-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WtQNlgO6oDBjgchk+3ImDoFtIScbOdqKBXWp9KnL9Zyt1z7EGaGgA9Ly74DiOsAA F1cIPPqXNbDn1P7/jlDMXw== 0001012870-96-000565.txt : 19961108 0001012870-96-000565.hdr.sgml : 19961108 ACCESSION NUMBER: 0001012870-96-000565 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961107 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: YES ENTERTAINMENT CORP CENTRAL INDEX KEY: 0000943747 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 943165290 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25916 FILM NUMBER: 96656161 BUSINESS ADDRESS: STREET 1: 3875 HOPYARD RD STE 375 CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 5108479444 MAIL ADDRESS: STREET 1: 3875 HOPYARD ROAD STREET 2: SUITE 375 CITY: PLEASANTON STATE: CA ZIP: 94588 10-Q 1 FORM 10-Q 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 September 30, 1996 OR [ ] Transition Report pursuant to Section 13 of 15 (d) of the Securities Exchange Act of 1934. For the transition period from _____ to ______. Commission File Number 0-25916 YES! ENTERTAINMENT CORPORATION (Exact name of registrant as specified in its charter) California 94-3165290 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3875 Hopyard Road, Suite 375, Pleasanton, CA 94588 -------------------------------------------------- (Address of principal executive offices and zip code) (510) 847-9444 (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 proceeding 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 ----- ----- As of October 18, 1996 there were 14,013,670 shares of the registrant's common stock outstanding. This quarterly report on Form 10-Q contains ____ pages of which this is page number 1. YES! ENTERTAINMENT CORPORATION FORM 10-Q SEPTEMBER 30, 1996 TABLE OF CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Statements of Operations - Three months and nine months ended September 30, 1996 and September 30, 1995 3 Consolidated Balance Sheets - September 30, 1996 and December 31, 1995 4 Consolidated Statements of Cash Flows - Nine months ended September 30, 1996 and September 30, 1995 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Securing Holders 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURE PAGE 18 2 PART I. FINANCIAL INFORMATION ------------------------------ Item 1. CONSOLIDATED FINANCIAL STATEMENTS YES! ENTERTAINMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts)
Three Months Ended Nine Months Ended ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, 1996 1995 1996 1995 ------------- ------------- ------------- ------------- Net sales $ 29,636 $ 18,610 $ 50,122 $ 28,971 Cost of sales 16,475 8,775 27,668 13,724 ------------- ------------- ------------- ------------- Gross profit 13,161 9,835 22,454 15,247 ------------- ------------- ------------- ------------- Operating expenses: Marketing, advertising and promotion 1,241 1,960 3,408 3,851 Selling, distribution and administrative 7,526 4,378 17,094 11,495 ------------- ------------- ------------- ------------- Total operating expenses 8,767 6,338 20,502 15,346 ------------- ------------- ------------- ------------- Operating income (loss) 4,394 3,497 1,952 (99) Interest income 33 24 245 64 Interest expense (206) (378) (516) (740) Other income (expense), net (22) (63) (114) (42) ------------- ------------- ------------- ------------- Net income (loss) before provision for income taxes 4,199 3,080 1,567 (817) Provision for income taxes 808 - 282 - ------------- ------------- ------------- ------------- Net income (loss) $ 3,391 $ 3,080 $ 1,285 $ (817) ============= ============= ============= ============= Net income (loss) per share $ 0.23 $ 0.29 $ 0.09 $ (0.20) ============= ============= ============= ============= Shares used in computing net income (loss) per share 14,913 10,750 14,638 4,021 ============= ============= ============= =============
See accompanying notes. 3 YES! ENTERTAINMENT CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands)
