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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, 1998
[ ] 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 8, 1998
was 7,313,200 shares of Common Stock, no par value.
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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 April 30, 1998 (unaudited)
and July 31, 1997 ............................................. 3
Consolidated Statements of Income (unaudited) for the
Three Months and Nine Months Ended April 30, 1998 and 1997 .... 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended April 30, 1998 and 1997 ..................... 5
Notes to Consolidated Financial Statements (unaudited) ......... 6
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 8K ................................. 13
SIGNATURES ................................................................ 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
AS OF
--------------------------------------
APRIL 30, 1998 JULY 31, 1997
-------------- -------------
CURRENT ASSETS: (UNAUDITED)
Cash and cash equivalents ..................................................... $ 1,936,499 $ 4,960,612
Accounts and notes receivable, less allowance for
doubtful accounts of $3,986,970 and $3,213,653 ........................... 38,927,215 37,728,254
Inventories ................................................................... 69,370,586 47,239,520
Other current assets .......................................................... 7,966,880 3,781,724
------------- -------------
Total current assets ..................................................... 118,201,180 93,710,110
Property and equipment, net ........................................................ 16,105,813 14,985,887
Goodwill, less accumulated amortization of $706,707 and $365,433 ................... 14,088,660 14,412,736
Other assets ....................................................................... 2,484,583 2,796,841
------------- -------------
Total assets ............................................................. $ 150,880,236 $ 125,905,574
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade ....................................................... $ 21,838,032 $ 22,340,182
Bank overdraft ................................................................ -- 461,220
Revolving line of credit under the Credit Facility ............................ 11,515,914 22,607,721
Current maturities of long-term debt .......................................... 3,447,484 3,472,017
Current obligations under capital leases ...................................... 824,459 691,333
Other accrued liabilities ..................................................... 3,109,075 5,831,652
Income taxes payable .......................................................... 2,561,634 2,437,432
Deferred income tax payable ................................................... 521,727 496,431
------------- -------------
Total current liabilities ................................................ 43,818,325 58,337,988
------------- -------------
Long-term liabilities:
Long-term debt, net of current maturities ..................................... 5,472,691 7,320,233
Convertible subordinated debentures ........................................... 15,000,000 15,000,000
Obligations under capital leases .............................................. 1,022,958 917,506
Deferred income tax payable ................................................... 694,596 660,918
------------- -------------
Total liabilities ........................................................ 66,008,570 82,236,645
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Commitments and contingencies
SHAREHOLDERS' EQUITY :
Preferred stock - no par value; 10,000,000 shares
authorized; no shares issued ............................................. -- --
Common stock - no par value; 20,000,000 shares
authorized; 7,307,000 and 4,901,300 shares issued ....................... 1,000 1,000
Additional paid-in capital .................................................... 70,903,715 35,006,539
Deferred compensation ......................................................... (513,333) (618,333)
Cumulative foreign currency translation adjustments ........................... (2,286,460) (2,303,027)
Retained earnings ............................................................. 16,766,744 11,582,750
------------- -------------
Total shareholders' equity ............................................... 84,871,666 43,668,929
------------- -------------
Total liabilities & shareholders' equity ................................. $ 150,880,236 $ 125,905,574
============= =============
The accompanying 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 APRIL 30, NINE MONTHS ENDED APRIL 30,
-------------------------------- ---------------------------------
1998 1997 1998 1997
------------ ------------ ------------- ------------
Net sales ......................................... $ 37,262,519 $ 28,001,220 $ 126,546,943 $ 89,931,131
Cost of sales ..................................... 24,516,976 17,453,575 82,426,591 60,505,731
------------ ------------ ------------- ------------
GROSS PROFIT ................................. 12,745,543 10,547,645 44,120,352 29,425,400
Selling, general and administrative
expenses ........................................ 9,298,129 7,955,836 33,256,037 22,677,391
------------ ------------ ------------- ------------
OPERATING INCOME ............................. 3,447,414 2,591,809 10,864,315 6,748,009
Interest expense .................................. (817,898) (1,011,027) (3,269,772) (3,115,244)
Interest income ................................... 40,566 6,945 304,715 16,081
Other income (expense) ............................ (77,134) -- 76,118 --
------------ ------------ ------------- ------------
Income before income tax ..................... 2,592,948 1,587,727 7,975,376 3,648,846
