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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO
_________________
Commission file number: 0-28104
JAKKS Pacific, Inc.
(Exact name of registrant as specified in its charter)
Delaware 95-4527222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22619 Pacific Coast Highway
Malibu, California 90265
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 456-7799
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]
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The number of shares outstanding of the issuer's common stock is 18,063,141 (as
of May 15, 2001).
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2001
ITEMS IN FORM 10-Q
PAGE
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Facing page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed consolidated balance sheets -
December 31, 2000 and March 31, 2001 (unaudited) 3
Condensed consolidated statements of operations for the three months
ended March 31, 2000 and 2001 (unaudited) 4
Condensed consolidated statements of cash flows for the three months ended
March 31, 2000 and 2001 (unaudited) 5
Notes to condensed consolidated financial
statements (unaudited) 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations. 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 13
Part II OTHER INFORMATION
Item 1. Legal Proceedings. 14
Item 2. Changes in Securities and Use of Proceeds. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to
a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K. 14
Signatures. 15
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. For example, statements included in this report regarding
our financial position, business strategy and other plans and objectives for
future operations, and assumptions and predictions about future product demand,
supply, manufacturing, costs, marketing and pricing factors are all
forward-looking statements. When we use words like "intend," "anticipate,"
"believe," "estimate," "plan" or "expect," we are making forward-looking
statements. We believe that the assumptions and expectations reflected in such
forward-looking statements are reasonable, based on information available to us
on the date hereof, but we cannot assure you that these assumptions and
expectations will prove to have been correct or that we will take any action
that we may presently be planning. We are not undertaking to publicly update or
revise any forward-looking statement if we obtain new information or upon the
occurrence of future events or otherwise.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
ASSETS
December 31, 2000 March 31, 2001
----------------- --------------
(*) (unaudited)
Current assets
Cash and cash equivalents $ 29,275,424 $ 24,291,405
Marketable securities 13,617,912 27,321,493
Accounts receivable, net 47,053,699 52,722,349
Inventory, net 30,534,826 29,769,304
Advanced royalty payments 2,495,027 2,321,145
Prepaid expenses and other current assets 5,655,480 5,407,304
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Total current assets 128,632,368 141,833,000
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Office furniture and equipment 3,779,585 4,253,143
Molds and tooling 23,929,329 24,705,265
Leasehold improvements 1,927,805 1,817,557
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Total 29,636,719 30,775,965
Less accumulated depreciation and amortization 10,653,467 12,675,409
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Property and equipment, net 18,983,252 18,100,556
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Notes Receivable-Officers 2,450,000 2,325,000
Investment in joint venture 9,758,359 1,244,891
Goodwill, net 74,590,189 73,836,435
Trademarks, net 12,104,546 11,972,370
Intangibles and deposits, net 2,203,679 2,045,843
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Total assets $248,722,393 $251,358,095
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 33,712,040 $ 29,132,097
Income taxes payable 7,623,355 9,221,369
Current portion of long term debt 400,000 400,000
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Total current liabilities 41,735,395 38,753,466
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Long term debt, net of current portion 1,000,000 900,000
Deposits -- 27,600
Deferred income taxes 1,456,817 756,817
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Total liabilities 44,192,212 40,437,883
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Contingency
Stockholders' equity
Common stock, $.001 par value; 25,000,000 shares authorized;
19,485,582 and 19,511,055 shares issued, respectively 19,485 19,511
Additional paid-in capital 156,475,343 156,844,565
Treasury stock, at cost, 1,493,600 and 1,493,600 shares,
respectively (12,911,483) (12,911,483)
Retained earnings 60,946,836 66,967,619
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Total stockholders' equity 204,530,181 210,920,212
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Total liabilities and stockholders' equity $248,722,393 $251,358,095
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See accompanying notes to condensed consolidated financial statements.
