UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996
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[_] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission file number: 0-17927
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JANEX INTERNATIONAL, INC.
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(Exact name of small business issuer as specified in its charter)
Colorado 84-1034251
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
21700 Oxnard Street, Suite 1610, Woodland Hills, California 91367
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(Address of principal executive offices)
Issuer's telephone number, including area code: (818) 593-6777
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Not applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 July 31, 1996, the issuer had 5,046,721 shares of its common stock
outstanding.
Transitional Small Business Disclosure Format:
Yes No X
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Total sequentially numbered pages in this document: 19.
1
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Sequential
Page
Numbers
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets (Unaudited) - December 31,
1995 and June 30, 1996 3 - 4
Condensed Consolidated Statements of
Operations (Unaudited) - Three and Six
Months Ended June 30, 1995 and 1996 5
Condensed Consolidated Statements of
Cash Flows (Unaudited) - Six Months
Ended June 30, 1995 and 1996 6 - 7
Notes to Condensed Consolidated
Financial Statements (Unaudited) -
Six Months Ended June 30, 1995
and 1996 8 - 13
Item 2. Management's Discussion and
Analysis or Plan of Operation 14 - 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
June 30, December
1996 31, 1995
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 116,851 $ 783,564
Certificate of deposit (Note 5) 500,000 500,000
Accounts receivable, net 1,754,245 494,987
Inventories - principally
finished goods 504,790 605,623
Prepaid royalties 188,995 119,995
Other current assets 206,069 143,761
---------- ----------
Total current assets 3,270,950 2,647,930
Property and equipment, net 624,306 359,674
Intangible assets, net 2,133,447 2,245,352
Product development costs, net 191,994 184,026
Other assets 35,487 11,985
---------- ----------
$6,256,184 $5,448,967
========== ==========
(continued)
3
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
June 30, December
1996 31, 1995
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable - bank (Note 5) $ 400,000 $ 751,425
Notes payable - stockholders 458,760
Loan payable - agent (Note 6) 279,877
Note payable 500,000 500,000
Accounts payable 1,280,660 355,834
Accrued expenses 702,321 503,715
Income taxes payable 16,166 6,586
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Total current liabilities 3,179,024 2,576,320
----------- -----------
Notes payable - stockholders 658,760
(Note 7)
Commitments and contingencies
(Notes 2 and 3)
Stockholders' equity (Note 4):
Class A convertible preferred
stock, no par value;
authorized - 5,000,000 shares;
issued and outstanding - none
Common stock, no par value;
authorized - 20,000,000 shares;
issued and outstanding -
5,046,721 shares 11,138,941 11,054,816
Accumulated deficit (8,720,541) (8,182,169)
----------- -----------
Total stockholders' equity 2,418,400 2,872,647
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$ 6,256,184 $ 5,448,967
=========== ===========
See accompanying notes to condensed
consolidated financial statements.