Income tax provision .............................. (907,297) (563,152) (2,791,382) (1,343,880)
------------ ------------ ------------- ------------
NET INCOME ................................... $ 1,685,651 $ 1,024,575 $ 5,183,994 $ 2,304,966
============ ============ ============= ============
NET INCOME PER SHARE:
Basic ........................................... $ 0.23 $ 0.21 $ 0.84 $ 0.47
------------ ------------ ------------- ------------
Diluted ......................................... $ 0.22 $ 0.20 $ 0.77 $ 0.47
------------ ------------ ------------- ------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ........................................... 7,264,743 4,881,100 6,189,961 4,867,129
------------ ------------ ------------- ------------
Diluted ......................................... 8,597,198 5,048,143 7,533,852 4,909,756
------------ ------------ ------------- ------------
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)
NINE MONTHS ENDED APRIL 30,
---------------------------------
1998 1997
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................ $ 5,183,994 $ 2,304,966
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization ...................................................... 1,798,777 1,525,507
Provision for doubtful accounts receivable ......................................... 1,735,725 814,535
Deferred income tax provision ...................................................... 58,974 240,484
Stock distributed as compensation .................................................. 105,000 38,750
Gain on sale of property and equipment ............................................. -- (65,643)
Change in operating assets and liabilities (net of TLC acquistion):
Accounts and notes receivable .................................................... (2,930,925) 1,943,424
Inventories ...................................................................... (22,131,066) 3,626,264
Prepaids and other assets ........................................................ (3,306,852) (230,768)
Accounts payable and accrued liabilities ......................................... (3,241,177) (4,503,660)
Income taxes payable ............................................................. 124,202 (100,633)
------------ -----------
Net cash provided by (used in) operating
activities ................................................................... (22,603,348) 5,593,226
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment ....................................... (1,650,419) (579,484)
Proceeds from sale of property and equipment .......................................... 36,955 --
Investment in TLC, net of cash ........................................................ -- 124,083
Payments for intangible assets ........................................................ (49,256) (8,023)
------------ -----------
Net cash used in investing activities ......................................... (1,662,720) (463,424)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under Revolving Credit Facility ........................................ (11,091,807) (321,907)
Proceeds from public offering ......................................................... 34,158,759 --
Repayment of long-term debt ........................................................... (1,944,170) (2,843,626)
Repayment of capital lease obligations ................................................ (652,591) (441,518)
Increase (decrease) in bank overdraft ................................................. (461,220) 239,527
Proceeds from exercise of stock options ............................................... 1,216,417 --
------------ -----------
Net cash provided by (used in) financing activities ........................... 21,225,388 (3,367,524)
------------ -----------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATES ............................................... 16,567 (1,159,562)
------------ -----------
Increase (decrease) in cash and cash equivalents ........................................ (3,024,113) 602,716
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................................ 4,960,612 531,040
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............................................. $ 1,936,499 $ 1,133,756
============ ===========
Non-cash financing and investing-activity: capital leases incurred ...................... $ 891,169 $ 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 to 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, 1997, which is on
file with the United States Securities and Exchange Commission.
2. INVENTORIES
Inventories are comprised of the following:
APRIL 30, 1998 JULY 31, 1997
-------------- -------------
Purchased for resale ................... $69,018,416 $46,898,557
Operating supplies ..................... 352,170 340,963
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Total ........................ $69,370,586 $47,239,520
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6
3. EARNINGS PER SHARE
During fiscal 1998, the Company implemented Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which establishes
standards for computing and presenting earnings per share ("EPS") for entities
with publicly held common stock. SFAS No. 128 simplifies the standards for
computing EPS previously found in Accounting Principles Board Opinion No. 15,
"Earnings Per Share", and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS,
which excludes dilution. It also requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. Basic earnings per share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share differs from basic earnings per share due to the
assumed conversions of dilutive options, warrants and convertible debt that were
outstanding during the period. EPS for periods ended on or prior to April 30,
1997 have been restated to conform to the requirements of SFAS No. 128.
