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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, 2001
[ ] 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, 2001
was 7,395,000 shares of Common Stock, no par value.
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PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of April 30, 2001
(unaudited) and July 31, 2000 3
Consolidated Statements of Operations (unaudited)
for the Three Months and Nine Months Ended
April 30, 2001 and 2000 4
Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended April 30, 2001 and 2000 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 3. Default Upon Senior Securities 28
Item 6. Exhibits and reports on Form 8-K 30
SIGNATURES 34
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,
------------- -------------
2001 2000
------------- -------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 2,710,640 $ 4,898,838
Accounts and notes receivable, less allowance for
doubtful accounts of $7,430,730 and $7,649,799 20,891,989 32,243,309
Inventories, net 43,707,158 56,223,075
Prepaid royalties 4,544,491 11,148,077
Other prepaid expenses 1,500,024 2,512,308
------------- -------------
Total current assets 73,354,302 107,025,607
Property and equipment, net 20,521,215 25,272,499
Assets Held for Sale, net 1,100,000 --
Goodwill, less accumulated amortization
of $2,090,353 and $1,700,187 15,540,313 15,930,479
Other assets 1,296,959 2,001,363
------------- -------------
Total assets $ 111,812,789 $ 150,229,948
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdraft $ 1,467,500 $ 1,036,523
Notes payable to banks 18,865,485 29,556,028
Long-term debt classified as current 1,440,589 1,840,114
Current maturities of convertible subordinated debentures 14,554,485 14,850,000
Current maturities of long-term debt 532,610 644,217
Current obligations under capital leases 605,309 1,173,571
Accounts payable, trade 25,278,272 27,612,837
Accrued royalties payable 13,975,470 15,200,973
Other accrued liabilities 3,540,768 3,402,027
Income taxes payable 1,707,143 2,906,103
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Total current liabilities 81,967,631 98,222,393
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LONG-TERM LIABILITIES:
Obligations under capital leases, net of current maturities 554,708 734,571
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Total liabilities 82,522,339 98,956,964
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Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock - no par value; 10,000,000 shares
authorized; no shares issued -- --
Common stock - no par value; 20,000,000 shares
authorized; 7,395,000 shares issued 1,000 1,000
Additional paid-in capital 71,323,487 71,486,820
Deferred compensation -- (198,333)
Accumulated other comprehensive losses (6,482,974) (4,279,982)
Accumulated deficit (35,551,063) (15,736,521)
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Total shareholders' equity 29,290,450 51,272,984
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Total liabilities and shareholders' equity $ 111,812,789 $ 150,229,948
============= =============
The accompanying 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,
---------------------------------- ----------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net sales $ 21,704,549 $ 31,258,950 $ 84,758,891 $ 107,151,325
Cost of sales 17,898,031 22,916,955 65,611,545 74,424,941
------------- ------------- ------------- -------------
GROSS PROFIT 3,806,518 8,341,995 19,147,346 32,726,384
Selling, general and administrative
expenses 8,861,247 11,708,867 33,470,105 35,021,920
------------- ------------- ------------- -------------
OPERATING LOSS (5,054,729) (3,366,872) (14,322,759) (2,295,536)
Interest expense (1,879,049) (1,467,919) (5,067,663) (4,565,011)
Interest income 7,890 26,723 114,623 65,186
Other income (116,507) 359,857 (141,927) 410,030
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAX (7,042,395) (4,448,211) (19,417,726) (6,385,331)
Income tax benefit (provision) 347,158 -- (396,816) --
------------- ------------- ------------- -------------
NET LOSS $ (6,695,237) $ (4,448,211) $ (19,814,542) $ (6,385,331)
============= ============= ============= =============
LOSS PER SHARE:
Basic $ (0.91) $ (0.60) $ (2.68) $ (0.86)
------------- ------------- ------------- -------------
Diluted $ (0.91) $ (0.60) $ (2.68) $ (0.86)
------------- ------------- ------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 7,395,000 7,395,000 7,395,000 7,395,000
------------- ------------- ------------- -------------
Diluted 7,395,000 7,395,000 7,395,000 7,395,000
------------- ------------- ------------- -------------
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,
-------------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $(19,814,542) $ (6,385,331)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 4,767,907 2,333,584
Provision for doubtful accounts receivable 571,146 740,641
Provision for inventory reserve (71,041) --
Provision for royalty license reserves 2,371,369 --
Amortization of deferred compensation 35,000 105,000
Loss on sale of property and equipment 47,297 5,316
Change in operating assets and liabilities:
Accounts and notes receivable 10,780,174 8,572,238
Inventories 12,586,958 14,644,446
Prepaids and other assets 6,823,511 (2,196,265)
Accounts payable and accrued liabilities (4,324,669) (11,856,813)
Income taxes payable (1,198,960) 3,371,635
------------ ------------
Net cash provided by operating activities 12,574,150 9,334,451
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (696,338) (2,147,093)
Proceeds from sale of property and equipment 70,957 75,046
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Net cash used in investing activities (625,381) (2,072,047)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under Revolving Credit Agreements (10,690,543) (3,974,603)
Proceeds of long-term debt -- 297,693
Repayment of long-term debt (806,647) (1,293,909)
Repayment of capital lease obligations (867,762) (1,151,425)
Increase in book overdraft 430,977 500,551
------------ ------------
Net cash used in financing activities (11,933,975) (5,621,693)
------------ ------------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATES (2,202,992) (1,301,598)
------------ ------------
Increase (decrease) in cash and cash equivalents (2,188,198) 339,113
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,898,838 2,345,634
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,710,640 $ 2,684,747
============ ============
Non-cash financing and investing-activity:
Capital leases incurred $ 119,637 $ 335,446
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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. 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 that may be expected for a full year.
The financial information included herein should be read in conjunction
with the Company's consolidated financial statements and related notes in its
Annual Report on Form 10-K for the fiscal year ended July 31, 2000, which is on
file with the United States Securities and Exchange Commission.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
The Company has adopted SFAS No. 133, as amended by SFAS No. 137, on August 1,
2000. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in an asset's, liability's,
or firm commitment's fair value, changes in the fair value of the derivative
instrument will generally be offset in the income statement by changes in the
hedged item's fair value. For cash-flow hedge transactions in which the Company
is hedging the variability of cash flows related to a variable-rate asset,
liability, or a forecasted transaction, changes in the fair value of the
derivative instrument will be reported in other comprehensive income. The gains
and losses on the derivative instrument that are reported in other comprehensive
income will be reclassified as earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item. The
ineffective portion of all hedges will be recognized in current-period earnings.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." In SAB No. 101, the SEC staff expresses its views regarding the
appropriate recognition of revenue with regard to a variety of circumstances,
some of which are of particular relevance to the Company. The Company will be
required to adopt SAB No. 101 for the quarter beginning May 1, 2001. The Company
is currently evaluating SAB No. 101, however, the Company believes that it will
not have a material impact on the financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44")
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB Opinion No. 25 ("APB No. 25") "Accounting for Stock Issued
to Employees." FIN No. 44 clarifies the application of APB No. 25 for only
certain issues. It does not address any issues related to the application of the
fair value method in SFAS No. 123 "Accounting for Stock-Based Compensation."
Among other issues, FIN No. 44 clarifies (a) the definition of employee for
purposes of applying ABP No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed
6
stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 is effective July 1,
2000, but certain conclusions in the interpretation cover specific events that
occur after either December 15, 1998, or January 12, 2000. The Company believes
that FIN No. 44 does not have a material impact on the financial statements.
3. INVENTORIES
Inventories are comprised of the following:
APRIL 30, 2001 JULY 31, 2000
---------------- ---------------
Purchased for resale $43,305,207 $55,686,257
Operating supplies 401,951 536,818
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Total $43,707,158 $56,223,075
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4. CONTINGENCIES
In December 1997, a legal action was instituted against the Company by an
individual alleging claims for unfair competition (misappropriation), breach of
contract, breach of implied in fact contract, and quasi contract in connection
with alleged infringement resulting from the sale of Tornado Taz(TM). The
plaintiff seeks to recover the Company's profits on the sale of the toy in
question which could be as much as two million dollars or more, or alternatively
the plaintiff may seek to recover royalties as a measure of damages. The Company
responded by denying the essential allegations of the complaint and by filing
counterclaims and by filing a motion for summary judgement. The plaintiff filed
motions for summary judgement for dismissal of the claims and counterclaims. On
January 21, 1999, a judge in the United States District Court Southern District
of New York granted both the defendant's and plaintiff's motions for summary
judgement dismissing the claims and counterclaims. On February 19, 1999, the
plaintiff filed a notice of appeal with respect to the court's granting the
Company's motion for summary judgement. The Company filed a similar notice on
February 25, 1999 regarding the granting of the plaintiff's motion for summary
judgement. The Court of Appeals reversed the grant of summary judgement against
the plaintiff and affirmed the grant of summary judgement against the Company,
thus dismissing all of the Company's counterclaims against the plaintiff,
thereby remanding the matter back to the United States District Court Southern
District of New York for trial. To date, no trial date has been set by the
United States District Court. In September 2000, the District Judge allowed the
Company to file another motion for summary judgement with the court requesting
dismissal of plaintiff's claims against the defendant, which has not been ruled
upon by the court.
5. SUBSEQUENT EVENT
On May 23, 2001, the Company received notification from the holders of its
Convertible Debentures of demand for immediate payment of all amounts
outstanding under its Convertible Debentures. The unpaid principal and interest
due and payable under the Debentures, which matured on December 31, 2000, totals
approximately $15.7 million. The Company currently does not have sufficient
funds to satisfy such obligations. The Company's failure to satisfy these
obligations may result in the exercise by the holders of the Debentures of their
rights and remedies under the Loan Agreement, including, but not limited to, the
contractual right to control the Company's Board and the right to convert their
debt into the Company's common stock at the average closing stock price for the
month of December 2000, which would give the holders majority ownership of the
Company's stock. However, the holders of the Debentures are precluded by an
agreement with the senior lender from taking legal action against the Company or
its assets to satisfy the debt due under the Debentures for a period of up to
180 days from the date of receipt of the notification without the consent of the
senior lender. Subsequent to May 23, 2001, the Company engaged in discussions
with the holders of the Debentures and requested that they consider the
withdrawal of the notice of demand for payment in exchange for a proposal from
the Company to either restructure and extend the final maturity of the
Debentures, or purchase the entire amount of debt outstanding
7
under the Debentures on a discounted basis. The Company and the holders of the
Debentures could not reach an agreement on this matter; however, the Company
submitted the proposals to the holders of the Debentures. To date, the Company
has not received a response from the holders of the Debentures relative to the
Company's restructuring or buyout proposals. There can be no assurance that the
Company will be able to satisfactorily restructure or extend the final maturity
of the Debentures, or that if obtained, the terms will be as favorable to the
Company as those contained in the current credit arrangements. See Footnote No.
8 Long-term Debt for additional details.
On May 1, 2001, the Company received a Nasdaq Staff Determination
indicating the Company's securities would be delisted from The Nasdaq National
Market, effective with the open of business on May 2, 2001. The Company's common
stock currently trades on the OTC Bulletin Board. The Company previously
disclosed that on March 1, 2001 it had received a Nasdaq Staff Determination
indicating the Company no longer complied with the continued listing
requirements of The Nasdaq Stock Market, and that its securities were therefore,
subject to being delisted from the Nasdaq National Market. Specifically, the
Company did not meet the continued listing requirements of NASD Marketplace Rule
4450(a)(5), as the Company's stock has failed to maintain a minimum bid price of
$1.00 per share for the required 30 consecutive days. Furthermore, the Company's
common stock failed to maintain a minimum market value of public float of $5
million for 30 consecutive days as required by NASD Marketplace Rule 4450(a)(2).
