UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from: Not applicable
Commission File No. 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.)
2999 N. 44TH STREET, SUITE 225 85018
PHOENIX, ARIZONA 85018-7247 (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code: (602) 808-8765
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
As of May 18, 2000, the issuer had 9,098,750 shares of its common stock, no par
value, and 5,000,000 shares of its preferred stock, no par value, issued and
outstanding (plus an additional minimum of 12,000,000 shares of Common Stock
committed for issuance). See footnote 1 to the Company's financial statements
included with this report.
JANEX INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I
CONSOLIDATED BALANCE SHEETS...............................................1
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED).........................2
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED).........................3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)....................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION............................................9
PART II OTHER INFORMATION.................................................11
ITEM 5. OTHER INFORMATION.................................................11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................14
SIGNATURES.................................................................16
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2000
December 31, 1999 (Unaudited)
----------------- --------------
ASSETS (All Collateralized)
Current assets:
Cash and cash equivalents ........................ $ 3,920 $ 8,712
Accounts receivable, net of allowance of $22,942
at December 31, 1999 and March 31, 2000 ........ 55,978 61,934
Inventories ...................................... -- --
Other current assets ............................. 84,306 77,052
------------ ------------
Total current assets ................................. 144,204 147,698
Property and equipment, net .......................... 3,025 2,093
Intangible assets, net ............................... 270,662 261,589
------------ ------------
Total assets ......................................... $ 417,891 $ 411,380
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Note payable - bank .............................. $ 256,943 $ 256,943
Due to Futech Interactive Products, Inc. ......... 1,630,192 1,650,452
Accounts payable ................................. 1,033,671 1,058,327
Accrued expenses ................................. 546,155 684,849
------------ ------------
Total current liabilities ............................ 3,466,961 3,650,571
Shareholders' deficit:
Class A convertible preferred stock, no par value:
Authorized shares - 5,000,000
Issued and outstanding shares - 5,000,000 at
December 31, 1999 and March 31, 2000,
Respectively ................................... 569,022 569,022
Common stock, no par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 18,098,750 and
11,698,750 at December 31, 1999 and March 31,
2000, respectively ............................. 12,803,507 18,874,457
Common stock issuable - 10,000,000 at March 31,
2000 (minimum) ................................. -- --
Additional paid-in capital ....................... 554,517 554,517
Accumulated deficit .............................. (16,976,116) (23,237,187)
------------ ------------
Total shareholders' deficit .......................... (3,049,070) (3,239,191)
------------ ------------
Total liabilities and shareholders' deficit .......... $ 417,891 $ 411,380
============ ============
See accompanying summary of accounting policies and notes to financial
statements.
1
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended March 31,
-------------- --------------
1999 2000
-------------- --------------
Net Sales .................................... $ 222,346 $ 2,530
Royalty Income ............................... -- 5,956
Cost of Sales ................................ (187,037) (430)
Royalty Expense .............................. (5,355) --
------------ ------------
Gross margin ............................ 29,954 8,056
Operating Expenses:
Selling, general and
administrative ........................ 154,928 178,774
Stock based compensation ................ -- 6,070,950
Depreciation and amortization ........... 73,408 10,005
------------ ------------
Loss from operations ......................... (198,382) (6,251,673)
------------ ------------
Other income (expense)
Interest expense ........................ (5,520) (7,398)
Other income (expense) .................. 409 --
------------ ------------
Total other income (expense) ................. (5,111) (7,398)
------------ ------------
Loss before income tax ....................... (203,493) (6,259,071)
Income tax provision ......................... (4,725) (2,000)
------------ ------------
Net Loss ..................................... $ (208,218) $ (6,261,071)
============ ============
Loss per common share ........................ $ (0.01) $ (0.33)
============ ============
Weighted average number of Common
shares outstanding ........................... 18,098,750 18,920,728
============ ============
See accompanying summary of accounting policies and notes to
financial statements.
2
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31,
------------------------------------
1999 2000
------ ------
OPERATING ACTIVITIES
Net loss .................................................. $ (208,218) $(6,261,071)
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Stock based compensation ............................. -- 6,070,950
Depreciation ......................................... 45,686 932
Amortization ......................................... 27,722 9,073
Changes in operating assets and liabilities:
Accounts receivable .................................. (38,348) (5,956)
Inventories .......................................... 96,065 --
Other current assets ................................. (79,548) 7,254
Accounts payable ..................................... (236,146) 24,656
Accrued expenses ..................................... (233,442) 138,694
----------- -----------
Net cash used in operating activities ..................... (626,229) (15,468)
INVESTING ACTIVITIES
Product development costs ................................. (24,168) --
----------- -----------
Net cash used in investing activities ..................... (24,168) --
FINANCING ACTIVITIES
Increase in due to Futech ................................. 605,718 20,260
----------- -----------
Net cash provided by financing activities ................. 605,718 20,260
----------- -----------
Net increase in cash and cash equivalents ................. (44,679) 4,792
Cash and cash equivalents at beginning of period .......... 62,412 3,920
----------- -----------
Cash and cash equivalents at end of period ................ $ 17,733 $ 8,712
=========== ===========
Supplemental cash flow Information:
Cash paid for interest .................................... $ 5,321 $ 3,858
----------- -----------
Cash paid for income taxes ................................ $ 4,725 --
=========== ===========
See accompanying summary of accounting policies and notes to
financial statements.
