================================================================================
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, 1996
[ ] 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 10,
1996 was 4,881,100 shares of Common Stock, no par value.
================================================================================
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements:
Consolidated Balance Sheets as of October 31, 1996 (unaudited)
and July 31, 1996 3
Consolidated Statements of Income (unaudited) for the
Three Months Ended October 31, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended October 31, 1996 and 1995 5
Notes to Consolidated Financial Statements (unaudited) 6
Risk Factors 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Report on Form 8-K/A. An amendment to the current report filed
with respect to the acquisition of Ace Novelty Co. Inc., was
filed on September 3, 1996.
SIGNATURES 11
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
OCTOBER 31, JULY 31,
1996 1996
------------ -------------
(UNAUDITED)
Current assets:
Cash and cash equivalents ............... $ 1,201,622 $ 531,040
Accounts and notes receivable,
less allowance for doubtful
accounts of $2,113,738
and $1,621,603 ..................... 31,434,341 29,306,584
Inventories ............................. 37,125,950 44,437,694
Other current assets .................... 3,087,003 3,734,009
------------ -------------
Total current assets ............... 72,848,916 78,009,327
Property and equipment, net .................. 15,163,656 15,130,186
Goodwill, less accumulated amortization
of $73,397 and $17,943 .................. 9,055,110 8,852,712
Other assets ................................. 1,850,899 1,920,689
------------ -------------
Total assets ....................... $ 98,918,581 $ 103,912,914
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft .......................... $ -- $ 2,357,436
Note payable to shareholder ............. 3,000,000 3,000,000
Notes payable to banks and others ....... 18,961,723 21,775,809
Current maturities of long-term debt .... 4,515,093 4,518,411
Current obligations under capital leases 476,776 379,534
Accounts payable, trade ................. 13,440,811 15,334,237
Other accrued liabilities ............... 4,471,922 4,371,357
Income taxes payable .................... 2,631,018 1,776,737
Deferred income tax payable ............. 233,401 223,459
------------ -------------
Total current liabilities .......... 47,730,744 53,736,980
------------ -------------
Long-term liabilities:
Long-term debt, net of current maturities 9,832,953 10,434,378
Obligations under capital leases ........ 775,689 661,826
Deferred income tax payable ............. 422,486 379,661
------------ -------------
Total liabilities .................. 58,761,872 65,212,845
------------ -------------
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;
4,841,100 and 4,841,100
shares issued ...................... 1,000 1,000
Additional paid-in capital .............. 33,746,597 33,746,597
Cumulative foreign currency
translation adjustments ............ (403,583) (414,306)
Retained earnings ....................... 6,812,695 5,366,778
------------ -------------
Total shareholders' equity ......... 40,156,709 38,700,069
------------ -------------
Total liabilities &
shareholders' equity ............ $ 98,918,581 $ 103,912,914
============ =============
The accompany notes are an integral part of the
Consolidated Financial Statements.
3
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED OCTOBER 31,
------------------------------
1996 1995
------------ ------------
Net sales ...................................... $ 39,890,521 $ 23,439,570
Cost of sales .................................. 28,475,871 16,402,967
------------ ------------
Gross profit .............................. 11,414,650 7,036,603
Selling, general and administrative expenses ... 7,936,036 4,475,017
------------ ------------
Operating income .......................... 3,478,614 2,561,586
Interest expense ............................... (1,151,209) (73,497)
Interest income ................................ 91,631 290,831
Other income ................................... (48,681) --
------------ ------------
Income from continuing operations
before income tax ...................... 2,370,355 2,778,920
Income tax provision ........................... (924,438) (1,119,157)
------------ ------------
Income from continuing operations .............. 1,445,917 1,659,763
Discontinued operations:
Loss from discontinued opeRATIONS ......... -- (90,453)
============ ============
Net income ................................ $ 1,445,917 $ 1,569,310
============ ============
Income (loss) per share:
Continuing operations ..................... $ 0.30 $ 0.34
Discontinued operations ................... -- (0.02)
============ ============
Net income per share ........................... $ 0.30 $ 0.32
============ ============
Weighted average shares outstanding ............ 4,841,100 4,841,100
============ ============
The accompanying notes are an integral part
of the Consolidated Financial Statements.
