UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: Not applicable
Commission file number 0-17927
JANEX INTERNATIONAL, INC.
(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 No.)
21700 OXNARD STREET, STE. 1610, WOODLAND HILLS, CALIFORNIA 91367
(Address of principal executive offices) (Zip Code)
818-593-6777
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act of 1934 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, 1997, the issuer had 5,296,721 shares of its common stock, no par
value, issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Total sequentially numbered pages in this document: 21
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheet as of
December 31, 1996 and June 30, 1997.................... 3
Consolidated Statements of Operations
for the three and six months ended
June 30, 1997 and 1996................................. 4
Consolidated Statements of Cash Flows
for the three months ended
June 30, 1997 and 1996................................ 5 - 6
Notes to Consolidated Financial Statements............ 7 - 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION..................................... 13 - 19
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................... 20
SIGNATURE............................................. 21
2
JANEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1997 AND DECEMBER 31, 1996
June 30, December 31,
1997 1996
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 98,387 $ 186,616
Certificate of deposit (Note 5) 100,000 500,000
Accounts receivable,
net of allowance of $187,091 & $202,634 $ 652,652 $ 230,479
Inventories 209,021 569,637
Prepaid royalties 159,101 182,465
Other current assets 75,632 179,108
------------ ------------
Total current assets 1,294,793 1,848,305
PROPERTY AND EQUIPMENT, net 430,245 476,355
INTANGIBLE ASSETS, net 352,077 2,021,551
PRODUCT DEVELOPMENT COSTS, net 166,473 242,471
DEFERRED LOAN CHARGES 178,624 331,155
OTHER ASSETS 3,552 11,939
------------ ------------
$ 2,425,764 $ 4,931,776
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Loan payable - bank (Note 5) $ -0- $ 400,000
Loans payable - agent (Note 6) 355,428 450,088
Accounts payable 1,152,116 809,308
Accrued expenses 996,682 848,359
Note payable (Note 8) 334,146 531,356
Income taxes payable -0- 1,940
------------ ------------
Total current liabilities 2,838,372 3,041,051
Notes payable - stockholders (Note 7) 1,230,000 1,115,000
------------ ------------
Total liabilities 4,068,372 4,156,051
Commitments and contingency (Notes 2 and 3) -- --
STOCKHOLDERS' EQUITY (Note 4)
Class A convertible preferred stock,
no par value; 5,000,000 shares authorized;
none issued and outstanding
Common stock, no par value; 20,000,000 shares
authorized; 5,296,721 shares issued and
outstanding 11,268,816 11,268,816
Additional paid-in capital 554,517 554,517
Accumulated deficit (13,465,941) (11,047,608)
Total stockholders' equity (deficit) (1,642,608) 775,725
------------ ------------
$ 2,425,764 $ 4,931,776
============ ============
See accompanying notes to condensed consolidated financial statements.
3
JANEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
------------ ----------- ------------ ----------
NET SALES $ 1,881,778 $2,442,732 $ 3,615,654 $3,337,038
----------- ---------- ----------- ----------
COSTS AND EXPENSES
Cost of sales 1,113,333 1,369,050 2,157,558 1,900,745
Selling, general and
administrative 589,311 692,335 1,229,249 1,375,428
Royalty expense 397,992 198,338 489,895 231,530
----------- ---------- ----------- ----------
Total costs and expenses 2,100,636 2,259,723 3,876,702 3,507,703
----------- ---------- ----------- ----------
OPERATING (LOSS) INCOME (218,858) 183,009 (261,048) (170,665)
----------- ---------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest income 5,670 12,791 12,355 24,454
Interest expense (121,710) (32,168) (247,439) (46,963)
Foreign exchange gain -- 18,975 -- 17,781
Loss from settlement with
warrant holder (Note 4) -- -- -- (84,125)
Depreciation/Amortization (1,778,502) (156,664) (1,923,303) (272,443)
Gain on disposal of
fixed assets -- -- 1,500 --
----------- ---------- ----------- ----------
Total other income (expense) (1,894,542) (157,066) (2,156,887) (361,296)
----------- ---------- ----------- ----------
(LOSS) INCOME BEFORE INCOME
TAX (2,113,400) 25,943 (2,417,935) (531,961)
INCOME TAX 48 1,315 398 6,411
----------- ---------- ----------- ----------
NET (LOSS) INCOME $(2,113,448) $ 24,628 $(2,418,333) $ (538,372)
=========== ========== =========== ==========
(LOSS) PER COMMON SHARE: $ (0.40) $ (0.01) $ (0.46) $ (0.11)
=========== ========== =========== ==========
Weighted average number of
shares outstanding 5,296,721 5,046,721 5,296,721 5,046,721
=========== ========== =========== ==========
See accompanying notes to condensed consolidated financial statements.