(*) Derived from audited financial statements
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2000 and 2001 (Unaudited)
Three Months Ended March 31,
2000 2001
Net sales $50,782,075 $59,961,872
Cost of sales 30,678,416 35,494,184
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Gross profit 20,103,659 24,467,688
Selling, general and administrative expenses 16,099,802 16,894,201
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Income from operations 4,003,857 7,573,487
Profit from joint venture (5,211,345) (727,616)
Other expense 451,803 306,633
Interest, net (952,046) (485,506)
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Income before provision for income taxes 9,715,445 8,479,976
Provision for income taxes 3,112,012 2,459,193
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Net income $ 6,603,433 $ 6,020,783
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Earnings per share - basic $ 0.34 $ 0.33
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Earnings per share - diluted $ 0.32 $ 0.32
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See accompanying notes to condensed consolidated financial statements.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 2001 (Unaudited)
Three Months Ended March 31,
2000 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,603,433 $ 6,020,783
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Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 1,881,137 3,062,355
Earned Compensation from stock option grants -- 236,385
Change in operating assets and liabilities
Accounts receivable (1,953,215) (5,668,650)
Preferred return from joint venture (1,598,628) 8,513,468
Inventory 2,601,394 765,522
Advanced royalty payments (1,270,027) 173,882
Prepaid expenses and other current assets 1,343,818 248,176
Accounts payable and accrued expenses (7,583,316) (4,579,943)
Income taxes payable 1,834,228 1,598,014
Deferred income taxes (117,975) (700,000)
Marketable securities 15,069,326 (13,703,581)
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Total adjustments 10,206,742 (10,054,372)
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Net cash provided (used) by operating activities 16,810,175 (4,033,589)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and equipment (2,272,976) (1,139,246)
Other assets 56,408 30,953
Repayment of Notes receivable from officers -- 125,000
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Net cash used by investing activities (2,216,568) (983,293)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock options and warrants exercised 303,198 132,863
Repayment of long term debt (1,242) (100,000)
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Net cash provided by financing activities 301,956 32,863
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Net increase (decrease) in cash and cash equivalents 14,895,563 (4,984,019)
Cash and cash equivalents, beginning of period 57,546,406 29,275,424
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Cash and cash equivalents, end of period $72,441,969 $24,291,405
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 1,277,784 $ 535,443
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Interest $ -- $ 22,221
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See accompanying notes to condensed consolidated financial statements.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2001
Note 1 - Basis of presentation
The accompanying 2000 and 2001 unaudited interim condensed consolidated
financial statements included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
prevent the information presented from being misleading. These financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's Form 10-K, which contains financial
information for the years ended December 31, 1998, 1999 and 2000.
The information provided in this report reflects all adjustments (consisting
solely of normal recurring accruals) that are, in the opinion of management,
necessary to present fairly the results of operations for this period. The
results for this period are not necessarily indicative of the results to be
expected for the full year.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries.
Basic earnings per share has been computed using the weighted average number of
common shares. Diluted earnings per share has been computed using the weighted
average number of common shares and common share equivalents (which consist of
warrants and options, to the extent they are dilutive).
Note 2 -- Earnings per share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." This statement establishes simplified standards for
computing and presenting earnings per share (EPS). It requires dual presentation
of basic and diluted EPS on the face of the income statement for entities with
complex capital structures and disclosure of the calculation of each EPS amount.
THREE MONTHS ENDED MARCH 31,
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2000 2001
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WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
-------- ---------- --------- -------- --------- ---------
Earnings per share - basic
Income available to
common stockholders......... $6,603,433 19,289,560 $0.34 $6,020,783 18,007,601 $0.33
---------- ---------- ----- ---------- ---------- -----
Effect of dilutive securities
Options and warrants......... -- 1,084,437 -- 912,866
-------- ---------- ---------- ----------
Earnings per share - diluted
Income available to common
stockholders plus assumed
exercises .................. $6,603,433 20,373,997 $0.32 $6,020,783 18,920,467 $0.32
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
March 31, 2001
Note 3 -- Common stock and preferred stock
The Company has 26,000,000 authorized shares of stock consisting
of 25,000,000 shares of $.001 par value common stock and 1,000,000 shares of
$.001 par value preferred stock. During 2000, the Company purchased 1,493,600
shares of its common stock for a total of $12,911,483 pursuant to a buy-back
program approved by the Board of Directors.
