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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission file number 0-26374
PLAY BY PLAY TOYS & NOVELTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Texas 74-2623760
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4400 Tejasco
San Antonio, Texas 78218-0267
(Address of principal executive offices and zip code)
(210) 829-4666
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The aggregate number of the Registrant's shares outstanding on June 11, 1997
was 4,881,100 shares of Common Stock, no par value.
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of April 30, 1997 (Unaudited)
and July 31, 1996 3
Consolidated Statements of Operations (Unaudited) for the
Three Months and Nine Months Ended April 30, 1997 and 1996 4
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended April 30, 1997 and 1996 5
Notes to Consolidated Financial Statements (Unaudited) 6
Risk Factors 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Signatures 14
Item 6. Exhibit
(a) Exhibit 27 - Financial Data Schedule E-1
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
APRIL 30, JULY 31,
1997 1996
------------ ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents ..................................... $ 1,133,756 $ 531,040
Accounts and notes receivable, less allowance for
doubtful accounts of $2,053,298 and $1,621,603 ........... 27,638,965 29,306,584
Inventories ................................................... 39,601,640 42,447,111
Other current assets .......................................... 4,300,898 4,203,291
------------ ------------
Total current assets ..................................... 72,675,259 76,488,026
Property and equipment, net ........................................ 15,584,979 15,130,186
Goodwill, less accumulated amortization
of $261,488 and $17,943 ....................................... 12,214,682 11,024,013
Other assets ....................................................... 2,049,853 1,920,689
------------ ------------
Total assets ............................................. $102,524,773 $104,562,914
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft ................................................ $ 2,117,909 $ 2,357,436
Notes payable to banks and others ............................. 21,453,902 21,775,809
Note payable to shareholder ................................... 3,000,000 3,000,000
Current maturities of long-term debt .......................... 3,561,559 4,518,411
Current obligations under capital leases ...................... 718,439 379,534
Accounts payable, trade ....................................... 17,254,338 15,334,237
Other accrued liabilities ..................................... 1,980,847 5,021,357
Income taxes payable .......................................... 1,690,045 1,776,737
Deferred income tax payable ................................... 421,118 223,459
------------ ------------
Total current liabilities ................................ 52,198,157 54,386,980
------------ ------------
Long-term liabilities:
Long-term debt, net of current maturities ..................... 8,751,913 10,434,378
Obligations under capital leases .............................. 823,927 661,826
Deferred income tax payable ................................... 422,486 379,661
------------ ------------
Total liabilities ........................................ 62,196,483 65,862,845
------------ ------------
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; 4,881,100 and 4,841,100 shares issued ........ 1,000 1,000
Additional paid-in capital .................................... 34,130,347 33,746,597
Cumulative foreign currency translation adjustments ........... (1,474,801 (414,306
Retained earnings ............................................. 7,671,744 5,366,778
------------ ------------
Total shareholders' equity ............................... 40,328,290 38,700,069
------------ ------------
Total liabilities & shareholders' equity ................. $102,524,773 $104,562,914
============ ============
The accompany notes are an integral part of the Consolidated Financial
Statements.
3
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net sales .............................................. $ 28,001,220 $ 14,301,523 $ 89,931,131 $ 49,763,965
Cost of sales .......................................... 16,939,816 9,261,917 59,241,014 33,474,023
------------ ------------ ------------ ------------
Gross profit ...................................... 11,061,404 5,039,606 30,690,117 16,289,942
Selling, general and administrative
expenses ............................................. 8,469,595 3,446,090 23,942,108 11,233,343
------------ ------------ ------------ ------------
Operating income .................................. 2,591,809 1,593,516 6,748,009 5,056,599
Interest expense ....................................... (1,011,027) (67,282) (3,115,244) (176,767)
Other income ........................................... 6,945 63,400 16,081 599,906
------------ ------------ ------------ ------------
Income from continuing operations
before income tax .............................. 1,587,727 1,589,634 3,648,846 5,479,738
Income tax provision ................................... (563,152) (708,256) (1,343,880) (2,296,649)
------------ ------------ ------------ ------------
Income from continuing operations ...................... 1,024,575 881,378 2,304,966 3,183,089
Discontinued operations:
Loss from discontinued operations ................. -- (21,998) -- (239,002)
Loss on disposal of discontinued operations ....... -- (239,002) -- (145,036)
------------ ------------ ------------ ------------
Net income ........................................ $ 1,024,575 $ 620,378 $ 2,304,966 $ 2,799,051
============ ============ ============ ============
Income (loss) per share:
Continuing operations ............................. $ 0.21 $ 0.18 $ 0.47 $ 0.66
Discontinued operations ........................... -- (0.05) -- (0.08)
------------ ------------ ------------ ------------
Net income per share ................................... $ 0.21 $ 0.13 $ 0.47 $ 0.58
============ ============ ============ ============
Weighted average shares outstanding .................... 4,881,100 4,841,100 4,867,474 4,841,100
============ ============ ============ ============
The accompanying notes are an integral part of the Consolidated Financial
Statements.