September 30, December 31, 1996 1995* ------------- ------------ (Unaudited) Assets ------ Current assets: Cash and cash equivalents $ 4,595 $ 2,987 Accounts receivable, net 26,845 26,260 Inventories 20,380 12,050 Prepaid expenses 5,870 3,974 Other current Assets 3,012 560 ------------- ------------ Total current assets 60,702 45,831 Property and equipment, net 3,569 2,769 Intangibles, deposits, and other assets, net 1,842 270 ------------- ------------ Total assets $ 66,113 $ 48,870 ============= ============ Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Convertible notes payable $ 2,000 $ 2,000 Loans payable 9,359 10,125 Accounts payable 8,933 5,484 Accrued royalties 766 1,267 Accrued liabilities 682 1,012 Capital lease obligations due within one year 21 87 Income taxes payable 464 185 ------------- ------------ Total current liabilities 22,225 20,160 Capital lease obligations 18 29 Other liabilities 58 97 Commitments and contingencies Common stock 82,612 69,511 Accumulated deficit (38,800) (40,085) Less amounts receivable from shareholders - (842) ------------- ------------ Total shareholders' equity 43,812 28,584 ------------- ------------ Total liabilities and shareholders' equity $ 66,113 $ 48,870 ============= ============
*Derived from audited financial statements See accompanying notes. 4 YES! ENTERTAINMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Nine months ended ------------------------------------- September 30, September 30, 1996 1995 ------------- ------------- OPERATING ACTIVITIES Net income (loss) $ 1,285 $ (817) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,809 1,549 Changes in operating assets and liabilities: Accounts receivable (585) (9,425) Inventories (8,330) (947) Prepaid expenses and other current assets (4,347) (3,235) Other assets (1,579) - Accounts payable 3,449 (1,014) Accrued liabilities (831) (111) Income taxes payable 280 - Other long-term liabilities (40) - ------------- ------------- Net cash used in operating activities (8,889) (14,000) INVESTING ACTIVITIES Acquisition of property and equipment (2,566) (1,051) Increase in intangibles and deposits (36) (15) ------------- ------------- Net cash used in investing activities (2,602) (1,066) FINANCING ACTIVITIES Decrease in restricted cash - 789 Increase (decrease) in loans payable (767) 287 Principal payments on capital lease obligations (77) (56) Proceeds from convertible notes payable - 1,400 Proceeds from issuance of common stock, net of issuance costs 13,943 10,993 ------------- ------------- Net cash provided by financing activities 13,099 13,413 ------------- ------------- Net increase (decrease) in cash and cash equivalents 1,608 (1,653) Cash and cash equivalents at beginning of period 2,987 2,558 ------------- ------------- Cash and equivalents at end of period $ 4,595 $ 905 ============= =============
See accompanying notes. 5 YES! ENTERTAINMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS Interim Financial Statements ---------------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q but do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements and should, therefore, be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 1995 included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 1996. In the opinion of management, all adjustments (which consist only of normal recurring accruals) have been made to present fairly the consolidated operating results for the unaudited periods. The interim operating results are not necessarily indicative of the results for fiscal 1996. Basis of Presentation --------------------- The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates ---------------- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. BALANCE SHEET COMPONENTS (IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1996 1995 ---------------------------- Inventories Raw Materials $ 2,750 $ 1,904 Work-in-process 594 575 Finished goods 17,036 9,571 ------- ------- $20,380 $12,050 ======= =======
6 3. RECENT DEVELOPMENT In July and September 1996, the Company's board of directors and shareholders, respectively, approved (i) the Company's reincorporation in Delaware and (ii) an amendment to the Company's 1995 Stock Option Plan to increase by 1,500,000 shares the number of shares that may be issued thereunder. The reincorporation into Delaware was effected on October 25, 1996. 7 YES! ENTERTAINMENT CORPORATION -- PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations includes certain forward looking statements about the Company that are based on current expectations. Actual results may differ materially as a result of any one or more of the risks identified in this section, as well as is the section captioned "Business Factors."