3
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Janex International, Inc. ("Company") and its subsidiaries are in the
business of developing, marketing and selling toys and functional children's
products which are manufactured by subcontractors. Janex sells its products
primarily to U.S.-based retailers and their Hong Kong subsidiaries.
The accompanying consolidated financial statements are unaudited, but, in the
opinion of Company management, contain all adjustments necessary to present
fairly the financial position of the Company at March 31, 2000, the results of
operations for the three months ended March 31, 2000 and 1999, and the changes
in cash flows for the three months ended March 31, 2000 and 1999. These
adjustments are of a normal recurring nature. The consolidated balance sheet as
of December 31, 1999 is taken from the Company's audited financial statements.
Some of the information and footnote disclosures normally included in financial
statements that are prepared in accordance with generally-accepted accounting
principles have been condensed or omitted under the rules and regulations of the
Securities and Exchange Commission. However, Company management believes that
the disclosures contained in the financial statements are adequate to make the
information presented not misleading. For further information, refer to the
consolidated financial statements and notes included in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1999, as filed with
the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation. All balance sheet accounts of the Company's
foreign subsidiaries are translated at the current exchange rate at the balance
sheet date, while income statement items are translated at the average currency
exchange rates for each period presented. The resulting translation adjustments,
if significant, are recorded as comprehensive income. At December 31, 1999 and
March 31, 2000, the adjustment was not significant.
The preparation of financial statements in conformity with generally-accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The financial statements have been prepared assuming the Company will continue
as a going concern. The Company has incurred significant operating losses in the
past three years and has negative net worth and negative working capital as of
March 31, 2000. These factors raise significant doubt as to the Company's
ability to continue as a going concern.
The Company's ultimate ability to continue as a going concern depends on the
market acceptance of its products, an increase in revenues and the achievement
of operating profits and positive cash flow. The Company will also require
additional financial resources from Futech Interactive Products, Inc.
("Futech"), or from other sources to provide near-term operating cash to enable
the Company to execute its plans to move toward profitability. Management
believes that future financings, the planned acquisitions (described in Item 5.
Other Information of this Form 10-QSB), and additional sales to be generated
from new product lines that are being developed, will be sufficient to allow the
Company to continue in operation.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2000.
4
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on various methods which approximate the first-in,
first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is
computed principally by the straight-line method over the
estimated useful lives of the assets which range from two to
five years for molds, machinery and equipment, and furniture
and fixtures. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the lease term.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At March 31, 2000, the Company has the following financial
instruments: cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses, and long-term debt. The
carrying value of cash and cash equivalents, accounts
receivable, accounts payable, and accrued expenses
approximates their fair value based on the liquidity of these
financial instruments or based on their short-term nature.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and product development
costs.
Costs of business acquisitions in excess of net asset of subsidiaries
acquired (goodwill) are amortized on a straight-line basis over a ten
year period. The Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted cash flows estimated
to be generated by those assets are less then the carrying amounts of
those assets. This methodology includes intangible assets acquired.
Goodwill relating to specific intangible assets is included in the
related impairment measurements to the extent it is identified with
such assets.
Product development costs consist of product design and development
(through subcontractors) for the various toys and children's products
the Company sells. The designs are stated at the lower of cost or net
realizable value and amortized on a straight-line basis over a one to
five year period.
Management reviews goodwill and other intangible assets periodically
for possible impairment. This policy includes recognizing write-downs
if it is probable that measurable undiscounted future cash flows
and/or the aggregate net cash flows of an asset, as measured by
current revenues and costs (exclusive of depreciation) over the
asset's remaining depreciable life, are not sufficient to recover the
net book value of an asset.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company transacts business on a credit basis with its customers.
The Company routinely assesses the financial strength of its customers
and, as a consequence, believes that its trade accounts receivable
credit risk exposure is limited. The Company does not require
collateral to support customer receivables. However, foreign
receivables are generally secured by a letter of credit. The Company
maintains an allowance for potential credit losses and such losses
have been within management's expectations.
5
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of the product to the
customer, with appropriate allowances made for estimated returns and
uncollectible accounts.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) 109 "Accounting for Income
Taxes." The statement employs an asset and liability approach for
financial accounting and reporting of deferred income taxes.
Generally, SFAS 109 allows for recognition of deferred tax assets in
the current period for the future benefit of net operating loss carry
forward and items for which expenses have been recognized for
financial statement purposes but will be deductible in future periods.
A valuation allowance is recognized, if the weight of available
evidence is more likely than not that some portion or all of the
deferred tax assets will not be realized.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related interpretations in accounting for its employee stock options.
Under APB 25, to the extent that the exercise price of the Company's
employee stock options equals management's estimate of the fair value
of the underlying stock on the date of grant, no compensation expense
is recognized. To the extent the fair market value of the common stock
at date of grant exceeds the option price, compensation expense is
recorded.
