provision for doubtful accounts receivable 246,794 29,915
Provision for inventory reserve (57,306) --
Provision for royalty license reserves (131,957) --
Amortization of deferred compensation 35,000 35,000
Loss on sale of property and equipment 30,966 7,031
Change in operating assets and liabilities:
Accounts and notes receivable 3,301,451 (3,488,855)
Inventories 8,375,678 7,231,978
Prepaids and other assets (357,185) (1,744,617)
Accounts payable and accrued liabilities (6,820,681) (3,204,824)
Income taxes payable 25,320 240,651
----------- -----------
Net cash provided by operating activities 4,641,179 1,018,455
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (373,854) (731,806)
Proceeds from sale of property and equipment 7,795 36,146
----------- -----------
Net cash used in investing activities (366,059) (695,660)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under Revolving Credit Agreements (3,545,411) (1,673,221)
Repayment of long-term debt (384,802) (323,307)
Repayment of capital lease obligations (358,214) (446,018)
Increase (decrease) in book overdraft (157,780) 2,935,053
----------- -----------
Net cash provided by (used in) financing activities (4,446,207) 492,507
----------- -----------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATES 134,373 (650,239)
----------- -----------
Increase (decrease) in cash and cash equivalents (36,714) 165,063
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,898,838 2,345,634
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,862,124 $ 2,510,697
=========== ===========
Non-cash financing and investing-activity:
Capital leases incurred $ -- $ 293,306
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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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. 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, 2000, 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."
The Company has adopted SFAS No. 133, as amended by SFAS No. 137, on August 1,
2000. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in an asset's, liability's,
or firm commitment's fair value, changes in the fair value of the derivative
instrument will generally be offset in the income statement by changes in the
hedged item's fair value. For cash-flow hedge transactions in which the Company
is hedging the variability of cash flows related to a variable-rate asset,
liability, or a forecasted transaction, changes in the fair value of the
derivative instrument will be reported in other comprehensive income. The gains
and losses on the derivative instrument that are reported in other comprehensive
income will be reclassified as earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item. The
ineffective portion of all hedges will be recognized in current-period earnings.
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 May 1, 2001. The Company
is currently evaluating SAB No. 101, however, the Company believes that it will
not have a material impact on the financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44")
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB Opinion No. 25 ("APB No. 25") "Accounting for Stock Issued
to Employees." FIN No. 44 clarifies the application of APB No. 25 for only
certain issues. It does not address any issues related to the application of the
fair value method in SFAS No. 123 "Accounting for Stock-Based Compensation."
Among other issues, FIN No. 44 clarifies (a) the definition of employee for
purposes of applying ABP No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed
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stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 is effective July 1,
2000, but certain conclusions in the interpretation cover specific events that
occur after either December 15, 1998, or January 12, 2000. The Company believes
that FIN No. 44 does not have a material impact on the financial statements.
3. INVENTORIES
Inventories are comprised of the following:
OCTOBER 31, 2000 JULY 31, 2000
---------------- -------------
Purchased for resale $47,508,012 $55,686,257
Operating supplies 396,691 536,818
----------- -----------
Total $47,904,703 $56,223,075
=========== ===========
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,
thereby remanding the matter back to the United States District Court Southern
District of New York for trial. To date, no trial date has been set by the
United States District Court. In September 2000, the District Judge allowed the
Company to file another motion for summary judgement with the court, which has
not been ruled upon by the court.
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. On November 6, 2000, the parties signed a settlement agreement and
release agreeing to dismiss all claims and counterclaims in the arbitration
proceedings. On November 10, 2000, the arbitrator issued an order for dismissal
of the arbitration proceedings.
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5. FORWARD CONTRACTS
During the quarter ended October 31, 2000, the Company's European
subsidiary entered into certain foreign exchange hedging contracts 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 October 31, 2000, the Company had
two forward exchange contracts outstanding, one of which settled in November
2000. The other contract will settle in August 2001. The notional value of these
contracts at issuance was approximately $1.5 million and $3.0 million,
respectively. At October 31, 2000, there was an unrealized loss of $90,176, net
of tax of $48,556, under the contracts, which has been recorded in other
comprehensive loss. There were no realized hedging gains or losses from
settlement of contracts in the first quarter of fiscal 2001.