RESULTS OF OPERATIONS - --------------------- (Dollars in thousands) Three months ended Nine months ended September 30, September 30, ------------------- ------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Net sales $29,636 $18,610 $50,122 $28,971 Cost of sales 16,475 8,775 27,668 13,724 ------- ------- ------- ------- Gross profit 13,161 9,835 22,454 15,247 Gross profit % 44% 53% 45% 53% Operating expenses 8,767 6,338 20,502 15,346 ------- ------- ------- ------- Operating expense % 30% 34% 41% 53% Operating income (loss) 4,394 3,497 1,952 (99) Interest and other expense, net (195) (417) (385) (718) ------- ------- ------- ------- Net income (loss) before income tax benefit 4,199 3,080 1,567 (817) Provision for income taxes 808 - 282 - ------- ------- ------- ------- Net income (loss) $ 3,391 $ 3,080 $ 1,285 $ (817) ======= ======= ======= =======
NET SALES: The Company's net sales for the third quarter of 1996 increased $11.0 million or approximately 59% to $29.6 million from $18.6 million in the third quarter of 1995. Net sales increased $21.2 million or approximately 73% to $50.1 million for the first nine months of 1996 from $29.0 million for the first nine months of 1995. These increases were primarily the result of continued strong sales of the Company's YES! Gear (TM) products, including the new Yak Bakwards(TM) and --------- ------------ Mega Mike(TM) products and several new models of Power Penz(TM). Within YES! - --------- ---------- ---- Gear, the Company's Yak Bak and Power Penz lines of products accounted for 62% - ---- ------- ---------- and 15% of the Company's third quarter sales; the 8 remaining YES! Gear line of products constituted 19% of the Company's sales in --------- the third quarter of 1996. In addition, initial sales of the Mrs. Fields Baking ------------------ Factory constituted 3% of the Company's sales in the third quarter of 1996. - ------- International sales in the third quarter and the first nine months of 1996 were significantly higher than in the comparable periods of 1995, primarily as the result of the Company's efforts to increase international sales, particularly in Pacific Rim countries. The Company expects international sales will constitute a higher percentage of the Company's sales in 1996 than in 1995. International shipments represented 20% of sales in each of the third quarter and nine months ended September 30, 1996 and 3% and 9% of sales in the third quarter and nine months ended September 30, 1995, respectively. The Company recognizes revenue upon shipment of product and computes net sales by concurrently deducting a provision for sales returns and allowances, including allowances for defective returns, price protection, mark downs and other returns. Sales allowances may vary as a percentage of gross sales due to changes in the Company's product mix, defective product allowances or other sales allowances. Sales of toys traditionally have been highly seasonal, with a majority of retail sales occurring during the December holiday season. The Company expects that its operating results will vary significantly from quarter to quarter, particularly in the quarters ending September 30 and December 31, when the majority of the products are shipped. The Company is dependent on a relatively small number of customers, in particular Toys "R" Us, Inc. and Wal-Mart Stores, Inc., for a significant percentage of its sales. Significant reductions in sales to any one or more of the Company's largest customers would have a material adverse effect on the Company's operating results. Because orders in the toy industry are generally cancelable at any time without penalty, there can be no assurance that present or future customers will not terminate their purchase agreements with the Company or significantly change, reduce or delay the amount of products ordered from the Company. Any such termination of a customer relationship or change, reduction or delay in orders would have a material adverse effect on the Company's operating results. COST OF SALES: Cost of sales were approximately 56% and 47% of net sales in the third quarters of 1996 and 1995, respectively, and approximately 55% and 47% of net sales for the first nine months of 1996 and 1995, respectively. The increases in cost of sales as a percentage of net sales in 1996 from the comparable periods in 1995 was primarily the result of the substantial increase in lower margin international sales in the first three quarters of 1996 and to a certain extent lower pricing of certain of the older items within the Company's YES! Gear line --------- of products. In absolute dollars, cost of sales increased $7.7 million or approximately 88% to $16.5 million in the third quarter of 1996 from $8.8 million in the third quarter of 1995 and increased $13.9 million or approximately 102% to $27.7 million for the first nine months of 1996 from $13.7 million for the first nine months of 1995, primarily as the result of higher net sales. 9