THREE MONTHS ENDED APRIL 30,
---------------------------------------------------------------------------------------
1998 1997
------------------------------------------ ------------------------------------------
Common Per Common Per
Income Shares Share Income Shares Share
------------- ------------- --------- -------------- ------------- ---------
BASIC EPS:
As reported $1,685,651 7,264,743 $0.23 $1,024,575 4,881,100 $0.21
EFFECT OF DILUTIVE SECURITIES:
Options 364,329 167,043
Warrants 30,626
8% Convertible Debentures 190,192 937,500
------------- ------------- --------- -------------- ------------- ---------
DILUTED EPS: $1,875,843 8,597,198 $0.22 $1,024,575 5,048,143 $0.20
============= ============= ========= ============== ============= =========
NINE MONTHS ENDED APRIL 30,
---------------------------------------------------------------------------------------
1998 1997
------------------------------------------ ------------------------------------------
Common Per Common Per
Income Shares Share Income Shares Share
------------- ------------- --------- -------------- ------------- ---------
BASIC EPS:
As reported $5,183,994 6,189,961 $0.84 $2,304,966 4,867,129 $0.47
EFFECT OF DILUTIVE SECURITIES:
Options 376,520 42,627
Warrants 29,871
8% Convertible Debentures 583,397 937,500
------------- ------------- --------- -------------- ------------- ---------
DILUTED EPS: $5,767,391 7,533,852 $0.77 $2,304,966 4,909,756 $0.47
============= ============= ========= ============== ============= =========
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, 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 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, 1997 (SEE "RISK FACTORS"
IN SUCH FORM 10-K). UPDATED INFORMATION WILL BE PERIODICALLY PROVIDED BY THE
COMPANY AS REQUIRED BY THE SECURITIES EXCHANGE ACT OF 1934.
RESULTS OF OPERATIONS
The following unaudited table sets forth the Company's results of
operations as a percentage of net sales for the periods indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- ------------------------
APRIL 30, APRIL 30,
------------------------- ------------------------
1998 1997 1998 1997
----------- ----------- --------- -----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 65.8 62.3 65.1 67.3
----------- ----------- --------- -----------
Gross profit 34.2 37.7 34.9 32.7
Selling, general and administrative expenses 25.0 28.4 26.3 25.2
----------- ----------- --------- -----------
Operating income 9.2 9.3 8.6 7.5
Interest expense (2.2) (3.6) (2.6) (3.5)
Interest income 0.1 - 0.2 -
Other income (expense) (0.2) - 0.1 -
Net income 4.5% 3.7% 4.1% 2.6%
=========== =========== ========= ===========
THREE MONTHS ENDED APRIL 30, 1998 AND 1997
NET SALES. Net sales for the fiscal quarter ended April 30, 1998 increased
33.1%, or $9.3 million, to $37.3 million from $28.0 million in the comparable
period in fiscal 1997. The increase in net sales was primarily attributable to
domestic amusement net sales growth of 43.4%, or $7.4 million, to $24.3 million
and international amusement net sales growth of 73.7%, or $3.0 million, to $7.2
million over the comparable period in fiscal 1997, partially offset by an 18.9%
decrease in retail net sales. Domestic net toy sales for the third quarter of
fiscal 1998 compared to the comparable period of fiscal 1997 increased 31.0%, or
$6.5 million, to $27.6 million, and international net toy sales increased 44.0%,
or $2.7 million, to $8.9 million.
Net sales of licensed products for the third quarter of fiscal 1998
increased 53.9%, or $9.2 million, to $26.3 million from $17.1 million in the
comparable period of fiscal 1997. The increase in licensed product sales was
primarily attributable to growth of sales of the Company's licensed products to
domestic and international amusement customers of 95.2%, or $10.4 million, to
$21.3 million from $10.9 million in the
8
comparable period of fiscal 1997. Within licensed products, sales of Looney
Tunes' characters increased 83.4%, or $9.0 million, to $19.8 million for the
third quarter of fiscal 1998 from $10.8 million in the comparable period of
fiscal 1997. Net sales of the TORNADO TAZ(TM) accounted for $1.3 million, or
3.6%, of the Company's net toy sales for the third quarter of fiscal 1998. Net
sales of PLAY-FACES(R) decreased 45.1%, or $929,000, to $1.1 million, from $2.1
million in the comparable period of fiscal 1997. Net sales of non-licensed
products for the third quarter of fiscal 1998 and 1997 accounted for 27.4%, or
$10.2 million, and 36.4%, or $10.2 million, respectively, of the Company's net
sales.