Deferred expense on stocks and options issued to officers and
directors for services or other consideration to be received in the
future are offset against equity and are amortized to expense over the
period of benefit.
LOSS PER SHARE
Loss per share is calculated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," (Statement
128). Basic earnings per share is computed by dividing net loss
(profits) by the weighted average number of common shares outstanding.
Diluted earnings per share is computed using the weighted average
number of common share equivalents during the period. Common share
equivalents include employee stock options using the treasury method
and dilutive convertible securities using the if-converted method.
Common share equivalents have been excluded from the calculation of
loss per share for all periods presented, as their effect is
anti-dilutive. For purposes of calculating loss per share, weighted
average outstanding shares includes the minimum 10,000,000 shares and
an additional 2,000,000 compensation shares issuable to related
parties upon an increase to 65,000,000 in the number of the Company's
authorized but unissued shares. See Part II Other Information, Item 5
Other Information, in this Form 10-QSB.
COMPREHENSIVE LOSS
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," (Statement 130). Statement 130 establishes new
rules for the reporting and display of comprehensive loss and its
components. Comprehensive loss for the Company is the same as net loss
for all periods presented.
6
PENSION PLAN
The Company has a 401(k) Plan for the benefit of the employees of the
Company. Under the provisions of the 401(k) Plan, employees may make
contributions on a tax-deferred basis to their 401(k) accounts, up to
the legal limits provided for by United States income tax regulations.
The Company, at its discretion, may contribute a portion of the
Company's profits to the 401(k) Plan. Such contributions are allocated
between members of the 401(k) Plan based on a pre-stated formula.
Employer contributions vest with 401(k) Plan participants at the rate
of 20% per year, beginning in year two and ending in year six of
employment. The Company did not make contributions to the 401(k) Plan
for 1999 and 2000.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued several
pronouncements. Of such pronouncements, only two may have future
applicability, Statement of Financial Accounting Standards (SFAS) No.
132 "Employers Disclosures about Pensions and other Postretirement
Benefits," effective June 15, 2000, and No. 137 "Accounting for
Derivative Instruments and Hedging Activities," effective June 15,
2000. The current financial statements would not have been impacted by
these pronouncements as the Company has not participated in derivative
transactions and a 401(k) Plan.
SHAREHOLDERS' DEFICIT
Stock Based Compensation
In March 2000, the Company granted options to purchase 2,150,000
shares at an exercise price of $.001 per share. 1,600,000 of such
options have been exercised as of March 31, 2000. The remaining
unexercised options at March 31, 2000 (550,000) were held by two
employees of the Company. The difference between the option price and
the fair market value of the common stock at the date of grant was
$2,069,350, which was charged to operations. Accordingly, common stock
increased by $2,070,950 ($2,069,350 + $1,600). Of the 1,600,000 shares
which have been exercised, 725,000 shares were exercised by employees
of the Company and 200,000 were exercised by a major shareholder of
the Company. The options that were not exercised were issued to
employees of the Company, one of whom exercised options for 500,000 of
the 725,000 shares.
Sec Part II, Item 5. Other Information, of this Form 10-QSB, for a
description of the transaction in which Palmilla Ventures Limited
Partnership, a related party, for itself and on behalf of certain
other related parties, surrendered to the Company 10,000,000 shares of
the Company's common stock. The 10,000,000 shares (minimum) and the
2,000,000 compensation shares issuable by the Company are deemed
issued and outstanding for purposes of computing loss per share, and
the 2,000,000 shares are treated as issued and outstanding for all
purposes.
Accumulated Deficit
Accumulated deficit increased to the extent of the Company's net loss
of $6,261,071.
4. SUBSEQUENT EVENTS
In May 2000, the Company issued options to purchase 950,000 shares of common
stock, at an exercise price of $.001 per share, as follows: 400,000 were
issued to the Company's chief executive officer, 300,000 were issued to the
Company's chief operating officer, and 250,000 were issued to the chief
financial officer (interim). The Company inadvertently issued options to
purchase 600,000 shares of common stock in excess of the maximum number
issuable under the Company's 2000 combination Stock Option Plan. Such options
have been exercised. Accordingly, in May 2000, the Company amended
outstanding options to reduce the number of options issuable by 600,000 and
the parties whose options were amended have agreed to return the 600,000
shares to the Company in exchange for the exercise price paid. The Company
intends to re-issue such options to such persons upon an increase in the
number of shares available under the Company's 2000 Combination Stock Option
Plan or adoption of a new plan.
