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, 1999
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.)
2999 N. 44TH STREET, SUITE 225 85018-7247
PHOENIX, ARIZONA (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code: (602) 808-8765
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of April 30, 1999, the issuer had 18,098,750 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: 15
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JANEX INTERNATIONAL, INC.
INDEX
PAGE
NUMBER
------
PART I
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998 3
Statements of Operations (unaudited) for the three months
ended March 31, 1999 and 1998 4
Statements of Cash Flows (unaudited) for the three months
ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements (unaudited) 6-9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 10-13
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURE 15
-2-
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, MARCH 31,
1998 1999
============ ============
ASSETS
Current assets:
Cash and cash equivalents $ 62,412 $ 17,733
Accounts receivable, net of allowance of
$26,000 at December 31, 1998 and
March 31, 1999, respectively 162,710 201,058
Inventories 131,098 35,033
Prepaid royalties 59,934 141,934
Other current assets 25,257 22,805
------------ ------------
Total current assets 441,411 418,563
Property and equipment, net 258,103 212,417
Intangible assets, net 405,625 402,072
------------ ------------
Total assets $ 1,105,139 $ 1,033,052
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Advance from parent $ 621,080 $ 1,226,799
Accounts payable 602,715 366,569
Accrued expenses 1,203,277 969,835
Note payable - other 257,000 257,000
------------ ------------
Total current liabilities 2,684,072 2,820,203
Shareholders' deficit:
Class A convertible preferred stock,
no par value:
Authorized shares - 5,000,000
Issued and outstanding shares - 5,000,000 at
December 31, 1998 and March 31, 1999,
respectively 569,022 569,022
Common stock, no par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 18,098,750 at
December 31, 1998 and March 31, 1999,
respectively 12,803,327 12,803,327
Additional paid-in capital 554,517 554,517
Accumulated deficit (15,505,799) (15,714,017)
------------ ------------
Total shareholders' deficit (1,578,933) (1,787,151)
------------ ------------
Total liabilities and shareholders' deficit $ 1,105,139 $ 1,033,052
============ ============
See accompanying notes.
-3-
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1999
============ ============
Net sales $ 1,608,557 $ 222,346
Cost of sales 769,735 187,037
Royalty expense 54,859 5,355
------------ ------------
Gross profit 783,963 29,954
Operating expenses:
Selling, general and administrative 424,536 154,928
Depreciation and amortization 75,244 73,408
------------ ------------
Income (loss) from operations 284,183 (198,382)
Other income (expense):
Interest income 157 --
Interest expense (57,325) (5,520)
Other income 1,375 409
------------ ------------
Net income (loss) before income taxes 228,390 (203,493)
Provision for income taxes (5,083) (4,725)
------------ ------------
Net income (loss) $ 223,307 $ (208,218)
============ ============
Basic and diluted net loss per common share $ 0.02 $ (0.01)
============ ============
Weighted average number of shares outstanding 9,005,267 18,098,750
============ ============
See accompanying notes.
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JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1999
========= =========
OPERATING ACTIVITIES
Net income (loss) $ 223,307 $(208,218)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 42,623 45,686
Amortization 32,621 27,722
Imputed Interest 20,273 --
Provision (credit) for doubtful accounts 14,341 --
Changes in operating assets and liabilities:
Accounts receivable (158,250) (38,348)
Inventories 19,942 96,065
Prepaid expenses and other (131,275) (79,548)
Accounts payable 168,692 (236,146)
Accrued expenses and other (332,788) (233,442)
--------- ---------
Net cash used in operating activities (100,514) (626,229)
--------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment (6,483) --
Product development costs (19,998) (24,168)
--------- ---------
Net cash used in investing activities (26,481) (24,168)
--------- ---------
FINANCING ACTIVITIES
Advances from parent -- 605,718
Net payments on notes payable (96,415) --
Payments on loans payable - agent (11,004) --
Proceeds from issuance of common stock 250,000 --
--------- ---------
Net cash provided by financing activities 142,581 605,718
--------- ---------
Net increase (decrease) in cash and cash equivalents 15,586 (44,679)
Cash and cash equivalents at beginning of period 164,672 62,412
--------- ---------
Cash and cash equivalents at end of period $ 180,258 $ 17,733
========= =========
See accompanying notes.