4
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED OCTOBER 31,
------------------------------
1996 1995
------------ ------------
Cash flows from operating activities:
Net income ................................... $ 1,445,917 $ 1,569,310
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization ............. 441,956 197,347
Provision for doubtful accounts receivable 399,434 501,210
Deferred income tax provision (benefit) ... 52,767 (333,389)
Gain on sale of property and equipment .... -- (2,718)
Change in operating assets and liabilities:
Accounts and notes receivable ........... (2,527,191) (2,694,448)
Inventories ............................. 7,311,744 (3,481,152)
Prepaids and other assets ............... 730,777 (318,697)
Accounts payable and accrued liabilities (6,765,585) 1,398,168
Income taxes payable .................... 854,281 922,669
------------ ------------
Net cash provided by (used in)
operating activities ................ 1,944,100 (2,241,700)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ........... (419,972) (196,547)
Proceeds from sale of property
and equipment ............................... -- 14,493
Purchase of short-term investments ........... -- (1,820,148)
Payments for intangible assets ............... (13,981) (34,778)
------------ ------------
Net cash used in investing
activities .......................... (433,953) (2,036,980)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of over-allotment
of common stock, net ........................ -- 3,380,097
Repayment of notes payable ................... (31,628,276) (2,500,000)
Net borrowing under Revolving Credit
Agreement ................................... 28,814,190 --
Proceeds from long-term debt ................. 340,904 --
Repayment of long-term debt .................. (604,743) --
Repayment of capital lease obligations ....... (129,799) --
Decrease in bank overdraft ................... 2,357,436 --
Repayment of long-term debt and capital
lease obligations ........................... -- (175,117)
------------ ------------
Net cash provided by (used in)
financing activities ................ (850,288) 704,980
------------ ------------
Effect of foreign currency exchange rates ...... 10,723 (239,081)
------------ ------------
Increase (decrease) in cash and cash
equivalents ................................... 670,582 (3,812,781)
Cash and cash equivalents at beginning
of period ..................................... 531,040 15,569,051
============ ============
Cash and cash equivalents at end of period ..... $ 1,201,622 $ 11,756,270
============ ============
Non-cash investing activity - capital
leases incurred ............................... $ 350,000 $ --
============ ============
The accompanying notes are an integral part
of the Consolidated Financial Statements.
5
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements and related
disclosures have been prepared in accordance with generally accepted accounting
principles applicable to interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. The year-end balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation of
the financial position and interim results of Play By Play Toys & Novelties,
Inc. (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 with the current year presentation. Because the
Company's business is seasonal, results for interim periods are not necessarily
indicative of those which may be expected for a full year.
The financial information included herein should be read in conjunction with
the Company's consolidated financial statements and related notes in its Annual
Report on Form 10-K for the fiscal year ended July 31, 1996, which is on file
with the United States Securities and Exchange Commission.
Earnings per share is calculated using the weighted average number of common
shares and common share equivalents outstanding during the period. All of the
Company's common share equivalents were immaterial or anti-dilutive for all
periods presented, and were not included in the computation of earnings per
share.
2. INVENTORIES
Inventories are comprised of the following:
OCTOBER 31, JULY 31,
1996 1996
----------- -----------
Purchased for resale .. $36,764,350 $44,294,109
Operating supplies .... 361,600 143,585
----------- -----------
Total ............. $37,125,950 $44,437,694
=========== ===========
3. SUBSEQUENT EVENT
In November 1996, the Company acquired The TLC Gift Company Limited
("TLC") based in Doncaster, England. TLC is a leading UK distributor of high
quality specialty plush toy and novelty products to the European retail and
amusement markets. The Company effected the purchase of TLC by issuing 40,000
shares of common stock to the sellers. TLC will become a wholly owned subsidiary
of Play By Play Europe, S.A. and will combine its principal office with Play By
Play Europe's headquarters in Valencia, Spain.
