UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): JUNE 20, 1996
(SEPTEMBER 3, 1996)
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)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
As previously reported, on May 1, 1996, Play By Play Toys & Novelties,
Inc. ("the Company", which term shall be deemed to include its subsidiaries,
unless the context indicates otherwise) entered into an Asset Purchase Agreement
(the "Agreement") with Ace Novelty Co., Inc. ("Ace"), Specialty Manufacturing
Ltd., ACME Acquisition Corp., Benjamin H. Mayers, Lois E. Mayers, Ronald S.
Mayers, Karen Gamoran and Beth Weisfield (collectively "Sellers") to acquire,
through the Company's wholly owned subsidiary, Ace Novelty Acquisition Co., Inc.
("ANAC"), certain of the assets and assume certain of the liabilities of Sellers
(the "Acquisition"). On June 20, 1996, the Company completed the Acquisition.
Under the terms of the Agreement, the Company acquired substantially all of the
operating assets, business operations and facilities of Sellers, including four
warehouse and distribution centers located in Bellevue, Washington; Los Angeles,
California; Chicago, Illinois; and Burnaby, British Columbia, Canada for
approximately $46.2 million, consisting of approximately $39.6 million in cash,
$2.9 million in subordinated debt and the assumption of approximately $3.7
million of certain liabilities of Sellers, primarily trade payables and accrued
liabilities. The Company or ANAC have entered into employment agreements with
James A. Weisfield, former executive officer of and Saul Gamoran, a former
consultant to Ace. Ronald S. Mayers tendered his resignation on July 11, 1996 to
pursue other business interests. In connection with the acquisition, certain
principals and selling stockholders executed non-compete agreements in favor of
the Company. In addition, the Company issued a Warrant to Purchase Common Stock
entitling Sellers to purchase up to 35,000 shares of the Company's common stock
at a price per share equal to $14.90 exercisable after one year from the
acquisition closing date, or earlier in the event the Company effects certain
registration of the Company's common stock, if any.
Pursuant to the Agreement, the Company acquired substantially all of
Sellers' accounts receivable, inventory, property, equipment, real estate,
intellectual property and certain other assets. The real estate acquired by the
Company in connection with the Acquisition includes the land and building
comprising Sellers' warehouse and distribution center in Chicago, Illinois, and
an undivided 51% interest in the land and building comprising Sellers' warehouse
and distribution center in Los Angeles, California. The Company has leased the
remaining undivided 49% interest in the Los Angeles facility as well as the
Bellevue, Washington warehouse and distribution center from Ace. Pursuant to the
Agreement, the Burnaby, British Columbia, Canada warehouse and distribution
center, as well as certain other properties situated throughout the United
States previously operated by Sellers, were assigned to and assumed by the
Company in connection with the Acquisition. The Company intends to use such
facilities and equipment substantially in the same manner as they were used by
Sellers. The intellectual property acquired from Sellers consists principally of
the trademarks and logos of "Ace" and "Acme." As a condition of closing, Sellers
were required to obtain consents to assignment from Warner Bros. relative to
Looney Tunes licenses for the mass market, amusement industry and the Space Jam
animated/live action motion picture starring basketball superstar Michael Jordan
and the Looney Tunes characters. In addition, Sellers agreed to use reasonable
best efforts to obtain consents to assignment covering the remaining licenses
and other contracts acquired from Sellers in connection with the Acquisition.
The debt incurred by the Company in connection with the acquisition
consisted of (i) approximately $34.0 million in revolving credit and term loans
under a credit agreement dated June 20, 1996 (the "Credit Agreement") among
Chemical Bank (the "Bank") as agent, Heller Financial, Inc. and Texas Commerce
Bank N.A. (the "Lenders"), and the Company, ANAC and Newco Novelty, Inc., a
wholly owned subsidiary of ANAC, as borrowers, (ii) a $3.0 million subordinated
loan from the Company's Chairman of the Board and Chief Executive Officer,
Arturo G. Torres, and (iii) a $2.9 million subordinated loan from Ace. The
Credit Agreement provides for a revolving credit, term loan and letter of credit
facility (the "Credit Facility") with a maximum aggregate commitment of $65.0
million. The Credit Facility replaced the Company's $10.0 million Revolving
Credit and Term Loan Agreement with Letter of Credit Facility with NationsBank
of Texas, N.A. The Credit Facility provides for a $53.0 million revolving line
of credit commitment, subject to availability under a borrowing base calculated
by reference to the level of eligible accounts receivable and inventory, and
includes a $15.0 million sublimit for the issuance of letters of credit. The
revolving credit facility matures on June 20, 1998. The Credit Facility also
includes a $12.0 million acquisition term loan which requires sixty equal
monthly principal payments of $200,000 plus accrued interest beginning August 1,
1996, with the entire unpaid balance being due and payable on June 20, 2001.
Interest on borrowings outstanding under the revolving line of credit
is payable monthly at an annual rate equal to, or at the Company's option, (i)
the Bank's Alternate Base Rate (as defined below) plus 0.50% or (ii) the LIBOR
rate plus 2.50%. For amounts outstanding under the term loans, interest is
payable monthly in arrears at an annual rate equal to, or at the Company's
option, (i) the Bank's Alternate Base Rate (as defined below) plus 0.75% or (ii)
the LIBOR rate plus 2.75%. The Bank's "Alternate Base Rate", means, as of any
day of determination thereof, a rate per annum equal to the greater of (i) the
Prime Rate (as defined in the Credit Facility) in effect on such a day, (ii) the
Federal Funds Effective Rate (as defined in the Credit Facility) in effect for
such a day plus 0.50% and (iii) the Base CD Rate (as defined in the Credit
Facility) in effect for such a day plus 1.0%. In connection with the Credit
Facility, the Company paid a structuring fee of $585,000 to the Bank and the
Lenders. Further, the Company agreed to pay a quarterly fee of 0.50% of the
unused portion of the revolving credit commitment, a fee of 2.0% of the face
amount of letters of credit when issued and an annual administrative fee equal
to $100,000.
The Credit Facility is secured by a first lien on substantially all of
the Company's assets, including 65% of the issued and outstanding stock of its
foreign subsidiaries. The Credit Facility excludes the assets of the Company's
foreign subsidiaries, but requires the Company to maintain certain financial
ratios, including tangible net worth, leverage and debt coverage ratios.
Negative covenants include restrictions on new indebtedness, sale or transfer of
assets, advances to third parties and advances to foreign subsidiaries in excess
of $650,000 per fiscal year during the term of the Credit Facility. The
Company's ability to pay dividends is restricted by the aforementioned
covenants. In addition, the Credit Facility prohibits Mr. Torres from
significantly reducing his ownership in the Company below specified levels,
which levels are reduced in the event of a secondary public offering of the
Company's common stock.