-5-
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Janex International, Inc. and subsidiaries (the "Company") are in the business
of developing, marketing and selling toys and functional children's products
which are manufactured by subcontractors. The Company sells its products
primarily to U.S.-based retailers and their Hong Kong subsidiaries.
On December 11, 1998, approximately 79 percent of the Company's outstanding
stock was acquired by Futech Interactive Products, Inc. ("Futech"). Because the
minority interest exceeds 20 percent, the Company did not establish a new basis
of accounting upon the acquisition.
The accompanying consolidated financial statements are unaudited, but, in the
opinion of the management of the Company, contain all adjustments necessary to
present fairly the financial position at March 31, 1999, the results of
operations for the three months ended March 31, 1999 and 1998, and the changes
in cash flows for the three months ended March 31, 1999 and 1998. These
adjustments are of a normal recurring nature. The consolidated balance sheet as
of December 31, 1998 is derived from the Company's audited financial statements.
Certain information and footnote disclosures, normally included in financial
statements 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 the financial statements are adequate
to make the information presented herein 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, 1998, as filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation. All balance sheet accounts of the Company's
foreign subsidiaries are translated at the current exchange rate at balance
sheet date, while income statement items are translated at the average currency
exchange rates for each period presented. The resulting translation adjustments,
if significant (in December 31, 1998 and March 31, 1999, the adjustment was not
significant), are recorded as comprehensive income.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
-6-
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform to the 1999 presentation.
The financial statements have been prepared assuming the Company will continue
as a going concern. The Company has incurred significant operating losses in the
past three years and has negative net worth and negative working capital as
March 31, 1999. These factors raise significant doubt as to the Company's
ability to continue as a going concern.
The Company's ultimate ability to continue as a going concern depends on the
market acceptance of products, and the achievement of operating profits and
positive cash flow. The Company will also require additional financial resources
from its new parent or other sources to provide near term operating cash to
enable the Company to execute its plans to move toward profitability. Management
believes that the financial resources of its new parent company, in addition to
sales to be generated from new product lines that are being developed, will be
sufficient to allow the Company to continue in operation.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 1999.
2. SIGNIFICANT ACCOUNTING POLICIES
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued Employees" (APB ) and related Interpretations in
accounting for its employee stock options. Under APB 25, to the extent that the
exercise price of the Company's employee stock options equals managements
estimate of the fair market value of the underlying stock on the date of grant,
no compensation expense is recognized.
Deferred expense on stock and options issued to officers and directors for
service other consideration to be received in the future are offset against
equity and are amortized to expense over the period of benefit.
Loss per share is calculated in accordance with Statement of Financial
Accounting Standards (SFAF) No. 128, "Earnings Per Share," (Statement 128).
Basic earnings per share is computed using the weighted average number of common
shares. Diluted earnings per share is computed using the weighted average number
of common share equivalents during the period. Common share equivalents include
employee stock options using the treasury method and dilutive convertible
securities using the if-converted methods. Common share equivalents have been
excluded for the calculation of loss per share for all periods presented, as
their effect is anti-dilutive.
-7-
As of January 1, 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME (Statement 130). Statement 130 establishes new rules for the reporting
and display of comprehensive loss and it components. Comprehensive loss for the
Company is the same as net loss for all periods presented.
3. INVENTORIES
Inventories are valued at the lower of cost or market and consist of the
following at March 31, 1999 and December 31, 1998:
DECEMBER 31, 1998 MARCH 31, 1999
-------------------- -------------------
Finished goods $ 131,098 $ 35,033
Work-in-process - -
-------------------- -------------------
$ 131,098 $ 35,033
==================== ===================
4. NOTE PAYABLE - OTHER
The Company may borrow up to $400,000 under a line of credit agreement with a
bank. Borrowings under the line bear interest at the bank's prime rate plus 0.25
percent (8.0 percent at March 31, 1999). The line is secured by all of the
Company's assets and is personally guaranteed by two shareholders. Borrowings
under the line are due July 1, 1999. Borrowing capacity of $143,000 is available
at March 31, 1999.