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED APRIL 30,
--------------------------------
1997 1996
----------- ------------
Cash flows from operating activities:
Net income ............................................................... $ 2,304,966 $ 2,799,05
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Loss from discontinued operations ..................................... -- 384,038
Depreciation and amortization ......................................... 1,525,507 482,541
Provision for doubtful accounts receivable ............................ 814,535 614,061
Deferred income tax provision ......................................... 240,484 22,058
Stock distributed as compensation ..................................... 38,750 --
Gain on sale of property and equipment ................................ (65,643) (3,169)
Change in operating assets and liabilities (net of TLC acquisition):
Accounts and notes receivable ....................................... 1,943,424 (3,619,393)
Inventories ......................................................... 3,626,264 (11,751,743)
Prepaids and other assets ........................................... (230,768) (1,378,151)
Accounts payable and accrued liabilities ............................ (4,503,660) (108,433)
Income taxes payable ................................................ (100,633) 765,657
----------- ------------
Net cash provided by (used in) operating
activities ...................................................... 5,593,226 (11,793,483)
----------- ------------
Cash flows from investing activities:
Purchase of property and equipment ....................................... (579,484) (1,951,281)
Proceeds from sale of property and equipment ............................. -- 14,493
Purchase of TLC, net of cash ............................................. 124,083 --
Redemption of short-term investments ..................................... -- 973,168
Payments for intangible assets ........................................... (8,023) (837,395)
----------- ------------
Net cash used in investing activities ............................ (463,424) (1,801,015)
----------- ------------
Cash flows from financing activities:
Proceeds from exercise of over-allotment of common stock, net ............ -- 3,380,097
Repayment of Revolving Credit Agreement, net ............................. (321,907) --
Proceeds from long-term debt ............................................. -- 67,041
Repayment of long-term debt .............................................. (2,843,626) (2,500,000)
Repayment of capital lease obligations ................................... (441,518) (218,024)
Decrease in bank overdraft ............................................... 239,527 --
----------- ------------
Net cash provided by (used in) financing activities .............. (3,367,524) 729,114
----------- ------------
Effect of foreign currency exchange rates .................................. (1,159,562) (508,258)
----------- ------------
Increase (decrease) in cash and cash equivalents ........................... 602,716 (13,373,642)
Cash and cash equivalents at beginning of period ........................... 531,040 15,569,051
----------- ------------
Cash and cash equivalents at end of period ................................. $ 1,133,756 $ 2,195,409
=========== ============
Non-Cash investing activity - capital leases incurred ...................... $ 1,007,492 $ --
=========== ============
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. and Subsidiaries (the "Company") as of and for the periods presented have
been included. Certain amounts in the financial statements for the prior period
have been reclassified to conform 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 outstanding during the period. Common share equivalents were
immaterial for all periods presented, and thus were not included in the
computations.
2. INVENTORIES
Inventories are comprised of the following:
JANUARY 31, JULY 31,
------------- ------------
1997 1996
---- ----
Purchased for resale $39,280,098 $42,303,526
Operating supplies 321,542 143,585
----------- ------------
Total $39,601,640 $42,447,111
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6
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. ACQUISITIONS
In November 1996, the Company, through its wholly-owned subsidiary Play By
Play Toys & Novelties Europe S.A., acquired all of the outstanding capital stock
of The TLC Gift Company, Ltd. ("TLC") based in Doncaster, England. The Company
effected the purchase of TLC by issuing 40,000 shares of restricted common stock
to the sellers of TLC. The shares had a fair market value of $345,000 at the
date of acquisition. The acquisition has been accounted for using the purchase
method of accounting, and, accordingly, the purchase price has been allocated to
the assets purchased and the liabilities assumed based on the fair values at the
date of acquisition. The Company acquired assets with an approximate value of
$2.1 million and assumed liabilities of approximately $2.7 million, resulting in
goodwill of approximately $1 million which will be amortized on a straight-line
basis over 20 years. The operating results have been included in the Company's
consolidated financial statements since the date of acquisition.