OPERATING EXPENSES: (in thousands) Three months ended Nine months ended September 30, September 30, ------------------- ------------------ 1996 1995 1996 1995 -------- -------- -------- -------- Marketing, advertising & promotion $1,241 $1,960 $ 3,408 $ 3,851 Selling, distribution & administrative 7,526 4,378 17,094 11,495 ------ ------ ------- ------- Total operating expenses $8,767 $6,338 $20,502 $15,346
Operating expenses increased $2.5 million or approximately 38% to $8.8 million in the third quarter of 1996 from $6.3 million in the third quarter of 1995, primarily as the result of higher variable expenses associated with higher net sales and higher fixed expenses required to support current and expected higher sales volume, offset in part by the Company's ongoing strategy to maintain a low break-even level. Operating expenses increased $5.2 million or approximately 34% to $20.5 million for the first nine months of 1996 from $15.3 million for the first nine months of 1995 for substantially the same reasons. Marketing, Advertising and Promotion. Marketing, advertising and promotion - ------------------------------------ expenses decreased $719,000 or approximately 37% to $1.2 million in the third quarter of 1996 from $2.0 million in the third quarter of 1995. Marketing, advertising and promotion expenses decreased $443,000 or approximately 12% to $3.4 million for the first nine months of 1996 from $3.9 million for the first nine months of 1995. The decrease in the third quarter of 1996 compared to the third quarter of 1995 was primarily due to the Company's decision to utilize the majority of its advertising expense in the fourth quarter to promote anticipated stronger seasonal retail sales. The decrease in the first nine months of 1996 compared to the first nine months of 1995 was primarily due to the third quarter decrease in sales, offset in part by an increase in advertising expense to support increased sales. The Company expects advertising expense in the last three months of the year to significantly exceed advertising expense in the first nine months of the year to support anticipated seasonal increases in sales and the introduction of the Company's 1996 product line, including in particular V-Link(TM). The Company expects advertising expense in 1996 to exceed - ------ advertising expense in 1995. Selling, Distribution and Administrative. Selling, distribution and - ---------------------------------------- administrative expenses increased $3.1 million or approximately 72% to $7.5 million in the third quarter of 1996 from $4.4 million in the third quarter of 1995. Selling, distribution and administrative expenses increased $5.6 million or approximately 49% to $17.1 million for the first nine months of 1996 from $11.5 million for the first nine months of 1995. The increase in expenses resulted from higher variable expenses associated with higher sales volume, higher royalty expenses associated with the increase in revenue, and higher costs in operations support, product development, and general and administrative expenses required to support current and expected higher sales volumes. 10 INTEREST EXPENSE: The following table shows interest expense and interest income for the applicable periods:
(in thousands) Three months ended Nine months ended September 30, September 30, ------------------ ----------------- 1996 1995 1996 1995 -------- ------- ------- -------- Interest income & 33 $ 24 $ 245 $ 64 Interest expense (206) (378) (516) (740)
The decrease in interest expense and increase in interest income in the quarter and nine months ended September 30, 1996 as compared to the comparable periods in 1995 are the result of the higher cash balances maintained by the Company during those periods which resulted in decreased reliance on bank borrowings and increased interest income. PROVISION FOR INCOME TAXES: The following table shows the provision for income taxes for the applicable periods:
(in thousands) Three months ended Nine months ended September 30, September 30, ------------------- ------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Provision for income taxes $808 $ -- $282 $ --
The provision for income taxes for the quarter and nine months ended September 30, 1996 is computed based on the projected annualized effective tax rate of 18% applied to the pre-tax book income for the period. The projected effective tax rate for the current year is less than the federal statutory rate (34%) due to the projected benefit of the utilization of net operating loss carryovers. The Company anticipates that its effective tax rate will be higher in 1996 than in 1995 due, in part, to anticipated increases in tax-able income and potential restrictions on the utilization of net operating loss carryovers. At December 31, 1995, the Company had net operating loss carryforwards for federal and California tax purposes of approximately $26 million and $12 million, respectively. The federal losses will expire in the years 2007 through 2010 and the state losses will expire in the years 1997 through 2000 if not utilized. Utilization of the net operating loss carryovers may be subject to a substantial annual limitation if it should be determined that there has been a change in the ownership of more than 50 percent of the value of the Company's stock, pursuant to Section 382 of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating loss carryovers before utilization. 