-8-
5. SEGMENT INFORMATION
A summary of the Company's operations by geographical area for the
three months ended March 31, 1998, and 1999 were as follows:
Adjustments
United Hong and
States Kong Eliminations Consolidated
----------- ----------- ----------- -----------
1998
Net sales:
Customers $ 15,679 $ 1,592,878 -- $ 1,608,557
Intercompany 1,952 (1,952) --
----------- ----------- ----------- -----------
Total revenue 15,679 1,594,830 (1,952) 1,608,557
Operating income (loss) (391,413) 675,596 -- 284,183
Interest expense (49,085) (8,240) -- (57,325)
Depreciation and amortization (27,052) (48,192) -- (75,244)
Adjustments
United Hong and
States Kong Eliminations Consolidated
----------- ----------- ----------- -----------
1999
Net sales:
Customers $ 119,354 $ 102,992 $ -- $ 222,346
Intercompany -- -- -- --
----------- ----------- ----------- -----------
Total revenue 119,354 102,992 222,346
Operating loss (156,504) (41,878) -- (198,382)
Interest expense (5,319) (201) -- (5,520)
Depreciation and amortization (24,887) (48,521) -- (73,408)
-9-
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, 1999 AND 1998:
Net Sales
- ---------
For three months ended March 31, 1999, net sales decreased significantly by
$1,386,211 or 86.2%, to $222,346, as compared to net sales of $1,608,557 for the
three months ended March 31, 1998. The significant decrease in net sales is due
to the transitional effects of the majority of our outstanding common stock
being acquired by Futech Interactive Products, Inc. and the company's
organization of a new product development team, operations management team,
Board of Directors, sales representation, and corporate headquarters. We believe
that our net sales will increase in the near future as some of those
transitional effects are diminished.
At March 31, 1999, the Company had a backlog of unfilled orders of approximately
$400,000 comparable with its order backlog of approximately $1,200,000 at March
31, 1998. Although the Company has noted a general decrease in order flow in
1999, 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, 1999.
Gross Profit
- ------------
For the three months ended March 31, 1999, gross profit was $29,954 or 13.5% of
net sales, as compared to $783,963 or 48.7% of net sales for the three months
ended March 31, 1998. The Company typically establishes prices to obtain a
target gross margin ranging from 45% to 50%, but overall gross margin can vary
depending on the sales mix in each quarter. The decrease in gross margin in
1999, as compared to 1998, was the result of the Company deciding to close out
certain slow-moving inventory at little or no profit and price adjustments due
to competition.
Royalty Expense
- ---------------
For the three months ended March 31, 1999, royalty expense was $5,355 or 2.4% of
net sales, as compared to $54,859 or 3.4% of net sales for the three months
ended March 31, 1998. The decrease of royalty expense in 1999, as compared to
1998 was a result of a shift in the sales mix to a higher proportion of
non-royalty sales, which include the Wet Pet line.
Selling, General and Administrative Expense
- -------------------------------------------
For the three months ended March 31, 1999, selling, general and administrative
expenses decreased by $269,608 or 63.5%, to $154,928 or 69.7% of net sales, as
compared to $424,536 or 26.4% of net sales, for the three months ended March 31,
1998. 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.
-10-
Liquidity and Capital Resources
- -------------------------------
The Company's cash balance decreased by $44,679 to $17,733 at March 31, 1999, as
compared to $62,412 at December 31, 1998. The Company's net working capital
decreased by $158,979 from working capital deficit of $2,242,661 at December 31,
1998 to a working capital deficit of $2,401,640 at March 31, 1999 and the
Company's current ratio decreased to 0.15:1 at March 31, 1999, as compared to
0.16:1 at December 31, 1998.
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, 1999. The Company has experienced recurring losses from
operations, negative cash flows and decreases in working capital.
The Company's ultimate ability to continue as a going concern depends on: (i)
the market acceptance of its products; (ii) its generation of sufficient
operating profits; (iii) its creation of a sustainable positive cash flow; and
(iv) obtaining additional financial resources to provide near term operating
cash. Management believes that the financial resources from its majority
shareholder, Futech, in addition to sales generated from new product lines that
it is developing, will allow the company to continue in operation for fiscal
year 1999.
