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 September 30, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number 0-17927
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JANEX INTERNATIONAL, INC.
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(Exact name of small business issuer as specified in its charter)
COLORADO 84-1034251
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
615 HOPE ROAD, BUILDING ONE, 1ST FLOOR, EATONTOWN, NEW JERSEY 07724
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(Address of principal executive offices (Zip Code)
908-935-0707
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(Issuer's telephone number, including area code)
21700 OXNARD STREET, STE. 1610, WOODLAND HILLS, CALIFORNIA 91367
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(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
As of October 31, 1997, the issuer had 7,604,413 shares of its common stock
issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Total sequentially numbered pages in this document: 26
1
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Sequential
Page Numbers
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PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(unaudited) as of September 30, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements
of Operations (unaudited) for the
three months and nine months ended
September 30, 1997 and 1996 . . . . . . . . . . . . . 4
Condensed Consolidated Statements of
Cash Flows (unaudited) for the nine months
ended September 30, 1997 and 1996 . . . . . . . 5 - 6
Notes to Condensed Consolidated Financial
Statements (unaudited). . . . . . . . . . . . . 7 - 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION . . . . . . . . . . . . . . . 15 - 22
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . 23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . 26
2
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
September 30, December 31,
1997 1996
-------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 275,706 $ 186,616
Certificate of deposit (Note 5) 100,000 500,000
Accounts receivable,
net of allowance of $203,928 and
$202,634 at September 30, 1997 and
December 31, 1996, respectively 750,682 230,479
Inventories (Note 4) 194,915 569,637
Prepaid royalties 150,313 182,465
Other current assets 135,676 179,108
------------ ------------
Total current assets 1,607,292 1,848,305
Property and equipment, net 394,077 476,355
Intangible assets, net (Note 3) 339,032 2,021,551
Product development costs, net (Note 3) 146,536 242,471
Deferred loan charges 102,359 331,155
Other assets 2,802 11,939
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$ 2,592,098 $ 4,931,776
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Loan payable - bank (Note 5) $ $ 400,000
Loans payable - agent (Note 6) 406,572 450,088
Note payable (Note 8) 265,447 531,356
Accounts payable 1,322,430 809,308
Accrued expenses 968,678 848,359
Income taxes payable 50 1,940
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Total current liabilities 2,963,177 3,041,051
Notes payable - stockholders (Note 7) 1,230,000 1,115,000
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Total liabilities 4,193,177 4,156,051
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STOCKHOLDERS' EQUITY (DEFICIENCY) (NOTE 10)
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; 7,604,413 shares and 5,296,721
shares issued and outstanding at September
30, 1997 and December 31, 1996,
respectively. 11,568,816 11,268,816
Additional paid-in capital 554,517 554,517
Accumulated deficit (13,724,412) (11,047,608)
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Total stockholders' equity (deficiency) (1,601,079) 775,725
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$ 2,592,098 $ 4,931,776
============ ============
See accompanying notes to condensed consolidated financial statements.