4
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
1997 1996
------------- ------------
Cash flows from operating activities
Net loss $(2,418,333) $ (538,372)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities:
Provision for losses on
accounts receivable, net (15,543) (82,587)
Amortization/Depreciation 1,923,303 272,443
Imputed interest 152,531 ---
Loss from settlement with
warrant holder -- 84,125
Changes in operating assets
and liabilities:
(Increase) decrease in -
Accounts receivable (406,630) (1,176,671)
Inventories 360,616 100,833
Prepaid royalties 23,364 (69,000)
Other current assets 103,476 (62,308)
Other assets 8,387 (23,502)
Increase (decrease) in -
Accounts payable 342,808 924,826
Accrued expenses 148,323 198,606
Income taxes payable (1,940) 9,580
----------- -----------
Net cash provided by (used in)
operating activities 220,362 (362,027)
----------- -----------
Cash flows from investing activities:
Additions to property
and equipment (82,099) (317,411)
Additions to product
development costs (49,622) (115,727)
Reduction of certificate of
deposit 400,000 ---
----------- -----------
Net cash provided by (used in)
investing activities 268,279 (433,138)
----------- -----------
5
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
1997 1996
---------- ---------
Cash flows from financing activities:
Repayment of loan payable - bank (400,000) (351,425)
Proceeds from loan payable -
shareholder 115,000 200,000
Repayment of loan payable - agent (94,660) --
Proceeds from loan payable - agent 279,877
Repayment of note payable (197,210) --
--------- --------
Net cash provided by (used in)
financing activities (576,870) 128,452
--------- --------
Cash and cash equivalents:
Net decrease (88,229) (666,713)
At beginning of period 186,616 783,564
--------- --------
At end of period $ 98,387 116,851
========= ========
See accompany notes to condensed consolidated financial statements
6
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization - Janex International, Inc. was incorporated in Colorado on July
- ------------
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
- --------
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, 1997,
the results of operations for the three and six months ended June 30, 1997 and
1996, and the changes in cash flows for the six months ended June 30, 1997 and
1996. These adjustments are of a normal recurring nature. The consolidated
balance sheet as of December 31, 1996 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.
7
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (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, 1996, as filed with the Securities
and Exchange Commission.
Seasonality - Because of the seasonality of the Company's business, the results
- -----------
of operations for the six months ended June 30, 1997 are not necessarily
indicative of the results of operations to be expected for the full fiscal year
ending December 31, 1997.
Net Loss Per Share - Net 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 loss per share
as their effect would be anti-dilutive or it is not material.
2. GOING CONCERN
The Company has suffered recurring losses from operations and had a net
loss of $2,418,333 for six months ended June 30, 1997. The Company's net working
capital deficit increased by $350,833 from $1,192,746 at December 31, 1996, to
$1,543,579 at June 30, 1997. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
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.
8
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (CONTINUED)
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 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
outstanding balance on the line of credit was $751,425 at December 31, 1995. On
March 20, 1996, the Company and 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.
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. Accordingly, at December 31, 1996, the outstanding balance under the
line of credit had been reduced by $351,425 to $400,000.
9
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (CONTINUED)
The Company, through a Hong Kong bank, has a line of credit for the
Company's subsidiary, Pro Gains, which allows Pro Gains to discount with the
bank letters of credit issued to Pro Gains by its customers. The credit is
tailored to match the Company's selling season. From May to November the credit
line is HK$7,000,000 (US$900,000) and from December to April the line is
HK$1,500,000 (US$200,000). Janex International, Inc. has issued a guarantee to
the Hong Kong bank in the full amount of the line. At June 30, 1997, the Company
had no advances under this line for discounted letters of credit. The cash
advances under the line are treated as reductions in accounts receivable.