To partially finance the Acquisition, Mr. Torres provided a $3.0
million unsecured demand loan. Interest on this loan is payable monthly at the
Bank's Alternate Base Rate and repayment of the note is subordinated to payment
of the Credit Facility pursuant to the terms of a Subordination Agreement dated
June 20, 1996 by and among Mr. Torres, the Company and the Bank. Outstanding and
unpaid principal and interest on the Torres loan is payable no later than June
21, 1998, however, earlier repayment of the note is permissible contingent upon
the Company's attainment of certain financial ratios and upon the receipt and
acceptance by the Bank of the Company's monthly unaudited financial statements
for the month ending November 30, 1996.
As part of the consideration for the Acquisition, Ace received a $2.9
million note from the Company. The first installment on the Ace note in the
amount of $600,000 is due and payable two business days following the
determination of the Final Balance Sheet (as defined in the Agreement) of Ace
and accrues interest at 8.0% per annum. The second installment on the Ace note
in the amount of $1.0 million is due and payable on December 20, 1996, of which
$500,000 is subject to offset against any claims by the Company against Ace. The
third installment on the Ace note in the amount of $500,000 is due June 20, 1997
and is also subject to offset against any claims by the Company against Ace. The
fourth installment on the Ace note in the amount of $800,000 is due and payable
on June 21, 1998 and is also subject to offset against any claims by the Company
against Ace. Interest on the Ace note, other than with respect to the first
installment of $600,000, is payable monthly in arrears at a rate of 12.0% per
annum during the first six months and 10.0% per annum thereafter, except with
respect to the $800,000 payment due June 21, 1998, which will continue to bear
interest at 12.0% per annum. Payment of all obligations under the Ace note is
subordinate to payment of the Credit Facility. The note is secured by a security
interest in certain assets of the Company which is also subordinate to those
securing the Credit Facility.
ITEM 7. FINANCIAL STATEMENTS, FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired
The financial statements of Ace Novelty Co., Inc. and subsidiaries which
were to be filed by amendment to the Registrant's Current Report on Form 8-K,
dated July 5, 1996, are filed herewith.
(i) Audited consolidated balance sheets as of December 31, 1994, 1995 and
the unaudited consolidated balance sheet as of March 31, 1996.
(ii) Audited consolidated statements of operations for the years ended
December 31, 1993, 1994 and 1995.
(iii) Unaudited consolidated statements of operations for the three months
ended March 31, 1995 and 1996.
(iv) Audited consolidated statements of cash flows for the years ended
December 31, 1993, 1994 and 1995.
(v) Unaudited consolidated statements of cash flows for the three months
ended March 31, 1995 and 1996.
(vi) Notes to consolidated financial statements.
(b) Pro Forma Financial Information
The Registrant's pro forma financial information, which was to be filed by
amendment to the Registrant's Current Report on Form 8-K, dated July 5, 1996, is
filed herewith.
(i) Notes to unaudited pro forma combined condensed financial
information.
(ii) Unaudited pro forma combined condensed balance sheet for the nine
months ended April 30, 1996 (for the Company and for Ace Novelty Co.,
Inc. and Subsidiaries).
(iii) Notes to the unaudited pro forma combined condensed balance sheet.
(iv) Unaudited pro forma combined condensed statements of operations for
the year ended July 31, 1995 (for the Company and Ace Novelty Co.,
Inc. and Subsidiaries).
(v) Unaudited pro forma combined condensed statements of operations for
the nine months ended April 30, 1996 (for the Company and for Ace
Novelty Co., Inc. and Subsidiaries).
(vi) Notes to the unaudited pro forma combined condensed statements of
operations.
(c) The following exhibits, from which schedules and attachments have been
omitted and will be furnished to the Commission upon its request, are filed with
this report on Form 8-K/A. Exhibits incorporated by reference to a prior filing
(on Form 8-K) are designated by an asterisk (*); all other exhibits not so
designated are documents required to be filed as exhibits to this Form 8-K/A.
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- --------------------
2.1* Asset Purchase Agreement dated May 1, 1996 by and among Ace Novelty
Acquisition Co., Inc. a Texas corporation, Play By Play Toys &
Novelties, Inc., a Texas corporation and the parent corporation of
Buyer, Ace Novelty Co., Inc., a Washington corporation, Specialty
Manufacturing Ltd., a British Columbia, Canada corporation, ACME
Acquisition Corp., a Washington corporation, 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.
2.2* Amendment No. 1 to Asset Purchase Agreement dated June 20, 1996 by
and among Play By Play Toys & Novelties, Inc., Ace Novelty Co., Inc.
and Subsidiaries, Specialty Manufacturing Ltd., ACME Acquisition
Corp.and Benjamin H. Mayers, Lois E. Mayers, Ronald S. Mayers, Karen
Gamoran and Beth Weisfield.
4* Play By Play Toys & Novelties, Inc. Warrant to Purchase Common
Stock.
10.1* 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.
10.2* Promissory Note dated June 20, 1996, of Play By Play Toys &
Novelties, Inc. payable to the order of Arturo G. Torres in the
principal sum of $3,000,000.
10.3* Subordination Agreement dated June 20, 1996, by and among Arturo
Torres, Play By Play Toys & Novelties, Inc. and Chemical Bank.
10.4* Loan Agreement dated June 20, 1996 by and between Arturo G. Torres
and Play By Play Toys & Novelties, Inc.
10.5* 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.
23.1 Consent of Coopers & Lybrand L.L.P. - Seattle, Washington
SIGNATURE
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, hereunto duly authorized.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By:
Juanita E. Lozano
CHIEF FINANCIAL OFFICER AND TREASURER
Dated: September 3, 1996
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS: PAGE
Report of Independent Accountants ............................ 10
Consolidated Balance Sheets as of December 31, 1994
and 1995, and March 31, 1996 (Unaudited) ................... 11
Consolidated Statements of Operations for the years
ended December 31, 1993, 1994 and 1995 ..................... 12
Consolidated Statements of Operations for the three
months ended March 31, 1995 (Unaudited) and 1996 (Unaudited) 13
Consolidated Statements of Cash Flows for the years
ended December 31, 1993, 1994 and 1995 ..................... 14
Consolidated Statements of Cash Flows for the three
months ended March 31, 1995 (Unaudited) and 1996 (Unaudited) 15
Notes to Consolidated Financial Statements ................... 16
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS:
Notes to Unaudited Pro Forma Combined Condensed
Financial Information ....................................... 24
Unaudited Pro Forma Combined Condensed Balance Sheet
as of April 30, 1996 ........................................ 27
Notes to Unaudited Pro Forma Combined Condensed
Balance Sheet ............................................... 28
Unaudited Pro Forma Combined Condensed Statements
of Operations for the year ended July 31, 1995 .............. 25
Notes to Unaudited Pro Forma Combined Condensed
Statements of Operations .................................... 26
Unaudited Pro Forma Combined Condensed Statements
of Operations for the nine months ended April 30, 1996 ...... 29
Notes to Unaudited Pro Forma Combined Condensed
Statements of Operations .................................... 30
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Ace Novelty Co., Inc.
