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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 JUNE 30, 1999
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.)
22761 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 10,683,378 (as
of August 9, 1999).
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 1999
ITEMS IN FORM 10-Q
PAGE
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Facing page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed consolidated balance sheet -
June 30, 1999 (unaudited) 3
Condensed consolidated statements of operations for the three and six months
ended June 30, 1998 and 1999 (unaudited) 4
Condensed consolidated statements of cash flows for the six months ended
June 30, 1998 and 1999 (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. 12
Part II OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities and Use of Proceeds. 13
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. 13
Signatures. 14
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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3
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
June 30, 1999 (Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 64,236,214
Accounts receivable, net 21,864,336
Inventory, net 7,485,157
Prepaid expenses and other current assets 1,475,611
------------
Total current assets 95,061,318
------------
Property and equipment, at cost 10,404,438
Less accumulated depreciation and amortization 3,158,305
------------
Property and equipment, net 7,246,133
------------
Goodwill, net 14,469,093
Trademarks, net 13,225,307
Investment in joint venture 1,053,852
Other 179,660
------------
Total assets $131,235,363
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 14,953,630
Reserve for sales returns and allowances 10,671,082
Income taxes payable 2,617,582
------------
Total current liabilities 28,242,294
------------
Deferred income taxes 17,455
------------
Total liabilities 28,259,749
------------
Commitments
Stockholders' equity
Preferred stock, $.001 par value; 1,000,000
shares authorized, no shares issued --
Common stock, $.001 par value; 25,000,000 shares authorized;
10,665,670 shares issued and outstanding 10,665
Additional paid-in capital 87,296,219
Retained earnings 15,700,296
------------
103,007,180
Less unearned compensation from grant of options 31,566
------------
Net stockholders' equity 102,975,614
------------
Total liabilities and stockholders' equity $131,235,363
============
See accompanying notes to condensed consolidated financial statements.
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4
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 1998 and 1999 (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1998 1999 1998 1999
Net sales $16,131,480 $35,981,209 $27,161,251 $60,941,501
Cost of sales 10,013,122 21,332,316 16,693,025 35,528,848
----------- ----------- ----------- -----------
Gross profit 6,118,358 14,648,893 10,468,226 25,412,653
Selling, general and administrative expenses 4,692,019 10,424,163 8,274,028 18,444,588
----------- ----------- ----------- -----------
Income from operations 1,426,339 4,224,730 2,194,198 6,968,065
Other (income) and expense:
Interest income (42,005) (398,385) (51,049) (530,851)
Interest expense 152,647 36,576 319,430 169,727
----------- ----------- ----------- -----------
Income before provision for income taxes 1,315,697 4,586,539 1,925,817 7,329,189
Provision for income taxes 357,732 1,231,602 505,991 1,969,055
----------- ----------- ----------- -----------
Net income $ 957,965 $ 3,354,937 $ 1,419,826 $ 5,360,134
=========== =========== =========== ===========
Net income per share - basic $ 0.16 $ 0.37 $ 0.26 $ 0.66
=========== =========== =========== ===========
Net income per share - diluted $ 0.14 $ 0.32 $ 0.22 $ 0.58
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
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5
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1999 (Unaudited)
Six Months Ended June 30,
1998 1999
Cash flows from operating activities:
Net income $ 1,419,826 $ 5,360,134
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,368,509 1,469,549
Change in accounts receivable (3,072,401) (9,937,611)
Change in inventory (828,730) (4,566,216)
Change in accounts payable and accrued expenses 1,259,081 13,405,187
Net change in other operating assets and liabilities (613,882) (267,714)
----------- -----------
Total adjustments (1,887,423) 103,195
----------- -----------
Net cash provided (used) by operating activities (467,597) 5,463,329