6. LICENSES
On November 10, 2000, the Company entered into amendments with a
particular licensor relative to three significant entertainment character
licensing agreements originally scheduled to expire on December 31, 2000. The
amendments provide for extensions of the license terms for up to two additional
years and specifically provide for the payment of the remaining balance of the
guaranteed minimum royalties due to the licensor over the extended two-year
period. The effectiveness of the aforementioned extensions was conditioned upon
the Company's ability to obtain extensions of the existing surety bonds that
secure payment of the guaranteed minimum royalties over the amended licensing
agreement periods by November 22, 2000. The Company secured renewals and
extensions of the surety bonds over the amended licensing periods by the
specified deadline as required by the licensor.
In connection with one of the aforementioned amendments, the Company
agreed to modify the terms of an existing warrant agreement with the licensor to
purchase up to 100,000 shares of the Company's common stock. The amendment
extends the exercise period of the warrant for two additional years and reduces
the purchase price per share from $15.4375 to $6.00, effective immediately upon
execution of the amendment, and provides for an additional adjustment to the
purchase price per share equal to the new Convertible Debenture conversion price
effective upon the Company's extension or refinancing of its Convertible
Debentures.
7. LONG-TERM DEBT
On November 10, 2000 the Company's Credit Facility was amended to
permanently increase the advance rate percentage applicable to inventory from
50% to 55%, and to waive the Company's non-compliance with certain financial
covenants under the Credit Facility at July 31, 2000 and to modify these same
financial covenants for future periods. In addition, the Credit Facility was
further amended to increase the fees that would be payable in the event the
Credit Facility is terminated prior to maturity, and also requires the Company
to reduce the term loan balance by a specified percentage in the event the
Company completes a sale of certain assets. The Company was in compliance with
the modified financial covenants at October 31, 2000.
The Company had entered into a Convertible Loan Agreement ("Convertible
Loan Agreement") dated July 3, 1997, pursuant to which the Company issued $15
million of convertible subordinated notes. In March 1999, the Company defaulted
under certain financial covenants of the Convertible Loan Agreement, and in July
1999 the Company defaulted in the payment of interest due on the convertible
subordinated notes as required by the senior lenders. On October 22, 1999, the
Company and the holders of the convertible subordinated notes entered into a
First Amendment to the Convertible Loan Agreement (the "First Amendment") which
waived existing defaults under the Convertible Loan Agreement, provided consent
to the new Credit Facility, and modified the financial covenants in the
Convertible Loan Agreement to conform to the financial covenants in the new
Credit Facility. In addition, the First Amendment increased the interest rate
from 8.5% to 10.5% per annum, changed the Convertible Debentures' final maturity
date from June 30, 2004 to December 31, 2000, and adjusted the conversion price
from $16 per share to $6 per share of common stock. In connection with the First
8
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Amendment, the Company granted the holders of the convertible subordinated
debentures a first lien on its 51% interest in its Los Angeles warehouse and a
second lien on substantially all its other assets. The First Amendment also
includes limitations on the issuance of stock options to employees, and entitles
the holders to two advisory board positions. The First Amendment also provides
for permanent board seats proportionate to their ownership interests on an as
converted basis, as well as limitations on the total number of board seats,
which could result in a change in control of the board if the debentures have
not been paid in full by final maturity. The First Amendment also provides for a
possible reset of the conversion price based on the average closing price of the
Company's stock for the month of December 2000 if the outstanding debentures
have not been converted or paid in full by final maturity. Conversion at current
stock prices would result in substantial dilution and would give the debenture
holders majority ownership of the Company's stock.
Monthly principal payment requirements on the Company's outstanding $15
million of Convertible Debentures commenced 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 flows from operations will be insufficient to enable the Company to retire
the unsatisfied obligations under the Convertible Debentures due at final
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. Pursuant to the terms
of the Debentures, the holders of the Debentures have the right to commence
legal proceedings against the Company (but not against the collateral pledged to
the senior lender) in the event the Company fails to make any regularly
scheduled payment due under the Debentures or upon any other default and
commencing 180 days after the date of the receipt by the Company's senior lender
of written notice from all of the Debenture holders of the declaration of the
default and the written demand for immediate payment of all the debt outstanding
under the Debentures. The Company defaulted in the payment of principal and
interest due under the Debentures beginning in October 2000. The Company is in
negotiations with the holders of its existing Convertible Debentures relative to
modifying or restructuring the terms of the debentures, including an extension
of the final maturity date, and the Company has retained the services of an
investment banking firm to assist management with its Convertible Debenture
refinancing efforts. 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 existing
Convertible Debentures.