The Company exercised its right to appeal the Staff Determination and requested
a hearing before a Nasdaq Listing Qualifications Panel. The hearing occurred on
April 5, 2001, and the May 1, 2001 Nasdaq Staff Determination was the
culmination of this hearing.
The delisting of the Company's common stock from the Nasdaq National
Market may adversely affect existing shareholders' ability to sell their shares,
and the Company's ability to obtain equity financing may be reduced.
The Company learned from a press release dated June 8, 2001, that the
District Court of Lancaster County, Nebraska, had entered an Order of
Liquidation of Amwest Surety Insurance Company. The court appointed a liquidator
who was authorized to take possession and control of all assets of Amwest Surety
Insurance Company and administer them under the general supervision of the
court. The court further entered orders enjoining all persons from instituting
or continuing the prosecution of any legal action or proceeding against Amwest
Surety Insurance Company, its assets or policyholders, or any threatened or
contemplated action that might lessen the value of assets of Amwest Surety
Insurance Company or prejudice the rights of policyholders, creditors,
shareholders or the administration of any proceeding involving Amwest Surety
Insurance Company. The Company is unable to determine what impact, if any, that
this matter will have on existing surety bonds from Amwest Surety Insurance
Company securing payment of substantially all of the guaranteed minimum
royalties due under the Company's EMEA and BLT licensing agreements with Warner
Bros. Consumer Products.
6. FORWARD CONTRACTS
During the quarter ended April 30, 2001, the Company's European subsidiary
entered into two foreign exchange hedging contracts relative to certain payments
arising out of its foreign operations and denominated in a currency other than
its functional currency. The Company does not enter into these contracts for
speculative purposes. At April 30, 2001, the Company had three forward exchange
contracts outstanding, which will settle in July, August and October 2001. The
notional value of the three outstanding contracts at issuance was approximately
$2.0 million, $3.0 million and $1.5 million, respectively. At April 30, 2001,
there was an unrealized gain of $35,552, net of tax of $19,144, under the
contracts, which has been recorded in other comprehensive loss. There were no
realized hedging gains or losses from settlement of contracts in the third
quarter of fiscal 2001.
8
7. LICENSES
On November 10, 2000, the Company entered into amendments with Warner
Bros. Consumer Products ("Warner Bros.") relative to three significant
entertainment character licensing agreements originally scheduled to expire on
December 31, 2000. One of the entertainment character licensing agreements, as
amended, provides the Company with licensing rights for Looney Tunes characters
and other properties for amusement and retail distribution within Europe, Middle
East and Africa ("EMEA"), the second agreement provides the Company with
worldwide licensing rights for Baby Looney Tunes characters for mass market
retail distribution ("BLT"), and the third agreement provides the Company with
licensing rights for Looney Tunes and other properties for retail distribution
in Latin America ("LA"). The amendments extend the licensing terms of the EMEA
and BLT agreements for up to two additional years, and until September 2001 for
the LA agreement and the retail distribution portion of the EMEA agreement, and
specifically provide for the payment of the remaining balance of the guaranteed
minimum royalties due to the licensor over the extended two-year period.
The aforementioned amendments were conditioned upon the Company obtaining
renewals and extensions of the existing surety bonds from Amwest Surety
Insurance Company securing payment of substantially all of the guaranteed
minimum royalties due under the EMEA and BLT agreements over the amended
licensing agreement periods by November 22, 2000. The Company secured renewals
and extensions of the surety bonds by the specified deadline as required by the
licensor.
In connection with one of the aforementioned amendments, the Company
agreed to modify the terms of an existing warrant agreement with the licensor to
purchase up to 100,000 shares of the Company's common stock. The amendment
extended the exercise period of the warrant for two additional years and reduced
the purchase price per share from $15.4375 to $6.00, effective immediately upon
execution of the amendment, and provides for an additional adjustment to the
purchase price per share equal to the new Convertible Subordinated Debenture
conversion price effective upon the Company's extension or refinancing of its
Convertible Subordinated Debentures.
In January 2001, the Company received notices of termination on several
significant entertainment character licensing agreements from Warner Bros. due
to the non-payment of past due royalties totaling approximately $3.2 million. On
February 5, 2001, the Company secured an agreement with Warner Bros. that
preserves the Company's licensing rights under these agreements, and provides
for the rescheduling of the payment of royalty obligations on terms more
favorable to the Company over the two-year period ended December 31, 2002. The
Company has royalty commitments to Warner Bros. totaling approximately $20.7
million. Of this amount, $13.9 million represents minimum guaranteed royalties
payable on the above three agreements with Warner Bros. that are payable in
quarterly installments totaling approximately $1.5 million beginning March 1,
2001 with a final balloon payment of approximately $6.5 million due and payable
on September 30, 2002 pursuant to the recent amendments and payment extensions
secured from the licensor. The remaining royalty commitments are generally
payable to the licensor on a monthly or quarterly basis as the royalties are
earned from sales of licensed merchandise, or at specified dates in the form of
advances against minimum guaranteed royalty commitments if the sales are not
sufficient during the period to earn out the minimum guaranteed royalties.
The Company has estimated that projected future revenues over the
remaining term of the LA license agreement, as recently amended, will be
insufficient to allow the Company to earn-out the guaranteed minimum royalties
advanced or required to be paid to the licensor over the remaining term of the
agreement. Accordingly, the Company recorded a provision totaling $2.4 million
in the second quarter of fiscal 2001 for the estimated guaranteed minimum
royalty shortfall associated with this license and is reflected in cost of sales
in the accompanying consolidated statement of operations.
9
8. LONG-TERM DEBT
The Company had entered into a Convertible Loan Agreement ("Convertible
Loan Agreement") dated July 3, 1997, pursuant to which the Company issued $15
million of Convertible Subordinated Debentures ("Debentures") to Renaissance US
Growth & Income Trust PLC ($2.5 million), Renaissance Capital Growth & Income
Fund III, Inc. ($2.5 million) and Banc One Capital Partners II, LLC ($10
million). In March 1999, the Company defaulted under certain financial covenants
of the Convertible Loan Agreement, and in July 1999 the Company defaulted in the
payment of interest due on the Debentures as required by its senior lenders. On
October 22, 1999, the Company and the holders of the Debentures entered into a
First Amendment to the Convertible Loan Agreement (the "First Amendment") which
waived existing defaults under the Convertible Loan Agreement, provided consent
to the Company's new senior credit facility, and modified the financial
covenants in the Convertible Loan Agreement to conform to the financial
covenants in the new senior Credit Facility ("Credit Facility"). In addition,
the First Amendment increased the interest rate from 8.5% to 10.5% per annum,
changed the Debentures' final maturity date from June 30, 2004 to December 31,
2000, and adjusted the conversion price from $16 per share to $6 per share of
common stock, as well as, a second reset of the conversion price based on the
average closing price of the Company's stock for the month of December 2000, or
$0.54865 per share, if the Debentures were not converted or paid in full by
final maturity. In connection with the First Amendment, the Company granted the
holders of the Debentures a first lien on its 51% interest in its Los Angeles
warehouse and a second lien on substantially all its other domestic assets, with
the exception of the Company's Chicago warehouse facility. The First Amendment
also included limitations on the issuance of stock options to employees, and
entitled the holders to two advisory board positions and provided for permanent
board seats proportionate to their ownership interests on an as converted basis,
as well as limitations on the total number of board seats.
Conversion of the debt under the Debentures into shares of the Company's
common stock at the second reset price would result in the issuance to the
holders of the Debentures of approximately 26.5 million shares of the Company's
common stock and would give the Debenture holders majority ownership (78.2%) of
the Company's outstanding common stock based on the number of shares outstanding
as of June 8, 2001. In addition, if the Debenture holders exercised their right
to request board seats proportionate to their ownership based on an assumed or
actual conversion, then the Debenture holders would be entitled to up to 7 board
seats based on a maximum of 9 available board positions, which would result in a
change in majority control of the Company's board. Certain change of control
events including, but not limited to, the acquisition by a person or a group of
beneficial ownership directly or indirectly of 50% or more of the voting power
of the total outstanding voting stock of the Company, or a change in the
composition of the Company's board which would result in the failure of the
current board to maintain majority control, would result in an event of default
under the Credit Facility. Such default, would give the senior lender the right
to accelerate demand for payment of the entire amount of debt outstanding under
the Credit Facility.
Monthly principal payment requirements on the Debentures commenced on June
30, 2000, at the rate of 1% of the outstanding principal balance. In October
2000, the Company defaulted in the payment of monthly principal and interest due
under the Debentures, and defaulted in the payment of principal and interest
totaling $15.1 million at final maturity on December 31, 2000. Such default
remains uncured as of June 8, 2001, and is subject to the accrual of additional
interest, until resolved. On February 26, 2001, the Company reached an agreement
in the form of a non-binding term sheet with the holders of the Debentures to
restructure and extend the final maturity of the Debentures until December 31,
2002. To allow the parties time to secure necessary approvals and consents to
the agreement, the holders of the Debentures agreed to a series of standstill
agreements that expired on April 30, 2001. No additional extensions of the
standstill period have been secured. The agreement was subject, in part, to the
payment at closing by the Company of past due principal and interest under the
Debentures totaling approximately $1.6 million. As a result of defaults
outstanding under the Credit Facility, the Company is prohibited from making
payments of principal or interest to subordinated creditors without the consent
of its senior lender. The Company was unable to secure the senior lender's
consent to the payment of past due principal and interest on the Debentures as
called for in the agreement, and the Company was unable to complete the
agreement with the holders of the Debentures. On May 23, 2001, the Company
received notice of
10
demand for payment from the holders of the Debentures of the entire amount of
debt due under the Debentures. The Company currently does not have sufficient
funds to satisfy these obligations. The Company's failure to satisfy these
obligations may result in the exercise by the holders of the Debentures of their
rights and remedies under the Loan Agreement. However, the holders of the
Debentures are precluded by an agreement with the senior lender from taking
legal action against the Company or its assets to satisfy the debt under the
Debentures for a period of up to 180 days from the date of receipt of the
notification without the consent of the senior lender. Subsequent to May 23,
2001, the Company engaged in discussions with the holders of the Debentures and
requested that they consider the withdrawal of the notice of demand for payment
in exchange for a proposal from the Company to either restructure and extend the
final maturity of the Debentures, or purchase the entire amount of debt
outstanding under the Debentures on a discounted basis. The Company and the
holders of the Debentures could not reach an agreement on this matter; however,
the Company submitted the proposals to the holders of the Debentures. To date,
the Company has not received a response from the holders of the Debentures
relative to the Company's restructuring or buyout proposals. There can be no
assurance that the Company will be able to satisfactorily restructure or extend
the final maturity of the Debentures, or that if obtained, the terms will be as
favorable to the Company as those contained in the current credit arrangements.
As a result of the default in the payment of principal and interest on the
Debentures, the Company is also in default of certain cross-default covenants of
its Credit Facility. In addition, in the second quarter of fiscal year 2001, the
Company violated financial net worth covenants of its Credit Facility, and such
defaults remain uncured. Because of the defaults under the Credit Facility, the
senior lender currently has the right to accelerate demand for payment of the
entire amount of principal, plus accrued and unpaid interest, under the Credit
Facility. In the event the senior lender elects to accelerate demand for payment
of the amounts outstanding under the Credit Facility, the Company would not have
sufficient funds to pay amounts that would then be due and payable. As of April
30, 2001, approximately $20.6 million in borrowings were outstanding under the
Credit Facility. Accordingly, the Company has classified all debt as current
until such time as the Company restructures or refinances the Debentures and
receives appropriate waivers from the lenders. Additionally, the Company has
accrued interest on amounts outstanding under the Credit Facility and the
Debentures at the default rates stated in the respective credit agreements for
the default periods; however, neither lender has made demand for payment of
interest at the default rates. The Company is current in the payment of interest
at the non-default rates on the Credit Facility. The Company is in discussions
with the senior lender relative to restructuring the financial covenants and
obtaining additional borrowings under the Credit Facility. The senior lender has
allowed the Company to continue to borrow under the Credit Facility, under the
terms of the Credit Facility, and has not exercised any rights or remedies
available under the Credit Facility as a result of the defaults. There can be no
assurance that the Company will be able to satisfactorily restructure or extend
the final maturity of the Debentures and resolve the defaults outstanding under
the Credit Facility or, that if obtained, that the terms will be as favorable to
the Company as those contained in the current credit arrangements.