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
$450,000 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 $150,000. 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, 1997 will be due and payable on January 15,
1998. 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. As of June 30, 1997, the Company had borrowed $227,231 under
this credit facility.
Pursuant to a supplementary agency agreement dated September 24, 1996, the
Company may borrow up to another $200,000 from its Agent provided that the
Company issues to the Agent an irrevocable stand-by letter of credit for
$100,000. Any advance under this facility is to be repaid within 60 days from
the date of advance with interest at 2% above the Hong Kong prime rate, and any
balance remaining unpaid at December 31, 1997, will be due and payable on
January 15, 1998. As of June 30, 1997, the Company had borrowed $128,197 under
this credit facility.
10
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (CONTINUED)
7. NOTES PAYABLE - STOCKHOLDERS
Effective as of April 19, 1996, pursuant to a Revolving Credit Agreement
(the "Agreement") with an individual lender (who is also a significant
shareholder of the Company) (the "Lender") that expires on October 19, 1999,
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 guarantee 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,
1997, the Company had borrowed $615,000 pursuant to this Agreement. In
addition, the Company has used an additional $150,000 as security to issue
stand-by letters of credit in connection with the loan payable to the Company's
Hong Kong agent (See Note 6).
Under the terms of the stock purchase agreement for the acquisition of
Janex, the Company issued two promissory notes to two stockholders 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 commenced on September 1, 1996.
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
11
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (CONTINUED)
June 28, 2000, with certain "piggy-back" registration rights. The
warrants vest in six-month increments over the term of the loan, and if the loan
is paid off early certain of the warrants will be void. The outstanding loan
balance as of June 30, 1997 was $500,000.
The Company charged to operations $152,532 of imputed interest from the
issuance of stock warrants noted in the above two paragraphs in the six months
ended June 30, 1997.
In addition, as part of the June 28, 1996 Agreement with the stockholders,
the payment of commissions owing one of the stockholders was extended to
February 1, 1998. Furthermore, the unpaid commission balance bears interest at
9.5% per annum beginning January 1, 1996, until paid with interest paid
quarterly beginning September 1, 1996. The outstanding commission loan balance
as of June 30, 1997 was $115,000.
8. NOTE PAYABLE
On December 22, 1995, the Company borrowed $500,000 in a private unsecured
loan transaction. Under the terms of the loan agreement, payments are to be
made on a periodic basis based upon the level of certain sales. The loan
accrues interest monthly on the unpaid portion at the rate of two percent (2%)
above the prime rate (8.5% at December 31, 1996) per annum.
In addition, an agreement was reached whereby an additional $340,000 was
added to the outstanding balance as of December 31, 1996. If the loan is not
fully paid off by December 31, 1997, the remaining balance and accrued interest
will be paid off no later than January 31, 1998. The balance of this note
payable at June 30, 1997 is $334,146.
9. NEW ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings per Share (SFAS 128). This pronouncement provides a
different method of calculating earnings per share than is currently used in
accordance with APB 15, Earnings per Share. SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share.
12
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (CONTINUED)
The pronouncement is effective for fiscal years and interim periods ending after
December 15, 1997; early adoption is not permitted. The Company has not
determined the effect, if any, of adoption on its EPS computation(s).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Consolidated Results of Operations - Six Months Ended June 30, 1997 and 1996:
Net Sales
- ---------
For the six months ended June 30, 1997, net sales increased by $278,616 or 8.3%,
to $3,615,654, as compared to net sales of $3,337,038 for the six months ended
June 30, 1996. The increase in net sales is a direct result of increased sales
generated by Malibu Fun Stuffed and shipment of its Wet Pet product line which
make up a substantial portion of 1997 sales (69%). A substantial portion of
1996 net sales consisted of products incorporating characters licensed from the
Walt Disney Company (42%) and the "Looney Tunes" characters licensed from Warner
Bros. Corporation (39%).
At June 30, 1997, the Company had a backlog of unfilled orders of approximately
$1,700,000 comparable with its order backlog of approximately $3,200,000 at June
30, 1996. 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 increase in order flow in 1997
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, 1997.