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (1,793,792) (3,816,830)
Investment in joint venture (1,000,000) (53,852)
Acquisition cost of trademarks (12,252) --
Cash paid in excess of fair value
of toy business assets acquired (goodwill) -- (4,320,501)
(Increase) decrease in other assets (168,158) 310,276
----------- -----------
Net cash used by investing activities (2,974,202) (7,880,907)
----------- -----------
Cash flows from financing activities:
Repayment of bank debt (114,700) --
Repayment of acquisition debt (1,766,376) --
Proceeds from sale of common stock -- 51,898,066
Proceeds from sale of convertible preferred stock 4,787,761 --
Dividends paid on convertible preferred stock -- (437,500)
Proceeds from warrants and stock options exercised 113,817 2,741,025
----------- -----------
Net cash provided by financing
activities 3,020,502 54,201,591
----------- -----------
Net increase (decrease) in cash and cash equivalents (421,297) 51,784,013
Cash and cash equivalents, beginning of period 2,535,925 12,452,201
----------- -----------
Cash and cash equivalents, end of period $ 2,114,628 $64,236,214
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 259,757 $ 897,486
=========== ===========
Interest $ 357,037 $ 169,727
=========== ===========
See note 4 for additional supplemental information to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 1999
Note 1 - Basis of presentation
The accompanying 1998 and 1999 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-KSB, which contains financial
information for the years ended December 31, 1996, 1997 and 1998.
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, options and convertible securities, to the extent they are dilutive).
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 1999
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 JUNE 30,
---------------------------------------------------------------------------------
1998 1999
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
-------- ---------- --------- -------- --------- ---------
Net income per share - basic
Net income................... $957,965 $3,354,937
Preferred stock dividends.... -- (87,500)
-------- ----------
Net income available to
common stockholders......... $957,965 5,882,658 $0.16 $3,267,437 8,829,339 $0.37
-------- --------- ----- ---------- --------- -----
Effect of dilutive securities
Options and warrants......... -- 301,206 -- 905,703
9% convertible debentures.... 93,183 1,043,478 23,684 217,390
7% convertible preferred
stock..................... -- 558,658 87,500 535,071
-------- --------- ---------- ---------
Net income per share - diluted
Income available to common
stockholders plus assumed
exercises and conversions... $1,051,148 7,786,000 $0.14 $3,378,621 10,487,503 $0.32
========== ========= ===== ========== ========== =====
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------
1998 1999
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
-------- ---------- --------- -------- --------- ---------
Net income per share - basic
Net income................... $1,419,826 $5,360,134
Preferred stock dividends.... -- (437,500)
---------- -----------
Net income available to
common stockholders......... $1,419,826 5,423,223 $0.26 $4,922,634 7,473,894 $0.66
-------- --------- ----- ---------- --------- -----
Effect of dilutive securities
Options and warrants......... -- 216,415 -- 762,040
9% convertible debentures.... 186,366 1,043,478 116,867 628,985
4% convertible preferred
stock..................... -- 459,555 -- --
7% convertible preferred
stock..................... -- 279,329 437,500 546,864
-------- --------- ---------- ---------
Net income per share - diluted
Income available to common
stockholders plus assumed
exercises and conversions... $1,606,192 7,422,000 $0.22 $5,477,001 9,411,783 $0.58
========== ========= ===== ========== ========= =====
Note 3 -- Preferred stock and common stock
In May 1999, the Company issued and sold 2,666,563 shares of its common
stock in a public offering and received $51.9 million of net proceeds.
Note 4 -- Supplemental information to condensed consolidated statements of cash
flows
In March 1998, all 3,525 outstanding shares of 4% redeemable
convertible preferred stock with a total stockholders' equity value of
$6,818,350 were converted into an aggregate of 939,998 shares of the Company's
common stock.
In March and April, 1999, the holders of $6.0 million principal amount of
the Company's 9% convertible debentures converted all such debentures into an
aggregate of 1,043,479 shares of the Company's common stock.