On November 10, 2000, the Credit Facility was amended to increase the
advance rate percentage applicable to inventory from 50% to 55%, and to waive
the Company's non-compliance with the net worth financial covenants under the
Credit Facility at July 31, 2000. The adjustment to the inventory advance rate
percentage increased the Company's borrowing availability relative to advances
on eligible inventory by 5% during the peak season (June 1 to November 30), or
approximately $1.0 million, based on current inventory levels. Prior to the
amendment, the inventory advance rate was 50% during the peak season and 55%
during the non-peak season (December 1 to May 31). In May 2001, the senior
lender advised the Company that a recently completed appraisal of its inventory
by a third party firm indicated that it failed to support the 55% advance rate
during the non-peak season. As a result, the inventory advance rate percentage
will be reduced from 55% to 50% during the non-peak season resulting in the loss
of approximately $1.0 million in borrowing availability, based on current
inventory levels. In addition, the Credit Facility was further amended to
increase the fees that would be payable in the event the Credit Facility is
terminated prior to maturity, and also requires the Company to reduce the senior
term loan balance by sixty percent (60%) of the net proceeds from the sale of
the Company's vending business. Approximately $1.8 million was outstanding under
the senior term loan at April 30, 2001.
11
Play By Play Europe previously had credit facilities with three separate
banks in Europe that merged into a single entity resulting in a greater
concentration of Company's credit arrangements within the surviving bank
("Bank"). To reduce the increased concentration of the Bank's credit risk, the
Bank advised the Company that it was progressively reducing its credit
commitment to the Company from 1.1 billion pesetas (approximately $6.0 million)
at March 31, 2000, to 575 million pesetas (approximately $3.2 million) by
November 30, 2000, concurrent with the maturity date of the credit arrangements
with the Bank. The Company has secured credit arrangements with the Bank that
provide for an aggregate credit commitment of 550 million pesetas (approximately
$2.9 million at April 30, 2001) that mature in November 2001. In addition, the
Company has secured credit arrangements with ten other banks that provide for
aggregate credit commitments of 2.7 billion pesetas (approximately $14.7 million
at April 30, 2001). The credit arrangements with the banks consist principally
of letter of credit, discounting and revolving loan facilities.
9. COMPREHENSIVE LOSS
The Company's comprehensive loss is comprised of net loss and foreign
currency translation adjustments. The components of comprehensive loss are as
follows:
THREE MONTHS ENDED APRIL 30, NINE MONTHS ENDED APRIL 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net loss $ (6,695,237) $ (4,448,211) $(19,814,542) $ (6,385,331)
Unrealized gain (loss) on
forward contracts (52,846) -- 17,180 --
Foreign currency
translation adjustment (3,955) (172,468) (2,202,992) (1,301,598)
------------ ------------ ------------ ------------
Comprehensive loss $ (6,752,038) $ (4,620,679) $(22,000,354) $ (7,686,929)
============ ============ ============ ============
10. LOSS PER SHARE
Basic loss per common share was computed by dividing net loss by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share differs from basic loss per share due to the assumed
exercises and conversions of dilutive options, warrants and convertible debt
that were outstanding during the period.
12
The calculations of basic and diluted loss per share for the three and
nine month periods ended April 30, 2001 and 2000 are as follows:
THREE MONTHS ENDED APRIL 30,
----------------------------------------------------------------------------------
2001 2000
--------------------------------------- ---------------------------------------
Common Per Common Per
Loss Shares Share Loss Shares Share
--------------------------------------- ---------------------------------------
BASIC EPS:
As reported $ (6,695,237) 7,395,000 $(0.91) $ (4,448,211) 7,395,000 $(0.60)
EFFECT OF DILUTIVE SECURITIES:
Options -- -- -- --
Warrants -- -- -- --
Convertible Subordinated Debentures -- -- -- --
--------------------------------------- ---------------------------------------
DILUTED EPS: $ (6,695,237) 7,395,000 $(0.91) $ (4,448,211) 7,395,000 $(0.60)
======================================= =======================================
NINE MONTHS ENDED APRIL 30,
----------------------------------------------------------------------------------
2001 2000
--------------------------------------- ---------------------------------------
Common Per Common Per
Loss Shares Share Loss Shares Share
--------------------------------------- ---------------------------------------
BASIC EPS:
As reported $(19,814,542) 7,395,000 $(2.68) $ (6,385,331) 7,395,000 $(0.86)
EFFECT OF DILUTIVE SECURITIES:
Options -- -- -- --
Warrants -- -- -- --
Convertible Subordinated Debentures -- -- -- --
--------------------------------------- ---------------------------------------
DILUTED EPS: $(19,814,542) 7,395,000 $(2.68) $ (6,385,331) 7,395,000 $(0.86)
======================================= =======================================
During the three months ended April 30, 2001 and 2000, and the nine months
ended April 30, 2001 and 2000, the Company had various amounts of common stock
options and warrants outstanding which were not included in the diluted earnings
per share calculation because the options and warrants would have been
anti-dilutive. In addition, the assumed conversion of the Debentures into the
Company's common stock at April 30, 2001 was not included in the diluted
earnings per share calculation because it would have been anti-dilutive.
11. DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information", which establishes reporting
standards for the way public companies report information about operating
business segments in annual and interim reports. While the Company is organized
and managed internally by sales and operating divisions, revenues are segmented
between amusement and retail distribution channels.
The Company evaluates performance based on several factors, of which the
primary financial measures are segment revenues and gross profit. Identifiable
assets are not broken out by business segment as both retail and amusement
business segments share common operating and administrative facilities and
assets are not identifiable to either business segment. As such, segment assets
are not relevant for management of the Company's business segments.
13
Information about revenue segments is presented below.
REVENUE SEGMENTS
AMUSEMENT RETAIL OTHER TOTAL
------------ ------------ ------------ ------------
THREE MONTHS ENDED
APRIL 30, 2001
Net sales $ 18,874,870 $ 1,642,225 $ 1,187,454 $ 21,704,549
Cost of sales 14,826,527 2,385,851 685,653 17,898,031
------------ ------------ ------------ ------------
Gross profit 4,048,343 (743,626) 501,801 3,806,518
THREE MONTHS ENDED
APRIL 30, 2000
Net sales $ 24,836,205 $ 5,183,177 $ 1,239,568 $ 31,258,950
Cost of sales 17,568,906 4,428,915 919,134 22,916,955
------------ ------------ ------------ ------------
Gross profit 7,267,299 754,262 320,434 8,341,995
NINE MONTHS ENDED
APRIL 30, 2001
Net sales $ 66,311,405 $ 14,455,689 $ 3,991,797 $ 84,758,891
Cost of sales 51,347,056 12,101,349 2,163,140 65,611,545
------------ ------------ ------------ ------------
Gross profit 14,964,349 2,354,340 1,828,657 19,147,346
NINE MONTHS ENDED
APRIL 30, 2000
Net sales $ 74,815,760 $ 28,484,810 $ 3,850,755 $107,151,325
Cost of sales 50,989,492 21,289,736 2,145,713 74,424,941
------------ ------------ ------------ ------------
Gross profit 23,826,268 7,195,074 1,705,042 32,726,384
The following are net sales by geographic areas for the three and nine months
ended April 30:
THREE MONTHS ENDED APRIL 30, NINE MONTHS ENDED APRIL 30,
----------------------------------- -----------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Domestic $ 13,311,768 $ 21,239,441 $ 51,091,926 $ 69,943,080
International 7,329,698 8,708,010 24,731,322 26,275,421
Latin America 1,063,083 1,311,499 8,935,643 10,932,824
------------ ------------ ------------ ------------
$ 21,704,549 $ 31,258,950 $ 84,758,891 $107,151,325
Indentifiable Assets:
APRIL 30, JULY 31,
2001 2000
------------ ------------
Domestic $ 62,690,257 $ 99,496,109
Foreign 49,122,532 50,733,839
------------ ------------
$111,812,789 $150,229,948
12. ASSETS HELD FOR SALE
In February 2001, the Company received a letter of intent from an
unrelated third party to purchase the Company's vending business, and
substantially all related assets, for the sale price of $1.25 million,
consisting of cash and a seller's note. The Company anticipates closing the
transaction in June 2001. The Company's vending assets represent 1.0% of the
total assets of the Company.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY, INCLUDING,
WITHOUT LIMITATION, THE COMPANY's LIQUIDITY AND CAPITAL RESOURCES, CHANGES IN
CONSUMER PREFERENCES, PRICE CHANGES BY COMPETITORS, RELATIONSHIPS WITH LICENSORS
AND CUSTOMERS, REALIZATION OF ROYALTY ADVANCES, NEW PRODUCT INTRODUCTIONS,
CAPABILITY OF MANAGING GROWTH, ABILITY TO SOURCE PRODUCTS, CONCENTRATION OF
CREDIT RISK, INTERNATIONAL TRADE RELATIONS AND MANAGEMENT OF QUARTER TO QUARTER
RESULTS, AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S SEC
REPORTS, INCLUDING THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED JULY 31, 2000 (SEE "RISK FACTORS" IN SUCH FORM 10-K). UPDATED INFORMATION
WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY THE SECURITIES
EXCHANGE ACT OF 1934.
GENERAL
The Company's principal business is to design, develop, market and
distribute stuffed toys and novelty items based on licensed entertainment
characters and trademarks. The Company also designs, develops, markets and
distributes electronic toys and non-licensed stuffed toys and novelties. While
the Company is organized and managed internally by sales and operating
divisions, revenues are segmented and reported in two reportable business
segments, amusement and retail. The Company's amusement sales operations involve
the sale of products to customers in amusement markets for use principally as
redemption prizes, and the retail sales operations involve the sale of products
to customers in retail markets for resale to their customers. The Company's toy
operations accounted for 94.5% and 95.3% of net sales for third quarter of
fiscal 2001 and fiscal 2000, respectively, and 95.3% and 96.4% of net sales for
the first nine months of fiscal 2001 and fiscal 2000, respectively.
Most of the Company's international toy sales are made in European
countries by the Company's subsidiaries Play-By-Play Europe, S.A. located in
Valencia, Spain and by Play-By-Play U.K. Ltd. located in Doncaster, England. To
date, the cost of most direct shipment sales from third-party manufacturers to
international customers has been borne by Play-By-Play Europe and have been
denominated in United States dollars. Accordingly, the Company is exposed to
foreign currency risk from the shipment date until receipt of payment.
Substantially all other sales by such subsidiaries are transacted in Spanish
pesetas or British pounds, their functional currencies, and therefore any gain
or loss on currency translation is reported as a component of Shareholders'
Equity on the Company's consolidated financial statements. In addition, the
Company faces similar risk on inventory purchases from third-party manufacturers
by the Company's European subsidiaries. These transactions are also denominated
in United States dollars so foreign currency risk exists from the time that the
subsidiaries are notified of the shipment until payment is made.
Some of the Company's license agreements require royalty payments in
Canadian dollars. Likewise, some of Play-By-Play Europe's license agreements
require payments in United States dollars. As a result, the Company experiences
currency risk to the extent that exchange rates fluctuate from the date the
royalty liability or minimum guarantee is incurred until the date the royalty is
actually paid to the licensor. Additionally, the Company is exposed to foreign
currency risk for intercompany receivable and payable transactions through the
settlement date.