Bellevue, Washington
We have audited the accompanying consolidated balance sheets of Ace Novelty Co.,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 11 to the consolidated financial statements, in May 1996,
the Company entered into an agreement to sell substantially all of its net
assets and operations in exchange for cash, notes and the assumption of
liabilities.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ace Novelty Co.,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
April 25, 1996, except for Note 11 as to which
the date is May 1, 1996
ACE NOVELTY CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 160,884 $ 32,421 $ 65,382
Notes and accounts receivable, net of allowances
of $2,187,857 and 2,212,518 in 1994 and 1995,
respectively ......................................... 15,316,738 9,134,501 11,849,510
Inventories ............................................ 25,552,450 19,123,289 20,166,583
Federal and state income taxes receivable .............. 1,248,404 68,254 64,544
Deferred income taxes .................................. -- 2,470,500 2,470,500
Prepaid expenses and other current assets .............. 934,444 473,179 465,437
------------ ------------ ------------
Total current assets ............................... 43,212,920 31,302,144 35,081,956
Equipment and leasehold improvements, at cost
Equipment .............................................. 11,591,364 7,204,699 6,663,083
Leasehold Improvements ................................. 3,706,441 4,390,358 4,405,936
------------ ------------ ------------
15,297,805 11,595,057 11,069,019
Less accumulated depreciation and amortization ......... (8,710,978) (6,234,286) (5,927,990)
------------ ------------ ------------
6,586,827 5,360,771 5,141,029
------------ ------------ ------------
Due from related parties .................................. 1,382,353 1,999,011 1,923,334
------------ ------------ ------------
Total assets ....................................... $ 51,182,100 $ 38,661,926 $ 42,146,319
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdraft ......................................... $ 457,743 $ 688,295 $ 1,056,093
Accounts payable and other accrued liabilities ......... 6,503,342 4,505,923 5,140,838
Notes payable .......................................... 32,290,094 22,394,864 25,655,113
Due to related parties ................................. 5,955 -- --
Accrued employee retirement ............................ 564,513 413,060 417,573
Federal, state and foreign income taxes payable ........ 256,184 216,184 191,757
Current portion of long-term debt ...................... 1,159,617 3,313,321 3,313,321
------------ ------------ ------------
Total current liabilities .......................... 41,237,448 31,531,647 35,774,695
LONG-TERM LIABILITIES:
Long-term debt less current portion .................... 12,103,746 7,429,566 7,079,992
Due to related parties ................................. 1,644,834 1,586,142 1,575,924
------------ ------------ ------------
Total liabilities .................................. 54,986,028 40,547,355 44,430,611
------------ ------------ ------------
Commitments and contingencies
STOCKHOLDERS' DEFICIT:
Common stock - $50 par value; 20,000 shares authorized,
issued and outstanding ............................... 1,000,000 1,000,000 1,000,000
Cumulative foreign currency translation adjustments .... (290,261) (156,990) (132,701)
Retained earnings ...................................... 4,673,351 3,865,505 3,060,462
Due from stockholders and related parties .............. (9,187,018) (6,593,944) (6,212,053)
------------ ------------ ------------
Total stockholders' deficit ........................ (3,803,928) (1,885,429) (2,284,292)
------------ ------------ ------------
Total liabilities and stockholders' deficit ........ $ 51,182,100 $ 38,661,926 $ 42,146,319
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
ACE NOVELTY CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1993 1994 1995
------------ ------------ ------------
Net sales ......................................... $ 87,421,386 $ 86,015,180 $ 66,036,152
Cost of sales ..................................... 65,943,079 69,356,564 45,808,236
------------ ------------ ------------
21,478,307 16,658,616 20,227,916
Selling, general and administrative expenses ...... 38,166,407 31,283,883 20,508,075
------------ ------------ ------------
Loss from continuing operations ............ (16,688,100) (14,625,267) (280,159)
Other income (expense):
Interest income (related party amounts are
$312,456, $246,171 and $421,270, respectively) 307,886 608,726 593,804
Interest expense (related party amounts are
$185,549, $130,561 and $174,632, respectively) (2,240,754) (4,878,319) (5,009,045)
Other (related party management fees are
$750,000 and $544,403 in 1994 and 1995,
respectively) ................................ 1,768,399 1,079,739 1,096,260
------------ ------------ ------------
Loss from continuing operations before
income tax benefit ......................... (16,852,569) (17,815,121) (3,599,140)
Income tax benefit ................................ 4,122,953 1,691,988 2,470,500
------------ ------------ ------------
Loss from continuing operations ............ (12,729,616) (16,123,133) (1,128,640)
Discontinued operations, net of income tax ....... 778,669 -- 320,794
------------ ------------ ------------
Net loss ................................... $(11,950,947) $(16,123,133) $ (807,846)
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
ACE NOVELTY CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
1995 1996
------------ ------------
(UNAUDITED)
Net sales ...................................... $ 14,409,239 $ 11,324,632
Cost of sales .................................. 10,137,191 7,460,882
------------ ------------
4,272,048 3,863,750
Selling, general and administrative expenses ... 5,606,510 3,868,549
------------ ------------
Loss from operations .................... (1,334,462) (4,799)
Other income (expense):
Interest income ............................. 56,327 133,714
Interest expense ............................ (1,267,476) (990,480)
Other ....................................... 324,396 56,523
------------ ------------
Net loss ................................ $ (2,221,215) $ (805,042)
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
ACE NOVELTY CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1993 1994 1995
------------ ------------- ------------
OPERATING ACTIVITIES:
Net loss ........................................ $(11,950,947) $ (16,123,133) $ (807,846)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ................. 1,108,110 1,444,248 1,044,268
Gain on sale of assets ........................ (31,265) (37,962) (251,416)
Deferred income taxes ......................... 659,786 1,356,427 (2,470,500)
Changes in:
Notes and accounts receivable, net ......... 7,658,378 1,277,282 6,182,237
Inventories ................................ 572,423 6,545,626 6,429,161
Prepaid expenses and other current assets .. (2,152,501) 1,857,920 461,265
Due from related parties ................... (57,996) 452,039 (616,658)
Adjustment of due from related parties ..... 4,023,638 2,627,998 --
Accounts payable and accrued liabilities ... (2,756,975) 389,427 (1,994,919)
Accrued employee retirement ................ (625,862) 12,872 (151,453)
Federal, state and foreign income taxes
receivable/payable ....................... (5,492,749) 2,287,201 1,140,150
------------ ------------- ------------
Net cash provided by (used in)
operating activities .................... (9,045,960) 2,089,945 8,964,289
------------ ------------- ------------
INVESTING ACTIVITIES:
Acquisition of business ......................... -- (4,001,000) --