The Company is in default in the payment of over $549,000 of principal and
interest due under its Convertible Debentures at October 31, 2000. The Company
has an aggregate of $14.7 million of the Debentures outstanding. As a result of
the default in the payment of principal and interest on the Debentures, the
Company is also in default of certain cross-default covenants of its Credit
Facility. The Convertible Debentures mature on December 31, 2000, however, the
Company is in negotiations with the holders of the debentures relative to
modifying or restructuring the terms of the debentures, including an extension
of the final maturity date. Currently, the Company does not have available
sufficient funds to make such principal and interest payments, and there can be
no assurance that the Company will obtain financing sufficient to cure its
payment defaults under the Debentures. If such payment defaults continue, then
the Debenture holders, subject to certain limited stand-still provisions, will
have the right to accelerate the entire amount of principal, plus accrued and
unpaid interest, under the Debentures. Because of cross-default violations under
the Credit Facility (resulting from payment defaults under the Debentures), the
senior lender thereunder currently has the right to accelerate the entire amount
of principal, plus accrued and unpaid interest, under the Credit Facility. In
the event of the acceleration of the Debentures and/or Credit Facility, the
Company has insufficient funds to pay amounts that would then be due and
payable. As of October 31, 2000, approximately $26.7 million in borrowings were
outstanding under the Credit Facility.
Play By Play Europe 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 the Bank's credit risk, the
Bank advised the Company that it was progressively reducing its credit
commitment to the Company from 1.1 billion pesetas
9
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(approximately $6.0 million) at March 31, 2000, to 575 million pesetas
(approximately $3.2 million) by November 30, 2000, concurrent with the maturity
date of the credit arrangements with this Bank. The Company has secured credit
arrangements with the Bank that provide for an aggregate credit commitment of
525 million pesetas (approximately $2.7 million at October 31, 2000) that mature
in November 2001. In addition, the Company has secured credit arrangements with
four other banks that provide for aggregate credit commitments of 459 million
pesetas (approximately $2.3 million at October 31, 2000) in replacement of the
Company's credit requirements that the Bank reduced, or that expired. These
agreements expire in November and December 2001. The Company is negotiating with
several other lenders for an additional 980 million pesetas (approximately $5.0
million at October 31, 2000) in additional financing. The credit arrangements
with the banks consist principally of letter of credit, discounting and
revolving loan facilities. The Company believes that it will be able to obtain
the additional financing from the other lenders, however, there can be no
assurance that the Company will be able to obtain the additional financing from
these lenders or if such financing is obtained, that the terms will be as
favorable to the Company as those contained in the existing credit arrangements.
The Company's failure to secure this financing could have a material adverse
impact on the European subsidiary's liquidity and working capital.
8. COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) is comprised of net income
(loss) and foreign currency translation adjustments. The components of
comprehensive income (loss) are as follows:
THREE MONTHS ENDED OCTOBER 31,
-----------------------------------
2000 1999
----------- ----------
Net Income (loss) $(1,011,531) $1,154,005
Unrealized loss on
forward contracts (90,176) --
Foreign currency
translation adjustment 224,549 (650,239)
----------- ----------
Comprehensive income (loss) $ (877,158) $ 503,766
=========== ==========
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9. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share was computed by dividing net income
(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.
The calculations of basic and diluted earnings (loss) per share for the
three month periods ended October 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31,
--------------------------------------------------------------------------
2000 1999
---------------------------------- ---------------------------------
COMMON PER COMMON PER
LOSS SHARES SHARE INCOME SHARES SHARE
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
As reported $(1,011,531) 7,395,000 $ (0.14) $1,154,005 7,395,000 $ 0.15
EFFECT OF DILUTIVE SECURITIES:
Options -- -- -- --
Warrants -- -- -- --
Convertible Subordinated Debentures -- -- 329,844 2,500,000
---------------------------------- ---------------------------------
DILUTED EPS: $(1,011,531) 7,395,000 $ (0.14) $1,483,849 9,895,000 $ 0.15
================================== =================================
</TABLE>
During the three months ended October 31, 2000, 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. In addition, the assumed conversion of the
Convertible Debentures into the Company's common stock at October 31, 2000 was
not included in the diluted earnings per share calculation because it would have
been anti-dilutive.
