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, 1998
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.
(Name of small business issuer in its charter)
COLORADO 84-1034251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
615 HOPE ROAD, BUILDING ONE
EATONTOWN, NEW JERSEY 07724
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (732) 935-0707
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of April 30, 1998, the issuer had 9,962,105 shares of its common stock, no
par value, issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
--- ---
Total sequential number pages in this document: 18
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JANEX INTERNATIONAL, INC.
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets as of March 31, 1998 (unaudited)
and December 31, 1997 (audited) 3
Statements of Operations (unaudited) for the three months
ended March 31, 1998 and 1997 4
Statements of Cash Flows (unaudited) for the three months
ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements (unaudited) 6-11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 12-15
PART II OTHER INFORMATION 16
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURE 18
2
JANEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Audited)
(Unaudited) December 31,
March 31, 1998 1997
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 180,258 $ 164,672
Certificate of deposit (Note 5) 100,000 100,000
Accounts receivable, net of allowance of $24,780 and $10,439 369,735 225,826
Inventories (Note 4) 153,165 173,107
Prepaid royalties 188,900 61,626
Other current assets 26,727 19,925
------------ ------------
TOTAL CURRENT ASSETS 1,018,785 745,156
PROPERTY AND EQUIPMENT, net 359,025 395,165
INTANGIBLE ASSETS, net 312,943 325,988
PRODUCT DEVELOPMENT COSTS, net 123,249 122,827
DEFERRED LOAN CHARGES 96,590 116,863
OTHER ASSETS - 2,801
------------ ------------
$ 1,910,592 $ 1,708,800
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Loans payable - agent (Note 6) $ 238,109 $ 249,113
Accounts payable 854,417 685,725
Accrued expenses 1,041,111 1,373,899
Note payable (Note 8) 122,774 219,189
------------ ------------
TOTAL CURRENT LIABILITIES 2,256,411 2,527,926
NOTES PAYABLE - STOCKHOLDERS (NOTE 7) 1,230,000 1,230,000
------------ ------------
TOTAL LIABILITIES 3,486,411 3,757,926
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 3)
STOCKHOLDERS' (DEFICIT) (Note 4):
Class A convertible preferred stock, no par value, 5,000,000
shares authorized; none issued and outstanding
Common stock, no par value; 20,000,000 shares authorized;
9,962,105 shares issued and outstanding 11,868,816 11,618,816
Additional paid-in capital 554,517 554,517
Accumulated deficit (13,999,152) (14,222,459)
------------ ------------
TOTAL STOCKHOLDERS' (DEFICIT) (1,575,819) (2,049,126)
------------ ------------
$ 1,910,592 $ 1,708,800
============ ============
See accompanying notes to consolidated financial statements.
3
JANEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended March 31,
--------------------------
1998 1997
---------- ----------
NET SALES $1,608,557 $1,733,876
---------- ----------
COSTS AND EXPENSES
Cost of sales 769,735 1,044,225
Selling, general and administrative 424,536 639,938
Royalty expense 54,859 91,903
Depreciation and amortization 75,244 144,801
---------- ----------
TOTAL COST AND EXPENSES 1,324,374 1,920,867
---------- ----------
OPERATING INCOME (LOSS) 284,183 (186,991)
---------- ----------
OTHER INCOME (EXPENSE)
Interest income 157 6,685
Interest expense (57,325) (125,729)
Foreign exchange gain 1,375 -
Gain on disposal of fixed assets - 1,500
---------- ----------
TOTAL OTHER INCOME (EXPENSE) (55,793) (117,544)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAX 228,390 (304,535)
---------- ----------
INCOME TAX PROVISION 5,083 350
---------- ----------
NET INCOME (LOSS) $ 223,307 $ (304,885)
========== ==========
INCOME (LOSS) PER COMMON SHARE $0.02 $(0.06)
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 9,005,267 5,296,721
========== ==========
See accompanying notes to consolidated financial statements.
4
JANEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended March 31,
----------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 223,307 $(304,885)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for losses on accounts receivable, net 14,341 (2,232)
Amortization 32,621 85,280
Depreciation 42,623 59,521
Imputed interest 20,273 76,266
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (158,250) (564,865)
Inventories 19,942 215,371
Prepaid royalty (127,274) -
Other current assets (6,802) 61,336
Other assets 2,801 4,205
Increase (decrease) in:
Accounts payable 168,692 536,215
Accrued expenses (332,788) 256,628
Income tax payable - (1,940)
------------ ------------
Net cash provided by (used in) operating activities (100,514) 420,900
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (6,483) (22,204)
Additions to product development costs (19,998) (44,750)
------------ ------------
Net cash used in investing activities (26,481) (66,954)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan payable - shareholder - 90,000
Repayment of note payable - agent (11,004) (140,244)
Proceeds from issuance of common stock 250,000 -
Repayment of note payable (96,415) (136,841)
------------ ------------
Net cash provided by (used in) financing activities 142,581 (187,085)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,586 166,861
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 164,672 186,616
------------ ------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 180,258 $ 353,477
============ ============
See accompanying notes to consolidated financial statements.