Net sales in Spain and the United Kingdom reported in U.S. Dollars were
$5.1 million and $2.3 million, respectively, for the third quarter of fiscal
2001 and $16.9 million and $7.8 million, respectively, for the first nine months
of fiscal 2001. Total cost of sales in Spain and the United Kingdom reported in
U.S. Dollars were $3.0 million and $2.1 million, respectively, for the third
quarter of fiscal 2001 and $11.8 million and $6.1 million, respectively, for the
first nine months of fiscal 2001. As a result of the continued weakness of the
Spanish Peseta and British Pound versus the U.S. Dollar, European sales as
reported in U.S. Dollars were negatively impacted by the foreign exchange rates,
while European cost of sales as reported in U.S. Dollars were positively
impacted by the foreign exchange rates. European sales would have increased by
approximately $1.1 million and $3.9 million
15
for the third quarter of fiscal 2001 and the first nine months of fiscal 2001,
respectively, and European cost of sales would have increased by approximately
$754,000 and $2.7 million for the third quarter of fiscal 2001 and the first
nine months of fiscal 2001, respectively, if the exchange rates had remained
constant with the prior year's exchange rates.
The third quarter and nine months ended April 30, 2001 have proven
challenging for the Company. Liquidity issues and declining sales continued to
impact the Company. The Company's liquidity situation remains tight and
available borrowings under the Company's revolving credit facilities are
limited. The Company is aggressively reducing inventory levels to improve cash
flows and reduce the Company's warehouse capacity requirements. These inventory
reductions have impacted the Company's overall margins and results of operations
due to reduced pricing necessary to stimulate sales. The liquidity situation may
impact the Company's ability to source merchandise with certain vendors which
may restrict terms and tighten credit policies toward the Company.
On December 31, 2000, the Company defaulted in the payment of principal
and interest due at final maturity under its Convertible Debentures, and on May
23, 2001 the Company received notice of demand for payment of all amounts due
and payable under the Debentures. The Company does not have sufficient funds to
satisfy the obligations under the Debentures. During the period subsequent to
final maturity, the Company has been engaged in, and remains in, discussions
with the holders of the Debentures relative to restructuring and extending the
final maturity of the debentures, or purchase the entire amount of debt
outstanding under the Debentures on a discounted basis. To date, the Company has
been unable to secure an agreement satisfactory to the Company, the Debenture
Holders and its senior lenders. There can be no assurance that the Company will
be able to satisfactorily restructure or extend the final maturity of the
Debentures, or that if obtained, the terms will be as favorable to the Company
as those contained in the current credit arrangements.
The Company recently renegotiated more favorable payment terms of royalty
obligations payable under several licensing agreements with Warner Bros.
Consumer Products in an attempt to improve its liquidity and to cure royalty
payment defaults under these agreements. The Company is exploring other
opportunities to improve its liquidity including the sale of its vending
business, sale or sale/leaseback transactions involving the Company's owned real
estate and the sale or closure of other non-core business units.
The Company's overall sales have declined from the same period a year ago,
in both the Company's amusement and retail operations. With respect to the
Company's amusement sales operations, international amusement sales have
increased over the comparable period a year ago; however, domestic amusement
sales have declined from the prior year, resulting in an overall decline in
amusement sales on a consolidated basis. While liquidity issues have impacted
the Company's sales activities due to such things as fulfillment delays and
reduced orders from customers concerned about the Company's financial situation,
amusement industry issues such as slowing attendance at arcades and family fun
centers, a maturing crane and arcade industry, increased competition, the
absence of "hit" licensed properties in the current season and softening demand
for Looney Tunes and Pokemon merchandise have impacted the Company's amusement
sales.
The Company has experienced increased competition for entertainment
character licensing opportunities in part due to the Company's financial
situation. The Company faces significant liquidity demands to service the
guaranteed royalty commitments on three particular licensing agreements with
Warner Bros. Consumer Products over the next two calendar years. As indicated
previously, the Company has negotiated more favorable extended payment terms of
these guaranteed royalties; however, the negative impact on the Company's
liquidity is compounded by the fact that sales of merchandise under these
license agreements have not performed to levels required to enable the Company
to generate the cash flows necessary to service the guaranteed royalty
commitments.
Management's goal is to return the Company to profitability. However, the
current liquidity situation requires the Company to take actions to improve
liquidity and cash flows that will impact near term profitability. The Company
is on an aggressive cost reduction and restructuring plan which has included
significant personnel
16
cuts, facility downsizings and closures, and the elimination of non-producing or
non-core business units. During the first nine months of the current fiscal
year, the Company eliminated a significant number of positions on a worldwide
basis, closed its Miami, Florida, and Woodinville, Washington distribution
centers and consolidated its New York City office and showroom into a single
facility. In the past several months, the Company has aggressively reduced
temporary third party storage arrangements further reducing the Company's
operating costs. The Company ceased finishing production operations at its
distribution center in San Antonio, Texas, during the third quarter
concentrating these activities at distribution centers in Los Angeles,
California and Chicago, Illinois. The Company is also actively pursuing the
reduction of distribution capacity at its San Antonio, Texas and Los Angeles,
California distribution centers.
RESULTS OF OPERATIONS
The following unaudited table sets forth the Company's results of
operations and results of operations as a percentage of net sales for the
periods indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- --------------------------------------
APRIL 30, APRIL 30,
------------------------------------- --------------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- -----------------
$ % $ % $ % $ %
------ ------ ------ ------ ------ ------ ------ ------
Net sales 21.7 100.0% 31.3 100.0% 84.8 100.0% 107.2 100.0%
Cost of sales 17.9 82.5% 22.9 73.3% 65.6 77.4% 74.4 69.5%
------ ------ ------ ------ ------ ------ ------ ------
Gross profit 3.8 17.5% 8.3 26.7% 19.1 22.6% 32.7 30.5%
Selling, general and
administrative expenses 8.9 40.8% 11.7 37.5% 33.5 39.5% 35.0 32.7%
------ ------ ------ ------ ------ ------ ------ ------
Operating loss (5.1) -23.3% (3.4) -10.8% (14.3) -16.9% (2.3) -2.1%
Interest expense (1.9) -8.7% (1.5) -4.7% (5.1) -6.0% (4.6) -4.3%
Interest income 0.0 0.0% 0.0 0.1% 0.1 0.1% 0.1 0.1%
Other income (0.1) -0.5% 0.4 1.2% (0.1) -0.2% 0.4 0.4%
Income tax benefit (provision) 0.3 1.6% 0.0 0.0% (0.4) -0.5% 0.0 0.0%
------ ------ ------ ------ ------ ------ ------ ------
Net loss (6.7) -30.8% (4.4) -14.2% (19.8) -23.4% (6.4) -6.0%
====== ====== ====== ====== ====== ====== ====== ======
THREE MONTHS ENDED APRIL 30, 2001 AND 2000
AMUSEMENT RETAIL TOTAL TOY SALES
----------------------------------- ----------------------------------- ---------------------------------
APRIL 30, APRIL 30, APRIL 30,
----------------------------------- ----------------------------------- ---------------------------------
2001 2000 CHANGE % 2001 2000 CHANGE % 2001 2000 CHANGE %
----- ------ ------ ------- ------ ----- ----- ------- ------ ----- ----- ------
Net sales 18.9 24.8 (6.0) -24.0% 1.6 5.2 (3.5) -68.3% 20.5 30.0 (9.5) -31.7%
Cost of sales 13.7 17.6 (3.8) -21.8% 3.5 4.4 (1.0) -21.5% 17.2 22.0 (4.8) -21.8%
----- ------ ------ ------- ------ ----- ----- ------- ------ ----- ----- ------
Gross profit 5.1 7.3 (2.1) -29.3% (1.8) 0.8 (2.6) -343.4% 3.3 8.0 (4.7) -58.8%
===== ====== ====== ====== ===== ===== ====== ===== ======
NET SALES. Net sales for the three months ended April 30, 2001 were $21.7
million, a decrease of 30.6%, or $9.6 million, from $31.3 million in the
comparable period in fiscal 2000. The decrease in net sales was primarily
attributable to a decrease in the Company's worldwide amusement net sales of
24.0%, or $6.0 million, to $18.9 million, and a decrease in the Company's
worldwide retail net sales of 68.3%, or $3.5 million, to $1.6 million over the
comparable period in fiscal 2000. The decrease in amusement sales in the third
quarter occurred principally within the Company's domestic markets and was
concentrated within the Company's crane and arcade and parks and carnivals
customer base. Domestic amusement sales continue to be impacted by softening
demand for Looney Tunes and Pokemon merchandise, as well as, reduced pricing
related to the Company's inventory reduction efforts. The Company further
believes that the decrease in domestic amusement, and in particular, in crane
and arcade was related to a number of industry factors including increased
competition, a maturing market and slowing attendance at arcades and family fun
centers. Decreases in domestic amusement sales were partially
17
offset by increases in international amusement sales, while Latin American
amusement sales remained relatively flat. Retail sales for the third quarter
were down primarily due to a decline in sales of licensed plush at mass market
retail and licensed feature plush, which the Company believes is an industry
wide problem. Domestic net toy sales for the third quarter of fiscal 2001
compared to the third quarter of fiscal 2000 decreased 38.1%, or $7.8 million,
to $12.7 million. International net toy sales decreased 15.8%, or $1.4 million,
to $7.3 million, due in large part to continued weakness in the Spanish Peseta
and the British Pound, the functional currencies of the Company's European
subsidiaries, versus the U.S. Dollar, and Latin America net toy sales decreased
39.0%, or $314,000, to $491,000.
Net toy sales to amusement customers for the third quarter of fiscal 2001
and fiscal 2000 were $18.9 million and $24.8 million, respectively, which
accounted for 87.0% and 79.4%, respectively, of the Company's net sales. The
decrease of 24.0%, or $6.0 million, is primarily attributable to decreased sales
of licensed plush of 19.8%, or $3.8 million, to $15.2 million, from $19.0
million, decreased sales of non-licensed plush toys of 45.3%, or $1.9 million,
to $2.3 million, from $4.2 million, and decreased sales of novelty items of
18.2%, or $294,000, to $1.3 million, from the comparable period in fiscal 2000.
Net toy sales to retail customers for the third quarter of fiscal 2001 and
fiscal 2000 were $1.6 million and $5.2 million, respectively, which accounted
for 7.6% and 16.9%, respectively, of the Company's net sales. The 68.3%, or $3.5
million, decrease in net sales to retail customers from the third quarter of
fiscal 2000 to the third quarter of fiscal 2001 is attributable to a decrease in
sales of licensed electronic toys of 93.1%, or $1.8 million, to $133,000, from
$1.9 million, a decrease in sales of licensed plush of 53.3%, or $1.6 million,
to $1.4 million, from $3.1 million. Sales of non-licensed electronic toys
remained relatively flat.
Net sales of licensed products for the third quarter of fiscal 2001 were
$16.8 million, a decrease of 30.3%, or $7.3 million, from $24.2 million in the
comparable period of fiscal 2000. The decrease in licensed product sales was
primarily attributable to softening demand for Looney Tunes and Pokemon
merchandise. Net sales of licensed plush toys accounted for $16.7 million, or
81.3%, of the Company's net toy sales for the third quarter of fiscal 2001
compared to $22.1 million, or 73.6%, of the Company's net toy sales, in the
comparable period of fiscal 2000. Within licensed products, sales of Looney
Tunes and Pokemon merchandise accounted for $6.2 million and $1.6 million, or
30.3% and 7.7%, of the Company's net toy sales for the third quarter of fiscal
2001 compared to $10.6 million and $6.8 million, or 34.4% and 21.9%, in the
comparable period of fiscal 2000.