On May 16, 2000, Golden Books Family Entertainment, Inc., as plaintiff
("Golden Books"), served the Company with a Second Amended Complaint which
names Futech Interactive Products, Inc. ("Futech"), Vincent W. Goett
("Goett"), and the Company as defendants. The Company was not named in the
original complaint or the first amended complaint. The case is pending in the
United States Bankruptcy court for the Southern District of New York
(Bankruptcy case No. 99-10030). The proceeding originally commenced in June
1999. The Second Amended Complaint alleges, among other things, (i) that
Futech is indebted to Golden Books in the amount of $1 million under a
promissory note dated August 14, 1996 ("Note"), (ii) that Futech has
defaulted on its obligations under the Note, (iii) that Goett has personally
guaranteed performance of Futech's obligations under the Note, (iv) that
Goett in January 2000 caused Futech to transfer all or virtually all of its
assets to the Company, and (v) that the transfer was made by Goett and Futech
knowingly with intent to deplete Futech of assets and that the Company
accepted the transfer knowingly and with intent to assist Goett and Futech in
depleting Futech of assets and thereby rendering it judgement-proof or, in
the alternative, that Futech, on or about January 2000, transferred to the
Company Futech's Interactive Books division and all of the assets and
liabilities thereof. On the basis of the foregoing, the Second Amended
Complaint alleges that Futech, Goett and the Company (or in the alternative
Goett and the Company) are jointly and severably liable for the $1 million
under the Note, plus interest, costs and reasonable attorney's fees.
The Second Amended Complaint also alleges (i) that Futech transferred its
assets to the Company with intent to hinder, delay or defraud Golden Books in
pursuit of its claim against Futech, (ii) that such transfer was made without
receiving a reasonably equivalent value for the transfer, (iii) that Futech
was insolvent at the time of transfer (or became insolvent as a result), (iv)
that the transfer included all or substantially all of Futech's assets to the
Company, (v) that the transfer of Futech assets to the Company was a
"fraudulent conveyance" under Arizona law, and (vi) that Goett conspired with
Futech and Janex to effect the asset transfer with the intent and for the
purpose of hindering, delaying and defrauding Futech's creditors, including
rendering Futech judgement proof, and that such conduct was malicious and
intended to injure Golden Books.
Based on the foregoing, Golden Books claims it is entitled to garnishment,
avoidance of the transfer, and attachment or other provisional remedy and $1
million, plus interest and punitive damages.
As described in Item 5. Other Information, in Part II of this Form 10-QSB, in
February 2000, the Company entered into an agreement, as amended, to acquire
the assets of Futech. The Company also entered into an agreement in February
2000 to acquire from Futech the website okid.com and related assets. However,
these asset purchases have not been consummated and are expressly conditioned
upon, among other things, the approval of Futech's creditors. Since the
Company has not completed the acquisition of Futech's assets, the Company
believes that it has strong defenses against the foregoing claims and intends
to vigorously defend against them. Although the Company believes it has
strong defenses, no assurance can be given as to the outcome of the
litigation, which could have a material adverse effect on the Company.
7
5. SEGMENT INFORMATION
The Company operates exclusively in the children's products industry. For
geographical reporting, revenues are attributed to the geographic location
from which goods are shipped. Intercompany sales are recorded at cost. A
summary of the Company's operations by geographical area for the three months
ended March 31, 1999 and 2000 is as follows:
ADJUSTMENTS
AND
UNITED STATES HONG KONG ELIMINATIONS CONSOLIDATED
------------- --------- ------------ ------------
1999
Net sales:
Customers .............. $ 119,354 $ 102,992 $ -- $ 222,346
Intercompany ........... -- -- -- --
Total revenue ............... $ 119,354 102,992 -- 222,346
Operating income (loss) ..... (156,504) (41,878) -- (198,382)
Interest expense ............ (5,319) (201) -- (5,520)
Depreciation and amortization (24,887) (48,521) -- (73,408)
ADJUSTMENTS
AND
UNITED STATES HONG KONG ELIMINATIONS CONSOLIDATED
------------- --------- ------------ ------------
2000
Net sales:
Customers .............. $ 2,530 $ -- $ -- $ 2,530
Intercompany ........... -- -- -- --
Royalties received $ 5,956 -- -- $ 5,956
Total revenue ............... $ 8,486 -- -- $ 8,486
Operating loss .............. (6,251,523) (11,962) -- (6,251,523)
Interest expense ............ (7,398) -- -- (7,398)
Depreciation and
amortization .............. (9,083) (922) -- (10,005)
8
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The Company has during the quarter ended March 31, 2000 entered into agreements
to license technology and acquire several companies with complimentary products
in an effort to promote growth in the Company's core business and revenues.
For a description of these planned acquisitions, see Part II Other Information,
Item 5. Other Information, in this Form 10-QSB.
Although we expect to realize revenues if we consummate the acquisitions, we
also expect that our operating expenses will dramatically increase. Although we
plan to carefully review operating expenses with a view to reducing them,
wherever possible, we expect that interest expense on debt assumed (estimated
$13 million) in connection with the acquisitions will approximate $1,200,000 per
year. Each of the companies we plan to acquire has incurred, in the past and
continues to incur, significant losses and negative cash flow. We cannot assure
you that we will be able to reduce expenses or that the acquired companies will
become profitable. Accordingly, we expect to continue to incur significant
losses for the foreseeable future.
CONSOLIDATED RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 AND 1999:
NET LOSS
The Company's net loss for the quarter ended March 31, 2000 increased by
$6,051,853 over the comparable prior period. Such increase is principally
attributable to a non cash charge to operations of $6,070,950 related to stock
based compensation expense.