4
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
NET SALES $2,442,732 $2,280,331 $3,337,038 $3,063,085
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 1,369,050 1,199,151 1,900,745 1,610,660
Selling, general and administrative 848,999 891,080 1,647,871 1,569,231
Royalty Expense 198,338 325,497 231,530 410,546
---------- ---------- ---------- ----------
Total costs and expenses 2,416,387 2,415,728 3,780,146 3,590,437
---------- ---------- ---------- ----------
OPERATING (LOSS) INCOME 26,345 (135,397) (443,108) (527,352)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest Income 12,791 18,324 24,454 32,853
Interest Expense (32,168) (18,286) (46,963) (32,093)
Foreign exchange gain 18,975 - 17,781 -
Loss from settlement with warrant holder - - (84,125) -
Total other income (expense) (402) 38 (88,853) 760
---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE INCOME TAX 25,943 (135,359) (531,961) (526,592)
INCOME TAX 1,315 1,553 6,411 3,153
---------- ---------- ---------- ----------
NET (LOSS) INCOME $ 24,628 $ (136,912) $ (538,372) $ (529,745)
========== ========== ========== ==========
(LOSS) INCOME PER COMMON SHARE:
Primary $ 0.01 $ (0.03) $ (0.11) $ (0.11)
========== ========== ========== ==========
Weighted average number of
primary shares outstanding 5,046,721 4,803,534 5,046,721 4,757,881
========== ========== ========== ==========
Fully diluted $ 0.01 $ (0.03) $ (0.11) $ (0.11)
========== ========== ========== ==========
Weighted average number of fully
diluted shares outstanding 5,046,721 4,803,534 5,046,721 4,757,881
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
5
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
1996 1995
------------ -----------
Increase (decrease) in cash
and cash equivalents
Cash flows from operating activities:
Net loss $ (538,372) $(529,745)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Provision for losses on
accounts receivable, net (82,587) 61,823
Amortization 219,664 197,093
Depreciation 52,779 106,551
Foreign exchange loss
Loss from settlement with
warrant holder 84,125
Changes in operating assets
and liabilities:
(Increase) decrease in -
Accounts receivable (1,176,671) (261,679)
Inventories 100,833 (38,488)
Prepaid royalties (69,000) (104,873)
Other current assets (62,308) (1,076)
Other assets (23,502) (2,356)
Increase (decrease) in -
Accounts payable 924,826 196,357
Accrued expenses 198,606 81,391
Income taxes payable 9,580 1,554
----------- ---------
Net cash used in operating
activities (362,027) (293,448)
----------- ---------
Cash flows from investing activities:
Additions to property and
equipment (317,411) (283,779)
Additions to product
development costs (115,727) (198,426)
----------- ---------
Net cash used in investing
activities (433,138) (482,205)
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6
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
1996 1995
---------- -----------
Cash flows from financing activities:
Proceeds from exercise of common
stock purchase warrants $ $ 80,000
Repayment of loan payable - bank (351,425)
Proceeds from loan payable -
shareholder 200,000
Proceeds from loan payable -
agent 279,877
Proceeds from bank loan -- 420,000
Payment of shareholder
note payable -- (166,666)
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Net cash provided by
financing activities 128,452 333,334
--------- ----------
Cash and cash equivalents:
Net decrease (666,713) (442,319)
At beginning of period 783,564 1,072,021
--------- ----------
At end of period $ 116,851 $ 629,702
========= ==========
See accompanying notes to condensed
consolidated financial statements.
7
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization - Janex International, Inc. was incorporated in Colorado on July
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28, 1986, and is the parent corporation of With Design in Mind, a California
corporation, Janex Corporation ("Janex"), a New Jersey corporation, and Malibu
Fun Stuffed ("Malibu"), a California corporation, all of which are wholly-owned
subsidiaries. Janex International, Inc. is also the parent corporation of Pro
Gains Company Limited ("Pro Gains"), a Hong Kong corporation, owned 50% by Janex
International, Inc. and 50% by Janex. Malibu Fun Stuffed International Limited
("MFSI"), a Hong Kong corporation, is owned 99% by Malibu and 1% by Janex
International, Inc. As used in this report, the "Company" refers to Janex
International, Inc. and its subsidiaries, unless the context indicates
otherwise.
Business - The Company's business is conducted primarily through its
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subsidiaries, Janex, Pro Gains, Malibu and MFSI, and consists mainly of
developing, manufacturing (through subcontractors), marketing and selling toys
and functional children's products ("Children's Products"). These products
include (1) coin and gumball banks, flashlights, battery-operated toothbrushes
and clocks marketed under the brand name "Janex" and (2) plush, pool toys, video
sets and children's watches marketed under the brand name "Malibu Fun Stuffed!",
all of which retail for prices between $3 and $40. The Children's Products are
manufactured to the Company's specifications by manufacturers based in Macau,
China and the United States, and are sold nationwide to mass merchant retailers,
toy specialty stores, department stores and gift shops through a network of
independent sales representative firms.