In June 1999, all 1,000 outstanding shares of 7% cumulative convertible
preferred stock with a total stockholders' equity value of $4,731,152 were
converted into an aggregate of 558,658 shares of the Company's common stock.
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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 develop, produce and market children's toys and
related products. We commenced business operations when we assumed operating
control over the toy business of Justin Products Limited ("Justin"), and have
included the results of Justin's operations in our consolidated financial
statements from July 1, 1995, the effective date of that acquisition. The Justin
product lines, which consisted primarily of fashion dolls and accessories and
electronic products for children, accounted for substantially all of our net
sales for the period from April 1, 1995 (inception) to December 31, 1995.
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 Corporation with its lines of educational toy foam puzzle mats and activity
sets. We expect Berk to contribute modestly beginning in the third quarter of
1999.
Our products currently include (1) toys and action figures featuring
licensed characters, including popular wrestling characters under our World
Wrestling Federation license, (2) die-cast collectible and toy vehicles marketed
under our Road Champs and Remco brand names, (3) pre-school electronic toys
marketed under our Child Guidance brand name, (4) educational toy foam puzzles,
mats and activity sets, and (5) 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 Titan Sports, Inc. to publish World Wrestling
Federation electronic video game software on all platforms. The license
agreement permits the joint venture to release these games after November 16,
1999. We expect that the first game produced under this license will be released
in late 1999. We also expect that JAKKS and THQ Inc. will share equally any
profits generated by the joint venture.
We contract the manufacture of most of our products to unaffiliated
manufacturers located in China. We sell 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
products, originate in the United States, so we hold certain inventory in a
warehouse and fulfillment facility operated by an unaffiliated third party. 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 a
representative 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.
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9
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
$15.3 million and trademarks of approximately $14.4 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
10 to 30 years.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1998 1999 1998 1999
------ ------ ------ ------
Net sales............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................................... 62.1 59.3 61.5 58.3
----- ----- ------ -----
Gross profit.......................................... 37.9 40.7 38.5 41.7
Selling, general and administrative expenses.......... 29.1 29.0 30.4 30.3
----- ----- ------ -----
Income from operations................................ 8.8 11.7 8.1 11.4
Interest, net......................................... (0.7) 1.0 (1.0) 0.6
----- ----- ------ -----
Income before income taxes............................ 8.1 12.7 7.1 12.0
Provision for income taxes............................ 2.2 3.4 1.9 3.2
----- ----- ------ -----
Net income............................................ 5.9% 9.3% 5.2% 8.8%
===== ===== ====== =====
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Net Sales. Net sales increased $19.9 million, or 123%, to $36.0 million in
1999 from $16.1 million in 1998. The significant growth in net sales was due
primarily to the continuing growth of the World Wrestling Federation product
line with its expanded product offerings in the action figures and accessories
categories and frequent character releases, as well as to increasing sales of
Child Guidance pre-school toys and fashion and holiday dolls. Contributions made
by sales of Road Champs die-cast toy and collectible vehicles and Remco toy
vehicles were comparable with the prior year.
Gross Profit. Gross profit increased $8.5 million, or 139%, to $14.6
million in 1999, or 40.7% of net sales, from $6.1 million, or 37.9% of net
sales, in 1998. The overall increase in gross profit was attributable to the
significant increase in net sales. The increase in the gross profit margin of
2.8% of net sales was due in part to the changing product mix, which included
products, such as World Wrestling Federation action figures, with higher margins
than some of our other products, and the amortization expense of molds and tools
used in the manufacture of our products, which decreased on a percentage basis
due to the fixed nature of these costs. The higher margin resulting from lower
product costs was offset in part by higher royalties.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $5.7 million, or 122%, to $10.4 million, or
29.0% of net sales, in 1999, from $4.7 million, or 29.1% of net sales, in 1998.