Note 4 -- Acquisitions
In October 1999, the Company acquired all of the stock of Flying Colors
Toys, Inc. ("Flying Colors") for approximately $52.9 million. Consideration paid
at closing was in cash. Professional fees totaling $310,667 were incurred as
part of the acquisition costs. Contingent consideration includes an earn-out in
an amount of up to $4.5 million in each of the three 12-month periods following
the closing, if gross profits of Flying Colors branded products achieve certain
prescribed levels in each of such period. The maximum earn-out for the initial
earn-out period ended September 30, 2000 of $4.5 million was earned by the
sellers.
On July 28, 2000, the Company acquired all of the outstanding capital stock
of Pentech International, Inc. ("Pentech") for an aggregate purchase price of
approximately $20.6 million, which was paid in cash on the closing of the
transaction. In addition, the Company paid on the closing $10.0 million to pay
down certain indebtedness of Pentech, assumed liabilities of approximately $25.5
million and incurred estimated legal and other acquisition costs of
approximately $1.2 million. Pentech designs, produces and markets writing
instruments and craft products.
Note 5 -- Notes Receivable From Officers
As of March 31, 2001, there were two notes receivable from officers
totaling $2,075,000 issued at interest rates of 6.5% each, with interest payable
on each April 28 and October 28 of each year, and principal payable at maturity
on April 28, 2003. Additionally, there is a third note receivable from an
officer for $250,000 issued at an interest rate of 7.0%, with interest and
principal payable at maturity on May 12, 2002.
Note 6 -- Litigation
On or about March 26, 2001, Rose Art Industries, Inc. and Licensing
International, Ltd. commenced an action against the Company in the United States
District Court for the District of New Jersey in which they allege the Company's
willful infringement of a patent owned by Licensing International and licensed
to Rose Art through the Company's production and sale of Zyrofoam modeling
compound. The plaintiffs seek injunctive relief, monetary damages in an
unspecified amount, together with interest thereon, and reasonable attorneys'
fees. The Company believes that their claims are without merit and intends
vigorously to defend against their action. At this early state in these
proceedings, the Company is unable to predict the likely outcome of the action
or its impact on its business, financial condition or results of operations. The
Company is a party to, and certain property is the subject of, various pending
claims and legal proceedings that routinely arise in the ordinary course of
business, but the Company does not believe that any of these claims or
proceedings will have a material effect on its business, financial condition or
results of operations.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read together with the Company's Condensed Consolidated
Financial Statements and Notes thereto which appear elsewhere herein.
OVERVIEW
JAKKS was founded to design, develop, produce and market children's toys
and related products. We commenced business operations in 1995 when we assumed
operating control over the toy business of Justin Products Limited ("Justin"),
which consisted primarily of fashion dolls and accessories and electronic
products for children.
One of our key strategies has been to grow through the acquisition or
licensing of product lines, concepts and characters. In 1996, we expanded our
product lines to include products based on licensed characters and properties,
such as World Wrestling Federation action figures and accessories.
We acquired Road Champs in February 1997, and have included the results of
operations of Road Champs from February 1, 1997, the effective date of the
acquisition. We acquired the Child Guidance and Remco trademarks in October
1997, both of which contributed to operations nominally in 1997, but contributed
more significantly to operations commencing in 1998. In June 1999, we acquired
Berk with its lines of educational toy foam puzzle mats and activity sets. Berk
began to contribute modestly beginning in the third quarter of 1999. In October
1999, we acquired Flying Colors, whose product lines include licensed activity
kits, play clay compound playsets and lunch boxes as well as other related
products. Flying Colors product lines contributed to operations beginning in the
fourth quarter of 1999. In July 2000, we acquired Pentech whose product lines
include pens, markers, pencils, and other writing instruments, crafts and
activity kits, and related stationery products. Pentech product lines
contributed to operations beginning in August 2000.
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Our products currently include (1) action figures and accessories featuring
licensed characters, principally from the World Wrestling Federation license,
(2) Flying Colors molded plastic activity sets, clay compound playsets and lunch
boxes, (3) Wheels division products, including Road Champs die-cast collectible
and toy vehicles and Remco toy vehicles and role-play toys and accessories, (4)
Child Guidance infant and pre-school electronic toys, educational toy foam
puzzle mats and blocks, activity sets and outdoor products, (5) Pentech pens,
markers, pencils, and other writing instruments and craft products, and (6)
fashion dolls and related accessories.