Relative to the acquisition of Ace Novelty Co., Inc. at June 20, 1996, the
Company has adjusted the purchase price allocation and expects to continue
adjusting such purchase price allocation during the allocation period as
contingent assets and liabilities are determined or realized in accordance with
Statement of Financial Accounting Standards No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises."
4. STOCK OPTIONS
During the second quarter of fiscal 1997, the Compensation Committee
granted incentive stock options to purchase 153,000 shares of Common Stock under
the Play By Play Toys & Novelties, Inc. 1994 Incentive Plan (the "Incentive
Plan") and nonqualified stock options outside of the Incentive Plan to purchase
191,500 shares of Common Stock to certain officers and employees of the Company.
The options generally have an immediate to four-year vesting period and are
exercisable at prices ranging from $8.00 to $12.10 per share.
In addition to the stock options granted as described in the preceding
paragraph, the Company granted nonqualified stock options outside of the
Incentive Plan to purchase 50,000 shares of Common Stock to the directors of the
Company. These stock options were granted at an exercise price of $11.00 per
share which was 100% of the closing sales price of the Common Stock on the date
of grant. One-half of these options vest six months from the date of grant and
one-half vest on the first anniversary of the date of grant.
5. CONTINGENCIES
The Company is from time to time subject to routine litigation incidental
to its business. The Company's management believes that the results of pending
legal proceedings will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
7
RISK FACTORS
THIS FORM 10-Q 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") AND THE TLC GIFT COMPANY LIMITED ("TLC"),
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 OF NEW PRODUCTS BY CONSUMERS,
AND 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 61.0% and 56.1% of the Company's net sales during the third
quarter and the nine months of fiscal 1997, respectively. Sales of products
developed and sold under the Company's licenses from The Coca-Cola Company
accounted for approximately 5.0% and 5.5%, those from LOONEY TUNES' characters
accounted for approximately 38.6% and 29.8% and those from Disney characters
accounted for approximately 3.5% and 7.2% of the Company's net sales during the
third quarter and nine months of fiscal 1997, respectively. The Company's
existing license agreements generally have terms ranging from one to three
years. In the past, the Company has been successful in renewing its significant
licenses and none of its significant licenses have 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
territories and markets 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 could affect the growth of the Company. In addition, the
Company's licensors typically have the right to approve, at 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 significant 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 ACQUISITIONS. In June and November 1996, the Company
acquired Ace and TLC, respectively, from unrelated parties. The Company acquired
substantially all of the operating assets, business operations and facilities of
the companies, including five warehouse and distribution centers. There can be
no assurance that the Company will be able to successfully integrate and operate
Ace or TLC, nor that the resulting integration expense will not have a
materially adverse effect upon the Company's operating results.
8
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 NOVELTY CO., INC. AND THE
TLC GIFT COMPANY LIMITED, COMPETITIVE AND ECONOMIC FACTORS, PRICE CHANGES BY
COMPETITORS, RELATIONSHIPS WITH LICENSORS, NEW PRODUCT INTRODUCTION, ABILITY TO
MANAGE GROWTH, ABILITY TO SOURCE PRODUCTS, INTERNATIONAL TRADE RELATIONS AND
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, AND OTHER RISKS DETAILED FROM TIME TO
TIME IN THE COMPANY'S SEC REPORTS, INCLUDING THE FORM S-1 REGISTRATION STATEMENT
DATED JULY 19, 1995 (SEE "RISK FACTORS"). UPDATED INFORMATION WILL BE
PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY THE SECURITIES EXCHANGE ACT
OF 1934.
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 the first and fourth
fiscal quarters, and collections from those sales have been highest during the
succeeding fiscal quarters. The Company's working capital needs and borrowings
to fund those needs have been highest during the third and fourth fiscal
quarters. As a result of the Company's increased sales to the amusement industry
and increased penetration of the retail market, the Company anticipates that its
sales, collections and borrowings to fund working capital needs may become more
significant in the third and fourth fiscal quarters.