Additions to equipment and leasehold improvements (2,097,172) (2,426,081) (1,313,086)
Proceeds from sale of discontinued operations,
equipment and other assets .................... 28,642 37,962 1,746,294
------------ ------------- ------------
Net cash provided by (used in)
investing activities ................... (2,068,530) (6,389,119) 433,208
------------ ------------- ------------
FINANCING ACTIVITIES:
Advances to shareholders and related parties .... (10,364,586) (2,556,496) (249,064)
Repayments from shareholders and related parties 1,864,200 -- 2,842,138
Principal payments on long-term debt ............ (4,885,659) (721,534) (2,522,977)
Proceeds from long-term debt .................... 7,081,020 7,625,606 --
Bank overdraft .................................. 430,205 (4,093,536) 230,551
Proceeds from notes payable ..................... 67,832,774 106,619,000 89,846,730
Principal payments on notes payable ............. (49,882,565) (101,551,643) (99,741,960)
Advances from shareholders and related parties .. 126,126 278,430 56,968
Repayments to shareholders and related parties .. (1,279,932) (1,058,699) (121,617)
------------ ------------- ------------
Net cash (used in) provided by
financing activities .................... 10,921,583 4,541,128 (9,659,231)
------------ ------------- ------------
Foreign currency translation ....................... (58,162) (335,689) 133,271
------------ ------------- ------------
Net decrease in cash and cash equivalents . (251,069) (93,735) (128,463)
Cash and cash equivalents:
Beginning of year ............................... 505,688 254,619 160,884
------------ ------------- ------------
End of year ..................................... $ 254,619 $ 160,884 $ 32,421
============ ============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
ACE NOVELTY CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
1995 1996
------------ ------------
(UNAUDITED)
OPERATING ACTIVITIES:
Net loss ................................................ $ (2,221,215) $ (805,042)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ......................... 314,772 253,677
Gain on sale of assets ................................ 2,000 10,346
Changes in:
Accounts and notes receivable, net ................. (266,290) (2,715,009)
Inventories ........................................ (1,048,165) (1,043,294)
Prepaid expenses and other current assets .......... 123,288 7,742
Due from related parties ........................... 98,344 75,677
Accounts payable and accrued liabilities ........... (975,278) 634,915
Accrued employee retirement ........................ 60,006 4,513
Federal, state and foreign income taxes
receivable/payable ............................... 648,165 (20,717)
------------ ------------
Net cash used in operating activities ............. (3,264,373) (3,597,192)
INVESTING ACTIVITIES:
Additions to equipment and leasehold improvements ....... (471,293) (44,282)
------------ ------------
Net cash used in investing activities ............. (471,293) (44,282)
------------ ------------
FINANCING ACTIVITIES:
Advances to shareholders and related parties ............ (696,288) (116,040)
Repayments from shareholders and related parties ........ 1,391,051 497,931
Principal payments on long-term debt .................... (282,889) (349,574)
Bank overdraft .......................................... (457,743) 367,798
Proceeds from notes payable ............................. 21,408,000 14,604,249
Principal payments on notes payable ..................... (17,565,582) (11,344,000)
Advances from shareholders and related parties .......... 53,808 2,167
Repayments to shareholders and related parties .......... (56,859) (12,386)
------------ ------------
Net cash used in financing activities ............. 3,793,498 3,650,145
------------ ------------
Foreign currency translation ............................... (72,622) 24,290
------------ ------------
Net increase (decrease) in cash and cash equivalents ....... (14,790) 32,961
Cash and cash equivalents:
Beginning of year ....................................... 160,884 32,421
------------ ------------
End of year ............................................. $ 146,094 $ 65,382
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
ACE NOVELTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Ace Novelty Co., Inc. and Subsidiaries (the "Company") sells stuffed
toys and novelty products to the amusement industry in the United
States and Canada, including the nation's premier theme parks and
family entertainment centers. The Company designs, develops, markets
and distributes stuffed toys based upon licenses for children's
entertainment characters and corporate trademarks as well as
proprietary characters developed and owned by the Company.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include the accounts of Ace Novelty Co., Inc. and its wholly-owned
subsidiaries, Specialty Manufacturing Ltd., Bairnbright Company, Ltd.,
Carecraft Co., Ltd., Easy Success Company, Ltd. and TTM Manufacturing
Company. TTM Manufacturing Company was liquidated in 1994. Bairnbright
Company, Ltd. and Carecraft Co., Ltd. were liquidated in 1995. All
significant intercompany balances and transactions have been eliminated
in the financial statements.
INVENTORIES Inventories are stated at the lower of first-in, first-out
cost or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost and depreciated
on the straight-line method over the estimated useful lives of the
assets as follows:
Equipment 4 - 8 years
Leasehold improvements Term of lease or useful
life, whichever is shorter
Maintenance and repairs are charged to expense as incurred and
expenditures for major improvements are capitalized. Gains or losses on
dispositions of properties are reflected in income at the time of
disposal.
INCOME TAXES
Effective January 1, 1993, the Company adopted the liability method of
accounting for income taxes under Financial Accounting Standards Board
Statement No. 109, ACCOUNTING FOR INCOME TAXES ("STATEMENT NO. 109").
Prior to January 1, 1993, the Company accounted for income taxes under
Accounting Principles Board Opinion No. 11, ACCOUNTING FOR INCOME
TAXES. The cumulative effect of this change on net loss was not
significant. Under Statement No. 109, the differences between the tax
basis of assets and liabilities and their financial statement amounts
are reflected as deferred income taxes using enacted tax rates. A
valuation allowance is established for deferred tax assets if it is
more likely than not that all or some portion of the deferred tax asset
will not be realized. Income tax expense or benefit is the tax payable
or receivable for the period and the change during the period in net
deferred tax assets and liabilities.
ACE NOVELTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED:
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
FOREIGN EXCHANGE
The Company translates the assets and liabilities of its foreign
operations at rates of exchange in effect at year-end. Revenues,
expenses and cash flows of foreign operations are translated at the
average rates of exchange during the year. Gains and losses resulting
from translations of the balance sheet accounts are accumulated as a
separate component of stockholders' equity until such time that the
foreign entity is sold or liquidated.
REVENUE RECOGNITION Sales and related costs are recorded by the Company
upon shipment of products to buyers.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents. The
carrying value approximates fair value because of the short maturity of
these instruments.
NOTES RECEIVABLE
Notes receivable of approximately $2 million bear interest at rates
which approximate short-term borrowing rates. Accordingly, the carrying
amounts approximate fair value.