NET SALES
For the three months ended March 31, 2000, net sales decreased by $219,816 to
$2,530, as compared to net sales of $222,346 for the three months ended March
31, 1999. The decrease in net sales is due to several factors. The focus of
Company management during the first quarter on the acquisition of several
complimentary businesses has had an adverse effect on sales performance, as
management's attention was not directed to selling product. In addition, the
Company's shortage of operating capital has adversely affected the Company's
sales and marketing activities and its ability to acquire inventory, all of
which has adversely affected sales. Unless and until the Company consummates the
planned acquisitions, the Company does not expect it will realize any
significant sales during the year ending December 31, 2000. The planned
acquisitions may not be consummated.
At March 31, 2000, the Company had no backlog of unfilled orders, compared to a
backlog of approximately $400,000 at March 31, 1999. The decrease in backlog is
due to the decrease in sales activity described above.
GROSS MARGIN
Gross margin is equal to net sales plus royalty income, less cost of sales and
royalty expense.
For the three months ended March 31, 2000, gross margin was $8,056, as compared
to a gross margin of $29,954 for the three months ended March 31, 1999.
9
ROYALTY EXPENSE AND INCOME
For the three months ended March 31, 2000, there was no royalty expense, as
compared to $5,355, or 2% of net sales, for the three months ended March 31,
1999. The decrease in royalty expense for the three months ending March 31, 2000
was a result of the very substantial reduction in sales for the three months
ending March 31, 2000. The Company received royalties of $5,956 during this
period, generated from a new licensing agreement with Fundex Games, Ltd.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the three months ended March 31, 2000, selling, general and administrative
expenses increased by $23,826 to $178,754, as compared to $154,928 for the three
months ended March 31, 1999.
The increase in selling, general and administrative expenses was due to
increased expenses of approximately $100,000 for the costs of legal, financial,
and advisory services related to SEC compliance, partially offset by a reduction
of recurring operating expenses.
STOCK BASED COMPENSATION
For the three months ended March 31, 2000, the Company incurred stock based
compensation (non cash) in the amount of approximately $6,000,000. These charges
relate to stock options granted and stock issuable to related parties as
compensation for surrendering their shares to the Company. See Part II, Other
Information, Item 5, Other Information, for a description of the transaction in
which certain related parties surrendered their shares to the Company.
LIQUIDITY AND CAPITAL RESOURCES
We continue to experience a severe working capital deficiency and negative cash
flow. We currently have no cash and are unable to meet our financial obligations
as they become due. Our working capital deficiency was $3,239,191, including
indebtedness to a related party of approximately $1,650,452, at March 31, 2000,
compared to $3,322,668 at March 31, 1999. At this time, we are not generating
any significant revenue, but are incurring substantial costs and expenses to
fund our operations. We expect that our working capital deficiency will increase
significantly as a result of completing the planned acquisitions. We also expect
the completion of the acquisitions will exacerbate our cash flow problems.
Based on current cash on hand, we need to raise additional funds immediately. We
plan to reduce the working capital deficiency by raising additional capital in
the form of either debt or equity financings. Further, as described above, we
plan to carefully review operating expenses, with a view to reducing them,
wherever possible. We cannot assure you that we will raise sufficient funds to
reduce the working capital deficiency or fund our operations. If we are unable
to raise sufficient capital in a timely fashion to reduce the working capital
deficit and fund continuing operations, our business will be adversely affected
and we will not be able to continue as a going concern.
Our auditors' report as at December 31, 1999 indicates that certain factors
raise substantial doubt about our ability to continue as a going concern. Our
auditors issued a going concern opinion because we:
- have experienced a significant decline in revenues;
- have negative net worth and working capital; and
- have recurring losses.
Based upon our current budget and business planning, we believe that we will
need approximately $10 million of additional capital to fund our planned
operations over the next twelve months and that we will need to raise or
generate such amount during the next twelve months to eliminate our auditors'
going concern opinion. We cannot be sure that we will be able to internally
generate or raise sufficient funds to continue our operations, or that our
auditors will not issue another going concern opinion.
Our ultimate ability to continue as a going concern depends on: (1) the market
acceptance of our products; (2) our generating sufficient operating profits; (3)
creation of a sustainable positive cash flow; and (4) obtaining additional
financial resources to provide near term operating cash.
10
Our operating activities used $15,488 for the three months ended March 31, 2000,
as compared to $626,229 for the three months ended March 31, 1999. The decrease
in cash used by our operating activities is primarily attributable to an
increase of $163,350 in accounts payable and accrued expenses in the current
quarter, compared to a decrease of $469,588 in accounts payable and accrued
expenses in the prior quarter. The increase in accounts payable and accrued
expenses reflects lack of operating capital.
Our financing activities generated $20,260 during the three months ended March
31, 2000, compared to $605,718 during the same period in 1999. The decrease in
cash generated from financing activities is a result of decreased advances from
Futech.