Net sales of non-licensed products for the third quarter of fiscal 2001
decreased 37.1%, or $2.2 million, to $3.7 million, from $5.9 million in the
comparable period of fiscal 2000. This decrease is primarily attributable to a
decrease in sales of non-licensed plush of $1.9 million and a decrease in sales
of non-licensed novelty items of $294,000.
GROSS PROFIT. Gross profit decreased 54.4%, or $4.5 million, to $3.8
million for the third quarter of fiscal 2001 from $8.3 million in the comparable
period of fiscal 2000. This decrease was principally due to the lower overall
sales as compared to the same period a year ago, as well as from reduced margins
on sales made within the Company's domestic and Latin American amusement
division in connection with the Company's inventory reduction and liquidity
improvement efforts and the Company's worldwide retail division, partially
offset by increased margins on the Company's international amusement sales. In
addition, in the third quarter of fiscal 2001, the Company wrote-off the balance
of a prepaid royalty totaling $523,000 related to a retail toy licensing
agreement for the "My Best Friend Doll" product line that the Company is no
longer developing or marketing, and recorded a write-down totaling $900,000
related to certain slow moving merchandise. Gross profit as a percentage of net
sales decreased to 17.5% for the third quarter of fiscal 2001 from 26.7% in the
comparable period in fiscal 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately 24.3%, or $2.8 million, to $8.9
million for the third quarter of fiscal 2001 from $11.7 million in the
comparable period in fiscal 2000. This decrease is primarily attributable to
decreased labor costs of $917,000,
18
decreased advertising expenses including trade shows of $596,000, decreased
product development costs of $331,000, decreased bad debt expense of $553,000,
and decreased occupancy costs of $259,000, offset by increased depreciation and
amortization of $230,000 related principally to the amortization of costs
related to the Company's ERP system. These cost reductions are related to the
Company's ongoing cost reduction efforts. As a percentage of net sales, selling,
general and administrative expenses increased to 40.8% for the third quarter of
fiscal 2001 from 37.5% in the comparable period in fiscal 2000.
INTEREST EXPENSE. Interest expense increased approximately $411,000 for
the third quarter of fiscal 2001 as compared to the same period a year ago. The
increase in interest expense reflects the accrual of interest at the default
rates specified in the respective credit agreements for amounts outstanding
under the Credit Facility and the Convertible Debentures totaling $590,000, and
increases in the interest rates on loan amounts outstanding under the Company's
Credit Facility, offset by decreased borrowings outstanding under the Company's
lines of credit.
OTHER INCOME AND EXPENSE. Other income and expense decreased approximately
$476,000 for the third quarter of fiscal 2001 as compared to the same period a
year ago due to fluctuations in foreign exchange rates.
INCOME TAX BENEFIT. Income tax benefit for the third quarter of fiscal
2001 reflects benefits realized by the Company's foreign subsidiaries. The
Company recorded no tax expense for the third quarter of fiscal 2000 due to the
net loss for the period and the utilization of available net operating loss
carryforwards to offset tax on taxable income in certain foreign jurisdictions.
NINE MONTHS ENDED APRIL 30, 2001 AND 2000
AMUSEMENT RETAIL TOTAL TOY SALES
------------------------------- ----------------------------------- ------------------------------------
APRIL 30, APRIL 30, APRIL 30,
------------------------------- ----------------------------------- ------------------------------------
2001 2000 CHANGE % 2001 2000 CHANGE % 2001 2000 CHANGE %
------ ------ ----- ------ ------ ----- ----- ------ ----- ------ ------ -------
Net sales 66.3 74.8 (8.5) -11.4% 14.5 28.5 (14.0) -49.3% 80.8 103.3 (22.5) -21.8%
Cost of sales 50.3 51.0 (0.7) -1.4% 13.2 21.3 (8.1) -38.0% 63.4 72.3 (8.8) -12.2%
------ ------ ----- ------ ------ ----- ----- ------ ----- ------ ------ -------
Gross profit 16.1 23.8 (7.8) -32.6% 1.3 7.2 (5.9) -82.5% 17.3 31.0 (13.7) -44.2%
====== ====== ===== ====== ===== ===== ===== ====== ======
NET SALES. Net sales for the nine months ended April 30, 2001 were $84.8
million, a decrease of 20.9%, or $22.4 million, from $107.2 million in the
comparable period in fiscal 2000. The decrease in net sales was primarily
attributable to a decrease in the Company's worldwide amusement net sales of
11.4%, or $8.5 million, to $66.3 million, and a decrease in the Company's
worldwide retail net sales of 49.3%, or $14.0 million, to $14.5 million over the
comparable period in fiscal 2000. The decrease in amusement sales in the first
nine months of fiscal 2001 occurred principally within the Company's domestic
markets and was concentrated within the Company's crane and arcade, parks and
carnivals, and premiums customer base. Domestic amusement sales continue to be
impacted by softening demand for Looney Tunes and Pokemon merchandise, as well
as, reduced pricing related to the Company's inventory reduction efforts. The
Company further believes that the decrease in domestic amusement, and in
particular, in crane and arcade was related to a number of industry factors
including increased competition, a maturing market and slowing attendance at
arcades and family fun centers. In addition, the Company's sales to fundraising
customers decreased due to product fulfillment issues caused by the Company's
liquidity situation. Decreases in domestic amusement sales were partially offset
by increases in international amusement sales, while Latin American amusement
sales decreased slightly. Retail sales for the first nine months of fiscal 2001
were down primarily due to a decline in sales of licensed plush at mass market
retail and licensed feature plush, which the Company believes is an industry
wide problem. Domestic net toy sales for the first nine months of fiscal 2001
compared to the first nine months of fiscal 2000 decreased 27.6%, or $18.7
million, to $49.1 million. International net toy sales decreased 5.9%, or $1.5
million to $24.7 million, in part due to continued weakness in the Spanish
Peseta and the British Pound, the functional currencies of the Company's
European subsidiaries, versus the U.S. Dollar, and Latin America net toy sales
decreased 24.7%, or $2.3 million, to $6.9 million.
19
Net toy sales to amusement customers for the first nine months of fiscal
2001 and fiscal 2000 were $66.3 million and $74.8 million, respectively, which
accounted for 78.2% and 69.8%, respectively, of the Company's net sales. The
decrease of 11.4%, or $8.5 million, is primarily attributable to decreased sales
of novelty items of 40.2%, or $4.5 million, to $6.7 million, from $11.2 million,
and decreased sales of licensed plush toys of 8.4%, or $3.8 million, to $41.0
million, from $44.8 million in the comparable period in fiscal 2000.
Net toy sales to retail customers for the first nine months of fiscal 2001
and fiscal 2000 were $14.5 million and $28.5 million, respectively, which
accounted for 17.1% and 26.6%, respectively, of the Company's net sales. The
49.3%, or $14.0 million, decrease in net sales to retail customers from the
first nine months of fiscal 2000 to the first nine months of fiscal 2001 is
attributable to a decrease in sales of licensed electronic toys of 79.6%, or
$6.3 million, to $1.6 million, from $7.9 million, a decrease in sales of
licensed plush of 29.9%, or $5.1 million, to $11.9 million, from $17.0 million,
a decrease in sales of non-licensed electronic toys of 69.3%, or $1.7 million,
to $759,000, from $2.5 million, and a decrease in sales of Play-FACES(R) of
86.9%, or $915,000, to $138,000, from $1.1 million.
Net sales of licensed products for the first nine months of fiscal 2001
were $54.7 million, a decrease of 22.7%, or $16.1 million, from $70.8 million in
the comparable period of fiscal 2000. The decrease in licensed product sales was
primarily attributable to softening demand for Looney Tunes merchandise. Net
sales of licensed plush toys accounted for $52.9, or 65.6%, of the Company's net
toy sales for the first nine months of fiscal 2001 compared to $61.8, or 59.8%,
of the Company's net toy sales, in the comparable period of fiscal 2000. Within
licensed products, sales of Looney Tunes and Pokemon merchandise accounted for
$21.1 million and $11.4 million, or 26.1% and 14.1%, of the Company's net toy
sales for the first nine months of fiscal 2001 compared to $37.2 million and
$6.8 million, or 35.4% and 6.5%, in the comparable period of fiscal 2000.
Net sales of non-licensed products for the first nine months of fiscal
2001 decreased 19.9%, or $6.5 million, to $26.1 million, from $32.5 million in
the comparable period of fiscal 2000. This decrease is primarily attributable to
a decrease in sales of novelty items of $4.5 million and a decrease in sales of
non-licensed electronic toys of $1.7 million.
GROSS PROFIT. Gross profit decreased 41.5%, or $13.6 million, to $19.1
million for the first nine months of fiscal 2001 from $32.7 million in the
comparable period of fiscal 2000 due to lower overall sales as compared to the
same period a year ago. Gross profit was also impacted by reduced margins on
sales made within the Company's domestic and Latin American amusement divisions
in connection with the Company's inventory reduction and liquidity improvement
efforts, and the Company's domestic and Latin American retail divisions,
partially offset by increased margins on the Company's international amusement
and retail sales. In addition, the Company recorded a charge of $2.4 million in
the second quarter relative to a recently amended licensing agreement with
Warner Bros. that the Company anticipates it will be unable to earn out over the
remaining term of the agreement, and in the third quarter of fiscal 2001, the
Company wrote-off the balance of a prepaid royalty totaling $523,000 related to
a retail toy licensing agreement for the "My Best Friend Doll" product line that
the Company is no longer developing or marketing, and recorded a write-down
totaling $900,000 related to certain slow moving merchandise. Gross profit as a
percentage of net sales decreased to 22.6% for the first nine months of fiscal
2001 from 30.5% in the comparable period in fiscal 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately 4.4%, or $1.6 million, to $33.5
million for the first nine months of fiscal 2001 from $35.0 million in the
comparable period in fiscal 2000. A $1.7 million charge was recorded in the
second quarter of fiscal 2001 to write-down vending business assets that are
held for sale to net realizable value. Excluding this charge, selling, general
and administrative expenses decreased approximately 9.4%, or $3.3 million, to
$31.7 million for the first nine months of fiscal 2001. This decrease is
primarily attributable to decreased advertising expenses including trade shows
of $2.7 million, decreased labor costs of $410,000, and decreased occupancy
costs of $310,000, offset by losses totaling $450,000 related to the settlement
of certain litigation pending against the Company and non-
20
insured product damage losses, increased legal and professional fees of $613,000
related principally to litigation and other legal matters, and increased
depreciation and amortization of $734,000 related principally to the
amortization of costs related to the Company's ERP system. The decrease in
selling, general and administrative expenses is the result of the Company's
ongoing cost reduction efforts, including reduced operating costs related to the
Company's direct marketing business which was discontinued in July 2000.
Selling, general and administrative expenses as a percentage of net sales
increased to 37.4% for the first nine months of fiscal 2001 from 32.7% in the
comparable period in fiscal 2000.
INTEREST EXPENSE. Interest expense increased $502,000, to $5.1 million,
for the first nine months of fiscal 2001 from $4.6 million in the comparable
period of fiscal 2000. The increase in interest expense reflects the accrual of
interest at the default rates specified in the respective credit agreements for
amounts outstanding under the Credit Facility and the Convertible Debentures
totaling $590,000, and increases in the interest rates on loan amounts
outstanding under the Company's Credit Facility, offset by decreased borrowings
outstanding under the Company's lines of credit.
OTHER INCOME AND EXPENSE. Other income and expense decreased approximately
$552,000 for the first nine months of fiscal 2001 as compared to the same period
a year ago due to fluctuations in foreign exchange rates.