Gross Profit
- ------------
For the six months ended June 30, 1997, gross profit was $1,458,096 or 40.3% of
net sales, as compared to $1,436,293 or 43.0% of net sales for the six months
ended June 30, 1996. 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 small decrease in gross margin
in 1997 as compared to 1996 was primarily the result of the Company taking
markdowns in 1997 to close out certain slow-moving inventory.
13
Selling, General and Administrative Expenses
- --------------------------------------------
For the six months ended June 30, 1997, selling, general and administrative
expenses decreased by $146,179 or 10.6%, to $1,229,249 or 33.9% of net sales, as
compared to $1,375,428 or 41.2% of net sales for the six months ended June 30,
1996. Selling, general and administrative expenses are comprised of fixed
overhead costs and variable selling expenses. The decrease in selling, general
and administrative expenses as a percentage of sales is consistent with the
increase in net sales.
Royalty Expense
- ---------------
For the six months ended June 30, 1997, royalty expense was $489,895 or 13.5% of
net sales, as compared to $231,530 or 6.9% of net sales for the six months ended
June 30, 1996. The increase in royalty expense in 1997 as compared to 1996 was
as a result of three factors. First, royalty rates vary from license to license
from 8% to 16%. Royalties will vary between periods based upon the product mix
included in sales during the period. Secondly, the increase in royalties as a
percentage of sales is consistent with a general upward trend in the royalty
rates on license agreements. An finally, a reserve of $322,500 was charged to
operations to meet royalty guarantees made on contracts under which insufficient
product sales were generated to meet the minimum guarantee.
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.
14
Net Loss
- --------
The reasons for the increase in net loss in 1997 as compared to 1996 are
summarized above. For the six months ended June 30, 1997, the net loss was
$2,418,333 or $.46 per share, as compared to a net loss of $538,372, or $.11 per
share, for the six months ended June 31, 1996.
Consolidated Financial Condition - June 30, 1997
Liquidity and Capital Resources
- -------------------------------
The Company's cash balance decreased by $88,229 to $98,387 at June 30, 1997, as
compared to $186,616 at December 31, 1996. The Company's net working capital
decreased by $350,833 from working capital deficit of $1,192,746 at December 31,
1996 to a working capital deficit of $1,543,579 at June 30, 1997, and the
Company's current ratio decreased to 0.46:1 at June 30, 1997 as compared to
0.61:1 at December 31, 1996. For the six months ended June 30, 1997, the
Company's operations provided cash resources of $220,362, as compared to
utilizing cash resources of $362,027 for the six months ended June 30, 1996,
primarily as a result of a decrease in inventories, an increase in accounts
receivable and an increase in accounts payable and accrued expenses during the
six months ended June 30, 1997.
During the six months ended June 30, 1997, 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 $82,099, and additions to product development costs of $49,622.
The Company believes that its existing cash balance together with its existing
lines of credit and projected cash flow from operations will not be sufficient
----------------------
to fund projected order flow, overhead and debt repayment for the fiscal year
ending December 31, 1997. Accordingly, the Company must obtain additional
financing in order to maintain its current level of operations. If financing is
not obtained in the immediate future, then the Company will have no choice but
to seek to substantially reduce operations to a level consistent with available
working capital. The Company is actively seeking additional sources of
financing, including but not limited to a merger with, or acquisition by,
another company. There can be no assurances that any such additional financing
will be available on a timely basis and/or under acceptable terms. If such
financing does not materialize the Company will be forced to cease operations.
The Company has experienced recurring losses from operations, negative cash
flows and decreases in working capital.
15
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 outstanding
balance on the line of credit was $751,425 at December 31, 1995. On March 20,
1996, the Company and 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. 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.
Accordingly, at December 31, 1996, the outstanding balance under the line of
credit had been reduced by $351,425 to $400,000.