As of March 31, 2000, subject to the availability of operating capital and
assuming the completion of the planned acquisitions discussed under Part II,
Other Information, Item 5, Other Information, we plan to make capital
expenditures over the next twelve months of up to $1,500,000 to fund new product
development, including initial licensing charges and tooling. In addition, if we
complete the acquisition of WWW.OKID.COM and related assets, we also anticipate
that we will expend approximately $3,300,000 for Web site development and
marketing over the next twelve months. If we complete our planned acquisitions,
we expect the combined companies to have significantly more employees then we
currently have.
INFLATION
We do not believe that inflation has had a significant impact on our costs and
profits during the past two years.
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this report that are subject to a
number of risks and uncertainties, including without limitation, those described
below and other risks and uncertainties indicated from time to time in our
filings with the SEC. These forward-looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include the information concerning possible or
assumed future results of operations. Also, when we use words such as
"believes," "expects," "anticipates" or similar expressions, we are making
forward-looking statements. Readers should understand that the following
important factors, in addition to those discussed in the referenced SEC filings,
could affect our future financial results, and could cause actual results to
differ materially form those expressed in our forward-looking statements:
* the implementation of our growth strategy;
* the effects of the planned acquisition and new relationships with
complementary companies;
* the integration of acquisitions;
* the availability of additional capital;
* variations in stock prices and interest rates;
* fluctuations in quarterly operating results; and
* other risks and uncertainties described in our filings with the SEC.
We make no commitment to disclose any revisions to forward-looking statements,
or any facts, events or circumstances after the date hereof that may bear upon
forward-looking statements.
11
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 16, 2000, Golden Books Family Entertainment, Inc., as plaintiff
("Golden Books"), served the Company with a Second Amended Complaint which
names Futech Interactive Products, Inc. ("Futech"), Vincent W. Goett
("Goett"), and the Company as defendants. The Company was not named in the
original complaint or the first amended complaint. The case is pending in the
United States Bankruptcy court for the Southern District of New York
(Bankruptcy case No. 99-10030). The proceeding originally commenced in June
1999. The Second Amended Complaint alleges, among other things, (i) that
Futech is indebted to Golden Books in the amount of $1 million under a
promissory note dated August 14, 1996 ("Note"), (ii) that Futech has
defaulted on its obligations under the Note, (iii) that Goett has personally
guaranteed performance of Futech's obligations under the Note, (iv) that
Goett in January 2000 caused Futech to transfer all or virtually all of its
assets to the Company, and (v) that the transfer was made by Goett and Futech
knowingly with intent to deplete Futech of assets and that the Company
accepted the transfer knowingly and with intent to assist Goett and Futech in
depleting Futech of assets and thereby rendering it judgement-proof or, in
the alternative, that Futech, on or about January 2000, transferred to the
Company Futech's Interactive Books division and all of the assets and
liabilities thereof. On the basis of the foregoing, the Second Amended
Complaint alleges that Futech, Goett and the Company (or in the alternative
Goett and the Company) are jointly and severably liable for the $1 million
under the Note, plus interest, costs and reasonable attorney's fees.
The Second Amended Complaint also alleges (i) that Futech transferred its
assets to the Company with intent to hinder, delay or defraud Golden Books in
pursuit of its claim against Futech, (ii) that such transfer was made without
receiving a reasonably equivalent value for the transfer, (iii) that Futech
was insolvent at the time of transfer (or became insolvent as a result), (iv)
that the transfer included all or substantially all of Futech's assets to the
Company, (v) that the transfer of Futech assets to the Company was a
"fraudulent conveyance" under Arizona law, and (vi) that Goett conspired with
Futech and Janex to effect the asset transfer with the intent and for the
purpose of hindering, delaying and defrauding Futech's creditors, including
rendering Futech judgement proof, and that such conduct was malicious and
intended to injure Golden Books.
Based on the foregoing, Golden Books claims it is entitled to garnishment,
avoidance of the transfer, and attachment or other provisional remedy and $1
million, plus interest and punitive damages.
As described in Item 5. Other Information, in this Part II, in February 2000,
the Company entered into an agreement, as amended, to acquire the assets of
Futech. The Company also entered into an agreement in February 2000 to
acquire from Futech the website okid.com and related assets. However, these
asset purchases have not been consummated and are expressly conditioned upon,
among other things, the approval of Futech's creditors. Since the Company has
not completed the acquisition of Futech's assets, the Company believes that
it has strong defenses against the foregoing claims and intends to vigorously
defend against them. Although the Company believes it has strong defenses, no
assurance can be given as to the outcome of the litigation, which could have
a material adverse effect on the Company.
ITEM 5. OTHER INFORMATION.
During the quarter ended March 31, 2000, the Company adopted a Combination
Stock Option Plan ("Plan") which permits the issuance of options to purchase
up to 2,500,000 shares of Common Stock. During the current quarter, the
Company issued options to purchase an aggregate 2,150,000 shares of Common
Stock at an exercise price of $.001 per share, including options for 200,000
shares issued to a greater than 5% shareholder. In May 2000, options to
purchase an additional 925,000 shares were issued, at an exercise price of
$.001 per share, to three of the Company's officers, two of whom are major
stockholders, and options to purchase an aggregate 600,000 shares were
terminated. The Company intends to re-issue such options for 600,000 shares
at such time as the number of shares covered by the Company's Plan is
increased or the Company adopts a new plan.