RESULTS OF OPERATIONS
The following unaudited table sets forth the Company's results of operations
as a percentage of net sales for the periods indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
1997 1996 1997 1996
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 60.5 64.8 65.9 67.3
Gross profit 39.5 35.2 34.1 32.7
Selling, general and administrative expenses 30.2 24.1 26.6 22.6
Operating income 9.3 11.1 7.5 10.2
Interest expense (3.6) (0.5) (3.5) (0.4)
Other income - 0.4 - 1.2
Net income 3.7 4.3 2.6 5.6
9
THREE MONTHS ENDED APRIL 30, 1997 AND 1996
NET SALES. Net sales for the three months ended April 30, 1997 increased
95.8% to approximately $28.0 million from approximately $14.3 million in the
comparable period in fiscal 1996 which is primarily attributable to the
acquisition of Ace. The Company's toy operations accounted for 97.3% or
approximately $27.2 million of net sales for the third quarter of fiscal 1997
and 93.6% or approximately $13.4 million of net sales for the third quarter of
fiscal 1996. Net sales derived from vending operations accounted for 2.6% or
approximately $736,000 of the Company's net sales for the third quarter of
fiscal 1997 as compared to 6.2% or approximately $890,000 of the Company's net
sales for the third quarter of fiscal 1996. Domestic net toy sales for the third
quarter of fiscal 1997 increased 92.6% or approximately $10.2 million, and
international net toy sales increased 152.6% or approximately $3.7 million from
approximately $10.9 million and $2.4 million, respectively, in the comparable
quarter in fiscal 1996.
Net sales of licensed products for the three months ended April 30, 1997
increased approximately 140.4% or approximately $10.0 million from approximately
$7.1 million in the comparable period in fiscal 1996. The increase in licensed
product sales is primarily attributable to the acquisition of Ace, which
contributed approximately $7.7 million of the increase in net sales of licensed
products, and the strong European market, which increased license product sales
approximately $3.0 million from the comparable period in fiscal 1996. Net sales
of non-licensed products increased 61.9% or approximately $3.9 million from
approximately $6.3 million in the comparable quarter in fiscal 1996. Within
non-licensed products, Ace contributed net sales of approximately $2.3 million
for the third quarter of fiscal 1997. Net sales of non- licensed stuffed toys
increased 68.3% or approximately $3.7 million, from approximately $5.4 million
in the comparable period in fiscal 1996.
Net toy sales to retail customers for the third quarter of fiscal 1997 and
1996 accounted for 22.0% or approximately $6.1 million and 19.3% or
approximately $2.8 million, respectively, of the Company's net sales. The
approximate 123.6% increase in sales to retail customers from the third quarter
of fiscal 1996 to the third quarter of fiscal 1997 is primarily attributable to
the continued growth in domestic licensed products sales of 92.7% or
approximately $2.0 million and international licensed products sales of 233.0%
or approximately $1.4 million.
Net toy sales to amusement customers for the third quarter of fiscal 1997
and 1996 accounted for 75.3% or approximately $21.1 million and 74.4% or
approximately $10.6 million, respectively, of the Company's net sales. The
approximate 98.3% increase in dollar volume is primarily attributable to the
acquisition of Ace, which accounted for approximately $9.6 million.
GROSS PROFIT. Gross profit increased approximately 119.5% to approximately
$11.1 million for the third quarter of fiscal 1997 from approximately $5.0
million in the same period in fiscal 1996, due primarily to the overall increase
in the Company's net sales. Gross profit as a percentage of net sales increased
approximately 4.3% from 35.2% to approximately 39.5% for the third quarter of
fiscal 1997. This increase is primarily attributable to increased European sales
which carry a higher profit margin, and better profit margins domestically due
to increased manufacturing volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 145.8% to approximately $8.5 million for the
third quarter of fiscal 1997 from approximately $3.4 million in the comparable
period in fiscal 1996. This increase is primarily attributable to increased
selling expenses of 118.1% or approximately $3.0 million, including payroll
related costs, salaried associated with the increase in the Company's sales,
increased costs related to the production of merchandise catalogs, and 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, the addition of four distribution and warehouse
facilities associated with the acquisition of Ace and one distribution facility
10
associated with the acquisition of TLC. As a percentage of net sales, these
expenses increased to approximately 30.2% from approximately 24.1%, due
primarily to the fixed administrative costs associated with the larger
infrastructure described above. With the acquisition of Ace, the higher fixed
overhead costs as a percentage of sales compared to the prior years is expected
during the second and third quarters as such quarters have lower sales volume.