Selling, general and administrative expenses decreased nominally as a percentage
of net sales due in part to the fixed nature of certain of these expenses, which
were offset in part by increases in advertising expenses and product development
costs of our various products in 1999. The overall dollar increase of $5.7
million was due to the significant increase in net sales with their
proportionate impact on variable selling costs, such as freight and shipping
related expenses, sales commissions, cooperative advertising and travel
expenses. We produced television commercials in support of several of our
products, including World Wrestling Federation action figures, in 1998 and 1999.
From time to time, we may increase our advertising efforts, including the use of
more expensive advertising media, such as television, if we deem it appropriate
for particular products.
Interest, Net. We had significantly lower interest-bearing obligations in
1999 than in 1998 with the conversion of our 9% convertible debentures in 1999.
In addition, we had significantly higher average cash balances during 1999 than
in 1998 due to the net proceeds from the sale of our common stock in May 1999.
Provision for Income Taxes. Provision for income taxes included Federal,
state and foreign income taxes in 1998 and 1999, at effective tax rates of 27.2%
in 1998 and 26.9% in 1999, benefiting from a flat 16.5% Hong Kong Corporation
Tax on our income arising in, or derived from, Hong Kong. As of December 31,
1998, we had deferred tax assets of approximately $493,000 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.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net Sales. Net sales increased $33.8 million, or 124%, to $60.9 million in
1999 from $27.1 million in 1998. The significant growth in net sales was due
primarily to the continuing growth of the World Wrestling Federation product
line with its expanded product offerings in the action figures and accessories
categories and frequent character releases, as well as to increasing sales of
Child Guidance pre-school toys and fashion and holiday dolls. Contributions made
by sales of Road Champs die-cast toy and collectible vehicles and Remco toy
vehicles were comparable with the prior year.
Gross Profit. Gross profit increased $14.9 million, or 143%, to $25.4
million in 1999, or 41.7% of net sales, from $10.5 million, or 38.5% of net
sales, in 1998. The overall increase in gross profit was attributable to the
significant increase in net sales. The increase in the gross profit margin of
3.2% of net sales was due in part to the changing product mix, which included
products, such as World Wrestling Federation action figures, with higher margins
than some of our other products, and the amortization expense of molds and tools
used in the manufacture of our products, which decreased on a percentage basis
due to the fixed nature of these costs. The higher margin resulting from lower
product costs was offset in part by higher royalties.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $10.1 million, or 123%, to $18.4 million, or
30.3% of net sales, in 1999, from $8.3 million, or 30.4% of net sales, in 1998.
Selling, general and administrative expenses decreased nominally as a percentage
of net sales due in part to the fixed nature of certain of these expenses, which
were offset in part by increases in advertising expenses and product development
costs of our various products in 1999. The overall dollar increase of $10.1
million was due to the significant increase in net sales with their
proportionate impact on variable selling costs, such as freight and shipping
related expenses, sales commissions, cooperative advertising and travel
expenses. We produced television commercials in support of several of our
products, including World Wrestling Federation action figures, in 1998 and 1999.
From time to time, we may increase our advertising efforts, including the use of
more expensive advertising media, such as television, if we deem it appropriate
for particular products.
Interest, Net. We had significantly lower interest-bearing obligations in
1999 than in 1998 with the conversion of our 9% convertible debentures in 1999.
In addition, we had significantly higher average cash balances during 1999 than
in 1998 due to the net proceeds from the sale of our common stock in May 1999.
Provision for Income Taxes. Provision for income taxes included Federal,
state and foreign income taxes in 1998 and 1999, at effective tax rates of 26.3%
in 1998 and 26.9% in 1999, benefiting from a flat 16.5% Hong Kong Corporation
Tax on our income arising in, or derived from, Hong Kong. As of December 31,
1998, we had deferred tax assets of approximately $493,000 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 fiscal
quarters. The Company's working capital needs have been highest during the third
and fourth quarters.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, we had working capital of $66.8 million, as compared
to $13.7 million as of December 31, 1998. This increase was primarily
attributable to the sale of our common stock in May 1999 as well as to our
operating activities.