11 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At September 30, 1996, the Company had cash, cash equivalents and short-term investments of approximately $4.6 million, a $1.6 million increase from approximately $3.0 million at December 31, 1995. This increase is attributed primarily to the exercise in January 1996 of the remaining outstanding common stock purchase warrants issued in connection with the Company's initial public offering in June 1995 (the "IPO Warrants"), which generated net cash to the Company of $13.8 million, offset by net cash used in operating activities of approximately $8.9 million, net cash used in investing activities of approximately $2.6 million, and repayment of bank loans of approximately $767,000. The positive cash flow in the first nine months of 1996 was largely the result of the exercise of the IPO Warrants, the Company's net income before depreciation and amortization of $3.1 million, and an increase in accounts payable of approximately $3.4 million, partially offset by an increase in inventory of approximately $8.3 million, an increase in prepaid expenses and other current assets of approximately $4.3 million, an increase in property and equipment of approximately $2.6 million, an increase in other assets of approximately $1.6 million, a decrease in accrued liabilities of approximately $821,000, a decrease in loans payable of approximately $767,000 and an increase in accounts receivable of approximately $585,000. To meet seasonal working capital requirements during the balance of 1996, the Company anticipates borrowing substantial amounts under an Accounts Receivable Management and Security Agreement (the "ARM Agreement") entered into with BNY Financial Corporation ("BNY") in July 1995. The terms of the ARM Agreement, as amended, provide that BNY may advance YES! up to $30 million on the basis of the Company's accounts receivable, inventory and product being imported on a letter of credit basis. Loans to the Company are fully secured by all of the Company's assets, including intellectual property, and BNY acquired ownership of all of the Company's trade receivables. The Company is required to remain in compliance with certain financial and other covenants under the ARM Agreement with BNY. The ARM Agreement also restricts the ability of the Company to obtain working capital in the form of indebtedness, other than indebtedness incurred in the ordinary course of the Company's business, to grant security interests in the assets of the Company or to pay dividends on the Company's securities. The Company's actual working capital needs will depend upon numerous factors, including the extent and timing of acceptance of the Company's products in the market, the Company's operating results, the cost of increasing the Company's sales and marketing activities and the status of competitive products, none of which can be predicted with certainty. The Company has experienced severe working capital shortfalls in the past, which have restricted the Company's ability to conduct its business as anticipated. The Company anticipates that it will experience periods of significant negative cash flow in 1996 as a result of seasonality in the toy industry, the timing of new product introductions and the Company's planned growth in inventory 12 and accounts receivable. There can be no assurance that additional financing will be available to the Company on acceptable terms, if at all, when required by the Company. The inability to obtain such financing would have a material adverse effect on the Company's operating results. RECENT DEVELOPMENTS - ------------------- In July and September 1996, the Company's board of directors and shareholders, respectively, approved (i) the Company's reincorporation in Delaware and (ii) an amendment to the Company's 1995 Stock Option Plan to increase by 1,500,000 shares the number of shares that may be issued thereunder. The reincorporation into Delaware was effected on October 25, 1996. BUSINESS FACTORS Because of the variety and uncertainty of the factors affecting the Company's operating results, past financial performance and historic trends may not be a reliable indicator of future performance. These factors, as well as other factors affecting the Company's operating performance, and the fact that the Company participates in a highly dynamic industry, may result in significant volatility in the Company's common stock price. The Company's business is subject to a number of risks and the Company's forward looking statements should be considered in light of the business factors set forth below. Limited Operating History; History of Losses; Accumulated Deficit. The Company - ----------------------------------------------------------------- has a short operating history, having commenced operation in November 1992 and shipped its first product in July 1993. Although the Company has