The Company had negative cash flow from operating activities of $626,229 for the
three months ended March 31, 1999, as compared to a negative operating cash flow
in 1998 of $100, 514, as declining sales have led to lower accounts receivable
collections in 1999.
During the three months ended March 31, 1999, the Company incurred additions to
product development costs of $24,168. This compares to additions to tooling and
molds related to new licenses of $6,483 and additions to product development
costs of $19,998 for the three months ended March 31, 1998.
The Company generated $605,718 from financing activities during the three months
ended March 31, 1999, compared to $142,581 during the same period in 1998. The
cash generated in financing activities came from proceeds of advances from
parent of $605,718.
The Company's capital commitments for 1999 include commitments for minimum
guaranteed royalties under licensing agreements. The commitments for 1999 amount
to $268,959. The Company also maintains a non-cancelable operating lease on its
former facility, although it subleases that space for an amount approximating
the Company's rent to the landlord. Future minimum payments under this lease are
$102,000 for 1999.
-11-
The Company may borrow up to $400,000 under a line of credit agreement with a
bank. Borrowings under the line bear interest at the bank's prime rate plus 0.25
percent (8.0 percent at March 31, 1999). The line is secured by all of the
Company's assets and is personally guaranteed by two shareholders. Borrowings
under the line are due July 1, 1999. Borrowing capacity of $143,000 is available
at March 31, 1999.
Inflation
- ---------
Management does not believe that inflation has had a significant impact on the
Company's costs and profits during the past two years.
Year 2000
- ---------
The Year 2000 presents potential concerns for business and consumer computing.
The consequences of this issue may include systems failures and business process
interruption. The Year 2000 issue affects Janex's internal systems, including
information technology (IT) and non-IT systems. Janex is assessing the readiness
of its systems for handling the Year 2000. Although the assessment is still
underway, management believes that all material systems will be compliant by the
Year 2000 and that the cost to address the issues will not be material.
Nevertheless, Janex is creating contingency plans for certain internal systems.
The Company has not instituted any procedures to obtain certification from its
major vendors or customers that their systems are Year 2000 compliant. Such a
survey would include vendors who provide systems related services, e.g.,
banking, letter of credit processing, shipping, security, HVAC, etc. along with
third-party factories providing toy products. The cost of such a survey, in both
time and money, would be substantial. However, the Company does not believe that
the failure of any vendor or customer to be Year 2000 compliant will have a
material impact on the Company.
Forward-Looking Statements
- --------------------------
We have made forward-looking statements in this report that are subject to a
number of risks and uncertainties, including without limitation, those described
in our Annual Report on Form 10-KSB for the year ended December 31, 1998 and
other risks and uncertainties indicated from time to time in our filings with
the SEC. These forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include the information concerning possible or
assumed future results of operations. Also, when we use words such as
"believes," "expects," "anticipates" or similar expressions, we are making
forward-looking statements. Readers should understand that the following
important factors, in addition to those discussed in the referenced SEC filings,
could affect our future financial results, and could cause actual results to
differ materially from those expressed in our forward-looking statements:
-12-
o the implementation of our growth strategy;
o the integration of acquisitions;
o the availability of additional capital;
o variations in stock prices and interest rates;
o fluctuations in quarterly operating results; and
o other risks and uncertainties described in our filings with
the SEC.
We make no commitment to disclose any revisions to forward-looking statements,
or any facts, events or circumstances after the date hereof that may bear upon
forward-looking statements.
-13-
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 - The following reports were filed on Form
8-K during the three months ended March 31, 1999:
Date of Report Item
-------------- ----
February 25, 1999 Item 4. Changes In Registrant's
Certifying Accountant.
-14-
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 17, 1999 By: /s/ Vincent W. Goett
-------------------------------
Vincent W. Goett
President
Chief Executive Officer
By: /s/ Fred B. Gretsch
-------------------------------
Chief Financial Officer
Treasurer and Secretary
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