In general, we acquire products or product concepts from others or we
engage unaffiliated third parties to develop our own products, thus minimizing
operating costs. Royalties payable to our developers generally range from 1% to
6% of the wholesale price for each unit of a product sold by us. We expect that
outside inventors will continue to be a source of new products in the future. We
also generate internally new product concepts, for which we pay no royalties.
In June 1998, we formed a joint venture with THQ Inc., a developer,
publisher and distributor of interactive entertainment software, and the joint
venture licensed the rights from World Wrestling Federation Entertainment to
publish World Wrestling Federation electronic video game software on all
platforms. The first games produced under this license were released in November
1999. We are entitled to receive a guaranteed preferred return based on the
sales of the video games, and THQ is entitled to receive the balance of the
profits generated by the joint venture.
Through the acquisition of Pentech in July 2000, we became a fifty percent
member of a Chinese joint venture engaged in the manufacture of pencils, pens,
and markers that are sold individually, in sets or are included in Pentech and
Flying Colors activity kits.
We contract the manufacture of most of our products to unaffiliated
manufacturers located in China. We sell a substantial portion of the finished
products on a letter of credit basis or on open account to our customers, who
take title to the goods in Hong Kong. These methods allow us to reduce certain
operating costs and working capital requirements. A portion of our sales,
primarily sales of our Road Champs, Flying Colors and Pentech products,
originate in the United States, so we hold certain inventory in our warehouse
and fulfillment facility. In addition, we hold inventory of other products from
time to time in support of promotions or other domestic programs with retailers.
To date, substantially all of our sales have been to domestic customers. We
intend to expand distribution of our products into foreign territories and,
accordingly, we have (1) engaged representatives to oversee sales in certain
territories, (2) engaged distributors in certain territories, and (3)
established direct relationships with retailers in certain territories.
We establish reserves for sales allowances, including promotional
allowances and allowances for anticipated defective product returns at the time
of shipment. The reserves are determined as a percentage of net sales based upon
either historical experience or on estimates or programs agreed upon by our
customers.
Our cost of sales consists primarily of the cost of goods produced for us
by unaffiliated third-party manufacturers, royalties earned by licensors on the
sale of these goods and amortization of the tools, dies and molds owned by us
that are used in the manufacturing process. Other costs include inbound freight
and provisions for obsolescence. Significant factors affecting our cost of sales
as a percentage of net sales include (1) the proportion of net sales generated
by various products with disparate gross margins, (2) the proportion of net
sales made domestically, which typically carry higher gross margins than sales
made in Hong Kong, and (3) the effect of amortizing the fixed cost components of
cost of sales, primarily amortization of tools, dies and molds, over varying
levels of net sales.
Selling, general and administrative expenses include costs directly
associated with the selling process, such as sales commissions, advertising and
travel expenses, as well as general corporate expenses, goodwill and trademark
amortization and product development. We have recorded goodwill of approximately
$78.2 million and trademarks of approximately $13.9 million in connection with
acquisitions made to date. Goodwill is being amortized over a 30-year period,
while trademark acquisition costs are being amortized over periods ranging from
5 to 30 years.
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RESULTS OF OPERATIONS
The following unaudited table sets forth, for the periods indicated,
certain statement of operations data as a percentage of net sales.
THREE MONTHS ENDED
MARCH 31,
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2000 2001
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Net sales............................................. 100.0% 100.0%
Cost of sales......................................... 60.4 59.2
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Gross profit.......................................... 39.6 40.8
Selling, general and administrative expenses.......... 31.7 28.2
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Income from operations................................ 7.9 12.6
Profit from joint venture............................. (10.3) (1.2)
Interest, net......................................... (1.8) (0.8)
Other expense......................................... 0.9 0.5
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Income before income taxes............................ 19.1 14.1
Provision for income taxes............................ 6.1 4.1
----- -----
Net income............................................ 13.0% 10.0%
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THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Net Sales. Net sales increased $9.2 million, or 18.1%, to $60.0 million in
2001 from $50.8 million in 2000. The growth in net sales was due primarily to
the continuing growth in sales of our Flying Colors products and increases in
sales of our WWF Wrestling products, Child Guidance products, and fashion dolls,
as well as the addition of Pentech products, which began contributing to
operations in August 2000, offset by a decrease in sales of our Wheels division,
consisting primarily of our Road Champs die-cast toy and collectible vehicles
with its BXS die-cast bicycles and MXS die-cast motorcycles.
