YES! Entertainment Corporation

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YES! Entertainment Corporation

3875 Hopyard Rd., Ste. 375
Pleasanton, California 94588
U.S.A.
(925) 847-9444
Fax: (925) 734-0997
Web site: http://www.yesent.com

Public Company
Incorporated: 1992
Employees: 123
Sales: $50.9 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: YESS
SICs: 3944 Games, Toys, & Children’s Vehicles; 3942 Dolls & Stuffed Toys

YES! Entertainment Corporation (YES!) develops, manufactures, and markets toys and other children’s products domestically and internationally. YES! products frequently incorporate popular characters licensed from companies including the Walt Disney Company, in addition to characters created by YES! designers such as the world’s bestselling animated talking toy, Teddy Ruxpin. The company’s products are designed with the dual purpose of combining a learning experience for children (focusing on children between the ages of two and 12), which generally appeals to the educational concerns of parents, while providing fun and pleasure for the child. YES! Interactive Books, Princess of the Flowers, Travel Traxx, Where Is It?, Sound Mixers, Sound Doodles, Pop ‘N Hear, Listen to This, Zoundies, Play-Along Stories, Comes to Life Books, Yak Bak, Yak Bak 2, and Yak Bak 3 are trademarks of the company. The North American market for these and other related products is estimated to be in the range of 44 million consumers. Company employees are headquartered in Pleasanton, California; Carson, Nevada; and in Hong Kong.

1992: Former Atari Executive Incorporates YES!

YES! was founded by Donald Kingsborough in 1992, at which time the company began producing toys and other children’s entertainment products, including a variety of interactive items. Prior to his involvement at YES!, Kingsborough gained valuable experience in the toy production business while at Nintendo, where Kingsborough was credited with much of the initial success of the hugely popular Nintendo software games. He also worked as an executive at the consumer division of Atari, but by the mid-1980s Atari’s game products were falling out of favor with young consumers and Kingsborough moved on in 1985 to found a publicly owned company, Worlds of Wonder, Inc. That company—for a time ranking as the fastest-growing toy company in the nation, quickly expanding to sales of more than $300 million—failed after its flagship Teddy Ruxpin dolls dazzled, then fizzled. Then in 1989 Kingsborough became the CEO of Intelligy Corporation, a creator of educational and child development products. He next decided to make another attempt at directing his own company and formed YES! His idea was to steer the company towards adapting innovative technology in product designs, in new ways that could enhance enjoyment as well as natural creativity in children. Kings-borough explained in a press release that “The products we are introducing in 1993 combine the success of such children’s classics as teddy bears and storybooks with new, easy-to-use technology,” adding “the new products, designed to encourage family activity and early childhood skill development, are both educational and fun.” The company patented their technology, incorporated in their TV Teddy, a toy that interacted with specially encoded children’s videotapes and TV broadcast programs, talking, laughing, and asking questions related to numbers, the alphabet, and about popular characters. The company also developed and patented Comes to Life Books, a system that allows the book’s characters to read stories aloud to children in their own voices, accompanied by realistic sound effects and music. Comes to Life Books featured a DiscPlayer placed on Story Discs throughout the book, enabling children to hear the stories and follow along with the text and illustrations. Following a licensing agreement with Disney Publishing, YES! developed a newer version of Comes to Life Story Player package that included the StoryPlayer unit and a Mickey Mouse storybook. YES! also added a Winnie the Pooh storybook made available separately from the StoryPlayer package. Other products introduced during this period included the Princess of the Rowers mini-dolls, YES! Interactive Books, Nickelodeon electronic games, and Yak Bak instant playback recording devices. YES! relied primarily on major national chains to market their products. The company’s ten largest customers accounted for approximately 80 percent of gross sales in 1994, with Wal-Mart Stores, Inc. and Toys “R” Us, Inc. each accounting for approximately 25 percent of gross sales.