However, during the Company's peak sales period, the fourth and first quarters,
the general and administrative costs are expected to shrink as a percentage of
sales.
INTEREST EXPENSE AND OTHER INCOME. Interest expense increased to
approximately $1.0 million for the third quarter of fiscal 1997 from
approximately $67,000 in the comparable period in fiscal 1996 as a result of
financing the acquisition of Ace. Other income decreased 89.0% or approximately
$56,000 primarily due to the interest earned on interest bearing accounts and
short-term securities for the third quarter of fiscal 1996.
NINE MONTHS ENDED APRIL 30, 1997 AND 1996
NET SALES. Net sales for the nine months ended April 30, 1997 increased
approximately 80.7% to approximately $89.9 million from approximately $49.8
million in the comparable period in fiscal 1996. The increase in net sales is
primarily attributable to the acquisition of Ace, and strong international and
retail sales. The Company's toy operations accounted for 97.4% or approximately
$87.6 million of net sales for the nine months of fiscal 1997 and 94.6% or
approximately $47.1 million of net sales for the nine months of fiscal 1996. Net
sales derived from vending operations accounted for 2.6% or approximately $2.3
million of the Company's net sales for the nine months of fiscal 1997 as
compared to 5.2% or approximately $2.6 million of the Company's net sales for
the comparable period in fiscal 1996. Domestic net toy sales for the nine months
of fiscal 1997 compared to the same period of fiscal 1996 increased 78.6% or
approximately $32.4 million to $73.5 million, and international toy sales
increased 136.9% or approximately $8.1 million to $14.1 million.
Net sales of licensed products for the nine months of fiscal 1997
increased 73.0% or approximately $21.3 million, from approximately $29.2 million
in the comparable period in fiscal 1996. The increase in licensed product sales
is primarily attributable to the acquisition of Ace, which accounted for
approximately $17.6 million of the increase in net sales of licensed products,
and our strong European operations, which accounted for approximately $9.5
million, an approximate 209.5% increase from the comparable period in fiscal
1996. Net sales of non-licensed products increased 107.0% or approximately $19.2
million from approximately $17.9 million in the comparable period in fiscal
1996. Within non-licensed products, Ace's net sales accounted for approximately
$15.9 for the nine months of fiscal 1997. Net sales of non-licensed stuffed toys
increased 136.5% or approximately $19.2 million, from approximately $14.0
million in the comparable period in fiscal 1996.
Net toy sales to retail customers for the nine months of fiscal 1997 and
1996 accounted for 27.8% or approximately $25.0 million and 36.2% or
approximately $18.0 million, respectively, of the Company's net sales. The
approximate 38.8% increase in sales to retail customers from the nine months of
fiscal 1996 to the nine months of fiscal 1997 is primarily attributable to the
continued growth in domestic and international retail sales of 19.5% or
approximately $3.2 million and 233.0% or approximately $3.8 million,
respectively. The domestic growth was fueled by several new product lines added
during fiscal 1997. The decrease in retail sales as a percentage of total sales
from the nine months of fiscal 1996 to 1997 is principally due to the fact that
Ace is predominantly a supplier to the amusement/carnival industry whereas,
prior to the Ace acquisition, the Company had a more even sales mix of retail
and amusement customers.
Net toy sales to amusement customers for the nine months of fiscal 1997
and 1996 accounted for 69.6% or approximately $62.6 million and 58.4% or
approximately $29.1 million, respectively, of the Company's net sales. The
approximate 115.3% increase in dollar volume is primarily attributable to the
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acquisition of Ace, which accounted for approximately $32.5 million, and the
strong European market, which accounted for approximately $8.6 million, a 100.7%
increase from the comparable period in fiscal 1996.