Gross Profit. Gross profit increased $4.4 million, or 21.7%, to $24.5
million, or 40.8% of net sales, in 2001 from $20.1 million, or 39.6% of net
sales, in 2000. The overall increase in gross profit was attributable to the
increase in net sales. The increase in gross profit margin of 1.2% of Net Sales
is attributed to the decrease in royalty expense as a percentage of net sales
due to changes in the product mix and lower product costs, which is partially
offset by an increase in amortization expense of molds and tools used in the
manufacture of our products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $16.9 million in 2001 and $16.1 million in 2000,
constituting 28.2% and 31.7% of net sales, respectively. The overall increase of
$0.8 million in such costs was due to costs incurred in support of the Company's
development, marketing and distribution of products under its recently acquired
Pentech brand and the increase in net sales with its proportionate impact on
variable selling costs such as freight and shipping related expenses, sales
commissions, cooperative advertising and travel expenses, among others. We
produced and aired television commercials in support of several of our products,
including World Wrestling Federation action figures, Road Champs extreme sports
products and Flying Colors products in 2000 and 2001. From time to time, we may
increase our advertising efforts, if we deem it appropriate for particular
products.
Profit from Joint Venture. Beginning in the fourth quarter of 1999, we
began to earn our preferred return on the sale of World Wrestling Federation
video games by our joint venture with THQ. The joint venture had sales of only
carryover titles in 2001 compared to releasing a new Sony Play Station title
along with having sales of carryover titles in 2000.
Interest, Net. We had lower average cash balances during 2001 than in 2000
due to the net proceeds from the sale of our common stock in December 1999
reduced by significant disbursements in the third and fourth quarters of 2000
related to the acquisition of Pentech and the repurchase by the Company of its
common stock.
Other Expense. Other expense in 2001 relates to shut-down costs of certain
operations of Pentech, acquired in 2000, and such costs in 2000 relate to
shut-down costs of certain operations of Flying Colors, acquired in 1999.
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Provision for Income Taxes. Provision for income taxes included Federal,
state and foreign income taxes in 2000 and 2001, at effective tax rates of 32.0%
in 2000 and 29.0% in 2001, benefiting from a flat 16.5% Hong Kong Corporation
Tax on our income arising in, or derived from, Hong Kong. As of March 31,
2001, we had deferred tax assets of approximately $0.4 million for which no
allowance has been provided since, in the opinion of management, realization of
the future benefit is probable. In making this determination, management
considered all available evidence, both positive and negative, as well as the
weight and importance given to such evidence.
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SEASONALITY
The retail toy industry is inherently seasonal. Generally, in the past, the
Company's sales have been highest during the third and fourth quarters, and
collections for those sales have been highest during the succeeding fourth and
first fiscal quarters. The Company's working capital needs have been highest
during the third and fourth quarters.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, we had working capital of $103.1 million, as compared
to $86.9 million as of December 31, 2000. This increase was primarily
attributable to our operating results and the receipt of the preferred return
from our joint venture with THQ.
Operating activities used net cash of $4.0 million in 2001, as compared to
having provided cash of $16.8 million in 2000. Net cash was provided primarily
by net income, non-cash charges, such as depreciation and amortization and
earned compensation from stock option grants, as well as a decrease in preferred
return from THQ joint venture, inventory, advanced royalty payments, prepaid
expenses and other current operating assets, and an increase in income taxes
payable, which were offset by an increase in accounts receivable, decreases in
accounts payable and accrued expenses and deferred income taxes, as well as the
purchase of marketable securities. As of March 31, 2001, we had cash and cash
equivalents of $24.3 million and marketable securities of $27.3 million.
Our investing activities used net cash of $1.0 million in 2001, as compared
to $2.2 million in 2000, consisting primarily of the purchase of office
furniture and equipment and molds and tooling used in the manufacture of our
products partially offset by the repayment of notes receivable from officers. As
part of our strategy to develop and market new products, we have entered into
various character and product licenses with royalties ranging from 1% to 12%
payable on net sales of such products. As of March 31, 2001, these agreements
required future aggregate minimum guarantees of $12.8 million, exclusive of $2.3
million in advances already paid.