1995: Public Financing into Play

In 1994, revenues had reached $36.3 million but the company’s operating losses hit $21.9 million, and by early 1995 the company had incurred operating losses that had accumulated to a deficit of $45 million. In June YES! made its initial public offering, raising $10.9 million. At the time, auditors Ernst & Young characterized the offering as “risky and questioned whether the new money would be enough to sustain the company through the year,” according to Mara Der Hovanesian of Knight-Ridder/Tribune Business News. A toy industry analyst with Standard & Poor’s also quoted by Hovanesian stated: “I think Don (Kingsborough) has shown an uncanny understanding for product development and marketing, but his downfall (previously) was a profound lack of financial controls.” Hovanesian noted that YES! was offering shares at 42 percent below the previous price paid by insider investors, an unusual strategy for a growing company.

The company’s subsidiary in Hong Kong, Entertainment Products Limited, had been established to facilitate the purchase of YES! products, a significant portion of which were manufactured in the People’s Republic of China, and to distribute shipments internationally as well as to the parent company. Entertainment Products Ltd. also coordinated the manufacturing process with the company’s vendors. According to the SEC filings, YES! recorded the transactions of the subsidiary in its accounting records through the use of intercompany accounts, but was unable to reconcile those accounts, resulting in over $7.6 million in charges for the unaccountable balance. The company blamed poor tracking of operations at the foreign subsidiary and made plans for improving accounting and control procedures in Hong Kong. Executives felt that the company’s rapid growth contributed to many of the problems they were experiencing, straining management, financial, and other resources.

In an industry where consumer preferences are constantly changing and unpredictable, the company determined to lengthen the life cycle of its successful minirecorder products. YES! introduced four new Yak Bak products for 1996 following encouraging sales of its 1995 line of minirecorders. Pricing on many of the company’s micro-chip-based products had dropped into a more affordable range for consumers. Retail priced at $19.99 and geared to the six-year-old consumer, Yak Backwards records the user’s voice via microchip and plays it back, backwards. The toy also featured a “YALP” button (“play” backwards) that recorded users voices speaking words in reverse that would “YALP” it back to normal. Yak Back was incorporated into a special watch design with LCD time display and alarm features, capable of recording personal memos. The watch was designed to appeal to girls and boys of eight and older. Designed for six-year-olds and older, Yak Guard was a motion-triggered device capable of guarding rooms and belongings, or to “pull gags on friends and family members,” as suggested in company advertisements. A personally recorded “alarm” could be placed on door knobs or drawers, for example, alerting the owner of trespass. The company also introduced a colorful ballpoint pen that housed the Yak Write SEX, with “say,” “play,” and “warp” features, in addition to four unique sound effects.

On another front, YES! launched a line of food activity products, notably Mrs. Fields Baking Factory, a toy cookie oven that used mixes developed along with the Mrs. Fields Development Corporation. Kingsborough told Douglas Robson of the San Francisco Business Times that “Our goal is to license brands that kids ask for and that parents and grandparents would be familiar with.” YES! also introduced a kid-sized ice-cream/yogurt machine carrying the Baskin Robbins moniker.

Company Perspectives:

Our mission is to apply existing technologies to develop brands of products that are fun, interactive, and which emphasize creativity. These brands may emerge in existing industry categories or create new categories. Most importantly, the Company expects these will be brands that represent a significant point of difference from the competition and represent value to the consumer. We will employ a brand strategy in an attempt to develop product lines that are extendible for multiple years. This emphasizes a focus on products that generate logical product extensions at separate and distinct retail price points. To be successful, we must apply this brand discipline to rebuild and grow our existing core brands such as Yak Bak, Power Penz, and Air Vectors, as well as in our development of new core brands.