Net toy sales to retail customers for the third quarter of fiscal 1998 and
fiscal 1997 accounted for 13.4%, or $5.0 million, and 22.0%, or $6.2 million,
respectively, of the Company's net sales. The $1.2 million decrease in net sales
to retail customers from the third quarter of fiscal 1997 to the third quarter
of fiscal 1998 is primarily attributable to a decrease in sales of bean bag
plush toys and PLAY-FACES(R).
Net toy sales to amusement customers for the third quarter of fiscal 1998
and fiscal 1997 accounted for 84.6%, or $31.5 million, and 75.3%, or $21.1
million, respectively, of the Company's net sales. The 49.3%, or $10.4 million,
increase is primarily attributable to an increase in sales of novelty items of
$1.9 million, a 184.9% increase from the comparable period of 1997, and licensed
plush toys to amusement customers of $10.4 million, a 95.2% increase from the
comparable period of fiscal 1997, partially offset by a decrease in sales of
non-licensed plush toys of $1.9 million.
GROSS PROFIT. Gross profit increased 20.8% to $12.7 million for the third
quarter of fiscal 1998 from $10.5 million in the comparable period of fiscal
1997, due to the overall increase in the Company's net sales. Gross profit as a
percentage of net sales decreased to 34.2% for the third quarter of fiscal 1998
from 37.7% in the comparable period in fiscal 1997. The decrease in gross profit
margin as a percentage of sales is principally a result of increased sales from
distributors in Europe, the Middle East and Africa which generally have lower
gross profit margins, but are offset by lower operating costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately 16.9% to $9.3 million for the
third quarter of fiscal 1998 from $8.0 million in the comparable period in
fiscal 1997. This increase is primarily attributable to the growth of the
Company's infrastructure and increased expenses related to the expansion of the
Company's facilities in the U.S., Hong Kong and Spain. As a percentage of net
sales, selling, general and administrative expenses decreased to 25.0% for the
third quarter of fiscal 1998 from 28.4% in the comparable period of fiscal 1997.
INTEREST EXPENSE. Interest expense decreased 19.1% or approximately
$193,000 to $818,000 for the third quarter of fiscal 1998 from $1.0 million in
the comparable period in fiscal 1997 primarily due to the paydown of outstanding
debt with proceeds from the follow-on public offering offset by interest expense
of $295,000 on the convertible subordinated debentures.
NINE MONTHS ENDED APRIL 30, 1998 AND 1997
NET SALES. Net sales for the nine months ended April 30, 1998 increased
40.7%, or $36.6 million, to $126.5 million from $89.9 million in the comparable
period of fiscal 1997. The increase in net sales was primarily attributable to
domestic retail growth of 67.5%, or $13.2 million, to $32.8 million and domestic
and international amusement growth of 27.4%, or $14.8 million, to $68.7 million
and 73.4%, or $6.3 million, to $15.0 million, respectively. Domestic net toy
sales for the nine months of fiscal 1998 compared to the nine months of fiscal
1997 increased 38.1%, or $28.0 million, to $101.5 million, and international net
toy sales increased 61.9%, or $8.7 million, to $22.8 million.
Net sales of licensed products for the nine months of fiscal 1998
increased 48.9%, or $24.7 million, to $75.2 million from $50.5 million in the
comparable period of fiscal 1997. The increase in licensed
9
product sales was primarily attributable to the growth of sales of the Company's
licensed products to both retail and amusement customers, and the Company's
European operations, which accounted for $15.8 million of the Company's net
sales of licensed products for the nine months of fiscal 1998, a 66.6% increase
from the comparable period of fiscal 1997. Within licensed products, sales of
Looney Tunes' characters increased 121.2%, or $32.5 million, to $59.4 million
for the nine months of fiscal 1998 from $26.8 million in the comparable period
of fiscal 1997. Net sales of TORNADO TAZ(TM) accounted for $9.5 million, or
7.5%, of the Company's net toy sales for the nine months of fiscal 1998. Net
sales of PLAY-FACES(R) decreased 50.2%, or $6.5 million, to $6.4 million, from
$12.9 million in the comparable period of fiscal 1997. Net sales of non-licensed
products for the nine months of fiscal 1998 increased 32.4%, or $12.0 million,
to $49.1 million from $37.1 million in the comparable period of fiscal 1997.