3
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
NET SALES $1,165,533 $2,978,023 $4,781,187 $6,315,061
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Cost of sales 683,193 1,697,104 2,840,751 3,597,849
Selling, general and
administrative 506,271 1,038,546 1,735,520 2,413,974
Royalty expense 69,718 335,383 559,613 566,913
Depreciation and
amortization (Note 3) 52,822 229,250 1,976,125 501,693
---------- ---------- ---------- ----------
Total costs and expenses 1,312,004 3,300,283 7,112,009 7,080,429
---------- ---------- ---------- ----------
OPERATING LOSS (146,471) (322,260) (2,330,822) (765,368)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 944 6,692 13,299 31,146
Interest expense (Note 7) (112,944) (41,700) (360,383) (88,663)
Foreign exchange gain 6,392 24,173
Loss from settlement with
warrant holder (Note 9) (84,125)
Gain on disposal of
fixed assets 1,500
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Total other expense (112,000) (28,616) (345,584) (117,469)
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAX (258,471) (350,876) (2,676,406) (882,837)
INCOME TAX PROVISION 6,817 398 13,228
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NET LOSS $ (258,471) $ (357,693) $(2,676,804) $(896,065)
========== =========== =========== =========
LOSS PER COMMON SHARE $ (0.05) $ (0.07) $ (0.51) $ (0.18)
========== =========== =========== =========
Weighted average number of
common 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)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
-------------- --------------
Cash flows from operating activities:
Net loss $(2,676,804) $(896,065)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Provision for losses on
accounts receivable, net 1,294 (75,856)
Depreciation and amortization 2,129,065 501,693
Imputed interest expense 228,796
Loss from settlement with
warrant holder 84,125
Changes in operating assets
and liabilities:
(Increase) decrease in -
Accounts receivable (521,497) (484,682)
Inventories 374,722 237,722
Prepaid royalties 32,152 (118,000)
Other current assets 43,432 (37,229)
Other assets 9,137 6,085
Increase (decrease) in -
Accounts payable 513,122 538,396
Accrued expenses 120,319 241,930
Income taxes payable (1,890) 12,526
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Net cash provided by
operating activities 251,848 10,645
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Cash flows from investing activities:
Additions to property
and equipment (119,650) (421,177)
Additions to product
development costs (148,683) (200,145)
Decrease in certificate of
deposit 400,000
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Net cash provided by (used in)
investing activities 131,667 (621,322)
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(Continued)
5
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(CONTINUED)
NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
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Cash flows from financing activities:
Repayment of loan payable - bank (400,000) (351,425)
Proceeds from loan payable - shareholder 115,000 300,000
Proceeds from issuance of common stock 300,000
Repayment of loan payable - agent (43,516)
Proceeds from loan payable - agent 282,333
Repayment of note payable (265,909) (279,803)
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Net cash used in
financing activities (294,425) (48,895
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Cash and cash equivalents:
Net increase (decrease) 89,090 (659,572)
At beginning of period 186,616 783,564
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At end of period $ 275,706 $ 123,992
========= =========
See accompanying notes to condensed consolidated financial statements.
6
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization - Janex International, Inc. was incorporated in Colorado on July
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28, 1986, and is the parent corporation of With Design in Mind, a California
corporation, Janex Corporation ("Janex"), a New Jersey corporation, and Malibu
Fun Stuffed, Inc. ("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 September 30,
1997, the results of operations for the three and nine months ended September
30, 1997 and 1996, and the cash flows for the nine months ended September 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)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 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
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of operations for the three months and nine months ended September 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.
2. GOING CONCERN
The Company has suffered recurring losses from operations and had a net
loss of $2,676,804 for the nine months ended September 30, 1997. The Company's
net working capital deficit increased by $163,139 during the nine months ended
September 30, 1997, from $1,192,746 at December 31, 1996, to $1,355,885 at
September 30, 1997. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
3. WRITE-OFF OF INTANGIBLE ASSETS
In conjunction with the change in management during August 1997, new
management conducted a review of the Company's operations, financial condition
and business prospects. As a result, new management decided to decrease the
Company's dependence on licensed products, and to attempt to develop and market
new product lines.
8
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(CONTINUED)
In light of the historical operating losses from the Company's existing product
lines, limited working capital, and the change in the Company's business focus,
the Company determined to write-off certain intangible assets aggregating
$1,600,480. This write-off, consisted of trademarks, licensing relationships
and goodwill with net book values of $272,594, $493,203 and $834,683,
respectively, and was included in depreciation and amortization in the
accompanying condensed consolidated statement of operations for the nine months
ended September 30, 1997.
4. INVENTORIES
Inventories are valued at the lower of cost or market and consist of the
following at September 30, 1997 and December 31, 1996:
September 30, 1997 December 31, 1996
------------------ -----------------
Finished goods $137,134 $569,637
Work-in-process 57,781 ________
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$194,915 $569,637
======== ========
5. LOAN PAYABLE - BANK
The Company had a $1,000,000 line of credit with a bank with interest at
9.5%, pursuant to a loan agreement which expired on May 3, 1996. The line of
credit was 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.
