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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 SEPTEMBER 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 10,802,787 (as
of November 2, 1999).
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 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 -
September 30, 1999 (unaudited) 3
Condensed consolidated statements of operations for the three and nine months
ended September 30, 1998 and 1999 (unaudited) 4
Condensed consolidated statements of cash flows for the nine months ended
September 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. 13
Part II OTHER INFORMATION
Item 1. Legal Proceedings. None
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. 14
Item 5. Other Information. 14
Item 6. Exhibits and Reports on Form 8-K. 15
Signatures. 16
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 Sheet
September 30, 1999 (Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 73,427,409
Accounts receivable, net 34,638,251
Inventory, net 9,437,805
Prepaid expenses and other current assets 1,584,854
------------
Total current assets 119,088,319
------------
Property and equipment, at cost 12,362,663
Less accumulated depreciation and amortization 3,627,662
------------
Property and equipment, net 8,735,001
------------
Goodwill, net 14,353,964
Trademarks, net 13,072,694
Investment in joint venture 1,053,852
Other 316,865
------------
Total assets $156,620,695
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 30,049,883
Reserve for sales returns and allowances 12,063,447
Income taxes payable 3,227,346
------------
Total current liabilities 45,340,676
------------
Deferred income taxes 323,787
------------
Total liabilities 45,664,463
------------
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;
10,723,120 shares issued and outstanding 10,723
Additional paid-in capital 87,603,173
Retained earnings 23,342,336
------------
Total stockholders' equity 110,956,232
------------
Total liabilities and stockholders' equity $156,620,695
============
See accompanying notes to condensed consolidated financial statements.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1998 and 1999 (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
1998 1999 1998 1999
Net sales $34,218,151 $60,235,407 $61,379,402 $121,176,908
Cost of sales 20,976,452 35,476,603 37,669,477 71,005,451
----------- ----------- ----------- ------------
Gross profit 13,241,699 24,758,804 23,709,925 50,171,457
Selling, general and administrative expenses 8,173,172 14,866,324 16,447,200 33,310,912
----------- ----------- ----------- ------------
Income from operations 5,068,527 9,892,480 7,262,725 16,860,545
Other (income) and expense:
Other expense 319,838 -- 319,838 --
Interest income (47,868) (535,646) (98,917) (1,066,497)
Interest expense 148,208 1,093 467,638 170,820
----------- ----------- ----------- ------------
Income before provision for income taxes 4,648,349 10,427,033 6,574,166 17,756,222
Provision for income taxes 1,214,078 2,784,993 1,720,069 4,754,048
----------- ----------- ----------- ------------
Net income $ 3,434,271 $ 7,642,040 $ 4,854,097 $ 13,002,174
=========== =========== =========== ============
Net income per share - basic $ 0.58 $ 0.71 $ 0.87 $ 1.47
=========== =========== =========== ============
Net income per share - diluted $ 0.45 $ 0.65 $ 0.68 $ 1.29
=========== =========== =========== ============
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 Nine Months Ended September 30, 1998 and 1999 (Unaudited)
Nine Months Ended September 30,
1998 1999
Cash flows from operating activities:
Net income $ 4,854,097 $13,002,174
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,643,930 2,363,609
Change in accounts receivable (10,039,967) (22,711,526)
Change in inventory (1,082,166) (6,518,864)
Change in accounts payable and accrued expenses 8,926,848 30,503,569
Net change in other operating assets and liabilities (213,241) (70,625)
----------- -----------
Total adjustments 235,404 3,566,163
----------- -----------
Net cash provided by operating activities 5,089,501 16,568,337
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (2,911,011) (5,899,949)
Investment in joint venture (1,044,708) (9,144)
Acquisition cost of trademarks (12,252) --
Cash paid in excess of fair value
of toy business assets acquired (goodwill) -- (4,365,209)
(Increase) decrease in other assets (75,350) 173,071
----------- -----------
Net cash used by investing activities (4,043,321) (10,101,231)
----------- -----------
Cash flows from financing activities:
Repayment of bank debt (114,700) --
Repayment of acquisition debt (2,006,376) --
Proceeds from sale of common stock -- 51,898,066
Proceeds from sale of convertible preferred stock 4,792,430 --
Dividends paid on convertible preferred stock -- (437,500)
Proceeds from warrants and stock options exercised 347,711 3,047,536
----------- -----------
Net cash provided by financing
activities 3,019,065 54,508,102
----------- -----------
Net increase in cash and cash equivalents 4,065,245 60,975,208
Cash and cash equivalents, beginning of period 2,535,925 12,452,201
----------- -----------
Cash and cash equivalents, end of period $ 6,601,170 $73,427,409
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 266,803 $ 2,945,465
=========== ===========
Interest $ 505,245 $ 170,820
=========== ===========
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
September 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)
September 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 SEPTEMBER 30,
---------------------------------------------------------------------------------
1998 1999
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
-------- ---------- --------- -------- --------- ---------
Net income per share - basic
Net income available to
common stockholders......... $3,434,271 5,932,673 $0.58 $7,642,040 10,691,361 $0.71
---------- --------- ----- ---------- ---------- -----
Effect of dilutive securities
Options and warrants......... -- 337,251 -- 1,002,756
9% convertible debentures.... 93,183 1,043,478 -- --
7% convertible preferred
stock..................... -- 558,658 -- --
-------- --------- ---------- ---------
Net income per share - diluted
Income available to common
stockholders plus assumed
exercises and conversions... $3,527,454 7,872,060 $0.45 $7,642,040 11,694,117 $0.65
========== ========= ===== ========== ========== =====
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
1998 1999
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
-------- ---------- --------- -------- --------- ---------
Net income per share - basic
Net income................... $4,854,097 $13,002,174
Preferred stock dividends.... -- (437,500)
---------- -----------
Net income available to
common stockholders......... $4,854,097 5,595,305 $0.87 $12,564,674 8,562,060 $1.47
---------- --------- ----- ----------- --------- -----
Effect of dilutive securities
Options and warrants......... -- 267,910 -- 825,662
9% convertible debentures.... 279,549 1,043,478 116,867 416,240
4% convertible preferred
stock..................... -- 304,117 -- --
7% convertible preferred
stock..................... -- 373,808 437,500 361,895
-------- --------- ---------- ---------
Net income per share - diluted
Income available to common
stockholders plus assumed
exercises and conversions... $5,133,646 7,584,618 $0.68 $13,119,041 10,165,857 $1.29
========== ========= ===== =========== ========== =====
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.