achieved approximately $168 million in cumulative net sales through September 30, 1996, the Company incurred substantial operating losses in 1993 and 1994 and at September 30, 1996 had an accumulated deficit of approximately $38.8 million. While the Company achieved an operating profit in 1995, future profitability is dependent upon the Company's ability to successfully and timely introduce, finance and manufacture its new products, success-fully market its existing products and collect trade receivables in a timely manner. Dependence on 1996 Products. In 1996, the Company has introduced and expects to - --------------------------- commence sales of a number of new product lines, such as the V-Link and the Mrs. ------ ---- Fields(R) Baking Factory. In addition, the Company also expects to expand its - ------ -------------- existing product lines in 1996, particularly its YES! Gear line of products. --------- Manufacturing of certain of these items, in particular V-Link, in commercial ------ quantities has not commenced or is just commencing. The Company expects that completing the development and the manufacture of its 1996 product lines will place great demands on management and other Company resources. In particular, V-Link is a complicated consumer electronics product, and the Company expects it - ------ will incur substantial expense in completing the manufacture of V-Link. If the ------ Company is not able to complete the development, tooling, manufacture and successful marketing of its 1996 13 product lines, the Company's operating results and financial condition would be materially adversely affected. Dependence on YES! Gear. The majority of the Company's current product lines - ----------------------- are sold under the YES! Gear brand. Within YES! Gear, , the Company's Yak Bak --------- ------- and Power Penz lines of products accounted for 62% and 15% of the Company's ---------- third quarter 1996 sales; the remaining YES! Gear products constituted 19% of --------- the Company's sales in the third quarter of 1996. The Company expects the Yak --- Bak products specifically and the YES! Gear product line generally to - --- --------- continue to account for a substantial percentage of the Company's business. In addition, the Company is aware that a number of toy manufacturers are attempting to duplicate the Company's success in this area of product by introducing similar lines of products in 1996. While the Company believes it will compete favorably with these new products on the basis of styling, quality, product depth and promotional support, there can be no assurance that the sale of these competitive products will not impact the sale of the YES! Gear product line, --------- particularly on the basis of price. Just in Time Inventory; Compressed Sales Cycles. Most of the Company's most - ----------------------------------------------- significant customers have adopted inventory management systems to track sales of particular products and rely on reorders being filled rapidly by suppliers, rather than maintaining large on-hand inventories to meet consumer demand. While these systems reduce a retailer's investment in inventory, they increase pressure on suppliers like the Company to fill orders promptly and shift a significant portion of inventory risk to the supplier. In conjunction with an apparent delay in the beginning of the holiday selling cycle in 1996 (caused to a certain extent by the presidential election), the limited inventory carried by the Company's customers may reduce or delay consumer sell through which in turn could impair the Company's ability to obtain reorders of its product in quantities necessary to permit the Company to achieve planned sales and income growth. In addition, the Company may be required to incur substantial additional expense to fill late reorders in order to ensure the product is available at retail prior to Christmas; these may include drop-shipment expense and higher advertising allowances which would otherwise be born by the Company's customers. In the event that anticipated reorders do not materialize, the Company may also incur increased inventory carrying costs. Sales Concentration Risk. The Company's ten largest customers accounted for - ------------------------ approximately 87%, 68% and 76% of net sales for the years ending December 31, 1995, 1994 and 1993, respectively. For the year ended December 31, 1995, the Company's two largest customers, Wal-Mart Stores, Inc. and Toys "R" Us, Inc., each accounted for approximately 27% of net sales. For the year ended December 31, 1994, the same two customers accounted for approximately 21% and 14% of net sales, respectively. Toys "R" Us, Inc. accounted for approximately 41% of net sales in the year ended December 31, 1993. While the Company intends to expand distribution to new accounts, the Company expects to continue to depend on a relatively small number of customers for a significant percentage of its sales. Significant reductions in sales to any one or more of the Company's largest customers would have a material adverse effect on the