On March 20, 1996, the Company and the bank agreed to reduce the amount
available under the line of credit to $500,000 (including the ability of the
Company to utilize the line of credit to issue up to $100,000 of stand-by
letters of credit), and the bank waived certain covenant violations under the
original loan agreement. On May 27, 1997, the Company and the bank further
agreed to reduce the line of credit to $100,000 (including the ability of the
Company to utilize the line of credit to issue $100,000 of stand-by letters of
credit), and in conjunction therewith the $400,000 outstanding balance of the
line of credit was repaid in full by reducing the balance of the certificate of
deposit. The line of credit is secured by the remaining $100,000 balance of the
certificate of deposit at September 30, 1997.
9
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 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 line 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 credit line is
HK$1,500,000 (US$200,000). Janex International, Inc. has issued a guarantee to
the Hong Kong bank for the full amount of the credit line. At September 30,
1997, there were no advances under this credit line. Advances under the credit
line are treated as reductions of accounts receivable.
6. LOANS 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 (the "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 December 31, 1996 and September 30, 1997, the
Company had borrowed $271,789 and $286,045, respectively, 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. In November 1996, the Company opened the stand-by letter of credit to
the Agent. As of December 31, 1996 and September 30, 1997, the Company had
borrowed $178,299 and $120,527, respectively, under this credit facility.
10
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS TO NINE MONTHS ENDED SEPTEMBER 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 December
31, 1996 and September 30, 1997, the Company had borrowed $500,000 and $615,000,
respectively, 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
11
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(CONTINUED)
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 450,988 shares of the Company's 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 outstanding loan balance as of December 31
and September 30, 1997 was $500,000.
The Company charged to operations $76,266 and $228,798 of imputed interest
expense from the issuance of stock purchase warrants noted in the above two
paragraphs in the three months and nine months ended September 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
December 31, 1996 and September 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.
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 Company is obligated to repay the
remaining balance and accrued interest no later than January 31, 1998. The
balance of this note payable was $531,356 and $265,447 at December 31, 1996 and
September 30, 1997, respectively.
12
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(CONTINUED)
9. 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 nine months ended September 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.
10. STOCKHOLDERS' EQUITY (DEFICIENCY)
On August 27, 1997, the Company issued 2,307,692 shares of restricted
common stock at fair market value for a total purchase price of $300,000 in a
private placement with two present and significant shareholders and creditor of
the Company.
11. 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.
13
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 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).
Statements of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FAST is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various disclosure requirements previously in effect under
Accounting Principles Board Opinion No. 15, which has been superseded by SFAS
No. 128. The Company does not expect adoption of SFAS No. 129 to have a
material effect, if any, on its financial position or results of operation.
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FAST is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company has not determined the
effect of its financial position or results of operations, if any, from the
adoption of this statement.
Statements of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic areas in
which they operate and their major customers. The Company does not expect
adoption of SFAS No. 131 to have a material effect, in any, on its results of
operations.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Consolidated Results of Operations - Three and Nine Months Ended September 30,
1997 and 1996:
Net Sales
- ---------
For the nine months ended September 30, 1997, net sales decreased by $1,533,874
or 24.3%, to $4,781,187, as compared to net sales of $6,315,061 for the nine
months ended September 30, 1996. Sales for the three months ended September 30,
1997 decreased by $1,812,490 to $1,165,533 or 60.9% as compared to net sales of
$2,978,023 for the three months ended September 30, 1996.
The decrease in net sales of $1,812,490 for the three months overcame the slight
increase in net sales for the previous six month ended June 30, 1997 of
$278,616. The decrease in net sales is a direct result of various factors.
There was an apparent lack of any licenses in the marketplace. As a result,
many of the major customers of the Company are not willing to make large
inventory commitments. For the nine months ended September 30, 1997, products
incorporating characters licensed from The Walt Disney Company comprised 10% of
net sales and the "Looney Tunes" characters licensed from the Warner Bros.