Our financing activities provided net cash of $32,863 in 2001, consisting
primarily of proceeds from the exercise of options and warrants partially offset
by the repayment of long term debt. In 2000, financing activities provided net
cash of $0.3 million, consisting primarily of proceeds from the exercise of
options and warrants.
In October 1999, we acquired Flying Colors Toys. At or shortly after the
closing we paid approximately $34.7 million for the stock and paid off
approximately $17.6 million of indebtedness. We also agreed to pay an earn-out
of up to $4.5 million in each of the three 12-month periods following the
closing if net sales of Flying Colors products achieve certain targeted levels
during each such period. The sellers of Flying Colors earned the maximum of $4.5
million in the first earn-out period, which ended September 30, 2000. One of
Flying Colors' senior executives and most of its creative design and product
development staff have remained with Flying Colors Toys. Flying Colors'
principal products include molded plastic activity kits, compound playsets and
lunch boxes featuring licensed characters, including Rugrats, Blue's Clues and
Looney Tunes characters. The kits cover a broad range of products and
activities, such as make and paint your own characters, jewelry making, art
studios, posters, puzzles and other projects.
On July 28, 2000, the Company acquired all of the outstanding capital stock
of Pentech for an aggregate purchase price of approximately $20.6 million, which
was paid in cash on the closing of the transaction. In addition, the Company
paid on the closing $10.0 million to pay down certain indebtedness of Pentech,
assumed liabilities of approximately $25.5 million and incurred estimated legal
and other acquisition costs of approximately $1.2 million. In December 1999,
Pentech renewed a three-year $25,000,000 Revolving Credit Agreement with Bank
America Business Credit, Inc. now known as Bank of America, N.A. ("BABC") (the
"Credit Agreement"). Borrowings under the Credit Agreement are subject to
limitations based upon eligible inventory and accounts receivable as defined in
the Credit Agreement. Amounts borrowed under the Credit Agreement accrue
interest, at Pentech's option, at either prime plus 0.5% or LIBOR plus 2.5%.
Pentech designs, produces and markets writing instruments and craft products.
We believe that our cash flow from operations, cash and cash equivalents on
hand and marketable securities will be sufficient to meet our working capital
and capital expenditure requirements and provide us with adequate liquidity to
meet our anticipated operating needs for at least the next 12 months. Although
operating activities are expected to provide cash, to the extent we grow
significantly in the future, our operating and investing activities may use cash
and, consequently, this growth may require us to obtain additional sources of
financing. There can be no assurance that any necessary additional financing
will be available to us on commercially reasonable terms, if at all.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
in the areas of changes in United States and international borrowing rates and
changes in foreign currency exchange rates. In addition, we are exposed to
market risk in certain geographic areas that have experienced or remain
vulnerable to an economic downturn, such as China. We purchase substantially all
of our inventory from companies in China, and, therefore, we are subject to the
risk that such suppliers will be unable to provide inventory at competitive
prices. While we believe that, if such an event were to occur we would be able
to find alternative sources of inventory at competitive prices, we cannot assure
you that we would be able to do so. These exposures are directly related to our
normal operating and funding activities. Historically and as of March 31,
2001, we have not used derivative instruments or engaged in hedging activities
to minimize our market risk.
INTEREST RATE RISK
As of March 31, 2001, we do not have any outstanding balances on our
credit facility, nor do we expect to draw on the facility prior to its
termination or expiration, and we have only nominal interest-bearing
obligations. Accordingly, we are not generally subject to any direct risk of
loss arising from changes in interest rates.
FOREIGN CURRENCY RISK
We have wholly-owned subsidiaries in Hong Kong. Sales from these
operations are denominated in U.S. dollars. However, purchases of inventory and
operating expenses are typically denominated in Hong Kong dollars, thereby
creating exposure to changes in exchange rates. Changes in the Hong Kong
dollar/U.S. dollar exchange rate may positively or negatively affect our gross
margins, operating income and retained earnings. The exchange rate of the Hong
Kong dollar to the U.S. dollar has been fixed by the Hong Kong government since
1983 at HK$7.80 to US$1.00 and, accordingly, has not represented a currency
exchange risk to the U.S. dollar. We do not believe that near-term changes in
exchange rates, if any, will result in a material effect on our future earnings,
fair values or cash flows, and therefore, we have chosen not to enter into
foreign currency hedging transactions. We cannot assure you that this approach
will be successful, especially in the event of a significant and sudden change
in the value of the Hong Kong dollar.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about March 26, 2001, Rose Art Industries, Inc. ("Rose Art") and
Licensing International, Ltd. commenced an action against us in the United
States District Court for the District of New Jersey in which they allege our
willful infringement of a patent owned by Licensing International and licensed
to Rose Art through our production and sale of our Zyrofoam modeling compound.