This increase is primarily attributable to sales of TALKIN' TOTS(TM) of $13.0
million, and increased sales of novelty items of $3.3 million, offset by a
decrease in sales of non-licensed stuffed toys of $4.3 million.
Net toy sales to retail customers for the nine months of fiscal 1998 and
fiscal 1997 accounted for 32.1%, or $40.6 million, and 27.8%, or $25.0 million,
respectively, of the Company's net sales. The 62.3%, or $15.6 million increase
in sales to retail customers from the nine months of fiscal 1997 to the nine
months of fiscal 1998 is primarily attributable to sales of TALKIN' TOTS(TM)and
TORNADO TAZ(TM), partially offset by a decrease in sales of PLAY-FACES(R).
Net toy sales to amusement customers for the nine months of fiscal 1998
and fiscal 1997 accounted for 66.1%, or $83.7 million, and 69.6%, or $62.6
million, respectively, of the Company's net sales. The 33.7%, or $21.1 million,
increase is primarily attributable to an increase in domestic sales of licensed
plush toys to amusement customers which accounted for $39.5 million of the
Company's net sales, a 84.7% increase from the comparable period in fiscal 1997
and the strong European market, of which amusement sales totaled $15.0 million,
a 73.4% increase from the comparable period in fiscal 1997.
GROSS PROFIT. Gross profit increased 49.9% to $44.1 million for the nine
months of fiscal 1998 from $29.4 million in the comparable period in fiscal
1997, due to the overall increase in the Company's net sales. Gross profit as a
percentage of net sales increased to 34.9% for the nine months of fiscal 1998
from 32.7% in the comparable period in fiscal 1997. This increase was
principally a result of higher overall domestic retail margins from the
television promotion of TALKIN' TOTS(TM) and TORNADO TAZ(TM).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately 46.6% to $33.3 million for the
nine months of fiscal 1998 from $22.7 million in the comparable period in fiscal
1997. This increase is primarily attributable to increased television
advertisement costs of $4.2 million, increased payroll and related costs of $2.9
million, product development costs, and the growth of the Company's
infrastructure and increased expenses related to the expansion of the Company's
facilities in the U.S., Hong Kong and Spain. As a percentage of net sales,
selling, general and administrative expenses increased to 26.3% for the nine
months of fiscal 1998 from 25.2% in the comparable period of fiscal 1997. During
the quarter ended April 30, 1998, the Company started a new division, Direct
Sales. Management believes that this start-up division will incur expenses that
will exceed revenues over the subsequent year of approximately $500,000.
INTEREST EXPENSE. Interest expense increased 5% or approximately $155,000,
to $3.3 million for the nine months of fiscal 1998 from $3.1 million in the
comparable period in fiscal 1997 primarily due to interest expense of $900,000
on the convertible subordinated debentures, offset by a decrease in interest
expense on the revolving line of credit under the Credit Facility.
INCOME TAX EXPENSE. Income tax expense for the nine months of fiscal 1998
reflects an effective tax rate of approximately 35%, compared to 37% for the
nine months of fiscal 1997. The decrease is attributable primarily to lower tax
rates on increased international earnings.
10
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1998, the Company's working capital was $74.4 million
compared to $35.4 million at July 31, 1997. This increase was primarily
attributable to the reduction in amounts borrowed under the Company's line of
credit as a result of the completion of the Company's follow-on public offering
of its common stock in December 1997 and the funds provided by the convertible
subordinated debentures.
The Company satisfies its capital requirements and seasonal liquidity
shortfalls with cash flow primarily from borrowings and secondarily from
operations. The Company's primary capital needs have consisted of funding for
inventory, customer receivables, letters of credit, licenses and international
expansion.
The Company's operating activities used net cash of $22.6 million in the
first nine months of fiscal 1998 and provided net cash of $5.6 million in the
comparable period of fiscal 1997. The cash flow from operations for the first
nine months of fiscal 1998 was primarily affected by a significant increase in
inventory due to the purchase of its amusement lines in the third quarter of
fiscal 1998 as compared to substantial purchases made subsequent to the third
quarter in the prior year.