Basis of Presentation - The accompanying consolidated financial statements are
- ---------------------
unaudited but, in the opinion of management of the Company, contain all
adjustments necessary to present fairly the financial position at June 30, 1996,
the results of operations for the three and six months ended June 30, 1996 and
1995, and the changes in cash flows for the six months ended June 30, 1996 and
1995. These adjustments are of a normal recurring nature. The consolidated
balance sheet as of December 31, 1995 is derived from the Company's audited
financial statements. The accompanying consolidated financial statements include
the operations of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
8
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although management of
the Company believes that the disclosures contained in these financial
statements are adequate to make the information presented therein not
misleading. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1995, as filed with the Securities
and Exchange Commission.
Seasonality - Because of the seasonality of the Company's business, the results
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of operations for the three and six months ended June 30, 1996 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 1996.
Net Income (Loss) Per Share - Net income (loss) per share is based on the
- ---------------------------
weighted average number of shares of common stock outstanding during the
respective periods presented. Common stock equivalents are not included in the
calculation of income (loss) per share as their effect would be anti-dilutive or
it is not material.
Pro Forma Information - Malibu and its affiliate, MFSI, were acquired in August
- ---------------------
1995 in a transaction accounted for under the purchase method of accounting. As
the combined results of operations of Malibu and MFSI during 1995 were not
material in relation to the Company's consolidated results of operations, 1995
pro forma financial information is not presented.
2. GOING CONCERN
The Company has suffered losses from operations in two out of the last
three fiscal years, and had a net loss of $538,372 and a negative cash flow of
$666,713 for six months ended June 30, 1996. However, the Company's net working
capital increased by $20,316, from working capital of $71,610 at December 31,
1995 to working capital of $91,926 at June 30, 1996. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not
9
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
2. GOING CONCERN (continued)
include any adjustments that might result from the outcome of this uncertainty.
The Company has been able to continue in operation through the financial
support provided by a combination of debt and equity financing. Continued
operations depend upon the Company continuing to obtain financing for its
activities. Management's plan for the Company includes raising additional
working capital through debt and/or equity financing until profitable operations
and positive cash flow are achieved and maintained, which management believes
are in the near future. However, no assurances can be given that the Company
will be successful in raising additional capital. Further, should the Company be
successful in raising additional capital, there is no assurance that the Company
will achieve profitability or positive cash flow. If the Company is unable to
obtain adequate additional financing, management will be required to curtail the
operations of the Company.
3. LEGAL PROCEEDINGS
On May 27, 1993, a class action lawsuit (the "Lawsuit") was filed by Kevin
J. O'Rourke and Patricia Ann O'Rourke (the "Plaintiffs") against the Company and
other parties in the United States District Court for the Central District of
California (the "Court"). On May 24, 1994, on Motion by the Company, the Lawsuit
was dismissed, but the Plaintiffs were given 45 days to amend their complaint.
On July 8, 1994, the Plaintiffs filed their Second Amended Complaint.
Thereafter, settlement negotiations ensued without success. On May 6, 1996, the
Plaintiffs filed a voluntary Request for Dismissal of the Lawsuit, which the
Court entered without prejudice on May 7, 1996.
4. WARRANT AGREEMENT AND SETTLEMENT
Under the terms of the warrant agreement granting Deco Disc warrants to
purchase 500,000 shares of the Company's common stock (the "Warrant Agreement"),
the Company was obligated to register the stock underlying the warrants, and to
use its best efforts to maintain the registration statement effective during the
period the warrants are exercisable. Deco Disc threatened to sue the Company,
claiming that the Company did not file the registration
10
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
4. WARRANT AGREEMENT AND SETTLEMENT (continued)
statement on a timely basis, and that the registration statement was not kept
effective by the Company, resulting in Deco Disc being damaged. In order to
avoid any potential litigation, on March 26, 1996, the Company and Deco Disc
entered into a Settlement Agreement and Specific Release under which the Company
issued to Deco Disc additional warrants to purchase 100,000 shares of the
Company's common stock (restricted), with certain "piggy-back" registration
rights, at a price of $.64 per share, in exchange for Deco Disc releasing the
Company from any and all prior claims relating to violations of the Warrant
Agreement, and failure to update the registration statement. As a result of the
foregoing transaction, during the six months ended June 30, 1996, the Company
recorded a charge to operations of $84,125 as management's estimate of the fair
value of the 100,000 common stock purchase warrants.