The plaintiffs seek injunctive relief, monetary damages in a unspecified amount,
together with interest thereon, and reasonable attorneys' fees. We believe that
their claims are without merit and we intend vigorously to defend against their
action. On or about April 30, 2001, we filed an answer to their complaint in
which we assert various defenses and counterclaims, including among others that
their patent is invalid and unenforceable and that, in any case, the
manufacture, use and sale of our product does not infringe their patent.
Accordingly, we request the court to dismiss the complaint, to declare our
product non-infringing and the subject patent invalid and/or unenforceable, and
to award us our litigation costs. In our answer, we also allege Rose Art's
infringement of one of our patents and seek injunctive relief, monetary damages
in an unspecified amount and reasonable attorneys' fees. The parties are
currently engaged in discovery, and, at this early stage in these proceedings,
we are unable to predict the likely outcome of the action or its impact on our
business, financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NUMBER DESCRIPTION
- ------ -----------
3.1 Restated Certificate of Incorporation of the Company(1)
3.1.1 Certificate of Designation and Preferences of Series A
Cumulative Convertible Preferred Stock of the Company(2)
3.1.2 Certificate of Elimination of All Shares of 4% Redeemable
Convertible Preferred Stock of the Company(2)
3.1.3 Certificate of Amendment of Restated Certificate of
Incorporation of the Company(3)
3.2.1 By-Laws of the Company(1)
3.2.2 Amendment to By-Laws of the Company(4)
- ------------
(1) Filed previously as an exhibit to the Company's Registration Statement
on Form SB-2 (Reg. No. 333-2048-LA), effective May 1, 1996, and
incorporated herein by reference.
(2) Filed previously as an exhibit to the Company's Current Report on Form
8-K, filed April 7, 1998, and incorporated herein by reference.
(3) Filed previously as exhibit 4.1.2 of the Company's Registration
Statement on Form S-3 (Reg. No. 333-74717), filed on March 9, 1999, and
incorporated herein by reference.
(4) Filed previously as an exhibit to the Company's Registration Statement
on Form SB-2 (Reg. No. 333-22583), effective May 1, 1997, and
incorporated herein by reference.
(b) Reports on Form 8-K
We did not file a current report on Form 8-K in our fiscal quarter
ended March 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Registrant:
JAKKS PACIFIC, INC.
Date: May 15, 2001 By: /s/ Joel M. Bennett
--------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
NUMBER DESCRIPTION PAGE
- ------ ----------- -----
3.1 Restated Certificate of Incorporation of the Company(1)
3.1.1 Certificate of Designation and Preferences of Series A
Cumulative Convertible Preferred Stock of the Company(2)
3.1.2 Certificate of Elimination of All Shares of 4% Redeemable
Convertible Preferred Stock of the Company(2)
3.1.3 Certificate of Amendment of Restated Certificate of
Incorporation of the Company(3)
3.2.1 By-Laws of the Company(1)
3.2.2 Amendment to By-Laws of the Company(4)
- --------------
(1) Filed previously as an exhibit to the Company's Registration Statement
on Form SB-2 (Reg. No. 333-2048-LA), effective May 1, 1996, and
incorporated herein by reference.
(2) Filed previously as an exhibit to the Company's Current Report on Form
8-K, filed April 7, 1998, and incorporated herein by reference.
(3) Filed previously as exhibit 4.1.2 of the Company's Registration
Statement on Form S-3 (Reg. No. 333-74717), filed on March 9, 1999, and
incorporated herein by reference.
(4) Filed previously as an exhibit to the Company's Registration Statement
on Form SB-2 (Reg. No. 333-22583), effective May 1, 1997, and
incorporated herein by reference.