Net cash used in investing activities during the first nine months of
fiscal 1998 was $1.7 million compared to net cash used in investing activities
for the comparable period of fiscal 1997 of $463,000. In the first nine months
of fiscal 1998, net cash used in investing activities consisted principally of
the capital expenditures for property and equipment of $1.7 million. For the
first nine months of fiscal 1997, net cash used in investing activities
consisted principally of the purchase of property and equipment of $579,000.
Net cash provided by financing activities during the first nine months of
fiscal 1998 was $21.2 million and net cash used in financing activities during
the first nine months of fiscal 1997 was $3.4 million. During the first nine
months of fiscal 1998, the Company repaid a net of $11.1 million of borrowings
on the revolving line of credit under the Company's Credit Facility. In the
first nine months of fiscal 1997, the Company borrowed a net of $300,000 under
the revolving line of credit and repaid $1.8 million of the term loan and repaid
$1.0 million of the subordinated loan from the Ace sellers.
On December 2, 1997, the Company sold 2,300,000 shares of its common stock
in a follow-on public offering at a price of $16.00 per share. The net proceeds
after deducting underwriters' discounts and other expenses were approximately
$34.2 million. In December 1997, a portion of the net proceeds was used to repay
indebtedness of approximately $21.3 million outstanding under the revolving line
of credit under the Credit Facility and approximately $12.7 million was used to
fund the Company's operations.
The Company believes that its current available cash, net cash provided by
operating activities and available borrowings under the Company's Credit
Facility will be sufficient to meet the Company's cash requirements through the
remainder of fiscal 1998. The revolving Credit Facility matures on June 20,
1998. The Company believes that it will be able to extend or refinance the
Credit Facility.
11
YEAR 2000 COMPLIANCE
The Company and its subsidiaries are taking actions to provide that their
computer systems are capable of processing for the periods in the year 2000 and
beyond. The costs associated with this are not expected to significantly affect
operating cash flow, however there is no assurance that the Company's actions in
this regard will be successful.
SEASONALITY
Both the retail and amusement toy industries are inherently seasonal.
Generally, in the past, the Company's sales to the amusement industry have been
highest during the third and fourth fiscal quarters, and collections for those
sales have been highest during the succeeding fiscal quarters. The Company's
sales to the retail toy industry have been highest during its first and fourth
fiscal quarters, and collections from those sales have been highest during the
succeeding fiscal quarters. The Company's working capital needs and borrowings
to fund those needs have been highest during the third and fourth fiscal
quarters. As a result of the Company's increased sales to the amusement industry
and increased penetration of the retail market, the Company anticipates that its
sales, collections and borrowings to fund working capital needs may become more
significant in the third and fourth fiscal quarters.
12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
3.1 Amended Articles of Incorporation of the Company (filed as Exhibit 3.1
to the Registration Statement on Form S-1 (File No. 33-92204)
incorporated herein by reference).
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to the
Registration Statement on Form S-1 (File No. 33-92204) incorporated
herein by reference).
4.1 Specimen of Common Stock Certificate (filed as Exhibit 4.1 to the
Registration Statement on Form S-1 (File No. 33-92204) incorporated
herein by reference).
4.2 Form of Warrant Agreement and Form of Warrant (filed as Exhibit 4.2 to
the Registration Statement on Form S-1 (File No. 33-92204) incorporated
herein by reference).
4.3 Form of Play By Play Toys & Novelties, Inc. Grant of Incentive Stock
Option (filed as Exhibit 4.3 to the Registration Statement on Form S-1
(File No. 33-92204) incorporated herein by reference).
4.4 Form of Play By Play Toys & Novelties, Inc. Non-qualified Stock Option
Agreement (filed as Exhibit 4.4 to the Registration Statement on Form
S-1 (File No. 33-92204), incorporated herein by reference).
4.5 Warrant to Purchase Common Stock issued by the Registrant to Ace
Novelty Co., Inc. (filed as Exhibit 4.5 to Form 8-K (Date of Event: May
1, 1996), incorporated herein by reference).
10.1 Play By Play Toys & Novelties, Inc. 1994 Incentive Plan (filed as
Exhibit 10.1 to the Registration Statement on Form S-1 (File No.
33-92204) incorporated herein by reference).