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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.
REVENUE SEGMENTS
AMUSEMENT RETAIL OTHER TOTAL
----------- ----------- ----------- -----------
THREE MONTHS ENDED
OCTOBER 31, 2000
------------------
Net sales $32,053,809 $ 8,827,848 $ 695,418 $41,577,075
Cost of sales 22,050,651 6,543,689 354,999 28,949,339
----------- ----------- ----------- -----------
Gross profit 10,003,158 2,284,159 340,419 12,627,736
THREE MONTHS ENDED
OCTOBER 31, 1999
------------------
Net sales $31,185,535 $16,187,531 $ 661,766 $48,034,832
Cost of sales 21,650,761 11,613,908 318,530 33,583,199
----------- ----------- ----------- -----------
Gross profit 9,534,774 4,573,623 343,236 14,451,633
The following are net sales by geographic areas for the three months ended
October 31:
THREE MONTHS ENDED OCTOBER 31,
-----------------------------
2000 1999
------------ ------------
Domestic $ 26,353,986 $ 31,850,942
International 11,205,544 9,992,451
Latin America 4,017,545 6,191,439
------------ ------------
$ 41,577,075 $ 48,034,832
Identifiable Assets:
OCTOBER 31, JULY 31,
2000 1999
------------ ------------
Domestic $ 78,918,828 $ 93,748,057
Foreign 47,955,413 45,333,814
------------ ------------
$126,874,241 $139,081,871
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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, THE COMPANY's LIQUIDITY AND CAPITAL RESOURCES, CHANGES IN
CONSUMER PREFERENCES, PRICE CHANGES BY COMPETITORS, RELATIONSHIPS WITH LICENSORS
AND CUSTOMERS, REALIZATION OF ROYALTY ADVANCES, NEW PRODUCT INTRODUCTIONS,
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, 2000 (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,
------------------
2000 1999
------ ------
Net sales 100.0% 100.0%
Cost of sales 69.6 69.9
------ ------
Gross profit 30.4 30.1
Selling, general, and
administrative expenses 27.7 24.2
------ ------
Operating income (loss) 2.7 5.9
Interest expense (4.1) (3.3)
Interest income 0.1 0.1
Other income 0.5 0.2
Income tax provision (1.7) (0.5)
------ ------
Net income (loss) (2.5)% 2.4%
====== ======
THREE MONTHS ENDED OCTOBER 31, 2000 AND 1999
NET SALES. Net sales for the three months ended October 31, 2000 were
$41.6 million, a decrease of 13.4%, or $6.4 million, from $48.0 million in the
comparable period in fiscal 2000. The decrease in net sales was primarily
attributable to a decrease in the Company's worldwide retail net sales of 45.5%,
or $7.4 million, to $8.8 million, offset by an increase in the Company's
worldwide amusement net sales of 2.8%, or $868,000, to $32.1 million over the
comparable period in fiscal 2000. Retail sales for the first quarter were down
primarily due to a decline in sales of licensed plush at mass market retail and
licensed feature plush, which the Company believes is an industry wide problem.
In addition, the Company believes its retail turnaround efforts will not produce
meaningful results until calendar 2001 as it diversifies into other less
troubled categories. Domestic net toy sales for the first quarter of fiscal 2001
compared to the first quarter of fiscal 2000 decreased 17.7%, or $5.5 million,
to $25.7 million. International net toy sales increased 12.1%, or $1.2 million,
despite recent weakness in the Spanish Peseta versus the U.S. Dollar, to $11.2
million, and Latin America net toy sales decreased 35.1%, or $2.2 million, to
$4.0 million.