5. LOAN PAYABLE - BANK
The Company had a $1,000,000 line of credit with a bank with interest at
9.5%, pursuant to a loan agreement which expired on May 3, 1996. The line of
credit is secured by a $500,000 certificate of deposit purchased from the bank
and a first priority security interest in all of the assets of the Company. The
outstanding balance on the line of credit was $751,425 at December 31, 1995. On
March 20, 1996, the Company and the bank agreed to reduce the amount available
under the line of credit to $500,000 (including the ability of the Company to
utilize the line of credit to issue up to $100,000 of stand-by letters of
credit), and the bank waived certain covenant violations under the original loan
agreement. Accordingly, at June 30, 1996, the outstanding balance under the line
of credit had been reduced by $351,425 to $400,000. The Company is currently in
negotiations with the bank to restructure and extend the loan agreement, and
expects to conclude the negotiations during the latter part of August 1996.
There can be no assurances as to the ultimate resolution of these negotiations.
6. LOAN PAYABLE - AGENT
Pursuant to an Agency Agreement dated October 23, 1995, the Company,
through its Hong Kong subsidiaries, Pro Gains and MFSI, may borrow up to
$300,000 from its Hong Kong agent for the
11
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
6. LOAN PAYABLE - AGENT (continued)
payment of product development and tooling costs, provided that the Company
issues to the agent an irrevocable stand-by letter of credit for $100,000. The
loan is to be repaid from collections of certain customer invoices at the rate
of 5% of the invoice amount, with interest at 2% above the Hong Kong prime rate,
and any balance remaining unpaid at December 31, 1996 will be due and payable on
January 15, 1997. The agent will retain ownership of all tooling paid for with
the credit facility until the credit facility is repaid. The credit facility is
available in each year that the Agency Agreement is in effect, which was for an
initial term of two years. On March 22, 1996, the Company opened the stand-by
letter of credit to the agent. As of June 30, 1996, the Company had borrowed
$279,877 under this credit facility.
7. NOTES PAYABLE - STOCKHOLDERS
Effective as of April 19, 1996, pursuant to a Revolving Credit Agreement with an
individual lender (who is also a significant shareholder of the Company) (the
"Lender") that expires on October 19, 1999 (the "Agreement"), Janex Corporation
arranged to borrow up to $900,000, with interest at 9.5% payable quarterly. The
Agreement is secured by all of the assets of Janex Corporation, and the guaranty
of Janex International, Inc. As additional consideration, the Company granted
the Lender warrants to purchase up to 900,000 shares of the Company's common
stock (restricted), with certain "piggy-back" registration rights, exercisable
at a price of $1.45 per share through April 19, 2000. The warrants vest in equal
increments of 180,000 on the first day of consecutive six-month periods
commencing April 19, 1996. However, to the extent that amounts borrowed under
the Agreement are paid off and the Agreement is canceled during its term, any
unvested warrants shall be void. As of June 30, 1996, the Company had borrowed
$200,000 pursuant to this Agreement.
Under the terms of the stock purchase agreement for the acquisition of Janex,
the Company issued two promissory notes totalling $1,000,000, payable in semi-
annual installments over a three year period (at December 31, 1995, the amount
payable was $458,760, representing the present value of the future payments
under the obligation discount at 9%, not including imputed interest accrued but
not paid). The first three payments of $166,667 each under the $1,000,000 note
were made on June 30,
12
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
7. NOTES PAYABLE - STOCKHOLDERS (continued)
1994, December 31, 1994, and June 30, 1995. On December 29, 1995, the holders of
the $1,000,000 of notes agreed to a deferral of the payment due on December 31,
1995, to June 30, 1996. As a condition of the deferral, the Company agreed to
pay the note holders interest on the deferred payments at the rate of 9% per
annum from December 31, 1995 to the date of payment. On June 28, 1996, the note
holders agreed to further extend the payment date for all remaining payments to
February 1, 1998, subject to payment of interest at the rate of 9.5% per annum,
retroactive to January 1, 1996. Quarterly interest payments are to commence on
September 1, 1996. The Company also agreed to provide the note holders with
security for the notes. Further, in connection with the extension of the notes,
the Company entered into a warrant agreement with each of the note holders,
providing for the issuance of up to 282,994 warrants to one of them and up to
167,994 warrants to the other, to acquire a total of 450,998 shares of the Janex
International Common Stock (restricted), exercisable at a price of $1.45 per
share through June 28,2000, with certain "piggy-back" registration rights. The
warrants vest in 6-month increments over the term of the loan, and if the loan
is paid off early, certain of the warrants will be void.