5
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Janex International, Inc. was incorporated in Colorado on July 28, 1986 and is
the parent corporation of With Design in Mind ("WDIM"), a California
corporation' Janex Corporation ("Janex"), a New Jersey corporation' and Malibu
Fun Stuffed ("Malibu"), a California corporation, all 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 term "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. The Company's business 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 and
video sets 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 the management Company, contain all adjustments necessary to present
fairly the financial position at March 31, 1998, the results of operations for
the three months ended March 31, 1998 and 1997, and the changes in cash flows
for the three months ended March 31, 1998 and 1997. These adjustments are of a
normal recurring nature. The consolidated balance sheet as of December 31, 1997
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.
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, 1997, as filed with the Securities
and Exchange Commission.
6
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Continued)
SEASONALITY
Because of the seasonality of the Company' business, the results of operations
for the three months ended March 31, 1998 are not necessarily indicative of the
results of operations to be expected for the full fiscal year ending December
31, 1998.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
per Share." SFAS 128 replaced the calculation of primary and fully diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes the dilutive effects of options. Basic earnings per share has been
computed using the weighted average number of shares of common stock outstanding
for the period. Diluted earnings (loss) per share includes the effect, if any,
of unissued shares underlying warrants, computed using the treasury stock
method.
NOTE 2 - GOING CONCERN
The Company has suffered recurring losses from operations and had net income of
$223,307 for the three months ended March 31, 1998. The Company's net working
capital deficit decreased by $545,144 from $1,782,770 at December 31, 1997 to
$1,287,626 at March 31, 1998. These conditions, however, still raise substantial
doubt about the Company's ability to continue as a going concern.
NOTE 3 - LEGAL PROCEEDINGS
On July 15, 1997, Actional Limited ("Actional"), a company that previously
manufactured 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 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.
BD 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 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
7
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Continued)
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.
Both of these cases have been settled for a total payment of $50,000. In
connection with the settlement, the $50,000 has been deposited into an
attorneys' trust account to be paid subject to inspection an acceptance of
certain tools and molds delivered to the Company by Actional.
NOTE 4 - INVENTORIES
Inventories are value at the lower of cost or market and consist of the
following at March 31, 1998 and December 31, 1997:
March 31, December 31,
1998 1997
--------- ------------
Finished goods $100,688 $ 37,743
Work-in-process 52,477 135,364
-------- --------
$153,165 $173,107
======== ========
NOTE 5 - LOAN PAYABLE - BANK
The Company had a $1,000,000 line of credit with a bank with interest at 9 1/2%,
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 he
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
March 31, 1998.
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 was tailored to
match the Company's selling season. From May to November the credit line was
HK$7,000,000 (approximately US$900,000) and from December to April the line was
HK$1,500,000 (approximately US$200,000). Janex International, Inc. had issued a
guarantee to the Hong Kong bank in the full amount of the credit line. At
September 30, 1997, the bank decided not to renew the credit facility.
8
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 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 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 December 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
March 31, 1998 and December 31, 1997, the Company had borrowed $238,109 and
$249,113, 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 March 31, 1998 and December 31, 1997, the Company had no borrowing under
this credit facility.
NOTE 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
vested in equal increments of 180,000 on the first day of consecutive six-month
periods commencing April 19, 1996. As of March 31, 1998 and December 31, 1997,
the Company had borrowed $615,000, pursuant to this Agreement. In addition, the
Company has used an additional $150,000 as security to issue stand-by letters of
credit in connection with the loan payable to the Company's Hong Kong agent (see
Note 6).
9
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Continued)
Under the terms of the stock purchase agreement for the acquisition of Janex,
the Company issued two promissory notes to two stockholders totalling
$1,000,000, payable in semi-annual installments over a three-year period (at
December 31, 1995, the amount payable was $458,760, representing the present
value of the future payments under the obligation discount at 9%, not including
imputed interest accrued but not paid). The first three payments of $166,667
each under the $1,000,000 note were made on June 30, 1994, December 31, 1994,
and June 30, 1995. On December 29, 1995, the holders of the $1,000,000 of notes
agreed to a deferral of the payment due on December 31, 1995, to June 30, 1996.
As a condition of the deferral, the Company agreed to pay the note holders
interest on the deferred payments at the rate of 9% per annum from December 31,
1995 to the date of payment. On June 28, 1996, the note holders agreed to
further extend the payment date for all remaining payments to February 1, 1998,
subject to payment of interest at the rate of 9.5% per annum, retroactive to
January 1, 1996. Quarterly interest payments commenced on September 1, 1996.