Net toy sales to retail customers for the first quarter of fiscal 2001 and
fiscal 2000 were $8.8 million and $16.2 million, respectively, which accounted
for 21.2% and 33.7%, respectively, of the Company's net sales. The 45.5%, or
$7.4 million, decrease in net sales to retail customers from the first quarter
of fiscal 2000 to the first
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quarter of fiscal 2001 is attributable to a decrease in sales of licensed plush
of 25.7%, or $2.4 million, to $7.0 million, from $9.4 million, a decrease in
sales of licensed electronic toys of 74.0%, or $3.3 million, to $1.1 million,
from $4.4 million, a decrease in sales of non-licensed electronic toys of 62.3%,
or $1.0 million, to $634,000, from $1.7 million, and a decrease in sales of
PLAYOFACES(R) of 87.8%, or $640,000, to $89,000, from $730,000.
Net toy sales to amusement customers for the first quarter of fiscal 2001
and fiscal 2000 were $32.1 million and $31.2 million, respectively, which
accounted for 77.1% and 64.9%, respectively, of the Company's net sales. The
increase of 2.8%, or $868,000, is primarily attributable to increased sales of
licensed plush of 7.9%, or $1.3 million, to $17.8 million, from $16.5 million,
increased sales of novelty items of 9.0%, or $343,000, to $4.2 million, offset
by decreased sales of non-licensed plush toys of 7.1%, or $773,000, to $10.1
million from the comparable period in fiscal 2000.
Net sales of licensed products for the first quarter of fiscal 2001 were
$26.0 million, a decrease of 16.2%, or $5.0 million, from $31.0 million in the
comparable period of fiscal 2000. The decrease in licensed product sales was
primarily attributable to a decrease in sales of the Company's licensed
electronic toys of 74.0%, or $3.3 million, to $1.1 million, from $4.4 million in
the comparable period of fiscal 2000. Net sales of licensed plush toys accounted
for $24.8, or 60.6%, of the Company's net toy sales for the first quarter of
fiscal 2001 compared to $25.9, or 54.7%, of the Company's net toy sales, in the
comparable period of fiscal 2000. Within licensed products, sales of Looney
Tunes' characters accounted for $10.0 million, or 24.4%, of the Company's net
toy sales for the first quarter of fiscal 2001 compared to $17.6 million, or
37.1%, in the comparable period of fiscal 2000.
Net sales of non-licensed products for the first quarter of fiscal 2001
decreased 9.1%, or $1.4 million, to $14.9 million, from $16.3 million in the
comparable period of fiscal 2000. This decrease is primarily attributable to a
decrease in sales of non-licensed electronic toys of $1.0 million and a decrease
in sales of non-licensed plush of $773,000, offset by an increase in sales of
non-licensed novelty items of $343,000.
GROSS PROFIT. Gross profit decreased 12.6%, or $1.8 million, to $12.6
million for the first quarter of fiscal 2001 from $14.5 million in the
comparable period of fiscal 2000. This decrease was principally a result of
lower overall sales for the first quarter of fiscal 2001, as well as reduced
margins on sales made within the Company's domestic amusement division and the
Company's worldwide retail division in connection with the Company's inventory
reduction initiatives, offset by increased margins on international amusement
sales. Gross profit as a percentage of net sales increased to 30.4% for the
first quarter of fiscal 2001 from 30.1% in the comparable period in fiscal 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately 1.0%, or $122,000, to $11.5
million for the first quarter of fiscal 2001 from $11.6 million in the
comparable period in fiscal 2000. This decrease is primarily attributable to a
decrease of $960,000 in costs related to the Company's direct marketing
business, which was discontinued in July 2000, decreased warehousing and
distribution costs of $324,000, offset by increased seasonal temporary personnel
costs and certain benefit costs totaling $409,000 and increased professional
fees of $391,000 related principally to outstanding legal matters, and a
$246,000 increase in amortization expense related principally to the
amortization of costs related to the Company's ERP system. As a percentage of
net sales, selling, general and administrative expenses increased to 27.7% for
the first quarter of fiscal 2001 from 24.2% in the comparable period in fiscal
2000.
INTEREST EXPENSE. Interest expense increased $119,000, to $1.7 million,
for the first quarter of fiscal 2001 from $1.6 million in the comparable period
of fiscal 2000. The increase is attributable to increased borrowing costs,
including increases in the interest rates on loan amounts outstanding under the
Company's Credit Facility, offset by decreased borrowings outstanding under the
Company's revolving lines of credit.