Operating activities provided net cash of $5.5 million in 1999 as compared
to using net cash of $0.5 million in 1998. Net cash was provided primarily by
net income and non-cash charges, such as depreciation, amortization and
recognition of compensation expense for options, as well as a decrease in
accounts receivable and increases in operating liabilities, which were offset in
part by an increase in inventory. As of June 30, 1999, we had cash and cash
equivalents of $64.2 million.
Our investing activities used net cash of $7.9 million in 1999, as compared
to $3.0 million in 1998, consisting primarily of the purchase of molds and
tooling used in the manufacture of our products in 1999 and 1998 and goodwill
acquired in the Berk Acquisition in 1999. 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 10% payable on net sales of such products. As
of June 30, 1999, these agreements required future aggregate minimum guarantees
of $17.2 million, exclusive of $1.2 million in advances already paid.
Our financing activities provided net cash of $54.2 million in 1999,
consisting primarily of the issuance of common stock pursuant to our public
offering in May 1999 and the exercises of options and warrants, partially offset
by dividends paid to holders of our Series A Cumulative Convertible Preferred
Stock. In 1998, financing activities provided net cash of $3.0 million,
consisting primarily of the issuance of our 7% Series A Convertible Preferred
Stock partially offset by the repayment of various notes and other debt issued
in connection with our acquisitions in 1997.
In March and April 1999, the holders of $6.0 million principal amount of
our 9.0% convertible debentures converted all such debentures into 1,043,479
shares of our common stock.
In October 1997, we entered into a credit facility agreement with Norwest
Bank Minnesota, N.A. which provides our Hong Kong subsidiaries with a working
capital line of credit and letters of credit for the purchase of products and
the operation of those subsidiaries. The facility, which expired on May 31,
1999, had an overall limit of $5.0 million, but was subject to other limitations
based on advance rates on letters of credit and open accounts receivable. We
expect to seek an alternative facility.
In April 1998, we received $4.7 million in net proceeds from the issuance
of shares of our Series A Cumulative Convertible Preferred Stock to two
investors in a private placement, which were converted into 558,658 shares of
our common stock in June 1999. The use of proceeds was for working capital and
general corporate purposes.
In May 1999, we received $51.9 million in net proceeds from the issuance of
shares of our common stock in a public offering.
We believe that our cash flow from operations and cash and cash equivalents
on hand 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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RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which is effective for financial statements issued for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and displaying comprehensive income and its components in financial
statements. Comprehensive income, as defined, includes all changes to equity
(net assets) during a period from non-owner sources. To date, we have not had
any transactions that are required to be reported in other comprehensive income.
The FASB recently issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which is effective for financial statements
issued for fiscal years beginning after December 15, 1997. This statement
establishes standards for the way public business enterprises are to report
information about operating segments in annual financial statements and requires
those enterprises to report selected information about operating segments in
interim financial reports. We operate in one reportable segment: the
development, production and marketing of toys and related products.
IMPACT OF THE YEAR 2000
Many currently installed computer systems and software products are
dependent upon internal calendars coded to accept only two digit entries in the
date code field. These date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a result, our
computer systems and software may need to be upgraded to comply with Year 2000
requirements. Otherwise, system failures or miscalculations leading to
disruptions in our operations could occur. We have taken actions to address
this potential problem, including the identification of any non-compliant
processes or systems and the implementation of corrective measures. We expect to
replace internal software with non-compliant codes with software that is
compliant by September 1999.
We believe the financial reporting systems of our Hong Kong subsidiaries
are Year 2000 compliant. Their systems were upgraded in 1998 in the normal
course of business with software and hardware which the manufacturer has
represented as being Year 2000 compliant. We are currently in the process of
selecting a new software package in our corporate office which the manufacturer
has represented as being Year 2000 compliant, and we believe it will be
implemented by July 1999. We estimate the cost of this new software, including
implementation and data conversion costs, to be approximately $60,000. Our other
software is generally certified as Year 2000 compliant or is not considered
critical to our operations.