INCOME TAX PROVISION. Income tax expense for the first nine months of
fiscal 2001 reflects income taxes on the taxable income of certain of the
Company's foreign subsidiaries. The Company recorded no tax expense for the
first nine months of fiscal 2000 due to the net loss for the period and the
utilization of available net operating loss carryforwards to offset tax on
taxable income in certain foreign jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2001, the Company had a working capital deficit of $8.6
million compared to working capital of $8.8 million at July 31, 2000. Generally,
the Company satisfies its capital requirements and seasonal working capital
needs with cash flows primarily from borrowings and operations. The Company's
primary capital needs have consisted of repayment of indebtedness, funding for
inventory, property, plant and equipment, customer receivables, letters of
credit, licensing agreements, international expansion and business acquisitions.
The Company's operating activities provided net cash of $12.6 million and
$9.3 million in the first nine months of fiscal 2001 and 2000, respectively. The
cash flow from operations in the first nine months of fiscal 2001 was primarily
affected by decreases in inventory, accounts receivable and prepaids, and
increases in accounts payable and accrued liabilities.
Net cash used in investing activities during the first nine months of
fiscal 2001 and 2000 was $625,000 and $2.1 million, respectively. For the first
nine months of fiscal 2001, net cash used in investing activities consisted of
$696,000 of expenditures for property and equipment. In the first nine months of
fiscal 2000, net cash used in investing activities consisted principally of the
purchase of property and equipment of $2.1 million, including $1.2 million for
costs related to implementation of the Company's enterprise resource planning
system and $293,000 for vending equipment.
Financing activities used net cash of $11.9 million and $5.6 million
during the first nine months of fiscal 2001 and fiscal 2000, respectively.
During the first nine months of fiscal 2001, the Company received aggregate
advances of $57.2 million under, and made repayments of $67.9 million on, its
Credit Facility, and reduced the principal on its term loans by $310,000. During
the first nine months of fiscal 2000, the Company received aggregate advances of
$59.0 million under, and made repayments of $62.9 million on, its credit
facilities, and reduced the principal on its term loans by $1.3 million.
21
The Company has borrowed substantially all of its availability under its
Credit Facility. Thus, any future losses or other capital needs could require
the Company to seek additional financing from public or private issuance of debt
and/or equity or from asset sales. The Company may not be able to complete any
such financing or asset sales or, if so, on terms favorable to the Company. Any
equity financing could result in dilution to existing shareholders.
The Company is in discussions with its senior lender relative to
restructuring the Credit Facility to provide increased borrowing availability.
The Company's cash flows are highly dependent on future sales and collections of
receivables generated from sales and borrowings under the Company's senior
Credit Facility and other revolving credit facilities. If the Company is unable
to restructure and extend the Debentures and resolve defaults outstanding under
the Credit Facility, the senior lender could exercise rights and remedies under
the Loan Agreement. As such, the Company's liquidity is dependent on the senior
lender's willingness to continue to provide advances to the Company under the
Credit Facility. In the absence of this willingness by the senior lender, the
Company would not have sufficient liquidity to meet its obligations and would be
required to seek protection from its creditors. As indicated, the Company is
also attempting to address its liquidity deficiencies by attempting to
restructure its Debentures, renegotiating commitments under licensing
agreements, cost cutting and restructuring changes aimed at improving
profitability and cash flows, and the sale of certain assets and business units.
There can be no assurance that the Company will be able to satisfactorily
restructure its Credit Facility to provide additional financing to the Company.
The Company had entered into a Convertible Loan Agreement ("Convertible
Loan Agreement") dated July 3, 1997, pursuant to which the Company issued the
Debentures to Renaissance US Growth & Income Trust PLC ($2.5 million),
Renaissance Capital Growth & Income Fund III, Inc. ($2.5 million) and Banc One
Capital Partners II, LLC ($10 million). In March 1999, the Company defaulted
under certain financial covenants of the Convertible Loan Agreement, and in July
1999 the Company defaulted in the payment of interest due on the Debentures as
required by its senior lenders. On October 22, 1999, the Company and the holders
of the Debentures entered into a First Amendment to the Convertible Loan
Agreement (the "First Amendment") which waived existing defaults under the
Convertible Loan Agreement, provided consent to the Company's new senior credit
facility, and modified the financial covenants in the Convertible Loan Agreement
to conform to the financial covenants in the new senior credit facility. In
addition, the First Amendment increased the interest rate from 8.5% to 10.5% per
annum, changed the Debentures' final maturity date from June 30, 2004 to
December 31, 2000, and adjusted the conversion price from $16 per share to $6
per share of common stock, as well as, a second reset of the conversion price
based on the average closing price of the Company's stock for the month of
December 2000, or $0.54865 per share, if the Debentures were not converted or
paid in full by final maturity. In connection with the First Amendment, the
Company granted the holders of the Debentures a first lien on its 51% interest
in its Los Angeles warehouse and a second lien on substantially all its other
domestic assets, with the exception of the Company's Chicago warehouse facility.
The First Amendment also included limitations on the issuance of stock options
to employees, and entitled the holders to two advisory board positions and
provided for permanent board seats proportionate to their ownership interests on
an as converted basis, as well as limitations on the total number of board
seats.
Conversion of the debt under the Debentures into shares of the Company's
common stock at the second reset price would result in the issuance to the
holders of the Debentures of approximately 26.5 million shares of the Company's
common stock and would give the Debenture holders majority ownership (78.2%) of
the Company's outstanding common stock based on the number of shares outstanding
as of June 8, 2001. In addition, if the Debenture holders exercised their right
to request board seats proportionate to their ownership based on an assumed or
actual conversion, then the Debenture holders would be entitled to up to 7 board
seats based on a maximum of 9 available board positions, which would result in a
change in majority control of the Company's board. Certain change of control
events including, but not limited to, the acquisition by a person or a group of
beneficial ownership directly or indirectly of 50% or more of the voting power
of the total outstanding voting stock of the Company, or a change in the
composition of the Company's board which would result in the failure of the
current board to maintain majority control, would result in an event of default
under the Company's Credit
22
Facility. Such default, would give the senior lender the right to accelerate
demand for payment of the entire amount of debt outstanding under the Credit
Facility.
Monthly principal payment requirements on the Debentures commenced on June
30, 2000, at the rate of 1% of the outstanding principal balance. In October
2000, the Company defaulted in the payment of monthly principal and interest due
under the Debentures, and defaulted in the payment of principal and interest
totaling $15.1 million at final maturity on December 31, 2000. Such default
remains uncured as of June 8, 2001, and is subject to the accrual of additional
interest, until resolved. On February 26, 2001, the Company reached an agreement
in the form of a non-binding term sheet with the holders of the Debentures to
restructure and extend the final maturity of the Debentures until December 31,
2002. To allow the parties time to secure necessary approvals and consents to
the agreement, the holders of the Debentures agreed to a series of standstill
agreements that expired on April 30, 2001. No additional extensions of the
standstill period have been secured. The agreement was subject, in part, to the
payment at closing by the Company of past due principal and interest under the
Debentures totaling approximately $1.6 million. As a result of defaults
outstanding under the Credit Facility, the Company is prohibited from making
payments of principal or interest to subordinated creditors without the consent
of its senior lender. The Company was unable to secure the senior lender's
consent to the payment of past due principal and interest on the Debentures as
called for in the agreement, and the Company was unable to complete the
agreement with the holders of the Debentures. On May 23, 2001, the Company
received notice of demand for payment from the holders of the Debentures of the
entire amount of debt due under the Debentures. The Company currently does not
have sufficient funds to satisfy these obligations. The Company's failure to
satisfy these obligations may result in the exercise by the holders of the
Debentures of their rights and remedies under the Loan Agreement. However, the
holders of the Debentures are precluded by an agreement with the senior lender
from taking legal action against the Company or its assets to satisfy the debt
under the Debentures for a period of up to 180 days from the date of receipt of
the notification without the consent of the senior lender. Subsequent to May 23,
2001, the Company engaged in discussions with the holders of the Debentures and
requested that they consider the withdrawal of the notice of demand for payment
in exchange for a proposal from the Company to either restructure and extend the
final maturity of the Debentures, or purchase the entire amount of debt
outstanding under the Debentures on a discounted basis. The Company and the
holders of the Debentures could not reach an agreement on this matter; however,
the Company submitted the proposals to the holders of the Debentures. To date,
the Company has not received a response from the holders of the Debentures
relative to the Company's restructuring or buyout proposals. There can be no
assurance that the Company will be able to satisfactorily restructure or extend
the final maturity of the Debentures, or that if obtained, the terms will be as
favorable to the Company as those contained in the current credit arrangements.
As a result of the default in the payment of principal and interest on the
Debentures, the Company is also in default of certain cross-default covenants of
its Credit Facility. In addition, in the second quarter of fiscal year 2001, the
Company violated financial net worth covenants of its Credit Facility, and such
defaults remain uncured. Because of the defaults under the Credit Facility, the
senior lender currently has the right to accelerate demand for payment of the
entire amount of principal, plus accrued and unpaid interest, under the Credit
Facility. In the event the senior lender elects to accelerate demand for payment
of the amounts outstanding under the Credit Facility, the Company would not have
sufficient funds to pay amounts that would then be due and payable. As of April
30, 2001, approximately $20.6 million in borrowings were outstanding under the
Credit Facility. Accordingly, the Company has classified all debt as current
until such time as the Company restructures or refinances the Debentures and
receives appropriate waivers from the lenders. Additionally, the Company has
accrued interest on amounts outstanding under the Credit Facility and the
Debentures at the default rates stated in the respective credit agreements for
the default periods; however, neither lender has made demand for payment of
interest at the default rates. The Company is current in the payment of interest
at the non-default rates on the Credit Facility. The Company is in discussions
with the senior lender relative to restructuring the financial covenants and
obtaining additional borrowings under the Credit Facility. The senior lender has
allowed the Company to continue to borrow under the Credit Facility, under the
terms of the Credit Facility, and has not exercised any rights or remedies
available under the Credit Facility as a result of the defaults. There can be no
assurance that the Company will be able to satisfactorily restructure or extend
the final maturity of the Debentures and resolve the
23
defaults outstanding under the Credit Facility or, that if obtained, that the
terms will be as favorable to the Company as those contained in the current
credit arrangements.
On November 10, 2000, the Credit Facility was amended to increase the
advance rate percentage applicable to inventory from 50% to 55%, and to waive
the Company's non-compliance with the net worth financial covenants under the
Credit Facility at July 31, 2000. The adjustment to the inventory advance rate
percentage increased the Company's borrowing availability relative to advances
on eligible inventory by 5% during the peak season (June 1 to November 30), or
approximately $1.0 million, based on current inventory levels. Prior to the
amendment, the inventory advance rate was 50% during the peak season and 55%
during the non-peak season (December 1 to May 31). In May 2001, the senior
lender advised the Company that a recently completed appraisal of its inventory
by a third party firm indicated that it failed to support the 55% advance rate
during the non-peak season. As a result, the inventory advance rate percentage
will be reduced from 55% to 50% during the non-peak season resulting in the loss
of approximately $1.0 million in borrowing availability, based on current
inventory levels. In addition, the Credit Facility was further amended to
increase the fees that would be payable in the event the Credit Facility is
terminated prior to maturity, and also requires the Company to reduce the senior
term loan balance by sixty percent (60%) of the net proceeds from the sale of
the Company's vending business. Approximately $1.8 million was outstanding under
the senior term loan at April 30, 2001.