6
RISK FACTORS
THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, WITHOUT LIMITATION, THE SUCCESSFUL INTEGRATION OF
ACE NOVELTY CO. INC. ("ACE"), COMPETITIVE AND ECONOMIC FACTORS, PRICE CHANGES BY
COMPETITORS, RELATIONSHIPS WITH LICENSORS, ABILITY TO MANAGE GROWTH, ABILITY TO
SOURCE PRODUCTS, INTERNATIONAL TRADE RELATIONS, MANAGEMENT OF QUARTER-TO-QUARTER
RESULTS, INCREASES IN COSTS OF RAW MATERIALS, TIMING OF TECHNOLOGICAL ADVANCES
BY THE COMPANY AND ITS COMPETITORS, LACK OF ACCEPTANCE BY CONSUMERS OF NEW
PRODUCTS, THE OTHER FACTORS DISCUSSED IN THIS SECTION AND ELSEWHERE HEREIN, AND
OTHER RISKS DETAILED FROM TIME-TO-TIME IN THE COMPANY'S REPORTS FILED WITH THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION, INCLUDING, WITHOUT LIMITATION,
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JULY 31,
1996. UPDATED INFORMATION WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS
REQUIRED BY THE SECURITIES EXCHANGE ACT OF 1934.
RELIANCE ON LICENSE AGREEMENTS. Sales of licensed products accounted for
approximately 56.2% of the Company's net sales during the first quarter of
fiscal 1997. Sales of products developed and sold under the Company's licenses
from The Coca-Cola Company accounted for approximately 6.2%, those from LOONEY
TUNES' characters accounted for approximately 23.1% and those from Disney
characters accounted for approximately 9.9% of the Company's net sales during
the first quarter of fiscal 1997. The Company's existing license agreements
generally have terms ranging from one to two years, and approximately 69% and
31% of such licenses terminate during fiscal 1997 and 1998, respectively. In the
past, the Company has been successful in renewing its material licenses and none
of its material licenses has been terminated; however, there can be no assurance
that the Company will be able to procure new license agreements, renew existing
license agreements, or that existing licenses will not be terminated. In
addition, as a result of increased competition for licenses, the Company has in
certain instances been required, and anticipates a continued requirement in the
future, to pay higher royalties and higher minimum guaranty payments to obtain
or renew licenses. There can be no assurance that the Company will be able to
obtain additional or renew existing licenses for characters or trademarks on
commercially reasonable terms. The Company's license agreements limit both the
products that can be manufactured thereunder and the territory and market in
which such products may be marketed. Certain of the Company's license agreements
require licensor approval before merger, reorganization, certain stock sales,
certain management changes or assignment of the license, which restrictions
could affect the growth of the Company. In addition, the Company's licensors
typically have the right to approve, in their sole discretion, the products
developed by the Company and the third party manufacturer of such products.
Obtaining such approvals may be time consuming and could adversely affect the
timing of the introduction of new products. All of the Company's material
licenses are non-exclusive. Licenses that overlap the Company's licenses with
respect to products, geographic areas and markets have been and may continue to
be granted to competitors of the Company.
INTEGRATION OF ACE ACQUISITION. In June 1996, the Company acquired Ace
from an unrelated party. The Company acquired substantially all of the operating
assets, business operations and facilities, including four warehouse and
distribution centers. There can be no assurance that the Company will be able to
successfully integrate and operate Ace, nor that the resulting integration
expense will not have a materially adverse effect upon the Company's operating
results.
7
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 successful integration of Ace, relationships with
licensors, new product introduction, ability to manage growth, ability to source
products, international trade relations and management of quarter-to-quarter
results, and other risks set forth in the "Risk Factors" section hereof and
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, 1996 (see "Risk
Factors"). Updated information will be periodically provided by the Company as
required by the Securities Exchange Act of 1934.