Corporation comprised 14% of net sales, compared to 37% and 42%, respectively,
for the nine months ended September 30, 1996. The loss of revenue generated
from the lack of sales incorporating licensed products was offset by an increase
in sales of the Wet Pet Line, which for the nine months ended September 30, 1997
comprised 53% of sales as compared to 15% for 1996. However, as the Wet Pet
Line is seasonal, the sales for the three months ended September 30, 1997 were
flat, as compared to the three months ended September 30, 1996.
In addition, the changeover in new management, the resulting relocation of the
Company's headquarters and various personnel changes had a direct negative
impact on net sales for the three months ended September 30, 1997.
At September 30, 1997, the Company had a backlog of unfilled orders of
approximately $1,000,000 as compared with its order backlog of approximately
$1,200,000 at September 30, 1996. The Company has noted a general decrease in
order flow in 1997 as compared to prior years. Orders are continuing to come
in, thus the present backlog is not necessarily indicative of net sales to be
expected for the full fiscal year ending December 31, 1997.
15
Gross Profit
- ------------
For the nine months ended September 30, 1997, gross profit was $1,940,436 or
40.6% of net sales, as compared to $2,717,212 or 43.0% of net sales for the nine
months ended September 30, 1996. For the three months ended September 30, 1997
gross profit was $482,340 or 41.4% of net sales as compared to $1,280,919 or
43.0% of net sales for the three months ended September 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. During the three months ended June 30, 1997 the Company recorded
markdowns of approximately $75,000 to close out certain slow-moving inventory.
Selling, General and Administrative Expenses
- --------------------------------------------
For the nine months ended September 30, 1997, selling, general and
administrative expenses decreased by $678,454 or 28.1% to $1,735,520 or 36.3% of
net sales, as compared to $2,413,974 or 38.2% of net sales for the nine months
ended September 30, 1996. For the three months ended September 30, 1997, selling
general and administrative expenses decreased by $532,275 or 51.3% to $506,271
or 43.4% of net sales, as compared to $1,038,546 or 34.9% of net sales for the
three months ended September 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 in 1997 as compared
to 1996 is a direct result of management's continuing effort to reduce fixed
overhead costs.
Royalty Expense
- ---------------
For the nine months ended September 30, 1997, royalty expense decreased by
$7,300 to $559,613 or 11.7% of net sales, as compared to $566,913 or 9.0% of net
sales for the nine months ended September 30, 1996. For the three months ended
September 30, 1997, royalty expense decreased by $265,665 to $69,718 or 6.0% of
net sales, as compared to $335,383 or 11.3% of net sales for the three months
ended September 30, 1996. The decrease in royalty expense in 1997 as compared
to 1996 was as a result of two factors.
A significant shift in the sales mix to a higher proportion of non-royalty
sales, which include the Wet Pet Line, has resulted in a reduction of royalty
expense. This reduction was offset by a provision for loss of $322,500 that was
charged to operations to meet royalty guarantees made on contracts under which
insufficient product sales were generated to meet the minimum guarantees due
through December 31, 1997.
16
Depreciation and Amortization
- -----------------------------
In conjunction with the change in management during August 1997, new management
conducted a review of the Company's operations, financial condition and business
prospects. As a result, new management decided to decrease the Company's
dependence on licensed products, and to develop and market new product lines.
In light of the historical operating losses from the Company's existing product
lines, limited working capital, and the change in the Company's business focus,
the Company determined to write-off certain intangible assets aggregating
$1,600,480. This write-off, consisted of trademarks, licensing relationships
and goodwill with net book values of $272,594, $493,203 and $834,683,
respectively, and was included in depreciation and amortization in the
accompanying condensed consolidated statement of operations for the nine months
ended September 30, 1997.