Play By Play Europe previously had credit facilities with three separate
banks in Europe that merged into a single entity resulting in a greater
concentration of Company's credit arrangements within the surviving bank
("Bank"). To reduce the increased concentration of the Bank's credit risk, the
Bank advised the Company that it was progressively reducing its credit
commitment to the Company from 1.1 billion pesetas (approximately $6.0 million)
at March 31, 2000, to 575 million pesetas (approximately $3.2 million) by
November 30, 2000, concurrent with the maturity date of the credit arrangements
with the Bank. The Company has secured credit arrangements with the Bank that
provide for an aggregate credit commitment of 550 million pesetas (approximately
$2.9 million at April 30, 2001) that mature in November 2001. In addition, the
Company has secured credit arrangements with ten other banks that provide for
aggregate credit commitments of 2.7 billion pesetas (approximately $14.7 million
at April 30, 2001). The credit arrangements with the banks consist principally
of letter of credit, discounting and revolving loan facilities.
In February 2001, the Company received a letter of intent from an
unrelated third party to purchase the Company's vending business, and
substantially all related assets, for the sale price of $1.25 million,
consisting of cash and a seller's note. The Company anticipates closing the
transaction in June 2001. The Company's vending assets represent 1.0% of the
total assets of the Company. The sale of Val Verde Vending is consistent with
the Company's previously announced strategy of concentrating on core businesses.
On November 10, 2000, the Company entered into amendments with Warner
Bros. Consumer Products ("Warner Bros.") relative to three significant
entertainment character licensing agreements originally scheduled to expire on
December 31, 2000. One of the entertainment character licensing agreements, as
amended, provides the Company with licensing rights for Looney Tunes characters
and other properties for amusement and retail distribution within Europe, Middle
East and Africa ("EMEA"), the second agreement provides the Company with -
worldwide licensing rights for Baby Looney Tunes characters for mass market
retail distribution ("BLT"), and the third agreement provides the Company with
licensing rights for Looney Tunes and other properties for retail distribution
in Latin America ("LA"). The amendments extend the licensing terms of the EMEA
and BLT agreements for up to two additional years, and until September 2001 for
the LA agreement and the retail distribution portion of the EMEA agreement, and
specifically provide for the payment of the remaining balance of the guaranteed
minimum royalties due to the licensor over the extended two-year period.
The aforementioned amendments were conditioned upon the Company obtaining
renewals and extensions of the existing surety bonds from Amwest Surety
Insurance Company securing payment of substantially all of the guaranteed
minimum royalties due under the EMEA and BLT agreements over the amended
licensing agreement
24
periods by November 22, 2000. The Company secured renewals and extensions of the
surety bonds by the specified deadline as required by the licensor.
In January 2001, the Company received notices of termination on several
significant entertainment character licensing agreements from Warner Bros. due
to the non-payment of past due royalties totaling approximately $3.2 million. On
February 5, 2001, the Company secured an agreement with Warner Bros. that
preserves the Company's licensing rights under these agreements, and provides
for the rescheduling of the payment of royalty obligations on terms more
favorable to the Company over the two-year period ended December 31, 2002. The
Company has royalty commitments to Warner Bros. totaling approximately $20.7
million. Of this amount, $13.9 million represents minimum guaranteed royalties
payable on the above three agreements with Warner Bros. that are payable in
quarterly installments totaling approximately $1.5 million beginning March 1,
2001 with a final balloon payment of approximately $6.5 million due and payable
on September 30, 2002 pursuant to the recent amendments and payment extensions
secured from the licensor. The remaining royalty commitments are generally
payable to the licensor on a monthly or quarterly basis as the royalties are
earned from sales of licensed merchandise, or at specified dates in the form of
advances against minimum guaranteed royalty commitments if the sales are not
sufficient during the period to earn out the minimum guaranteed royalties.
The Company has estimated that projected future revenues over the
remaining term of the LA license agreement as recently amended will be
insufficient to allow the Company to earn-out the guaranteed minimum royalties
advanced or required to be paid to the licensor over the remaining term of the
agreement. Accordingly, the Company recorded a provision totaling $2.4 million
in the second quarter of fiscal 2001 for the estimated guaranteed minimum
royalty shortfall associated with this license and is reflected in cost of sales
in the accompanying consolidated statement of operations.
In addition to the above commitments, the Company's term loans with its
senior lender call for monthly payments of principal and interest totaling
approximately $52,000 until final maturity of the first term note on October 31,
2004, and thereafter, monthly payments of principal and interest totaling
approximately $17,000 until final maturity of the second term note on October
31, 2006. The Company has various notes payable which call for future minimum
payments of principal and interest totaling $160,000 through fiscal year 2002,
and the Company's capital lease obligations call for future minimum payments of
principal and interest totaling approximately $909,000 on capital leases that
expire at various dates through 2005.
EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Union introduced the euro, which became the common currency among the
participating member countries by converting to the euro at the exchange rates
in effect on the introduction date. One of the participating members is Spain,
which is the country in which Play-By-Play Toys & Novelties, Europa, S.A.
("Play-By-Play Europe") is located. Play-By-Play Europe intends to keep its
books in Spain's sovereign currency, the peseta, through the substantial portion
of the three-year introductory period, at the end of which all companies in
participating member countries must adopt the euro. Play-By-Play Europe's
accounting system is currently capable of performing the euro conversion, and
the Company does not anticipate that the costs related to the conversion will be
significant. In addition, because Play-By-Play Europe operates primarily in
Spain and in non-European Union countries, currently management does not
anticipate that the introduction of the euro will have a material adverse effect
on Play-By-Play Europe's results of operations, financial position, or cash
flows for the forseeable future.
SEASONALITY
Both the retail and amusement toy industries are inherently seasonal.
Generally, in the past, the Company's sales to the amusement industry have been
highest during the third and fourth fiscal quarters, and collections for those
sales have been highest during the succeeding two fiscal quarters. The Company's
sales to
25
the retail toy industry have been highest during the first and fourth fiscal
quarters, and collections from those sales have been highest during the
succeeding two fiscal quarters. The Company's working capital needs and
borrowings to fund those needs have been highest during the third and fourth
fiscal quarters. As a result of the Company's increased sales to amusement
customers and to retail customers, the Company anticipates that its borrowings
to fund working capital needs may become more significant in the third and
fourth fiscal quarters.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the consolidated financial statements included elsewhere
herein for a discussion of new pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the areas of changes in United States and
international borrowing rates (i.e. prime rate, LIBOR or other Eurodollar
rates), and changes in foreign currency exchange rates as measured against the
United States ("U.S.") dollar and functional currencies of its subsidiaries
(i.e. British pound, Spanish peseta, Hong Kong dollar, Canadian dollar). In
addition, the Company is exposed to market risk in certain geographic areas that
have experienced or are likely to experience an economic downturn, such as China
and Latin America. The Company purchases substantially all of its inventory from
suppliers in China, therefore, the Company is subject to the risk that such
suppliers will be unable to provide inventory at competitive prices. The Company
believes that if such an event were to occur, it would be able to find alternate
sources of inventory at competitive prices, however, there can be no assurance
that the Company would be successful.
INTEREST RATE RISK
The interest payable on the Company's revolving line-of-credit and term
loans under the Credit Facility is variable based on its Lender's prime rate,
and therefore, affected by changes in market interest rates. At April 30, 2001,
approximately $20.6 million in borrowings was outstanding under the Credit
Facility with a weighted average interest rate of 9.0%.
FOREIGN CURRENCY RISK
The Company has wholly-owned subsidiaries in Valencia, Spain and
Doncaster, England. Sales from these operations are typically denominated in
Spanish Pesetas or British Pounds, respectively, thereby creating exposures to
changes in exchange rates. Changes in the Spanish Peseta/U.S. Dollars exchange
rate and British Pounds/U.S. Dollars exchange rate may positively or negatively
affect the Company's sales, gross margins, net income and retained earnings.
Purchases of inventory by the Company's European subsidiaries from its suppliers
in the Far East are subject to currency risk to the extent that there are
fluctuations in the exchange rate between the United States Dollar and the
Spanish Peseta or the British Pound. Certain of the European subsidiaries'
license agreements call for payment of royalties in a currency different from
their functional currency, and these arrangements subject the Company to
currency risk to the extent that exchange rates fluctuate from the date that
royalty liabilities are incurred until the date royalties are actually paid to
the licensor.
Net sales in Spain and the United Kingdom reported in U.S. Dollars were
$5.1 million and $2.3 million, respectively, for the third quarter of fiscal
2001 and $16.9 million and $7.8 million, respectively, for the first nine months
of fiscal 2001. Total cost of sales in Spain and the United Kingdom reported in
U.S. Dollars were $3.0 million and $2.1 million, respectively, for the third
quarter of fiscal 2001 and $11.8 million and $6.1 million, respectively, for the
first nine months of fiscal 2001. As a result of the continued weakness of the
Spanish Peseta and British Pound versus the U.S. Dollar, European sales as
reported in U.S. Dollars were negatively impacted by
26
the foreign exchange rates, while European cost of sales as reported in U.S.
Dollars were positively impacted by the foreign exchange rates. European sales
would have increased by approximately $1.1 million and $3.9 million for the
third quarter of fiscal 2001 and the first nine months of fiscal 2001,
respectively, and European cost of sales would have increased by approximately
$754,000 and $2.7 million for the third quarter of fiscal 2001 and the first
nine months of fiscal 2001, respectively, if the exchange rates had remained
constant with the prior year's exchange rates.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1997, a legal action was instituted against the Company by an
individual alleging claims for unfair competition (misappropriation), breach of
contract, breach of implied in fact contract, and quasi contract in connection
with alleged infringement resulting from the sale of Tornado Taz(TM). The
plaintiff seeks to recover the Company's profits on the sale of the toy in
question which could be as much as two million dollars or more, or alternatively
the plaintiff may seek to recover royalties as a measure of damages. The Company
responded by denying the essential allegations of the complaint and by filing
counterclaims and by filing a motion for summary judgement. The plaintiff filed
motions for summary judgement for dismissal of the claims and counterclaims. On
January 21, 1999, a judge in the United States District Court Southern District
of New York granted both the defendant's and plaintiff's motions for summary
judgement dismissing the claims and counterclaims. On February 19, 1999, the
plaintiff filed a notice of appeal with respect to the court's granting the
Company's motion for summary judgement. The Company filed a similar notice on
February 25, 1999 regarding the granting of the plaintiff's motion for summary
judgement. The Court of Appeals reversed the grant of summary judgement against
the plaintiff and affirmed the grant of summary judgement against the Company,
thus dismissing all of the Company's counterclaims against the plaintiff,
thereby remanding the matter back to the United States District Court Southern
District of New York for trial. To date, no trial date has been set by the
United States District Court. In September 2000, the District Judge allowed the
Company to file another motion for summary judgement with the court requesting
dismissal of plaintiff's claims against the defendant, which has not been ruled
upon by the court.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
The Company defaulted in the payment of monthly principal and interest due
under the Convertible Debentures beginning in October 2000, and defaulted in the
payment of principal and interest totaling $15.1 million at final maturity on
December 31, 2000, and such defaults remain uncured subject to the accrual of
additional interest, until resolved. On May 23, 2001, the Company received
notice of demand for payment from the holders of the Debentures of the entire
amount of debt due under the Debentures. The Company currently does not have
sufficient funds to satisfy these obligations. The Company's failure to satisfy
these obligations may result in the exercise by the holders of the Debentures of
their rights and remedies under the Loan Agreement. However, the holders of the
Debentures are precluded by an agreement with the senior lender from taking
legal action against the Company or its assets to satisfy the debt under the
Debentures for a period of up to 180 days from the date of receipt of the
notification without the consent of the senior lender. Subsequent to May 23,
2001, the Company engaged in discussions with the holders of the Debentures and
requested that they consider the withdrawal of the notice of demand for payment
in exchange for a proposal from the Company to either restructure and extend the
final maturity of the Debentures, or purchase the entire amount of debt
outstanding under the Debentures on a discounted basis. The Company and the
holders of the Debentures could not reach an agreement on this matter; however,
the Company submitted the proposals to the holders of the Debentures. To date,
the Company has not received a response from the holders of the Debentures
relative to the Company's restructuring or buyout proposals. There can be no
assurance that the Company will be able to satisfactorily restructure or extend
the final maturity of the Debentures, or that if obtained, the terms will be as
favorable to the Company as those contained in the current credit arrangements.