8. SUBSEQUENT EVENTS
The Board of Directors extended the expiration date of the Company's Class A
Warrants from May 9, 1996 to May 9, 1999.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Consolidated Results of Operations - Six Months Ended June 30, 1996 and 1995:
Net Sales
- ---------
For the six months ended June 30, 1996, sales increased by $273,953 or
8.9%, to $3,337,038, as compared to sales of 3,063,085 for the six months ended
June 30, 1995. The increase in sales is a result of increased sales to Europe
and Canada, as well as sales generated by Malibu Fun Stuffed and its affiliate,
Malibu Fun Stuffed International, which the Company acquired in August 1995. A
substantial portion of 1996 net sales consisted of products incorporating
characters licensed from The Walt Disney Company (35%) and the "Looney Tunes"
characters licensed from Warner Bros. Corporation (40%), whereas a substantial
portion of 1995 net sales consisted of products incorporating characters
licensed from The Walt Disney Company (44%) and characters featured on the
television show Mighty Morphin Power Rangers (34%).
At June 30, 1996, the Company had a backlog of unfilled orders of
approximately $3.2 million comparable with its order backlog of approximately
$4.2 million at June 30, 1995. Although orders are booked throughout the fiscal
year, historically as much as 50% of the Company's business is booked during the
second fiscal quarter. Although the Company has noted a general slowdown in
order flow in 1996 as compared to prior years, the present backlog is not
necessarily indicative of net sales to be expected for the full fiscal year
ending December 31, 1996.
Gross Profit
- ------------
For the six months ended June 30, 1996, gross profit was $1,436,293 or
43.0% of sales, as compared to $1,452,425 or 47.4% of sales for the six months
ended June 30, 1995. The Company typically establishes prices to obtain a target
gross margin ranging from 45% to 50%, but overall gross margin can vary
depending on the sales mix in each quarter. The decrease in gross margin in 1996
as compared to 1995 was primarily the result of the Company taking markdowns in
1996 to close out certain slow-moving inventory.
Selling, General and Administrative Expenses
- --------------------------------------------
For the six months ended June 30, 1996, selling, general and administrative
expenses increased by $78,640 or 2.6%, to $1,647,871 or 49.38% of net sales, as
compared to $1,569,231 or 51.2% of net sales for the six months ended June 30,
1995.
14
Selling, general and administrative expenses are comprised of fixed overhead
costs and variable selling expenses. The increase in selling, general and
administrative expenses is consistent with the increase in sales, and included
additional costs relating to Malibu Fun Stuffed and Malibu Fun Stuffed
International.
Royalty Expense
- ---------------
For the six months ended June 30, 1996, royalty expense was $231,530 or
6.9% of sales, as compared to $410,546 or 13.4% of sales for the six months
ended June 30, 1995. Typical royalty contracts include royalty rates ranging
from 8% to 16%. The decrease in royalty expense in 1996 as compared to 1995 was
primarily the result of a shift in the sales mix in 1996 to a higher proportion
of non-royalty sales, which included sales to Europe and sales by Malibu Fun
Stuffed and Malibu Fun Stuffed International Limited.