Further, in connection with the extension of the notes, the Company entered into
a warrant agreement with each of the note holders, providing for the issuance of
up to 282,994 warrants to one of them and up to 167,994 warrants to the other,
to acquire a total of 450,998 shares of the 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 vested in six-month increments
over the term of the loan. On August 4, 1997, the shareholders agreed to further
extend the due date of the notes to February 1, 1999. The outstanding loan
balance as of March 31, 1998 and December 31, 1997, was $500,000.
The Company charged to operations $20,273 and $76,266 of imputed interest
expense from the issuance of stock purchase warrants noted in the above two
paragraphs in the three months ended March 31, 1998 and 1997, respectively.
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 March
31, 1998 and December 31, 1997 was $115,000.
NOTE 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. The balance of this note
payable at March 31, 1998 and December 31, 1997 was $122,774 and $219,189,
respectively.
10
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 9 - NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," establishes standards for the way that public companies
report information about operating segments in interim financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131, defines operating segments as components of a company
about which separate financial information is available that is evaluated
regularly by management in deciding how to allocate resources and in assessing
performance.
SFAS No's 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the relatively recent issuance of these
standards, management has been unable to fully evaluate the impact, if any, it
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of these
standards.
11
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CONSOLIDATED RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1998 AND 1997:
Net Sales
- ---------
For the three months ended March 31, 1998, net sales decreased slightly by
$125,319 or 7.2%, to $1,608,557, as compared to net sales of $1,733,876 for the
three months ended March 31, 1997. The slight decrease in net sales is a direct
result of a decrease of sales incorporating licensed products. For the three
months ended March 31, 1998, these sales were only 1% of total sales, as
compared to 31% for the comparable period in 1997. The decrease of sales was
almost offset by the increase of sales of the Wet Pet Product line, which made
up the substantial portion of 1998 sales (99%) as compared to 1997 sales (69%).
At March 31, 1998, the Company had a backlog of unfilled orders of approximately
$1,200,000 comparable with its order backlog of approximately the same at March
31, 1997. Although orders are booked throughout the fiscal year, historically as
much as 50% of the Company's business is booked during the second fiscal
quarter. Although the Company has noted a general increase in order flow in
1998, as compared to prior years, the present backlog is not necessarily
indicative of net sales to be expected for the full fiscal year ending December
31, 1998.
Gross Profit
- ------------
For the three months ended March 31, 1998, gross profit was $838,822 or 52.1% of
net sales, as compared to $689,651 or 39.8% of net sales for the three months
ended March 31, 1997. The Company typically established prices to obtain a
target gross margin ranging from 45% to 50%, but overall gross margin can vary
depending on the sales mix in each quarter. The increase in gross margin in
1998, as compared to 1997, was primarily the result of an increase in the sales
of the Wet Pet product line, which have a higher gross margin then that of sales
incorporating licensed products.
Selling, General and Administrative Expenses
- --------------------------------------------
For he three months ended March 31, 1998, selling, general and administrative
expenses decreased by $215,402 or 33.7%, to $424,536 or 26.4% of net sales, as
compared to $639,938 or 36.9% of net sales for the three months ended March 31,
1997. Selling, general and administrative expenses are comprised of fixed
overhead costs and variable selling expenses. The decrease in selling, general
and administrative expenses is a direct result of management's continuing effort
to reduce fixed overhead costs.
Royalty Expense
- ---------------
For the three months ended March 31, 1998, royalty expense was $54,859 or 3.4%
of net sales, as compared to $91,903 or 5.3% of net sales for the three months
ended March 31, 1997. The decrease of royalty expense in 1998, as compared to
1997 was as a result of a significant shift in the sales mix to a higher
proportion of non-royalty sales, which include the Wet Pet line.
12
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
Net Loss
- --------
The reasons for the increase in net income in 1998 as compared to 1997 are
summarized above. For the three months ended March 31, 1998, net income was
$223,307 or $.02 per share, as compared to a net loss of $304,885 or $.06 per
share, for the three months ended March 31, 1997.
CONSOLIDATED FINANCIAL CONDITION - MARCH 31, 1998:
Liquidity and Capital Resources
- -------------------------------
The Company's cash balance increased by $15,586 to $180,258 at March 31, 1998,
as compared to $164,672 at December 31, 1997. The Company's net working capital
increased by $545,144 from working capital deficit of $1,782,770 at December 31,
1997 to a working capital deficit of $1,237,626 at March 31, 1998 and the
Company's current ratio increased to 0.45:1 at March 31, 1998, as compared to
0.29:1 at December 31, 1997. For the three months ended March 31, 1998, the
Company's operations utilized cash resources of $100,514, as compared to
providing cash resources of $420,900 for the three months ended March 31, 1997,
primarily as a result of a decrease in inventories and accounts payable, an
increase in accounts receivable, prepaid royalties and accrued expenses during
the three months ended March 31, 1998.