Company's operating results. Because orders in the toy industry are generally cancelable at any time without penalty, there can be no assurance that present or future customers will not terminate their purchase arrangements with the Company or significantly change, reduce or delay the amount of products ordered from the Company. Any such 14 termination of a significant customer relationship or change, reduction or delay in significant orders could have a material adverse effect on the Company's operating results. Price Protection; Stock Balancing; Reliance of Timely Payment. In connection - ------------------------------------------------------------- with the introduction of new products, many companies in the toy industry discount prices of existing products, provide for certain advertising allowances and credits or give other sales incentives to their customers, particularly their most significant customers. In addition, in order to address working capital requirements, sales of inventory, changes in marketing trends and other issues, many companies in the toy industry allow retailers to return slow-moving products for credit, or if the manufacturer lowers the prices of its products, to provide price adjustments for inventories on hand at the time the price change occurs. The Company has made such accommodations in the past, and there can be no assurance that the Company will not make accommodations such as stock balancing, returns, other allowances or price protection adjustments to a significant degree in the future. Any such accommodations by the Company in the future could have a material adverse effect on the Company's operating results. In addition, in the past certain of the Company's retail customers have delayed payment beyond the date such payment is due. Delays in payments from retail customers in the future could materially impact the Company's anticipated cash flow to the detriment of the Company's business. Short Product Cycles. Consumer preferences in the toy industry are continuously - -------------------- changing and are difficult to predict. Few products achieve market acceptance, and even when they do achieve commercial success, products typically have short life cycles. There can be no assurance that (i) new products introduced by the Company will achieve any significant degree of market acceptance, (ii) acceptance, if achieved, will be sustained for any significant amount of time, or (iii) such products' life cycles will be sufficient to permit the Company to recover development, manufacturing, marketing and other costs associated therewith. In addition, sales of the Company's existing product lines are expected to decline over time, and may decline faster than expected unless existing products are enhanced or new product lines are introduced. Failure of new product lines to achieve or sustain market acceptance would have a material adverse effect on the Company's operating results and financial condition. International Business Risk. The Company relies exclusively either on foreign - --------------------------- distributors or foreign sales agents to market and sell the Company's products outside the United States. Although the Company's international sales personnel work closely with its foreign distributors and foreign sales agents, the Company cannot directly control such entities' sales and marketing activities and, accordingly, cannot directly manage the Company's product sales in foreign markets. With respect to sales made through a foreign sales agent, the Company also must incur significant marketing expense and, for non-F.O.B. sales, significant warehousing and inventory expense. A significant portion of these expenses must be incurred prior to determining whether the Company's products will be well received in that market and may not be recouped in the event the sales in the market fall below the Company's expectations. In addition, the Company's international sales may be disrupted by currency fluctuations 15 or other events beyond the Company's control, including political or regulatory changes. Dependence on Manufacturing Facilities Based in People's Republic of China. The - --------------------------------------------------------------------------- Company contracts for the manufacture of substantially all of its products with entities based in Hong Kong whose manufacturing facilities are located in the People's Republic of China. In 1997, Hong Kong will become a sovereign territory of the People's Republic of China. While the People's Republic of China has provided assurances that Hong Kong will be allowed to maintain critical economic and tax policies, there can be no assurance that political or social tensions will not develop in Hong Kong that would disrupt this process. In addition, recent tensions in the Taiwan Straits between the People's Republic of China and the Republic of China (Taiwan), and the United States' involvement therein, could result either in a disruption in manufacturing in the China mainland or in the imposition of tariffs or duties on Chinese manufactured goods. Either event