The Company has during the quarter ended March 31, 2000 entered into agreements
to license technology and acquire several companies with complimentary products
in an effort to promote growth in the Company's core business and revenues.
On January 19, 2000, the Company signed a non-binding letter of intent to
acquire 100% of the capital stock of WebShare, Inc. ("WebShare"), a San
Diego-based company that provides lead generation services to the timeshare
vacation resort industry through its subsidiary, ResorTravel.com. The
transaction is subject to, among other things, the negotiation, execution and
delivery of definitive agreements and approval of the board of directors.
In January, 2000, the Company entered into a license agreement ("License
Agreement") with Futech Interactive Products, Inc. ("Futech"). Under the License
Agreement, Futech granted the Company an exclusive license of the technology
related to the "Toynet" system of interactive talking toys. The License
Agreement may be terminated by either party upon 60 days written notice, without
penalty. The License Agreement specifies a royalty rate of 10% for non-licensed
product and 5% for licensed product. The License Agreement terminates upon
consummation of the Company's acquisition of the Futech Assets (defined below)
pursuant to the Futech Agreement (defined below).
On February 17, 2000, the Company signed a non-binding memorandum of
understanding to acquire 63.88% of the issued and outstanding common stock of
Trudy Corporation ("Trudy"), a public company, from its major shareholders
(reduced to 52% to reflect subsequent sales by the majority stockholder). Trudy
is a Norwalk, Connecticut-based designer, manufacturer, and distributor of high
quality specialty publishing products, with a library of more than eighty books
under the Soundprints imprint. The transaction is subject to, among other
things, the negotiation, execution and delivery of definitive agreements and
approval of the board of directors.
In February 2000, the Company entered into an agreement, as amended (the "Futech
Agreement"), with Futech, pursuant to which the Company would acquire all the
assets of Futech (other than those related to the website WWW.OKID.COM) ("Futech
Assets") and assume certain Futech liabilities. Vincent Goett, President and
Chief Executive Officer of the Company, is a major stockholder and creditor of
Futech. Under the Futech Agreement, in exchange for the Futech Assets, the
Company would issue Futech 16,000,000 shares of the Company's common stock. The
Company would be obligated to issue additional shares of common stock in the
event that the market price per share of the Company's common stock is less than
$1.00 at closing and has not reached a price of $1.00 per share during the 24
months following the closing. In addition, the Company has agreed to assume up
to $10 Million of Futech's obligations to a certain bank. Futech has agreed to
cancel approximately $1.6 Million in debt owed by the Company to Futech. This
transaction is subject to, among other conditions, approval of Futech's board of
directors, stockholders and creditors, as well as the approval of the Company's
board of directors and stockholder approval of an increase in the number of the
Company's authorized but unissued shares.
In addition, in February 2000, the Company entered into an agreement, as amended
(the "oKid Agreement"), with Futech to purchase the URL domain name and related
website, WWW.OKID.COM, and related assets (the "oKid Assets"). Under the oKid
Agreement, the Company will acquire the oKid Assets for 4,000,000 shares of the
Company's common stock, subject to increase as described above with respect to
12
the Company's purchase of the Futech Assets. This transaction is subject to,
among other conditions, approval of the board of directors of Futech and the
Company, approval of Futech's creditors, and stockholder approval of an increase
in the number of the Company's authorized but unissued shares.
On March 24, 2000, the Company entered into a Merger Agreement, as amended
("Merger Agreement"), with DaMert Company ("DaMert"), a Berkeley,
California-based designer, manufacturer, and distributor of specialty toy
products. Pursuant to the Merger Agreement, DaMert Company would be merged
with and into a wholly-owned subsidiary of the Company. Under the Merger
Agreement, the Company would issue 2,650,000 shares of the Company's common
stock as consideration for the Merger. By virtue of the Merger, the Company
will succeed to the business, assets and liabilities of DaMert Company. The
Company would be obligated to issue additional shares of common stock in the
event that the market price per share of the common stock is less than $2.00
at closing and has not reached a price of $2.00 per share during the 24
months following the closing. In addition, the Company has agreed to issue
64,425 shares of common stock to a major stockholder of DaMert Company in
satisfaction of approximately $129,000 of debt owing to such stockholder by
DaMert Company. The number of shares is subject to increase as described
above. This transaction is subject to, among other conditions, approval of
each party's board of directors and stockholders.
There can be no assurance that any of the foregoing acquisitions will be
consummated.
Because the Company did not have sufficient authorized but unissued shares of
common stock to execute its business and financial plans, in March 2000,
Palmilla Ventures Limited Partnership, of which Vincent Goett is a general
partner, agreed to surrender to the Company an aggregate of 10 million shares of
the Company's common stock so that such shares could be restored to the status
of authorized but unissued shares of common stock. Of the aggregate 10 million
shares surrendered, 1,159,952 (6.0% of the outstanding common stock prior to
surrender) were being held for the benefit of Dan Lesnick, Chief Operating
Officer and a Director of the Company, 2,182,417 (11.4% of the outstanding
common stock prior to surrender) were being held for the benefit of Mr. and Mrs.