RESULTS OF OPERATIONS
The following 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,
------------------------------
1996 1995
------ ------
(UNAUDITED)
Net sales .................................... 100.0% 100.0%
Cost of sales ................................ 71.4 70.0
Gross profit ................................. 28.6 30.0
Selling, general and administrative expenses . 19.9 19.1
Operating income ............................. 8.7 10.9
Interest expense ............................. (2.9) (0.3)
Interest income .............................. 0.2 1.2
Other income ................................. 0.1 --
Net income ................................... 3.6 6.7
NET SALES. Net sales for the fiscal quarter ended October 31, 1996
("fiscal 1997") increased 70.2% to approximately $39.9 million from
approximately $23.4 million in the comparable period in fiscal 1996. The
Company's toy operations accounted for approximately 97.9% or $39.1 million of
net sales for the first quarter of fiscal 1997 and 96.1% or $22.5 million of net
sales for the first quarter of fiscal 1996. Net sales derived from the vending
operations accounted for approximately 2.0% or $816,000 of the Company's net
sales for the first quarter of fiscal 1997 as compared to 3.8% or $880,000 of
the Company's net sales for the first quarter of fiscal 1996. Domestic net toy
sales for the first quarter of fiscal 1997 increased approximately 70.9% or
$14.6 million, and international toy sales increased approximately 100.5% or
$1.9 million, from $20.6 million and $1.9 million, respectively, in the
comparable quarter in fiscal 1996.
Net sales of licensed products increased approximately 40.0% or $6.4
million to $22.4 million, from approximately $16.0 million in the comparable
period in fiscal 1995. Within licensed products, the LOONEY TUNES licensed
product sales increased approximately 99.3% or $4.6 million to $9.3 million,
from approximately $4.7 million in the comparable quarter in fiscal 1995. Ace's
licensed sales were approximately $6.3 million for the first quarter of fiscal
1997. Net sales of non-licensed products increased approximately 155.7% or $10.1
million from approximately $6.5 million in the comparable quarter in fiscal
1996.
Net toy sales to retail customers for the first quarter of fiscal 1997
and 1996 accounted for approximately 28.5% or $11.4 million and 49.0% or $11.4
million, respectively, of the Company's net sales.
8
While sales remained flat for the first quarter of fiscal 1997 compared to the
corresponding period in fiscal 1996, PLAYOFACES(R) sales decreased by
approximately $2.5 million for the first quarter of fiscal 1997 offset by an
increase in licensed stuffed toy sales of approximately $2.5 million.
Net toy sales to amusement customers for the first quarter of fiscal
1997 and 1996 accounted for approximately 69.5% or $27.7 million and 47.2% or
$11.1 million, respectively, of the Company's net sales. The increase is
primarily attributable to Ace, which accounted for approximately $16.5 million,
and the strong European market, which accounted for approximately $2.5 million,
a 76.9% increase from the comparable period in fiscal 1996. The Company sells
both licensed and non-licensed products to its amusement customers for use
principally as redemption prizes. Sales to amusement customers generally result
in higher gross margins than sales to retail customers, with gross margins from
the sale of licensed products to amusement customers generally exceeding those
of non-licensed products.
GROSS PROFIT. Gross profit increased approximately 62.2% to
approximately $11.4 million for the first quarter of fiscal 1997 from
approximately $7.0 million in fiscal 1996, due to the overall increase in the
Company's net sales. Gross profit as a percentage of net sales decreased
approximately 1.4% from 30.0% to 28.6% for the first quarter of fiscal 1996.
This decrease is primarily attributable to the increase in sales of licensed
products to the amusement market and competitive pressures relating to
non-licensed products in the amusement market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately 77.3% to approximately $7.9
million for the first fiscal quarter of fiscal 1997 from approximately $4.5
million in the comparable period in fiscal 1996. This increase is primarily
attributable to increased selling expenses, such as payroll related costs and
sales commissions associated with the increase in the Company's sales, increased
travel and entertainment expenses, bad debt expense associated with increased
sales volume, increased occupancy costs relative to the establishment of a
distribution facility in Miami, Florida, an office in Hong Kong, the expansion
of the Company's distribution facility in Europe, and the addition of five
distribution and warehouse facilities associated with Ace. Of the increase, $3.0
million is related to Ace, primarily a result of approximately $2.0 million of
increased salaries related to Ace personnel. As a percentage of net sales, these
expenses increased to approximately 19.9% from approximately 19.1%, due
primarily to the Company's acquisition of Ace.