Loss from Settlement with Warrant Holder
- ----------------------------------------
Under the terms of the warrant agreement granting Deco Disc warrants to
purchase 500,000 shares of the Company's common stock (the "Warrant Agreement"),
the Company was obligated to register the stock underlying the warrants, and to
use its best efforts to maintain the registration statement effective during the
period the warrants are exercisable. Deco Disc threatened to sue the Company,
claiming that the Company did not file the registration statement on a timely
basis, and that the registration statement was not kept effective by the
Company, resulting in Deco Disc being damaged. In order to avoid any potential
litigation, on March 26, 1996, the Company and Deco Disc entered into a
Settlement Agreement and Specific Release under which the Company issued to Deco
Disc additional warrants to purchase 100,000 shares of the Company's common
stock (restricted), with certain "piggy-back" registration rights, at a price of
$.64 per share, in exchange for Deco Disc releasing the Company from any and all
prior claims relating to violations of the Warrant Agreement, and failure to
update the registration statement. As a result of the foregoing transaction,
during the six months ended June 30, 1996, the Company recorded a charge to
operations of $84,125 as management's estimate of the fair value of the 100,000
common stock purchase warrants.
Net Loss
- --------
The reasons for the increase in net loss in 1996 as compared to 1995 are
summarized above. For the six months ended June 30, 1996, the net loss was
$538,372, or $.11 per share, as compared to a net loss of $529,745, or $.11 per
share, for the six months ended June 30, 1995.
15
Consolidated Financial Condition - June 30, 1996:
Liquidity and Capital Resources
- -------------------------------
The Company's cash balance decreased by $666,713 to $116,851 at June 30,
1996, as compared to $783,564 at December 31, 1995. The Company's net working
capital increased by $20,316, from working capital of $71,610 at December 31,
1995 to working capital of $91,926 at June 30, 1996, and the Company's current
ratio increased to 1.029:1 at June 30, 1996 as compared to 1.028:1 at December
31, 1995. For the six months ended June 30, 1996, the Company's operations
utilized cash resources of $362,027, as compared to utilizing cash resources of
$293,448 for the six months ended June 30, 1995, primarily as a result of a
decrease in inventories, an increase in accounts receivable and an increase in
accounts payable during the six months ended June 30, 1996.
During the six months ended June 30, 1996, as part of the Company's
continuing program of capital investment in new products and licenses, the
Company incurred additions to property and equipment, reflecting tooling and
molds related to new licenses, of $317,411, and additions to product development
costs of $115,727.
Under the terms of the stock purchase agreement for the acquisition of
Janex, the Company issued two promissory notes totalling $1,000,000, payable in
semi-annual installments over a three year period (at December 31, 1995, the
amount payable was $458,760, representing the present value of the future
payments under the obligation discount at 9%, not including imputed interest
accrued but not paid). The first three payments of $166,667 each under the
$1,000,000 note were made on June 30, 1994, December 31, 1994, and June 30,
1995. On December 29, 1995, the holders of the $1,000,000 of notes agreed to a
deferral of the payment due on December 31, 1995, to June 30, 1996. As a
condition of the deferral, the Company agreed to pay the note holders interest
on the deferred payments at the rate of 9% per annum from December 31, 1995 to
the date of payment. On June 28, 1996, the note holders agreed to further extend
the payment date for all remaining payments to February 1, 1998, subject to
payment of interest at the rate of 9.5% per annum, retroactive to January 1,
1996. Quarterly interest payments are to commence on September 1, 1996. The
Company also agreed to provide the note holders with security for the notes.
Further, in connection with the extension of the notes, the Company entered into
a warrant agreement with each of the note holders, providing for the issuance of
up to 282,994 warrants to one of them and up to 167,994 warrants to the other,
to acquire a total of 450,998 shares of the Janex International Common Stock
(restricted), exercisable at a price of $1.45 per share through June 28,2000,
with certain "piggy-back" registration rights. The warrants vest
16
in 6-month increments over the term of the loan, and if the loan is paid off
early, certain of the warrants will be void.