NOTES PAYABLE, DUE TO RELATED PARTIES AND LONG-TERM DEBT Rates
currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of notes
payable, due to related parties and long-term debt. Accordingly, the
carrying amounts approximate fair value.
3. INVENTORIES:
Inventories consist of the following on December 31:
1994 1995
---- ----
Finished goods $22,348,184 $17,620,879
Raw materials 2,970,067 1,502,410
Work in process 234,199 --
------------ ------------
$25,552,450 $19,123,289
ACE NOVELTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED:
4. FINANCING ARRANGEMENTS:
NOTES PAYABLE
Notes payable consist of the following on December 31:
1994 1995
----------- -----------
Notes payable to banks, pursuant to a $30,000,000 line of credit
interest payable at prime plus 1.5% with 2% deferred (12% at
December 31, 1995); expiring on October 31, 1996 .................. $31,207,594 $21,635,864
Notes payable to banks, pursuant to a $5,000,000 line of credit,
interest payable at prime plus 1.5% with 2% deferred (12% at
December 31, 1995); expiring on October 31, 1996 .................. 1,050,000 759,000
Notes payable to employees, interest at prime rate .................. 2,500 --
Notes payable, interest payable at 10.0% ............................ 30,000 --
----------- -----------
$32,290,094 $22,394,864
=========== ===========
LONG-TERM DEBT
Long-term debt consists of the following on December 31:
1994 1995
----------- -----------
Notes payable to bank, with interest payable at prime plus .50% (9%
at December 31, 1995); principal and interest payments of
$62,061 per month, balance due April 30, 1998 ..................... $ 5,974,923 $ 5,786,338
Notes payable to banks, with interest payable at prime plus .25%
(8.75% at December 31, 1995); quarterly principal payments
of $150,000; balance due October 31, 1996 ......................... 4,200,000 2,280,000
Notes payable in connection with purchase of ACME Premium
Supply Corp., with interest payable at prime plus 2%
(10.5% at December 31, 1995) ...................................... 2,790,000 2,549,141
Various notes, with interest of 12%, principal due through 1996 ..... 248,440 127,408
Notes payable to a former franchisor for the purchase of a franchise,
with interest at 10%, annual principal payments
of $50,000 ........................................................ 50,000 --
------- ----------- -----------
13,263,363 10,742,887
Less current portion ................................................ 1,159,617 3,313,321
----------- -----------
$12,103,746 $ 7,429,566
=========== ===========
Aggregate scheduled future principal payment requirements on long-term
debt are as follows:
YEAR ENDING DECEMBER 31
1996 $ 3,313,321
1997 1,436,115
1998 5,993,451
-------------
$ 10,742,887
Substantially all of the Company's receivables, inventories and
equipment are pledged as collateral on the notes payable and long-term
note payable to banks. These loans have priority over all other loans.
Two of the Company's stockholders have personally guaranteed borrowings
pursuant to these loans. A related party has pledged certain real
estate as collateral for the note payable to a bank. A related party
has granted an interest in a partnership as collateral for the notes
issued in conjunction with the purchase of Acme Premium Supply Corp.
ACE NOVELTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED:
4. FINANCING ARRANGEMENTS, CONTINUED:
In 1994, the Company was unable to meet certain covenants in its then
existing bank credit agreement and in March 1994 received notice of
default. In February 1995, a new credit agreement was negotiated in the
aggregate amount of $54,100,000 (including the $4,200,000 term loan)
through December 31, 1995. In November 1995, the credit agreement was
extended to October 31, 1996. As part of this extension, the aggregate
commitment was reduced to $37,430,000 (including the balance of the
long-term note payable to banks at the time of $2,430,000). The credit
agreement includes restrictive covenants which require, among other
things, that the Company maintain Shareholders' Equity (as defined) of
not less than $1,250,000 and achievement of certain operating results.
The Company was in compliance with its bank debt restrictive covenants
at December 31, 1995.
In April 1996, the Company restructured the payments due on its notes
payable in connection with the purchase of ACME Premium Supply Corp.
The restructuring includes minimum payments totaling $800,000 in 1996
and additional payments based on the achievement of certain operating
results. The amounts due under this agreement bear interest at prime
plus 2%.
At December 31, 1995, the Company was contingently liable for payments
of letters of credit drawn in favor of foreign suppliers aggregating
approximately $862,000.
During 1994 approximately $1,208,000 of notes payable to employees were
assumed by a stockholder as partial payment of previous advances made
to the stockholder by the Company. The Company in 1994, also guaranteed
a $260,000 standby letter of credit for a company owned by certain
officers and/or directors of the Company.
The weighted average interest rates on short-term borrowings outstanding
as of December 31, 1993, 1994 and 1995 were 6.2%, 8.8% and 11.2%,
respectively. Interest payments on all obligations were $2,252,624,
$4,502,764 and $4,932,461 in 1993, 1994 and 1995, respectively.
5. ACME ACQUISITION:
In January 1994, the Company acquired substantially all the assets of
ACME Premium Supply Co. and K&A Enterprises, Inc. (collectively "ACME").
The acquisition of ACME's assets was accounted for as a purchase. The
purchase price of the assets acquired including assumed liabilities was
approximately $4,001,000. In addition, the Company advanced $2,000,000
to a related entity to acquire real property previously leased to ACME.
Net assets acquired included approximately $14,278,000 of current
assets, $1,165,000 of property, plant and equipment, $162,000 of other
assets and $11,604,000 of assumed liabilities.
ACE NOVELTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED:
6. DISCONTINUED OPERATIONS:
In 1994, the Company decided to sell its Print Shop division.
Accordingly, the operations of the Print Shop division are stated
separately as a discontinued operation in the accompanying consolidated
financial statements of the Company. In 1993, 1994 and 1995, the
division's sales were $8,161,379, $6,315,538 and $2,304,187,
respectively. In April 1995, the division was sold for $4,520,000 which
resulted in a gain of $320,794, net of the 1995 loss from operation of
the division of $179,206. The income attributable to discontinued
operations for 1993 of $778,669 is net of income tax of $383,524. The
net assets of the Print Shop included in the 1994 consolidated balance
sheet of the Company are summarized as follows:
Accounts receivable $1,224,000
Inventory 1,700,000
Property and equipment, net 904,000
Accounts payable (925,000)
------------
Net assets $2,903,000
7. EMPLOYEE BENEFIT PLANS:
DEFINED BENEFIT PENSION PLAN
Prior to 1991, the Company suspended its defined benefit pension plan
such that employees in the plan at the date of suspension no longer
earn additional benefits and no new employees are eligible to enter the
plan.
The funding policy for the suspended defined benefit plan is to
contribute amounts actuarially determined as necessary to provide
benefits to participants, and in amounts necessary to meet the minimum
contribution level stipulated by the Employee Retirement Income
Security Act of 1974 and the Internal Revenue Code. The following table
summarizes the funded status of the suspended plan and related
liabilities recognized in the consolidated balance sheets of the
Company.