10.2 Credit Agreement dated June 20, 1996, among the Registrant, Ace Novelty
Acquisition Co., Inc., Newco Novelty, Inc. and Chemical Bank, as agent
for the lenders (filed as Exhibit 10.2 to Form 8-K (Date of Event: May
1, 1996) incorporated herein by reference).
10.3 Promissory Note dated June 20, 1996, of Ace Novelty Acquisition Co.,
Inc. payable to the order of Ace Novelty Co., Inc. in the principal sum
of $2,900,000 (filed as Exhibit 10.3 to Form 8-K (Date of Event: May 1,
1996) incorporated herein by reference).
10.4 Employment agreement dated November 4, 1996, between the Registrant and
Raymond G. Braun, as amended by Amendment No.1 to Employment agreement
dated August 29, 1997 (filed as Exhibit 10.4 to Form 10-K for the year
ended July 31, 1997, and incorporated herein by reference).
10.5 Non-Qualified Stock Option agreement dated November 4, 1996, between
the Registrant and Raymond G. Braun, as amended by Amendment No. 1
dated August 29, 1997 (filed as Exhibit 10.5 to Form 10-K for the year
ended July 31, 1997, and incorporated herein by reference).
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
10.6 Employment agreement dated May 2, 1996, between the Registrant and Saul
Gamoran, as amended by Amendment No. 1 dated May 16, 1996 (filed as
Exhibit 10.6 to Form 10-K for the year ended July 31, 1997, and
incorporated herein by reference).
10.7 Employment agreement dated June 20, 1997, between the Registrant and
James A. Weisfield (filed as Exhibit 10.7 to Form 10-K for the year
ended July 31, 1997, and incorporated herein by reference).
10.8 Subordinated Convertible Debenture Agreements dated July 3, 1997,
between the Registrant and each of Renaissance Capital Growth and
Income Fund III, Inc., Renaissance U.S. Growth and Income Trust PLC and
Banc One Capital Partners II, Ltd. (the "Convertible Lenders") (filed
as Exhibit 10.8 to Form 10-K for the year ended July 31, 1997, and
incorporated herein by reference).
10.9 Convertible Loan Agreement dated July 3, 1997, among the Registrant,
the Convertible Lenders and Renaissance Capital Group, Inc (filed as
Exhibit 10.9 to Form 10-K for the year ended July 31, 1997, and
incorporated herein by reference).
10.10 License Agreement dated March 22, 1994 by and between Warner Bros., a
division of Time Warner Entertainment, L.P., and the Registrant (as
successor by assignment to Ace Novelty, Inc.) (filed as Exhibit 10.10
to Form 10-K for the year ended July 31, 1997, and incorporated herein
by reference).
10.11 License Agreement dated March 22, 1996 by and between Warner Bros., a
division of Time Warner Entertainment, L.P., and the Registrant (as
successor by assignment to Ace Novelty, Inc.) (filed as Exhibit 10.11
to Form 10-K for the year ended July 31, 1997, and incorporated herein
by reference).
10.12 License Agreement dated September 10, 1997 by and between Warner Bros.,
a division of Time Warner Entertainment, L.P., and the Registrant
(filed as Exhibit 10.12 to Form 10-K for the year ended July 31, 1997,
and incorporated herein by reference).
10.13 License Agreement dated January 1, 1998 by and between Warner Bros., a
division of Time Warner Entertainment, L. P. and the Registrant (filed
as Exhibit 10.13 to Form 10-Q for the quarter ended January 31, 1998,
and incorporated herein by reference).
10.14 License Agreement dated January 1, 1998 by and between Warner Bros., a
division of Time Warner Entertainment, L. P. and the Registrant (filed
as Exhibit 10.14 to Form 10-Q for the quarter ended January 31, 1998,
and incorporated herein by reference).
10.15 Amendment dated January 14, 1998 to License Agreement dated September
10, 1997 by and between Warner Bros., a division of Time Warner
Entertainment, L.P. and the Registrant (filed as Exhibit 10.15 to Form
10-Q for the quarter ended January 31, 1998, and incorporated herein by
reference).
27.0 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
None
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 15th day of June 1998.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By: /s/ RAYMOND G. BRAUN
Raymond G. Braun
CHIEF FINANCIAL OFFICER