The Company had a $1,000,000 line of credit with a bank with interest at
9.5%, pursuant to a loan agreement which expired on May 3, 1996. The line of
credit is secured by a $500,000 certificate of deposit purchased from the bank
and a first priority security interest in all of the assets of the Company. The
outstanding balance on the line of credit was $751,425 at December 31, 1995. On
March 20, 1996, the Company and the bank agreed to reduce the amount available
under the line of credit to $500,000 (including the ability of the Company to
utilize the line of credit to issue up to $100,000 of stand-by letters of
credit), and the bank waived certain covenant violations under the original loan
agreement. Accordingly, at June 30, 1996, the outstanding balance under the line
of credit had been reduced by $351,425 to $400,000. The Company is currently in
negotiations with the bank to restructure and extend the loan agreement, and
expects to conclude the negotiations during the latter part of August 1996.
There can be no assurances as to the ultimate resolution of these negotiations.
On December 22, 1995, the Company borrowed $500,000 in a private unsecured
loan transaction, with interest at prime plus 2%. Under the terms of the loan
agreement, payments are to be made on a periodic basis based upon the level of
certain sales. If the loan is not fully repaid by October 1, 1996, the remaining
balance becomes immediately due and payable. At June 30, 1996, the outstanding
balance on this loan was $500,000.
Pursuant to an Agency Agreement dated October 23, 1995, the Company,
through its Hong Kong subsidiaries, Pro Gains and MFSI, may borrow up to
$300,000 from its Hong Kong agent for the payment of product development and
tooling costs, provided that the Company issues to the agent an irrevocable
stand-by letter of credit for $100,000. The loan is to be repaid from
collections of certain customer invoices at the rate of 5% of the invoice
amount, with interest at 2% above the Hong Kong prime rate, and any balance
remaining unpaid at December 31, 1996 will be due and payable on January 15,
1997. The agent will retain ownership of all tooling paid for with the credit
facility until the credit facility is repaid. The credit facility is available
in each year that the Agency Agreement is in effect, which was for an initial
term of two years. On March 22, 1996, the Company opened the stand-by letter of
credit to the agent. As of June 30, 1996, the Company had borrowed $279,877
under this credit facility.
Effective as of April 19, 1996, pursuant to a Revolving Credit Agreement
with an individual lender (who is also a significant shareholder of the Company)
(the "Lender") that expires on September 19, 1998 (the "Agreement"), Janex
Corporation arranged to borrow up to $900,000, with interest at
17
9.5% payable quarterly. The Agreement is secured by all of the assets of Janex
Corporation, and the guaranty of Janex International, Inc. As additional
consideration, the Company granted the Lender warrants to purchase up to 900,000
shares of the Company's common stock (restricted), with certain "piggy-back"
registration rights, exercisable at a price of $1.45 per share through April 19,
2000. The warrants vest in equal increments of 180,000 on the first day of
consecutive six-month periods commencing April 19, 1996. However, to the extent
that amounts borrowed under the Agreement are paid off and the Agreement is
canceled during its term, any unvested warrants shall be void. As of June 30,
1996, the Company had borrowed $200,000 pursuant to this Agreement.
The Company believes that its existing cash balance, together with its
lines of credit and cash flow from operations, will be sufficient to fund order
flow and overhead for the remainder of the fiscal year ending December 31, 1996.
In order to fund any potential working capital deficiency that may develop in
1996 as a result of the debt repayment obligations referred to above, the
Company continues to engage in discussions with various financing sources.
Depending on the availability of financing and the results of its operations,
the ability of the Company to fund new licenses and develop new products may be
constrained. There can be no assurances that any additional financing necessary
to fund the debt service obligations and/or the operations of the Company will
be available on a timely basis and/or under acceptable terms and conditions. To
the extent that the Company's sales are limited by the availability of working
capital, the Company would be required to reduce operations to a level
consistent with its available working capital.
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PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K -
Three Months Ended June 30, 1996: Under Item 5. Other Events, the
Company reported that Michael S. Manahan had resigned on April 15,
1996, as a director, vice president, chief financial officer and
secretary of the Company. The Company also announced that the
expiration date of the Company's Class A warrants was extended from May
9, 1996 to May 9, 1996.
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SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
JANEX INTERNATIONAL, INC.
------------------------
(Registrant)
Date: By: /s/ SHELDON F. MORICK
-------------------------
Sheldon F. Morick
President and Director
(Duly authorized officer
and acting principal
financial officer)
20