INTEREST EXPENSE. Interest expense increased approximately 1466.3% to
approximately $1.1 million for the first quarter of fiscal 1997 from
approximately $73,000 in the comparable period in fiscal 1996 due to the
financing of the acquisition of Ace.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1996, the Company's working capital was approximately
$25.1 million, compared to approximately $24.3 million at July 31, 1996. The
Company entered into a $34.0 million revolving credit and term loan under a
Revolving Credit Term Loan with Letter of Credit Facility, which has a maximum
aggregate commitment of $65 million (the "$65 million Credit Facility"), among
The Chase Manhattan Bank, formerly Chemical Bank, as agent, Heller Financial,
Inc. and Texas Commerce Bank N.A., a $3.0 million subordinated loan from the
Company's Chairman of the Board and Chief Executive Officer, Arturo Torres, and
a $2.9 million subordinated loan from the Ace sellers. As of October 31, 1996,
the revolving loan balance was approximately $19.0 million, the term loan
balance was $11.4 million, the subordinated loan from Mr. Arturo Torres was $3.0
million, and the balance of the subordinated loan from the Ace sellers was $2.9
million.
The Company's operating activities provided net cash of approximately
$1.9 million in the first quarter of fiscal 1997 and used net cash of
approximately $2.2 million in the first quarter of fiscal 1996. The cash flow
from operations for the first quarter of fiscal 1997 was primarily affected by
net income and changes in inventory, accounts and notes receivable, accounts
payable and accrued liabilities.
9
Net cash used in investing activities in the first quarter of fiscal
1997 and 1996 was approximately $0.4 million and $2.0 million, respectively. For
the first quarter of fiscal 1997, net cash used in investing activities related
principally to the purchase of property and equipment. For the first quarter of
fiscal 1996, net cash used in investing activities consisted principally of net
proceeds from the issuance of common stock in connection with the exercise of
the over-allotment option by the underwriters of the Company's initial public
offering, net of repayments of borrowings and capital lease obligations.
Net cash used in financing activities in the first quarter of fiscal
1997 was approximately $850,000 and net cash provided by financing activities in
the first quarter of fiscal 1996 was approximately $705,000. In the first
quarter of fiscal 1997, cash used in repayment of notes payable on the revolving
loan of approximately $31.6 million was offset by the net borrowing under the
$65 million Credit Facility of approximately $28.8 million. In the first quarter
of fiscal 1996, cash provided by financing activities consisted principally of
net proceeds from the issuance of common stock in connection with the exercise
of the over-allotment option by the underwriters of the Company's initial public
offering, net of repayments of borrowings and capital lease obligations.
The Company believes that the net cash provided by operating activities
and borrowings under the $65 million Credit Facility will be sufficient to meet
the Company's current cash requirements for current operations through the
remainder of fiscal 1997.
SEASONALITY
Both the retail and amusement toy industries are inherently seasonal.
Generally, in the past, the Company's sales to the amusement industry have been
highest during the third and fourth fiscal quarters, and collections for those
sales have been highest during the succeeding fiscal quarters. The Company's
sales to the retail toy industry have been highest during its first and fourth
fiscal quarters, and collections from those sales have been highest during the
succeeding quarters. The Company's working capital needs and borrowings to fund
those needs have been highest during the first and fourth fiscal quarters. The
Company's international and domestic operations are also subject to risks due to
inclement weather.
10
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 16th day of December 1996.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By: /s/ JUANITA E. LOZANO
Juanita E. Lozano
Chief Financial Officer and Treasurer