Interest
- --------
For the nine months ended September 30, 1997, interest expense increased by
$271,720 to $360,383 or 7.5% of net sales, as compared to $88,663 or 1.4% of net
sales for the nine months ended September 30, 1996. For the three months ended
September 30, 1997, interest expense increased by $71,244 to $112,944 or 9.7% of
net sales, as compared to $41,700 or 1.4% of net sales for the three months
ended September 30, 1996. The increase in interest expense for the three months
and nine months ended September 30, 1997 as compared to the three months and
nine months ended September 30, 1996, respectively, is primarily due to $76,066
and $228,798 of imputed interest expense relating to the issuance of stock
purchase warrants. (See Note 7)
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,
17
during the three months ended March 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.
Net Loss
- --------
The reasons for the increase in net loss in 1997 as compared to 1996 are
summarized above. For the nine months ended September 30, 1997, the net loss
was $2,676,804 or $.51 per share, as compared to a net loss of $896,065, or $.18
per share for the nine months ended September 31, 1996. For the three months
ended September 31, 1997, the net loss was $258,471 or $.05 per share, as
compared to a net loss of $351,697 or $.07 per share for the three months ended
September 30, 1996.
Liquidity and Capital Resources
- -------------------------------
The Company's cash balance increased by $89,090 to $275,700 at September
30, 1997, as compared to $186,616 at December 31, 1996. The Company's net
working capital deficit increased by $163,139 from a working capital deficit of
$1,192,746 at December 31, 1996 to a working capital deficit of $1,355.885 at
September 30, 1997, and the Company's current ratio decreased to 0.54:1 at
September 30, 1997 as compared to 0.61:1 at December 31, 1996. For the nine
months ended September 30, 1997, the Company's operations provided cash
resources of $251,848, as compared to providing cash resources of $10,645 for
the nine months ended September 30, 1996, primarily as a result of a decrease in
inventories and an increase in accounts payable and accrued expenses, which was
partially offset by an increase in accounts receivable during the nine months
ended September 30, 1997.
During the nine months ended September 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 $119,650, and additions to product development
costs of $148,683.
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 attempt to substantially reduce operations to a level consistent
with available working capital. The Company is actively seeking additional
sources of financing. However, 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 is not completed, the Company will be forced to cease
operations. The
18
Company has experienced recurring losses from operations, negative cash flows
and decreases in working capital. The Company's independent certified public
accountants have included an explanatory paragraph in their report indicating
there is substantial doubt with respect the Company's ability to continue as a
going concern.
The Company had a $1,000,000 line of credit with a bank with interest at
9.5%, pursuant to a loan agreement which expired on May 3, 1996. The line of
credit was 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. On
March 20, 1996, the Company and the bank agreed to reduce the amount available
under the line of credit to $500,000 (including the ability of the Company to
utilize the line of credit to issue up to $100,000 of stand-by letters of
credit), and the bank waived certain covenant violations under the original loan
agreement. On May 27, 1997, the Company and the bank further agreed to reduce
the line of credit to $100,000 (included the ability of the Company to utilize
the line of credit to issue $100,000 of stand-by letters of credit), and in
conjunction therewith the $400,000 outstanding balance of the line of credit was
repaid in full by reducing the balance of the certificate of deposit. The line
of credit is secured by the remaining $100,000 balance of the certificate of
deposit at September 30, 1997.
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 line 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 credit line is
HK$1,500,000 (US$200,000). Janex International, Inc. has issued a guarantee to
the Hong Kong bank for the full amount of the line. At September 30, 1997, the
Company had no advances under this credit line. Advances under the line are
treated as reductions of 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-
19
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 December 31,
1996 and September 30, 1997, the Company had borrowed $500,000 and $615,000
respectively, 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.
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 450,988 shares of the Company's 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 outstanding loan balance as of December 31, 1996 and
September 30, 1997, was $500,000.
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 December 31, 1996
and September 30, 1997 was $115,000.
20
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. 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 Company is obligated to repay the
remaining balance and accrued interest no later than January 31, 1998. The
balance of this note payable was $531,356 and $265,447 at December 31, 1996 and
September 30, 1997, respectively.