During the three months ended March 31, 1998, 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 $6,483 and additions to product development
costs of $19,998.
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, 1998. Accordingly, the Company must obtain additional
financing in order to maintain its current level of operations. If financing is
not obtained in the immediate future, then the Company will have no choice but
to seek to substantially reduce operations to a level consistent with available
working capital. The Company is actively seeking additional sources of
financing, including but not limited to a merger with, or acquisition by,
another company. There can be no assurances that any such additional financing
will be available on a timely basis and/or under acceptable terms. If such
financing does not materialize the Company will be forced to cease operations.
The Company has experienced recurring losses from operations, negative cash
flows and decreases in working capital.
The Company had a $1,000,000 line of credit with a bank with interest at 9 1/2%,
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 he
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
March 31, 1998.
13
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
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 was tailored to
match the Company's selling season. From May to November the credit line was
HK$7,000,000 (approximately US$900,000) and from December to April the line was
HK$1,500,000 (approximately US$200,000). Janex International, Inc. had issued a
guarantee to the Hong Kong bank in the full amount of the credit line. At
September 30, 1997, the bank decided not to renew the credit facility.
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
vested in equal increments of 180,000 on the first day of consecutive six-month
periods commencing April 19, 1996. As of March 31, 1998 and December 31, 1997,
the Company had borrowed $615,000, pursuant to this Agreement. In addition, the
Company has used an additional $150,000 as security to issue stand-by letters of
credit in connection with the loan payable to the Company's Hong Kong agent.
Under the terms of the stock purchase agreement for the acquisition of Janex,
the Company issued two promissory notes to two stockholders totalling
$1,000,000, payable in semi-annual installments over a three-year period (at
December 31, 1995, the amount payable was $458,760, representing the present
value of the future payments under the obligation discount at 9%, not including
imputed interest accrued but not paid). The first three payments of $166,667
each under the $1,000,000 note were made on June 30, 1994, December 31, 1994,
and June 30, 1995. On December 29, 1995, the holders of the $1,000,000 of notes
agreed to a deferral of the payment due on December 31, 1995, to June 30, 1996.
As a condition of the deferral, the Company agreed to pay the note holders
interest on the deferred payments at the rate of 9% per annum from December 31,
1995 to the date of payment. On June 28, 1996, the note holders agreed to
further extend the payment date for all remaining payments to February 1, 1998,
subject to payment of interest at the rate of 9.5% per annum, retroactive to
January 1, 1996. Quarterly interest payments commenced on September 1, 1996.
Further, in connection with the extension of the notes, the Company entered into
a warrant agreement with each of the note holders, providing for the issuance of
up to 282,994 warrants to one of them and up to 167,994 warrants to the other,
to acquire a total of 450,998 shares of the 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 vested in six-month increments
over the term of the loan. On August 4, 1997, the stockholders agreed to further
extend the due date of the notes to February 1, 1999. The outstanding loan
balance as of March 31, 1998 and December 31, 1997, was $500,000.
The Company charged to operations $20,273 and $76,266 of imputed interest
expense from the issuance of stock purchase warrants noted in the above two
paragraphs in the three months ended March 31, 1998 and 1997, respectively.
14
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
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 March
31, 1998 and December 31, 1997 was $115,000.
On December 22, 1995, the Company borrowed $500,000 in a private unsecured loan
transaction. Under the terms of the loan agreement, payments are to be made on a
periodic basis based upon the level of certain sales. The loan accrues interest
monthly on the unpaid portion at the rate of two percent (2%) above the prime
rate.
In addition, an agreement was reached whereby an additional $340,000 was added
to the outstanding balance as of December 31, 1996. The balance of this note
payable at March 31, 1998 and December 31, 1997 was $122,774 and $219,189,
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 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 December 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
March 31, 1998 and December 31, 1997, the Company had borrowed $238,109 and
$249,113, 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 March 31, 1998 and December 31, 1997, the Company had no borrowing under
this credit facility.
15
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 2 Changes in Securities and Use of Proceeds
On January 28, 1998, the Company issued 576,923 shares of restricted common
stock for a total purchase price of $75,000 in cash, in a private placement with
two new shareholders. The purchasers represented that they were accredited
investors as defined in Rule 501 of Regulation D promulgated 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.
On February 2, 1998, the Company issued 1,346,154 shares of restricted common
stock for a total purchase price of $175,000 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 promulgated 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.
16
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K -
Three months ended March 31, 1998: Under Item 5.
Other events: None
17
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
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: May 14, 1998 By: /s/ Leslie Friedland
------------------------
Leslie Friedland
President
Chief Executive Officer
By: /s/ Michael Handelman
-------------------------
Michael Handelman
Chief Financial Officer
18