1994 1995
----------- ----------
Actuarial present value of benefit obligations:
Vested ................................................... $ 1,097,708 $1,207,402
Nonvested ................................................ 24,424 --
----------- ----------
Accumulated benefit obligations .............................. 1,122,132 1,207,402
----------- ----------
Projected benefit obligations ................................ 1,122,132 1,207,402
----------- ----------
Plan assets at fair value, primarily stocks, bonds and
real estate investments .................................... 1,193,400 1,053,811
----------- ----------
Projected benefit obligation more than (less than) plan assets (71,268) 153,591
Unrecognized net gain ........................................ 483,389 241,156
----------- ----------
Accrued pension liability .................................... $ 412,121 $ 394,747
=========== ==========
ACE NOVELTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. EMPLOYEE BENEFIT PLANS, CONTINUED:
DEFINED BENEFIT PENSION PLAN, CONTINUED
Pension cost (credit) included the following components:
1993 1994 1995
-------- --------- --------
Interest cost on projected benefit
obligation................................. $ 94,646 $ 88,676 $ 88,152
Expected return on plan assets .............. (78,838) (37,654) (89,472)
Net amortization of prior gains ............. (38,010) (148,386) (16,554)
-------- --------- --------
Net periodic pension (credit) ........... $(22,202) $ (97,364) $(17,874)
======== ========= ========
The assumptions used in the actuarial calculations were as follows:
1993 1994 1995
------ ------ -------
Discount or settlement rate ............... 8.3% 8.0% 7.25%
Expected long-term rate of return on assets 8.3% 8.0% 8.00%
The defined contribution plan covers substantially all employees with
at least one year of service and who have attained the age of 21 years.
A portion of the Company contribution is discretionary and a portion is
a percentage match of the employees contribution. The Company
contributions for December 31, 1993, 1994 and 1995 were $41,746,
$63,128 and $47,670, respectively.
8. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases office, sales and warehouse space, primarily from
related parties, under noncancelable operating leases expiring through
2010. At December 31, 1995, minimum rental payments, net of expected
sublease receipts, are as follows:
GROSS NET
RENTAL SUBLEASE RENTAL
PAYMENTS RECEIPTS PAYMENTS
----------- ----------- -----------
1996 $ 1,664,520 $ 761,540 $ 902,980
1997 1,635,899 603,840 1,032,059
1998 1,246,800 603,840 642,960
1999 1,115,562 603,840 511,722
2000 984,324 299,680 684,644
Thereafter 10,942,396 295,200 10,647,196
----------- ----------- -----------
$17,589,501 $ 3,167,940 $14,421,561
=========== =========== ===========
Net rental expense under these leases and other month-to-month
agreements was $2,031,092, $1,706,200 and $1,302,742 in 1993, 1994 and
1995, respectively.
ROYALTIES
The Company licenses trademarks and entertainment characters and pays
associated royalties based on sales of the related products.
Substantially all of the license agreements are for periods of one to
four years and include guaranteed minimum royalty payments over the
life of the agreements. Royalty expenses are reported in cost of sales
in the statement of operations.
ACE NOVELTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. COMMITMENTS AND CONTINGENCIES, CONTINUED:
ROYALTIES, CONTINUED:
Future guaranteed minimum royalty obligations by year end and in the
aggregate under license agreements consist of the following at December
31:
1996 $ 198,321
1997 135,000
1998 2,200,076
1999 1,900,000
-----------
Total $ 4,433,397
CONTINGENCIES
The Company is involved in various legal matters arising in the normal
course of business including a dispute with the purchaser of the print
shop division. The dispute arose over the operation of the business
during the transition of ownership. In addition, certain regulatory
agencies are reviewing the sale of the division for possible regulatory
violations. Although the outcome is not determinable at this time,
management believes that the ultimate outcome of these matters will not
have a material adverse effect on the Company's financial position or
results of operations.
.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of note and trade
receivables. The concentration of credit risk with respect to note and
trade receivables is generally limited due to the large number of
customers comprising the Company's customer base, and their dispersion
across different industries and geographies. As such, the Company
generally does not require collateral from its customers.
9. TRANSACTIONS WITH RELATED PARTIES:
The Company sells certain merchandise and provides management services
to companies owned by officers/shareholders of the Company. In
addition, the Company leases certain offices, sales and warehouse space
from related parties. A summary of these transactions and the balances
at December 31 is presented below:
1993 1994 1995
----------- ----------- ----------
Sale of merchandise ........................ $ 5,126,212 $ 1,910,666 $ --
Purchase of merchandise .................... 77,925 -- --
Rent expense ............................... 1,811,971 1,339,870 1,327,777
Interest expense ........................... 185,549 130,561 174,632
Interest and management fee income ......... 312,456 996,171 965,673
Due to related parties ..................... 2,431,060 1,650,791 1,586,144
Advances to shareholders and related parties 11,094,715 10,569,371 8,592,955
Amounts due to and from related parties include receivables or payables
to officers/shareholders and certain entities in which they have
ownership interests. Management believes that advances to stockholders
and related parties, including amounts reflected as a reduction of
equity, will be realized in cash or transfer of assets. Amounts due
from certain entities are equal to the estimated net realizable value
of their assets consisting principally of trade receivables,
inventories and property, plant and equipment.
Amounts due between the Company, its officers and affiliates bear
interest at the prime rate (8.5% at December 31, 1995).
ACE NOVELTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES:
Income taxes consist of the following:
1993 1994 1995
---- ---- ----
Taxes currently refundable before giving effect to foreign tax
credits:
Federal ...................... $(4,806,570) $(2,558,048) $ --
State ........................ (380,730) (430,058) --
Foreign ...................... 404,561 (60,309) --
----------- ----------- -----------
(4,782,739) (3,048,415) --
Deferred taxes ................... 659,786 1,356,427 (2,470,500)
----------- ----------- -----------
Total income tax (benefit) $(4,122,953) $(1,691,988) $(2,470,500)
=========== =========== ===========
Deferred Federal income taxes are provided for temporary differences
which result principally from use of accelerated depreciation methods for
certain assets, inventory costs (Uniform Capitalization Rules), bad debts, and
certain other accruals.
The Company's effective income tax rate differs from the U.S. Statutory
Federal income tax rate of 34% due to certain expenses that are not
deductible for income tax purposes, the lower rates of foreign
jurisdictions and state taxes. The Company made no income tax payments
in 1994 and 1995.