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 (the "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 December 31, 1996 and September 30, 1997, the
Company had borrowed $271,789 and $286,045 respectively, 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. In March 1996, the Company opened the stand-by letter of
credit to the Agent. As of December 31, 1996 and September 30, 1997, the
Company had borrowed $178,299 and $120,527, respectively, under this credit
facility.
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 excisable. Deco Disc threatened to sue the Company,
claiming that the Company did not file the registration statement
21
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.
On August 27, 1997, the Company issued 2,307,692 shares of restricted
common stock at fair market value for a total purchase price of $300,000 in a
private placement with two present and significant shareholders and creditor of
the Company.
22
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
On July 15, 1997, Actional Limited ("Actional"), a company previously
used to manufacture products for the Company, filed a Complaint against Janex
Corporation, OSP Publishing ("OSP"), and O.S.P. Acquisition Corporation ("OSP
Acquisition"), in the Superior Court for the State of California, County of Los
Angeles, Case No. BC 174599, The Complaint sets forth a cause of action against
Janex Corporation for breach of contract, seeking damages in the sum of
$112,500. The Company has filed an answer to the Complaint, denying all
allegations and claims. The Company filed a Cross-Complaint against Actional,
OSP and OSP Acquisition, for breach of contract (against Actional), rescission
(against OSP and OSP Acquisition) and declaratory relief against all defendants.
The Company's breach of contract claim against Actional alleges that Actional
manufactured defective merchandise causing damage to the Company in the sum of
$241,129.85, plus other damages to be proved at trial.
On July 15, 1997, Actional filed an additional Complaint against the
Company, in the Superior Court for the State of California, County of Los
Angeles, Case No. BC 174598. The Complaint sets forth causes of action against
Janex Corporation for open book account and for account stated and seeks to
recover $113,895.17. The Company has filed an answer to the Complaint, denying
all allegations and claims. The Company filed a Cross-Complaint against
Actional, OSP and OSP Acquisition, for breach of contract (against Actional),
rescission (against OSP and OSP Acquisition) and declaratory relief against all
defendants. The Company's breach of contract claim against Actional alleges
that Actional manufactured defective merchandise causing damage to the Company
in the sum of $241,120.85, plus other damages to be proved at trial. The
Company requested that both of Actional's cases be consolidated and the Court
entered an order to that effect.
The Company believes that the damages that it sustained as a consequence of
defective merchandise manufactured by Actional, will offset all or a substantial
part of Actional's claims. Furthermore, the Company believes it has other
adequate defenses to the Actional claims. These matters are in a preliminary
stage, discovery is proceeding and no trial has been set. Settlement
discussions between Actional and the Company are being held, however, no
settlement has been reached.
23
Item 2. Changes in Securities and Use of Proceeds
On August 27, 1997, the Company issued 2,307,692 shares of restricted
common stock for a total purchase price of $300,000 in cash, in a private
placement with two present shareholders. The purchasers represented that they
were accredited investors as defined in Rule 501 of Regulation D promulated
under the Securities Act of 1933 ("1933 Act"). The Company believes that the
sale was exempt from registration pursuant to Section 4(2) of the 1933 Act, by
virtue of being a private placement with persons who had access to all
information concerning the Company and who gave written investment
representations. There were no underwriters and there were no underwriting
discounts or commissions paid.
24
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 September 30, 1997: Under Item 5.
Other Events: The Company filed a report on August 26, 1997 which
referred to the appointment of Daniel Lesnick and Alex Hughes to the
Board of Directors.
25
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
JANEX INTERNATIONAL, INC.
-------------------------
Registrant
Date: November __, 1997 By: /s/ Leslie Friedland
-----------------------
Leslie Friedland
President
(Duly Authorized Officer)
Date: November __, 1997 By: /s/ Michael Handelman
-----------------------
Michael Handelman
Chief Financial Officer
(Chief Financial and
Accounting Officer)
26