INCOME TAX EXPENSE. Income tax expense for the first quarter of fiscal
2001 reflects income taxes on the taxable income of certain of the Company's
foreign subsidiaries. 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
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<PAGE>
carryforwards incurred in the previous fiscal year to offset taxes on domestic
taxable income, offset by income taxes on the earnings of certain of the
Company's foreign subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2000, the Company's working capital was $9.1 million
compared to $8.8 million at July 31, 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 inventory, property, plant
and equipment, customer receivables, letters of credit, licensing agreements,
international expansion and business acquisitions.
The Company's operating activities provided net cash of $4.6 million and
$1.0 million in the three months of fiscal 2001 and 2000, respectively. The cash
flow from operations in the three months of fiscal 2001 was primarily affected
by decreases in inventory and accounts receivable, increases in prepaids, and
decreases in accounts payable and accrued liabilities.
Net cash used in investing activities during the three months of fiscal
2001 and 2000 was $366,000 and $696,000, respectively. For the three months of
fiscal 2001, net cash used in investing activities consisted of $374,000 of
expenditures for property and equipment. In the first quarter of fiscal 2000,
net cash used in investing activities consisted principally of the purchase of
property and equipment of $732,000.
Financing activities used net cash of $4.4 million during the three months
of fiscal 2001 and provided net cash of $493,000 during the three months of
fiscal 2000. During the three months of fiscal 2001, the Company received
aggregate advances of $27.7 million under, and made repayments of $31.3 million
on, its Credit Facility, and reduced the principal on its long-term loans by
$103,000. During the three months of fiscal 2000, the Company received aggregate
advances of $59.0 million under, and made repayments of $60.6 million on, its
credit facilities, and reduced the principal on its long-term loans by $2.4
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.
On November 10, 2000 the Company's Credit Facility was amended to
permanently increase the advance rate percentage applicable to inventory from
50% to 55%, and to waive the Company's non-compliance with certain financial
covenants under the Credit Facility at July 31, 2000 and to modify these same
financial covenants for future periods. In addition, the Credit Facility was
further amended to increase the fees that would be payable in the event the
Credit Facility is terminated prior to maturity, and also requires the Company
to reduce the term loan balance by a specified percentage in the event the
Company completes a sale of certain assets. The Company was in compliance with
the modified financial covenants at October 31, 2000.
The Company had entered into a Convertible Loan Agreement ("Convertible
Loan Agreement") dated July 3, 1997, pursuant to which the Company issued $15
million of convertible subordinated notes. In March 1999, the Company defaulted
under certain financial covenants of the Convertible Loan Agreement, and in July
1999 the Company defaulted in the payment of interest due on the convertible
subordinated notes as required by the senior lenders. On October 22, 1999, the
Company and the holders of the convertible subordinated notes entered into a
First Amendment to the Convertible Loan Agreement (the "First Amendment") which
waived existing defaults under the Convertible Loan Agreement, provided consent
to the new Credit Facility, and modified the financial covenants in the
Convertible Loan Agreement to conform to the financial covenants in the new
Credit Facility. In addition, the First Amendment increased the interest rate
from 8.5% to 10.5% per annum, changed the Convertible Debentures' final maturity
date from June 30, 2004 to December 31, 2000, and adjusted
15
<PAGE>
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 provides for permanent board seats proportionate to their
ownership interests on an as converted basis, as well as limitations on the
total number of board seats, which could result in a change in control of the
board if the debentures have not been paid in full by final maturity. The First
Amendment also provides for a possible reset of the conversion price based on
the average closing price of the Company's stock for the month of December 2000
if the outstanding debentures have not been converted or paid in full by final
maturity. Conversion at current stock prices would result in substantial
dilution and would give the debenture holders majority ownership of the
Company's stock.