The Company, through a Hong Kong bank, has a line of credit for the Company's
subsidiary, Pro Gains, which allows Pro Gains to discount with the bank letters
of credit issued to Pro Gains by its customers. The credit is tailored to match
the Company's selling season. From May to November the credit line is
HK$7,000,000 (US$900,000) and from December to April the line is HK$1,500,000
(US$200,000). Janex International, Inc. has issued a guarantee to the Hong Kong
bank in the full amount of the line. At June 30, 1997, the Company had no
advances under this line for discounted letters of credit. The cash advances
under the line are treated as reductions in accounts receivable.
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
guarantee 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. The Company recorded imputed interest of
$111,786 from the issuance of these warrants. As of June 30, 1997, the Company
had borrowed $615,000 pursuant to this Agreement. In addition, the Company has
used an additional $150,000 as security to issue stand-by letters of credit in
connection with loans payable to the Company's Hong Kong agent. The unamortized
loan charge at June 30, 1997 was $126,318.
16
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 by
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 commenced 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 six-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 recorded imputed interest of $55,668
from the issuance of these warrants and another $13,023 from the extension of
the notes. The outstanding loan balance and unamortized loan charge as of June
30, 1997, was $500,000 and $52,306.
In addition, as part of the June 28, 1996 Agreement, the payment of commissions
owing one of the stockholders was extended to February 1, 1998, Furthermore, the
unpaid commission balance bears interest at 9.5% per annum beginning January 1,
1996, until paid with interest paid quarterly beginning September 1, 1996. The
outstanding principal balance as of June 30, 1997 was $115,000.
On December 22, 1995, the Company borrowed $500,000 in a private unsecured loan
transaction. Under the terms of the loan agreement, payments are to be made on
a periodic basis based upon the level of certain sales. The loan accrues
interest monthly on the unpaid portion at the rate of two percent (2%) above the
prime rate (8.5% at December 31, 1996) per annum. In addition, an agreement was
reached whereby an additional $340,000 was added to the outstanding balance. If
the loan is not fully paid off by December 31, 1997, the remaining balance and
accrued interest will be paid off no later than January 31, 1998. The balance
of this note payable at June 30, 1997 is $334,146.
17
Pursuant to an Agency Agreement dated October 23, 1995, the Company, through its
Hong Kong subsidiaries, Pro Gains and MFSI, may borrow up to $450,000 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 $150,000. 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,
1997, will be due and payable on January 15, 1998. 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. In
March 1996, the Company opened the stand-by letter of credit to the agent. As
of June 30, 1997, the Company had borrowed $227,231 under this credit facility.
Pursuant to a supplementary agency agreement dated September 24, 1996, the
Company may borrow up to another $200,000 from its agent provided that the
Company issues to the Agent an irrevocable stand-by letter of credit for
$100,000. Any advance under this facility is to be repaid with 60 days from the
date of advance with interest at 2% above the Hong Kong prime rate, and any
balance remaining unpaid at December 31, 1997, will be due and payable on
January 15, 1998. As of June 30, 1997, the Company had borrowed $128,197 under
this credit facility.
On August 4, 1995, the Company acquired all of the outstanding stock of Malibu,
a California corporation, and its then affiliated Hong Kong company, MFSI.
Under the terms of the purchase agreement, the Company issued 125,000 shares of
the Company's restricted common stock to the former stockholder of the acquired
companies, and paid $50,000 cash. The Company recorded the acquisition using
the purchase method of accounting. Under this method, the allocation of the
purchase price to Malibu's and MFSI's assets and liabilities is required to
reflect fair value. The Company allocated the excess of purchase price over net
assets acquired to goodwill. In addition, the former stockholders of Malibu and
MFSI were entitled to an earn-out based on future performance of Malibu and
MFSI. In October 1996, the Company revised this agreement and issued the former
owners of Malibu 150,000 shares of restricted common stock in exchange for
cancellation of the earn-out provisions of the agreement. The common stock was
valued at $1.00 per share, which was management's estimate of the fair value at
the time. Accordingly, $150,000 was recorded as compensation expense.
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
18
maintain the registration statement effective during the period the warrants are
excisable. 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 $0.64 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 year ended
December 31, 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.
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PART II. OTHER INFORMATION
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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 March 31, 1997: Under Item 5.
Other Events: NONE
20
SIGNATURES
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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.
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Registrant
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Date: August 14, 1997 By: /s/ Leslie Friedland
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Leslie Friedland
President and Director
21