The tax effect of items that comprise a significant portion of deferred
tax assets and liabilities at December 31, 1994 and 1995 are as
follows:
1994 1995
----------- -----------
Deferred income tax asset:
Bad debt reserve ......................... $ 786,097 $ 811,613
Inventory ................................ 349,836 357,632
Accrued liabilities ...................... 295,229 151,180
Foreign tax credits ...................... 1,601,099 1,601,099
Net operating loss carryforward .......... 2,471,118 3,800,096
Other .................................... 50,449 51,729
----------- -----------
Total gross deferred income tax assets 5,553,828 6,773,349
Less valuation allowance ................. (5,553,828) (4,302,849)
----------- -----------
Net deferred income taxes ............ $ -- $ 2,470,500
=========== ===========
The valuation allowance (increased) decreased by $(5,553,828) and
$1,250,979 during the years ended December 31, 1994 and 1995. Net
operating loss carryforwards of $10,381,000 are available to offset
taxable income in future years until their expiration beginning in
2010.
11. SUBSEQUENT EVENT:
In May 1996, the Company entered into an agreement to sell
substantially all its net assets and operations in exchange for cash,
notes and the assumption of liabilities. The Company will also receive
forgiveness of debt from certain lenders.
PLAY BY PLAY TOYS & NOVELTIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information
consists of the Unaudited Pro Forma Combined Condensed Statement of Operations
for the year end July 31, 1995 and the nine months ended April 30, 1996 (the
"Pro Forma Statements of Operations") and the Unaudited Pro Forma Combined
Condensed Balance Sheet as of April 30,1996 (the "Pro Forma Balance Sheet," and
together with the Pro Forma Statements of Operations, the "Pro Forma Financial
Statements"). The Pro Forma Statements of Operations have been prepared by
combining the consolidated statements of operations of the Company with the
consolidated statements of operations of Ace Novelty Co., Inc. for the periods
indicated, adjusted to give effect to the completion of the Acquisition,
including the issuance of debt to fund such Acquisition, as if such transactions
had been consummated at the beginning of each such period. The Pro Forma Balance
Sheet has been prepared by combining the consolidated balance sheet of the
Company as of April 30, 1996 with the assets acquired and liabilities assumed
from Ace Novelty Co., Inc. as of April 30, 1996, adjusted to give effect to the
completion of the Acquisition, including the issuance of debt of fund such
Acquisition, as if such transactions had been consummated on April 30, 1996.
The Pro Forma Financial Statements are based on and should be read in
conjunction with (1) the notes thereto, (2) the consolidated financial
statements for the Company, including the related notes thereto, included in the
Company's Form 10-K for the fiscal year ended July 31, 1995 and included in the
Company's Form 10-Q for the nine month period ended April 30, 1996 and (3) the
consolidated financial statements for Ace Novelty Co., for the year ended July
31, 1995 and the nine month period ended April 30, 1996 included elsewhere in
this Form 8-K/A.
The Pro Forma Statement of Operations may not be indicative of the combined
results of operations or combined financial position that actually would have
been achieved had the Acquisition been consummated as of the dates and for the
periods indicated or which may be obtained in the future.
The pro forma adjustments are based on preliminary assumptions and
estimates made by the Company's management regarding anticipated efficiencies
resulting from the combined operations, reduction in costs planned by
management, purchase accounting adjustments, and the fair market value of
certain assets acquired in Ace. The Acquisition will be accounted for using the
purchase method of accounting.
PLAY BY PLAY TOYS & NOVELTIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF APRIL 30, 1996 FOR PLAY BY PLAY TOYS & NOVELTIES, INC., AND
ACE NOVELTY CO., INC.
HISTORICAL PRO FORMA
---------------------------- ---------------------------------
PLAY BY PLAY ACE ADJUSTMENTS COMBINED
------------ ----------- ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents ........... $ 2,195,000 $ 32,000 $ (2,227,000)(a) $ --
Accounts and notes receivable, net .. 13,978,000 12,253,000 (250,000)(b) 25,981,000
Inventories ......................... 25,544,000 20,794,000 (2,000,000)(b) 44,338,000
Prepaid royalties ................... 936,000 3,000 -- 939,000
Other assets ........................ 903,000 -- -- 903,000
------------ ----------- ------------ ------------
Total current assets ............ 43,556,000 33,082,000 (4,477,000) 72,161,000
Property and equipment, net ............ 5,745,000 5,053,000 3,647,000(b) 14,445,000
Goodwill ............................... -- -- 6,868,000(c) 6,868,000
Other assets ........................... 1,068,000 -- 585,000(d) 1,653,000
------------ ----------- ------------ ------------
Total assets .................... $ 50,369,000 $38,135,000 $ 6,623,000 $ 95,127,000
============ =========== ============ ============
CURRENT LIABILITIES:
Bank overdraft ...................... $ -- $ 876,000 $ 613,000(a) $ 1,489,000
Current maturities of long-term debt
and capital leases ................ 166,000 18,000 1,600,000(a) 4,184,000
-- -- 2,400,000(a) --
Accounts payable, trade ............. 8,647,000 4,028,000 -- 12,675,000
Obligations under royalty agreements 930,000 597,000 -- 1,527,000
Other accrued liabilities ........... 845,000 -- -- 845,000
Income taxes payable ................ 1,211,000 -- -- 1,211,000
Deferred income tax payable ......... 468,000 -- -- 468,000
------------ ----------- ------------ ------------
Total current liabilities ....... 12,267,000 5,519,000 4,613,000 22,399,000
------------ ----------- ------------ ------------
LONG-TERM LIABILITIES:
Long-term debt and capital leases,
net of current maturities ......... 109,000 -- 3,000,000(a) 34,735,000
-- -- 1,300,000(a) --
-- -- 9,600,000(a) --
-- -- 20,726,000(a) --
Deferred income tax payable ......... 232,000 -- -- 232,000
------------ ----------- ------------ ------------
Total liabilities ............... 12,608,000 5,519,000 39,239,000 57,366,000
------------ ----------- ------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Equity in net assets acquired .......... -- 32,616,000 (32,616,000)(e) --
Common stock, no par value ............. 1,000 -- -- 1,000
Additional paid in capital ............. 33,501,000 -- -- 33,501,000
Cumulative foreign currency
translation adjustment .............. (380,000) -- -- (380,000)
Retained earnings ...................... 4,639,000 -- -- 4,639,000
------------ ----------- ------------ ------------
Total shareholders' equity ....... 37,761,000 32,616,000 (32,616,000) 37,761,000
------------ ----------- ------------ ------------
Total liabilities and equity .... $ 50,369,000 $38,135,000 $ 6,623,000 $ 95,127,000
============ =========== ============ ============
See accompanying notes to Unaudited Pro Forma Combined Condensed Balance Sheet.
PLAY BY PLAY TOYS & NOVELTIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
The following are adjustments to the Unaudited Pro Forma Combined Condensed
Balance Sheet to reflect the completion of the acquisition of Ace Novelty Co.,
Inc., including the issuance of debt to fund such Acquisition.
(a) Reflects the recording of certain liabilities resulting from the
acquisition transactions.