GROSS PROFIT. Gross profit increased approximately 88.4% to approximately
$30.7 million for the nine months of fiscal 1997 from approximately $16.3
million in the nine months of fiscal 1996, due to the overall increase in the
Company's net sales. Gross profit as a percentage of net sales increased
approximately 1.4% from approximately 32.7% for the nine months of fiscal 1996
to approximately 34.1% for the nine months of fiscal 1997. This increase was
principally a result of purchasing in larger volumes and increased international
sales which carry a higher profit margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately 113.1% to approximately $23.9
million for the nine months of fiscal 1997 from approximately $11.2 million in
the comparable period in fiscal 1996. This increase is primarily attributable to
increased selling expenses of 103.2% or approximately $8.0 million, including
increased payroll related costs, salaried associated with the increase in the
Company's sales, increased costs related to the production of merchandise
catalogs, and 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, the addition of four
distribution and warehouse facilities associated with the acquisition of Ace and
one distribution facility associated with the acquisition of TLC. As a
percentage of net sales, these expenses increased to approximately 26.6% from
approximately 22.6%, due primarily to the addition of five distribution
facilities.
INTEREST EXPENSE AND OTHER INCOME. Interest expense increased
approximately $2.9 million to approximately $3.1 million for the nine months of
fiscal 1997 from approximately $177,000 in the comparable period in fiscal 1996
as a result of the financing of the acquisition of Ace. Other income decreased
97.3% or approximately $584,000 due to the interest earned on interest bearing
accounts and short-term securities during the same nine month period of fiscal
1996. Such interest bearing cash was used to partially fund the acquisition of
Ace.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1997, the Company's working capital was approximately $20.5
million, compared to approximately $22.1 million at July 31, 1996. In June 1996,
pursuant to the Ace acquisition, the Company entered into a $65.0 million loan
under a Revolving Credit Term Loan with Letter of Credit Facility, ("Credit
Facility"), among The Chase Manhattan Bank, formerly Chemical Bank, as agent,
Heller Financial, Inc., Texas Commerce Bank N.A., Union Bank of California and
Bank of America. Additionally, pursuant to the Ace acquisition, the Company
entered into a $3.0 million subordinated loan from the Company's Chairman of the
Board and Chief Executive Officer, and a $2.9 million subordinated loan from the
Ace sellers. As of April 30, 1997, the revolving loan balance was approximately
$21.5 million, the term loan balance was $10.2 million, the subordinated
shareholder loan was $3.0 million, and the subordinated loan from the Ace
sellers was $1.9 million.
The Company's operating activities provided net cash of approximately $5.6
million in the nine months of fiscal 1997 and used net cash of approximately
$11.8 million in the same nine-month period of fiscal 1996. The cash flow from
operations for the nine months ended April 30, 1997 was primarily affected by
changes in accounts receivable, inventory, accounts payable and non-cash
expenses.
Net cash used in investing activities during the nine months ended April
30, 1997 was approximately $463,000 compared to net cash used in investing
activities for the nine months of fiscal 1996 of approximately $1.8 million. For
the nine
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months of fiscal 1997, net cash used in investing activities consisted
principally of the purchase of property and equipment of approximately $579,000.
For the nine months of fiscal 1996, net cash provided used in investing
activities consisted principally of the purchase of property and equipment of
approximately $1.9 million and deferred acquisition costs totaling $784,000
incurred by the Company relative to the proposed acquisition of Ace, offset by
the redemption of short-term investments of approximately $973,000.
Net cash used in financing activities during the nine months ended April
30, 1997 was approximately $3.4 million and net cash provided by financing
activities in the nine months of fiscal 1996 was approximately $729,000. During
the nine months ended April 30, 1997, cash was used to repay the revolving loan
of approximately $322,000, repay the term loan of $1.8 million and repay the
subordinated loan from the Ace sellers of $1.0 million. In the nine months of
fiscal 1996, cash provided by financing activities consisted principally of
receipt of the 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 retirements of outstanding debt and capital
lease obligations.
The Company is considering a private placement of additional debt or
equity financing to fund expected future expenditures required for the continued
significant growth of the European and retail operations, and for the marketing
of the newly developed "Talkin' Tots" dolls and other new toys in existing and
new product lines. Although the Company believes that it has the ability to
raise additional equity or debt financing, no assurance can be given that any
such effort would be successful.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 16th day of June, 1997.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By: /s/RAYMOND G. BRAUN
Raymond G. Braun
CHIEF FINANCIAL OFFICER
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