would have an adverse impact on the Company's ability to obtain its products or on the cost of these products, respectively, such that its operating results and financial condition would be materially adversely affected. Dependence on Restrictive Facility. The Company is dependent on the ARM - ---------------------------------- Agreement with BNY Financial Corporation to meet its financial needs during 1996, due in large part to the seasonality of the Company's business whereby the Company is required to finance the manufacture of a substantial portion of its products in the summer and autumn but does not collect on the sale of these products until the fourth quarter of that year and the first quarter of the following year. Under the terms of the ARM Agreement, BNY Financial Corporation has taken a first priority security interest in substantially all of the Company' assets, including its intellectual property. The ARM Agreement also contains a number of restrictive covenants, including covenants concerning the requirement that Donald Kingsborough and Sol Kershner, the Company's Chief Executive Officer and Chief Financial Officer, respectively, remain active in the management of the Company. In the event the Company falls out of compliance with the ARM Agreement, and BNY Financial Corporation does not provide financing as contemplated, the Company may not be able to finance its operations, and its operating results and financial condition would be materially adversely affected. 16 PART II. OTHER INFORMATION --------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At a special meeting of shareholders held on September 24, 1996, the Company's shareholders approved (i) the Company's reincorporation in Delaware and (ii) an amendment to the Company's 1995 Stock Option Plan to increase by 1,500,000 shares the number of shares that may be issued thereunder. The number of shares voting at that meeting were as follows:
For Against Abstain Not Voted --------- ------- --------- --------- Reincorporation in Delaware 8,516,253 304,129 25,717 0 Increase in 1995 Stock Option Plan 6,836,162 817,269 1,173,698 19,000
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 4.1(1) Certificate of Incorporation of Registrant. 4.2(1) Bylaws of Registrant. 11.1 Statement Regarding Computation of Net Loss Per Share 27.1 Financial Data Schedule for the quarter ended September 30, 1996. ---------- (1) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form 8-B filed with Securities and Exchange Commission on October 31, 1996. b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1996. 17 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. YES! Entertainment Corporation ---------------------------------- Registrant Date November 6, 1996 /s/ Donald D. Kingsborough ---------------- ---------------------------------- Donald D. Kingsborough Chief Executive Officer (Principal Executive Officer) Date November 6, 1996 /s/ Sol Kershner ---------------- ---------------------------------- Sol Kershner Chief Financial Officer (Principal Financial and Accounting Officer) 18 EXHIBIT INDEX SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT DESCRIPTION PAGE - ------ ------------------- ------------ 4.1(1) Certificate of Incorporation of Registrant. 4.2(1) Bylaws of Registrant. 11.1 Statement Regarding Computation of Net Loss Per Share 27.1 Financial Data Schedule for the quarter ended September 30, 1996. - ---------- (1) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form 8-B filed with the Securities and Exchange Commission on October 31, 1996. 19 EX-11.1 2 STATEMENT RE COMPUTATION OF NET LOSS PER SHARE EXHIBIT 11.1 YES! ENTERTAINMENT CORPORATION STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE (in thousands, except per share amounts)
Three months ended September 30, Six months ended September 30, -------------------------------- ------------------------------ 1996 1995 1996 1995 -------- -------- --------- -------- Net income (loss) $ 3,391 $ 3,080 $ 1,285 $ (817) Computation of weighted average common and common equivalent shares outstanding: Weighted average common shares outstanding 14,005 8,984 13,843 3,963 Weighted average options outstanding 454 449 341 Weighted average warrants outstanding 455 1,317 455 Common equivalent shares from stock options granted or issued during the twelve-month period prior to the Company's proposed initial public offering - 58 -------- -------- --------- -------- Shares used in computing net loss per share 14,913 10,750 14,638 4,021 ======== ======== ========= ======== Net income (loss) per share $ 0.23 $ 0.29 $ 0.09 $ (0.20) ======== ======== ========= ========
EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS DEC-31-1996 DEC-31-1996 JUL-01-1996 JAN-01-1996 SEP-30-1996 SEP-30-1996 0 4,595 0 0 0 27,327 0 482 0 20,380 0 60,702 0 10,367 0 6,798 0 66,113 0 22,225 0 18 0 0 0 0 0 82,612 0 (38,199) 0 66,113 29,636 50,122 29,636 50,122 16,475 27,668 16,475 27,668 8,767 20,502 106 175 206 516 4,199 1,567 808 282 3,391 1,285 0 0 0 0 0 0 3,391 1,285 .23 .09 .23 .09
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