Other than the cost of the new software to be implemented in our corporate
office, we have spent only nominal amounts on the Year 2000 issue, and we do not
expect any significant future expenditures. Although we believe our cost
estimates to be accurate, we cannot assure you that these costs will not
increase or that the proposed solutions will be installed on schedule by the
date estimated.
We have addressed the Year 2000 preparedness of our critical suppliers and
major customers and related electronic data interfaces with these third parties.
We began in 1998, and are continuing our efforts, to contact critical suppliers
and larger customers to determine whether they are, or will be, compliant by the
Year 2000. Based on our evaluation and testing, these third parties are, or are
expected to be, compliant by the Year 2000. However, we will continue to monitor
the situation and we will formulate contingency plans to resolve
customer-related issues that may arise. At this time we cannot estimate the
impact that noncompliant suppliers and customers may have on us or our level of
operations in the Year 2000. At present, we have not developed contingency
plans, but we will determine whether to develop such plans when our assessment
is completed.
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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 June 30, 1999,
we have not used derivative instruments or engaged in hedging activities to
minimize our market risk.
INTEREST RATE RISK
As of June 30, 1999, we do not have any bank loan or other credit
facility, nor do we have any outstanding debt securities, and, 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 1999, the Company issued a warrant to purchase 111,250
shares of its common stock to Titan Sports, Inc. and a warrant to purchase
13,750 shares of its common stock to Stanley Shenker Associates, Inc. Each
warrant is exercisable by the holder thereof at any time until December 31, 2009
to purchase common stock of the Company at an exercise price of $10.00 per share
(subject to adjustment in the event of certain changes to the Company's capital
stock or certain transactions affecting the Company). The warrants were issued
pursuant to a Consumer Products License Agreement between Titan Sports, Inc. and
a joint venture limited liability company of which the Company is a member, in
connection with the grant of certain trademark and other licenses and rights to
the joint venture. No other consideration was paid to the Company in respect of
the issuance of these warrants. Because the warrants were issued directly to the
two holders pursuant to a privately negotiated commercial agreement,
registration of the warrants (or the underlying common stock) was not required
under the Securities Act of 1933 (the "Act") by reason of the exemption provided
by Section 4(2) of the Act for transactions by the issuer of the securities not
involving any public offering.
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)
4.1 JAKKS Pacific, Inc. 9.00% Convertible Debenture issued to
Renaissance Capital Growth & Income Fund III, Inc., dated
December 31, 1996(4)
4.2 JAKKS Pacific, Inc. 9.00% Convertible Debenture issued to
Renaissance US Growth & Income Trust PLC, dated December 31,
1996(4)
10.1 Lease Agreement, dated June 2, 1999, between Astoria Investment
Company Limited and Road Champs Limited(5)
10.2 Stock Purchase Warrant for 111,250 shares of Common Stock issued
to Titan Sports, Inc.(5)
10.3 Stock Purchase Warrant for 13,750 shares of Common Stock issued
to Stanley Shenker Associates, Inc.(5)
27 Financial Data Schedule(5)
- -------------------------
(1) Filed previously as an exhibit to the Company's Registration Statement
on Form SB-2 (File 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 (File 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 (File No. 333-22583), effective May 1, 1997, and
incorporated herein by reference.
(5) Filed herewith.
(b) Reports on Form 8-K
No Current Report on Form 8-K was filed in the fiscal quarter ended
June 30, 1999.
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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: August 9, 1999 By: /s/ Jack Friedman
-------------------
Chairman
(Principal Executive Officer)
Date: August 9, 1999 By: /s/ Joel M. Bennett
--------------------
Chief Financial Officer
(Principal Financial Officer)
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