Although YES! normally targeted children aged two to 12, the company experimented with the development of V-Link, geared to youth from the ages of ten through 17. The V-Link devices were developed as a private communications product including voicemail and messaging capabilities, allowing teens to communicate with each other at school, in malls, or anywhere within a 1,000-foot radius without toll or monthly charges. Unfortunately, the devices were shipped to retailers without the required FCC approval due to the low-power transmitters. Ongoing shipment delays meant that the devices were not in stores until very late in the Christmas selling season. Compounding the company’s woes, consumers who did buy the V-Links were disappointed in product performance. It was generally thought that the V-Links were an overpriced version of the walkie-talkie, but with less operating range. Another product, the PowerPenz “phone” device with a built-in infrared transmitter and receiver, was also delayed when the company withheld shipments and reported disappointments with “initial quality.” In the product design department an effort was underway to attract more young female customers, since most of YES!’s electronic gadgets appealed primarily to boy. The company entered the doll market when it signed licensing agreements with England-based Vivid Imagination, producers of Tweeny Weeny Families. YES! secured the rights to market the line of miniature animal toys in the United States and Canada, planning to feature the Hoppit family of eight rabbits. Vivid Imagination had experienced a remarkable success with the toys in Europe, claiming European sales in excess of $68 million.

Toy Sales Tumbled in 1996

Reporting in Forbes, Caroline Waxier stated that the company was probably trying to offer too much. She argued that the company was overreaching when it showed seven different toys at the New York toy fair, in addition to pushing their established Yak Bak toys and V-Link products. Sales had dropped in the fourth quarter of 1996, tumbling 30 percent. The company reported a loss of $ 12.7 million for the year. YES! stock that had risen to a price of $16.87 the previous summer plummeted to $3.50 by May 1997. Two class-action lawsuits were initially filed by unhappy investors, charging that company officials overstated earnings and sales potential deliberately to inflate the stock price. According to Greg Smiley of Knight-Ridder/Tribune Business News, one of the suits, filed in 1997, alleged that Kingsborough and retired CFO Sol Kershner overstated company profits to allow venture capitalists comprising a majority of the company’s board of directors to recoup some of the $40 million they had invested in YES! between 1993 and 1995. Five additional lawsuits were filed in the ensuing seven months.

Struggling to turn the company around, YES! hired Mark Shepherd to the executive management team. Shepherd, formerly the chief financial officer of the much larger toy company, Lewis Galoob, and a senior vice-president of finance for Einstein/Noah Bagel Corporation took over duties as COO and CFO at YES! The company reported that Kingsborough would henceforth concentrate on strategic relationships, marketing, and product direction. Other changes included the hiring of Leonard Ciciretto as executive vice-president of sales. By this time YES! had technically breached the terms of its BNY Financial Corp. credit line by losing so much money in a very short time, but the lender agreed to waive action and allowed YES! another year in which to become profitable. YES! gave 831,000 shares of stock to persuade six vendors to forgive debts totaling $3.1 million, and sold several of their toy lines, including assets of its food and Girls Activity business units, to Wham-O for $9.8 million plus potential royalties, in capital-raising moves that left the company heavily dependent on two of its most popular lines, Yak Bak and Power Penz. COO Shepherd explained that “the current financial foundation of the company, which includes approximately $10 million of capital raised by the sale of product lines, better positions YES! to move forward,” adding, “we have made progress toward lowering our break-even point and our goal is to improve margins throughout the remainder of 1998.”

In June 1998, YES! retained Gruntal & Co., LLC, a New York investment banking firm established in 1880, to advise the company in pursuing opportunities to maximize shareholder value. In July, YES! announced that it signed an agreement to settle all securities class-action lawsuits that were pending, although company officials maintained that the lawsuits were without merit. The $2.25 million was funded under the company’s insurance policies. A month later, the company announced that it had signed a letter of intent with Infinity Investors Limited, Infinity Emerging Opportunities Limited, and Glacier Capital Limited, the investors that held a majority of the company’s convertible preferred stock and five percent convertible debentures, to resolve issues between investors and YES! Terms of the letter of intent, involving a $3 million loan and a $10 million working capital line, allowed the company to replace The Bank of New York revolving credit agreement. Two of the Investor designees joined the YES! board of directors, and conditions of the preferred stock and debentures were modified.

The major market leaders competing with YES! included Mattel, Inc., Hasbro, Inc., Tyco Toys, Inc., Tiger Electronics, and Video Technology, all companies with substantial resources. Given Yes! Entertainment’s restricted working capital, heavy debt, and poor financial results into 1998, the company ran the risk of becoming “no” entertainment—at least of the desirable kind—for its shareholders.