As a result of the default in the payment of principal and interest on the
Debentures, the Company is also in default of certain cross-default covenants of
its Credit Facility. In addition, in the second quarter of fiscal year 2001, the
Company violated financial net worth covenants of its Credit Facility, and such
defaults remain uncured. Because of the defaults under the Credit Facility, the
senior lender currently has the right to accelerate demand for payment of the
entire amount of principal, plus accrued and unpaid interest, under the Credit
Facility. In the event the senior lender elects to accelerate demand for payment
of the amounts outstanding under the Credit Facility, the Company would not have
sufficient funds to pay amounts that would then be due and payable. As of April
30,
28
2001, approximately $20.6 million in borrowings were outstanding under the
Credit Facility. Accordingly, the Company has classified all debt as current
until such time as the Company restructures or refinances the Debentures and
receives appropriate waivers from the lenders. Additionally, the Company has
accrued interest on amounts outstanding under the Credit Facility and the
Debentures at the default rates stated in the respective credit agreements for
the default periods; however, neither lender has made demand for payment of
interest at the default rates. The Company is current in the payment of interest
at the non-default rates on the Credit Facility. The Company is in discussions
with the senior lender relative to restructuring the financial covenants and
obtaining additional borrowings under the Credit Facility. The senior lender has
allowed the Company to continue to borrow under the Credit Facility, under the
terms of the Credit Facility, and has not exercised any rights or remedies
available under the Credit Facility as a result of the defaults. There can be no
assurance that the Company will be able to satisfactorily restructure or extend
the final maturity of the Debentures and resolve the defaults outstanding under
the Credit Facility or, that if obtained, that the terms will be as favorable to
the Company as those contained in the current credit arrangements.
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
----------- -----------------------------------------------------------------
2.1 Asset Purchase Agreement dated May 1, 1996, by and among Ace
Novelty Acquisition Co., Inc. a Texas corporation ("Buyer"), Play
By Play Toys & Novelties, Inc., a Texas corporation and the
parent corporation of Buyer ("PBYP"), Ace Novelty Co., Inc., a
Washington corporation ("ACE"), Specialty Manufacturing Ltd., a
British Columbia, Canada corporation ("Specialty"), ACME
Acquisition Corp., a Washington corporation ("ACME"), and
Benjamin H. Mayers and Lois E. Mayers, husband and wife, Ronald
S. Mayers, a married individual, Karen Gamoran, a married
individual, and Beth Weisfield, a married individual
(collectively, "Stockholders") (filed as Exhibit 2.1 to Form 8-K,
Date of Event: May 1, 1996), incorporated herein by reference.
2.2 Amendment No. 1 to Asset Purchase Agreement dated June 20, 1996
by, and among Buyer, PBYP, ACE, Specialty, ACME and Stockholders.
(filed as Exhibit 2.2 to Form 8-K, Date of Event: May 1, 1996),
incorporated herein by reference.
3.1 Amended Articles of Incorporation of the Company (filed as
Exhibit 3.1 to the Registration Statement on Form S-1, File No.
33-92204) incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2
to the Registration Statement on Form S-1, File No. 33-92204),
incorporated herein by reference.
4.1 Specimen of Common Stock Certificate (filed as Exhibit 4.1 to the
Registration Statement on Form S-1, File No. 33-92204)
incorporated herein by reference.
4.2 Form of Warrant Agreement and Form of Warrant (filed as Exhibit
4.2 to the Registration Statement on Form S-1, File No.
33-92204), incorporated herein by reference.
4.3 Form of Play By Play Toys & Novelties, Inc. Grant of Incentive
Stock Option (filed as Exhibit 4.3 to the Registration Statement
on Form S-1, File No. 33-92204) incorporated herein by reference.
4.4 Form of Play By Play Toys & Novelties, Inc. Non-qualified Stock
Option Agreement (filed as Exhibit 4.4 to the Registration
Statement on Form S-1, File No. 33-92204) incorporated herein by
reference.
4.5 Play By Play Toys & Novelties, Inc. Warrant to Purchase Common
Stock (filed as Exhibit 4 to Form 8-K, Date of Event: May 1,
1996), incorporated herein by reference.
10.1 Play By Play Toys & Novelties, Inc. 1994 Incentive Plan (filed as
Exhibit 10.1 to the Registration Statement on Form S-1, File No.
33-92204), incorporated herein by reference.
10.2 Credit Agreement dated June 20, 1996, by and among Play By Play
Toys & Novelties, Inc., Ace Novelty Acquisition Co., Inc., Newco
Novelty, Inc. and Chemical Bank, a New York banking corporation
as agent for the lenders (filed as Exhibit 10.1 to Form 8-K, Date
of Event: May 1, 1996), incorporated herein by reference.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
--------- -----------------------------------------------------------------
10.3 Promissory Note dated June 20, 1996, of Ace Novelty Acquisition
Co., Inc. payable to the order of Ace Novelty Co., Inc. in the
principal sum of $2,900,000 (filed as Exhibit 10.5 to Form 8-K,
Date of Event: May 1, 1996), incorporated herein by reference.
10.5 Non-Qualified Stock Option agreement dated November 4, 1996,
between the Company and Raymond G. Braun, as amended by Amendment
No. 1 to Non-Qualified Stock Option agreement dated August 29,
1997 (filed as Exhibit 10.5 to Form 10-K for the fiscal year
ended July 31, 1997), incorporated herein by reference.
10.8 Subordinated Convertible Debenture Agreements dated July 3, 1997,
between the Company and each of Renaissance Capital Growth and
Income Fund III, Inc., Renaissance U.S. Growth and Income Trust
PLC and Banc One Capital Partners II, Ltd. (the "Convertible
Lenders") (filed as Exhibit 10.8 to Form 10-K for the fiscal year
ended July 31, 1997), incorporated herein by reference.
10.9 Convertible Loan Agreement dated July 3, 1997, among the Company,
the Convertible Lenders and Renaissance Capital Group, Inc.
(filed as Exhibit 10.9 to Form 10-K for the fiscal year ended
July 31, 1997), incorporated herein by reference
10.10+ License Agreement dated March 22, 1994 by and between Warner
Bros., a division of Time Warner Entertainment, L.P., and the
Company (as successor by assignment to Ace Novelty, Inc.) (filed
as Exhibit 10.10 to Form 10-K for the fiscal year ended July 31,
1997), incorporated herein by reference.
10.11+ License Agreement dated March 22, 1996 by and between Warner
Bros., a division of Time Warner Entertainment, L.P., and the
Company (as successor by assignment to Ace Novelty, Inc.) (filed
as Exhibit 10.11 to Form 10-K for the fiscal year ended July 31,
1997), incorporated herein by reference.
10.12+ License Agreement dated September 10, 1997 by and between Warner
Bros., a division of Time Warner Entertainment, L.P., and the
Company (as successor by assignment to Ace Novelty, Inc.) (filed
as Exhibit 10.12 to Form 10-K for the fiscal year ended July 31,
1997), incorporated herein by reference.
10.13+ License Agreement dated January 1, 1998 by and between Warner
Bros., a division of Time Warner Entertainment, L.P. and the
Registrant (filed as Exhibit 10.13 to Form 10-Q for the quarter
ended January 31, 1998, and incorporated herein by reference).
10.14+ License Agreement dated January 1, 1998 by and between Warner
Bros., a division of Time Warner Entertainment, L.P. and the
Registrant (filed as Exhibit 10.14 to Form 10-Q for the quarter
ended January 31, 1998, and incorporated herein by reference).
10.15+ Amendment dated January 14, 1998 to License Agreement dated
September 10, 1997 by and between Warner Bros., a division of
Time Warner Entertainment, L.P. and the Registrant (filed as
Exhibit 10.15 to Form 10-Q for the quarter ended January 31,
1998, and incorporated herein by reference).
31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
--------- -----------------------------------------------------------------
10.16 First Amendment to Convertible Loan Agreement made as of October
22, 1999, by and among the Company, Renaissance Capital Group,
Inc., and the Convertible Lenders party to the original
Convertible Loan Agreement (filed as Exhibit 10.16 to Form 10-K
for the fiscal year ended July 31, 1999), incorporated herein by
reference.
10.17 Loan and Security Agreement dated October 25, 1999 by and among
Congress Financial Corporation (Southwest), the Company, Ace
Novelty Co., Inc., Newco Novelty, Inc., and Friends, Food &
Games, Inc. (filed as Exhibit 10.17 to Form 10-K for the fiscal
year ended July 31, 1999), incorporated herein by reference.
10.18 Amendment No. 1 to Loan and Security Agreement dated March 20,
2000 by and among Congress Financial Corporation (Southwest), the
Company, Ace Novelty Co., Inc., Newco Novelty, Inc., and Friends,
Food & Games, Inc. (filed as Exhibit 10.18 to Form 10-Q for the
quarter ended April 30, 2000, and incorporated herein by
reference).
10.19 Amendment No. 2 to Loan and Security Agreement dated May 31, 2000
by and among Congress Financial Corporation (Southwest), the
Company, Ace Novelty Co., Inc., Newco Novelty, Inc., and Friends,
Food & Games, Inc. (filed as Exhibit 10.19 to Form 10-Q for the
quarter ended April 30, 2000, and incorporated herein by
reference).
10.20+ License Agreement dated July 26, 2000 by and between Warner
Bros., a division of Time Warner Entertainment, L.P. and the
Registrant .
10.21 Employment agreement dated October 4, 1999, between the Company
and Richard R. Neitz.
10.22+ Amendment dated November 10, 2000 to License Agreement dated
January 1, 1998 by and between Warner Bros., a division of Time
Warner Entertainment, L.P. and the Registrant.
10.23+ Amendment dated November 10, 2000 to License Agreement dated
September 10, 1997 by and between Warner Bros., a division of
Time Warner Entertainment, L.P. and the Registrant.
10.24+ Amendment dated November 10, 2000 to License Agreement dated
January 1, 1998 by and between Warner Bros., a division of Time
Warner Entertainment, L.P. and the Registrant.
10.25+ Amendment dated November 10, 2000 to License Agreement dated
January 26, 1999 by and between Warner Bros., a division of Time
Warner Entertainment, L.P. and the Registrant.
10.26 Amendment No. 3 to Loan and Security Agreement dated November 10,
2000 by and among Congress Financial Corporation (Southwest), the
Company, Ace Novelty Co., Inc., Newco Novelty, Inc., and Friends,
Food & Games, Inc.
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
-------- -----------------------------------------------------------------
10.27 Second Amendment to Convertible Loan Agreement made as of
December 29, 2000, by and among the Company, Renaissance Capital
Group, Inc., and the Convertible Lenders party to the original
Convertible Loan Agreement.
10.28 Third Amendment to Convertible Loan Agreement made as of January
12, 2001, by and among the Company, Renaissance Capital Group,
Inc., and the Convertible Lenders party to the original
Convertible Loan Agreement.
10.29 Fourth Amendment to Convertible Loan Agreement made as of January
26, 2001, by and among the Company, Renaissance Capital Group,
Inc., and the Convertible Lenders party to the original
Convertible Loan Agreement.
- -------------------
* Included herewith
+ Confidential treatment has been requested with respect to a portion of this
Exhibit.
(B) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K, date of event March 1, 2001,
regarding the appointment of Tomas Duran as Chief Executive Officer.
33
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 14th day of June 2001.
PLAY BY PLAY TOYS & NOVELTIES, INC.
By: /s/ JOE M. GUERRA
-----------------------------------
Joe M. Guerra
CHIEF FINANCIAL OFFICER AND TREASURER
34