Monthly principal payment requirements on the Company's outstanding $15
million of Convertible Debentures commenced 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 flows from operations will be insufficient to enable the Company to retire
the unsatisfied obligations under the Convertible Debentures due at final
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. Pursuant to the terms
of the Debentures, the holders of the Debentures have the right to commence
legal proceedings against the Company (but not against the collateral pledged to
the senior lender) in the event the Company fails to make any regularly
scheduled payment due under the Debentures or upon any other default and
commencing 180 days after the date of the receipt by the Company's senior lender
of written notice from all of the Debenture holders of the declaration of the
default and the written demand for immediate payment of all the debt outstanding
under the Debentures. The Company defaulted in the payment of principal and
interest due under the Debentures beginning in October 2000. The Company is in
negotiations with the holders of its existing Convertible Debentures relative to
modifying or restructuring the terms of the debentures, including an extension
of the final maturity date, and the Company has retained the services of an
investment banking firm to assist management with its Convertible Debenture
refinancing efforts. 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 existing
Convertible Debentures.
The Company is in default in the payment of over $549,000 of principal and
interest due under its Convertible Debentures at October 31, 2000. The Company
has an aggregate of $14.7 million of the Debentures outstanding. As a result of
the default in the payment of principal and interest on the Debentures, the
Company is also in default of certain cross-default covenants of its Credit
Facility. The Convertible Debentures mature on December 31, 2000, however, the
Company is in negotiations with the holders of the debentures relative to
modifying or restructuring the terms of the debentures, including an extension
of the final maturity date. Currently, the Company does not have available
sufficient funds to make such principal and interest payments, and there can be
no assurance that the Company will obtain financing sufficient to cure its
payment defaults under the Debentures. If such payment defaults continue, then
the Debenture holders, subject to certain limited stand-still provisions, will
have the right to accelerate the entire amount of principal, plus accrued and
unpaid interest, under the Debentures. Because of cross-default violations under
the Credit Facility (resulting from payment defaults under the Debentures), the
senior lender thereunder currently has the right to accelerate the entire amount
of principal, plus accrued and unpaid interest, under the Credit Facility. In
the event of the acceleration of the Debentures and/or Credit Facility, the
Company has insufficient funds to pay amounts that would then be due and
payable. As of October 31, 2000, approximately $26.7 million in borrowings were
outstanding under the Credit Facility.
Play By Play Europe 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 the Bank's credit risk, the
Bank advised the
16
<PAGE>
Company that it was 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 November 30, 2000, concurrent
with the maturity date of the credit arrangements with this Bank. The Company
has secured credit arrangements with the Bank that provide for an aggregate
credit commitment of 525 million pesetas (approximately $2.7 million at October
31, 2000) that mature in November 2001. In addition, the Company has secured
credit arrangements with four other banks that provide for aggregate credit
commitments of 459 million pesetas (approximately $2.3 million at October 31,
2000) in replacement of the Company's credit requirements that the Bank reduced,
or that expired. These agreements expire in November and December 2001. The
Company is negotiating with several other lenders for an additional 980 million
pesetas (approximately $5.0 million at October 31, 2000) in additional
financing. The credit arrangements with the banks consist principally of letter
of credit, discounting and revolving loan facilities. The Company believes that
it will be able to obtain the additional financing from the other lenders,
however, there can be no assurance that the Company will be able to obtain the
additional financing from these lenders or if such financing is obtained, that
the terms will be as favorable to the Company as those contained in the existing
credit arrangements. The Company's failure to secure this financing could have a
material adverse impact on the European subsidiary's liquidity and working
capital.
On November 10, 2000, the Company entered into amendments with a
particular licensor relative to three significant entertainment character
licensing agreements originally scheduled to expire on December 31, 2000. The
amendments provide for extensions of the license terms for up to two additional
years and specifically provide for the payment of the remaining balance of the
guaranteed minimum royalties due to the licensor over the extended two-year
period. The effectiveness of the aforementioned extensions was conditioned upon
the Company's ability to obtain extensions of the existing surety bonds that
secure payment of the guaranteed minimum royalties over the amended licensing
agreement periods by November 22, 2000. The Company secured renewals and
extensions of the surety bonds over the amended licensing periods by the
specified deadline as required by the licensor.
In connection with one of the aforementioned amendments, the Company
agreed to modify the terms of an existing warrant agreement with the licensor to
purchase up to 100,000 shares of the Company's common stock. The amendment
extends the exercise period of the warrant for two additional years and reduces
the purchase price per share from $15.4375 to $6.00, effective immediately upon
execution of the amendment, and provides for an additional adjustment to the
purchase price per share equal to the new Convertible Debenture conversion price
effective upon the Company's extension or refinancing of its Convertible
Debentures.