(b) Reflects purchase accounting adjustments to record assets at their
estimated fair market value.
(c) Reflects the estimated excess of the purchase price over the estimated
fair market of the net assets acquired.
(d) Reflects the capitalization of costs related to debt issuance.
(e) Reflects the elimination of the equity in the Ace Novelty Co., Inc. net
assets acquired.
PLAY BY PLAY TOYS & NOVELTIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF
OPERATIONS FOR THE YEAR ENDED JULY 31, 1995 FOR PLAY BY PLAY
TOYS & NOVELTIES, INC., AND
ACE NOVELTY CO., INC.
HISTORICAL PRO FORMA
PLAY BY PLAY ACE ADJUSTMENTS COMBINED
------------ ------------ ----------- -------------
Net sales ........................... $ 47,730,000 $ 71,371,000 $ -- $ 119,101,000
Cost of sales ....................... 31,016,000 55,672,000 -- 86,688,000
------------ ------------ ----------- -------------
Gross profit ..................... 16,714,000 15,699,000 -- 32,413,000
Operating expenses:
Selling, general and administrative
expenses ....................... 12,678,000 24,185,000 (977,000)(a) 36,367,000
-- -- 343,000(b) --
-- -- 138,000(c) --
Income (loss) from operations .... 4,036,000 (8,486,000) 496,000 (3,954,000)
Interest expense .................... (1,030,000) -- (3,995,000)(d) (5,142,000)
-- (1,072,000) 1,072,000(e) --
-- (117,000)(f) --
Other income, net ................... -- 855,000 -- 855,000
------------ ------------ ----------- -------------
Income(loss) from continuing
operations before income tax ... 3,006,000 (8,703,000) (2,544,000) (8,241,000)
Income tax (provision) benefit ...... (1,108,000) -- 3,917,000(g) 2,809,000
------------ ------------ ----------- -------------
Net (loss) income from continuing
operations ..................... 1,898,000 (8,703,000) 1,373,000 (5,432,000)
Loss from discontinued operations ... (259,000) -- -- (259,000)
------------ ------------ ----------- -------------
Net income (loss) ................ $ 1,639,000 $ (8,703,000) $ 1,373,000 $ (5,691,000)
============ ============ =========== =============
Earnings (loss) per share:
From continuing operations $ 0.39 $ (1.12)
From discontinued operations (0.05) (0.05)
Net earnings (loss) per share $ 0.34 $ (1.17)
Weighted average shares outstanding 4,841,000 4,841,000
============= ===============
See accompanying notes to Unaudited Pro Forma Combined Condensed Statements of
Operations.
PLAY BY PLAY TOYS & NOVELTIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF
OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 1996 FOR PLAY BY
PLAY TOYS & NOVELTIES, INC., AND
ACE NOVELTY CO., INC.
HISTORICAL PRO FORMA
PLAY BY PLAY ACE ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------
Net sales ........................... $ 49,764,000 $ 42,602,000 $ -- $ 92,366,000
Cost of sales ....................... 33,474,000 28,209,000 -- 61,683,000
------------ ------------ ----------- ------------
Gross profit ..................... 16,290,000 14,393,000 -- 30,683,000
Operating expenses:
Selling, general and administrative
expenses ....................... 11,233,000 13,175,000 (732,000)(a) 24,037,000
-- -- 257,000(b) --
-- -- 104,000(c) --
Income from operations ........... 5,057,000 1,218,000 371,000 6,646,000
Interest expense .................... (177,000) -- (2,996,000)(d) (3,261,000)
-- (2,765,000) 2,765,000(e) --
-- -- (88,000)(f) --
Other income, net ................... 600,000 667,000 -- 1,267,000
------------ ------------ ----------- ------------
Income from continuing
operations before income tax ... 5,480,000 (880,000) 52,000 4,652,000
Income tax (provision) benefit ...... (2,156,000) -- 258,000(g) (1,898,000)
------------ ------------ ----------- ------------
Net income from continuing
operations ..................... 3,324,000 (880,000 310,000 2,754,000
Loss from discontinued operations ... (799,000) -- -- (799,000)
------------ ------------ ----------- ------------
Net income ....................... $ 2,525,000 $ (880,000) $ 310,000 $ 1,955,000
============ ============ =========== ============
Earnings per share:
From continuing operations ....... $ 0.69 $ 0.57
From discontinued operations ..... (0.17) (0.17)
------------ ------------
Net earnings per share ........... $ 0.52 $ .40
----------- ------------
Weighted average shares outstanding . 4,843,000 4,843,000
=========== ============
See accompanying notes to Unaudited Pro Forma Combined Condensed Statements of
Operations.
PLAY BY PLAY TOYS & NOVELTIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
The following are adjustments to the Unaudited Pro Forma Combined Condensed
Statements of Operations to reflect the completion of the acquisition of Ace
Novelty Co., Inc., including the issuance of debt to fund such acquisition.
(a) Reflects the adjustment to operations, maintenance and general for
certain anticipated cost savings resulting from the consolidation of
operations and corporate functions, the integration of corporate
management and the elimination of certain other duplicate
administrative functions.
(b) Reflects amortization of the estimated excess purchase price over the
estimated fair market value of the net assets acquired of the Ace
Novelty Co., Inc. business on a straight-line basis over a 20 year
period.
(c) Reflects depreciation expense related to the purchase price of
additional equipment over their estimated useful lives. See note (a) of
Notes to Unaudited Pro Forma Combined Condensed Balance Sheet.
(d) Reflects the interest expense on (i) $34.0 million in revolving credit
and term loans at an assumed annual rate of 10.0%; (ii) a $3.0 million
subordinated loan at an annual interest rate of 9.0%; and (iii) a $2.9
million subordinated loan from Expo Management International, Inc.,
formerly known as Ace Novelty Co., Inc., at an annual interest rate of
11.2%.
(e) Reflects the removal of historical interest expense of Ace Novelty Co.,
Inc.
(f) Reflects amortization of debt issuance costs related to the issuance of
debt to fund the acquisition.
(g) Reflects the income tax provision (benefit) associated with the pro
forma adjustments calculated using the applicable statutory state
income tax rates and the statutory federal income tax rate of 34.0%.
Income tax expense, on a pro forma combined basis, differs from the
amount computed when applying the applicable statutory federal income tax rates
to earnings before income taxes. The reasons for the differences are as follows:
Nine Months
Year Ended Ended
JULY 31, 1995 APRIL 30, 1996
----------- ----------
Computed "expected" tax expense (benefit) $(2,802,000) $1,582,000
Amortization of goodwill ............. 117,000 87,000
Foreign tax .......................... 106,000 79,000
State income taxes ................... (254,000) 132,000
Other ................................ 24,000 18,000
----------- ----------
$(2,809,000) $1,898,000
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