Howard Moore, and 1,657,631 (8.6% of the outstanding common stock prior to
surrender) were being held for the benefit of Mr. Les Friedland, the Company's
former president.
Under this Agreement, as soon as possible following an increase to 65 million in
the number of the Company's authorized but unissued shares, the Company will
return the 10 million shares surrendered and will issue the surrendering
shareholders, PRO RATA, based on the number of shares surrendered, an aggregate
of 2 million additional shares of common stock as compensation for surrendering
their shares to the Company.
In addition, if the price of the Company's common stock is lower when the 10
million replacement shares are issued, than it was on the date the shares were
surrendered, the surrendering shareholders will be issued additional shares, PRO
RATA, based on the number of shares surrendered, such that the total replacement
shares issued is equal in value on the replacement date to the value of the
shares surrendered on the date of surrender. For example, if the value of 10
million shares on the date of surrender was $15 Million and the market price of
the Company's common stock on the replacement date was $1.00, the surrendering
shareholders would be issued 15 million shares of common stock on the
replacement date to replace the $15 Million in value surrendered at the
surrender date.
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits have been or are being filed
herewith, and are numbered in accordance with Item 601 of Regulation S-B:
EXHIBIT
NUMBER DESCRIPTION
2.1 Global Merger Agreement dated June 4, 1999 and incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K filed with the
Commission June 15, 1999. (1)
2.2 Termination Agreement dated as of December 1, 1999 relating to Global
Merger Agreement. (1)
2.3 Termination, Release and Settlement Agreement dated December 1999. (1)
2.4 Agreement for Purchase and Sale of Assets between Futech Interactive
Products, Inc. and the Company dated February 25, 2000, as amended by
the First Amendment thereto dated April 28, 2000.
2.5 Agreement for Purchase and Sale of oKid Assets between Futech
Interactive Products, Inc. and the Company dated February 25, 2000, as
amended by the First Amendment thereto dated April 28, 2000.
2.6 Merger Agreement between, among others, the Company and DaMert Company
dated March 2000, as amended by the First Amendment thereto dated May
10, 2000.
3.1 Articles of Incorporation. (2)
3.2 Amendment No. 1 to Articles of Incorporation. (3)
3.3 Statement of Resolution Establishing Series for Shares. (3)
3.4 Amendment No. 2 to Articles of Incorporation. (3)
3.5 Bylaws of the Company. (4)
3.6 Articles of Amendment to Articles of Incorporation, dated August 11,
1994 and filed on August 16, 1994. (5)
4.1 Specimen Common Stock Certificate. (3)
10.1 Lease Agreement between With Design in Mind International, Inc., a
Colorado corporation and Warner Center Business Park Properties III,
L.P. for premises located at 21700 Oxnard Street, Suite 1610, Woodland
Hills, CA 91367 dated January 6, 1994. (6)
10.26 Indemnification Agreement wherein the Company is indemnifying its
former accountants BDO Seidman, LLP for claims arising out of the
reissuance of the Company's 1997 financial statements. (7)
10.27 Letter Agreement between Palmilla Ventures Limited Partnership and the
Company dated March 9, 2000, as supplemented by a Letter Agreement
dated April 15, 2000.
14
16 Letter of BDO Seidman, LLP. (8)
16.1 Letter of Ernst & Young, LLP. (9)
21 Subsidiaries of the Registrant. (1)
27 Financial Data Schedule
99.1 2000 Combination Stock Option Plan. (10)
- ------------------
(1) Filed as an Exhibit with the same exhibit number to the Company's Form
10-KSB for the year ended December 31, 1999 and incorporated by this
reference.
(2) Incorporated by reference to Exhibit 3(a) to the Company's Registration
Statement on Form 8-A, filed with the Commission on August 15, 1989 and
declared effective on September 1, 1989.
(3) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-1 filed August 8, 1990.
(4) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form 8-A, filed with the Commission on August 15, 1989 and
declared effective on September 1, 1989.
(5) Incorporated by reference to an exhibit to the Company's Registration
Statement filed with the Commission December 20, 1994.
(6) Incorporated by reference to an exhibit to the Company's Form 10-KSB
for the fiscal year ended December 31, 1993.
(7) Incorporated by reference to an exhibit to the Company's Form 10-K SB
for the year ended December 31, 1998.
(8) Incorporated by reference to Exhibit 16 to the Company's Form 8-K filed
with the Commission of March 10, 1999.
(9) Incorporated by reference to Exhibit 16 to the Company's Form 8-K filed
with the Commission on April 28, 2000.
(10) Incorporated by reference to Exhibit 99.1 to the Company's Form
S-8 Registration Statement filed with the Commission on March 24, 2000.
(b) Reports on Form 8-K - Not applicable.
15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
JANEX INTERNATIONAL, INC.
Registrant
By: /s/ Vincent W. Goett
Date: May 18, 2000 ------------------------------------
Vincent W. Goett
President
Chief Executive Officer, Director
By: /s/ Charles M. Foley
Date: May 18, 2000 ------------------------------------
Charles M. Foley
Chief Financial Officer (Interim)
Treasurer and Secretary
16