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 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 PlayoByoPlay Toys & Novelties, Europa, S.A.
("PlayoByoPlay Europe") is located. PlayoByoPlay 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 PlayoByoPlay 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 PlayoByoPlay Europe's results of operations, financial position, or cash
flows for the forseeable future.
SEASONALITY
Both the retail and amusement toy industries are inherently seasonal.
Generally, in the past, the Company's sales to the amusement industry have been
highest during the third and fourth fiscal quarters, and collections for those
sales have been highest during the succeeding two fiscal quarters. The Company's
sales to
17
<PAGE>
the retail toy industry have been highest during the first and fourth fiscal
quarters, and collections from those sales have been highest during the
succeeding two fiscal quarters. The Company's working capital needs and
borrowings to fund those needs have been highest during the third and fourth
fiscal quarters. As a result of the Company's increased sales to amusement
customers and to retail customers, the Company anticipates that its borrowings
to fund working capital needs may become more significant in the third and
fourth fiscal quarters.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 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, 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
and 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 October 31, 2000, approximately $26.7 million in borrowings was
outstanding under the Credit Facility with a weighted average interest rate of
10.29%.
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.
18
<PAGE>
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,
thereby remanding the matter back to the United States District Court Southern
District of New York for trial. To date, no trial date has been set by the
United States District Court. In September 2000, the District Judge allowed the
Company to file another motion for summary judgement with the court, which has
not been ruled upon by the court.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
The Company is in default in the payment of over $549,000 of principal and
interest due under its Convertible Debentures at October 31, 2000. The Company
has an aggregate of $14.7 million of the Debentures outstanding. As a result of
the default in the payment of principal and interest on the Debentures, the
Company is also in default of certain cross-default covenants of its Credit
Facility. The Convertible Debentures mature on December 31, 2000, however, the
Company is in negotiations with the holders of the debentures relative to
modifying or restructuring the terms of the debentures, including an extension
of the final maturity date. Currently, the Company does not have available
sufficient funds to make such principal and interest payments, and there can be
no assurance that the Company will obtain financing sufficient to cure its
payment defaults under the Debentures. If such payment defaults continue, then
the Debenture holders, subject to certain limited stand-still provisions, will
have the right to accelerate the entire amount of principal, plus accrued and
unpaid interest, under the Debentures. Because of cross-default violations under
the Credit Facility (resulting from payment defaults under the Debentures), the
senior lender thereunder currently has the right to accelerate the entire amount
of principal, plus accrued and unpaid interest, under the Credit Facility. In
the event of the acceleration of the Debentures and/or Credit Facility, the
Company has insufficient funds to pay amounts that would then be due and
payable. As of October 31, 2000, approximately $26.7 million in borrowings were
outstanding under the Credit Facility.
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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.
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.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
-------- ----------------------------------------------------------------------
10.3 Promissory Note dated June 20, 1996, of Ace Novelty Acquisition Co.,
Inc. payable to the order of Ace Novelty Co., Inc. in the principal
sum of $2,900,000 (filed as Exhibit 10.5 to Form 8-K, Date of Event:
May 1, 1996), incorporated herein by reference.
10.5 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.
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).
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
-------- ----------------------------------------------------------------------
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-K for the fiscal year
ended July 31, 1999), 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-K for the fiscal year ended July 31,
1999), 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. (filed as Exhibit 10.18 to Form 10-Q for the quarter ended April
30, 2000, and incorporated herein by reference).
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. (filed as Exhibit 10.19 to Form 10-Q for the quarter ended April
30, 2000, and incorporated herein by reference).
10.20 License Agreement dated July 26, 2000 by and between Warner Bros., a
division of Time Warner Entertainment, L.P. and the Registrant (filed
as Exhibit 10.20 to Form 10-K for the year ended July 31, 2000, and
incorporated herein by reference).
10.21 Employment agreement dated October 4, 1999, between the Company and
Richard R. Neitz (filed as Exhibit 10.21 to Form 10-K for the year
ended July 31, 2000, and incorporated herein by reference).
27* Financial Data Schedule
---------------------
* Included herewith
22
<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 2000.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By: /s/ JOE M. GUERRA
Joe M. Guerra
CHIEF FINANCIAL OFFICER AND TREASURER
23