Note 5 -- Acquisition
In June 1999, the Company purchased all of the outstanding shares of Berk
Corporation, a producer of educational toy foam puzzle mats and activity sets,
for approximately $3.1 million in cash. In connection with this acquisition, the
Company assumed liabilities of approximately $300,000 and incurred acquisition
costs of approximately $158,000.
Note 6 -- Subsequent events
On October 5, 1999, the Company acquired all of the outstanding capital
stock of Flying Colors Toys, Inc. (formerly Colorbok Paper Products, Inc.)
effective October 1, 1999 for an aggregate purchase price of $35.8 million, of
which $34.7 million was paid in cash on the closing of the transaction and $1.1
million is to be paid out of cash collections of the pre-closing accounts
receivable. In addition, the Company paid on the closing $17.6 million in
satisfaction of certain indebtedness of Flying Colors, assumed liabilities of
approximately $5.8 million and incurred estimated legal and other acquisition
costs of $0.5 million. The Company has also agreed to pay to the shareholders an
earn-out in an amount up to $4.5 million in each of the three 12-month periods
following the closing if Gross Profit (as defined) of Flying Colors branded
products achieves certain prescribed levels in each of such periods. Flying
Colors designs, produces and markets licensed activity kits, play clay compound
playsets and lunch boxes and other related toy products.
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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 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. Berk began to contribute modestly beginning in the third quarter of 1999.
In October 1999, we acquired Flying Colors Toys, Inc., whose product lines
include licensed activity kits, play clay compound playsets and lunch boxes as
well as other related products. We expect Flying Colors to contribute to
operations beginning in the fourth quarter of 1999.
Our products currently include (1) action figures and accessories featuring
licensed characters, including popular wrestling characters under our World
Wrestling Federation license, (2) Flying Colors molded plastic activity sets,
clay compound playsets and lunch boxes, (3) 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 activity sets, and (5) fashion and mini 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, Inc.
(formerly Titan Sports, Inc.) to publish World Wrestling Federation electronic
video game software on all platforms. We expect that the first game produced
under this license will be released in November 1999. JAKKS will receive a
guaranteed preferred return based on the sale of WWF video games, and THQ will
be allocated the remaining 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
and Flying Colors 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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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1998 1999 1998 1999
------ ------ ------ ------
Net sales............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................................... 61.3 58.9 61.4 58.6
----- ----- ------ -----
Gross profit.......................................... 38.7 41.1 38.6 41.4
Selling, general and administrative expenses.......... 23.9 24.7 26.8 27.5
----- ----- ------ -----
Income from operations................................ 14.8 16.4 11.8 13.9
Interest, net......................................... (0.3) 0.9 (0.6) 0.7
Other expenses........................................ (0.9) -- (0.5) --
----- ----- ------ -----
Income before income taxes............................ 13.6 17.3 10.7 14.6
Provision for income taxes............................ 3.6 4.6 2.8 3.9
----- ----- ------ -----
Net income............................................ 10.0% 12.7% 7.9% 10.7%
===== ===== ====== =====
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net Sales. Net sales increased $26.0 million, or 76.0%, to $60.2 million in
1999 from $34.2 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 the addition of Berk products, which
contributed modestly to operations beginning in the third quarter of 1999.
Contributions made by sales of Road Champs die-cast toy and collectible vehicles
and Remco toy vehicles and fashion and holiday dolls were consistent with the
prior year.
Gross Profit. Gross profit increased $11.6 million, or 87.0%, to $24.8
million in 1999, or 41.1% of net sales, from $13.2 million, or 38.7% 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
2.4% 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 $6.7 million, or 81.9%, to $14.9 million, or
24.7% of net sales, in 1999, from $8.2 million, or 23.9% of net sales, in 1998.
Selling, general and administrative expenses increased nominally as a percentage
of net sales due in part to increases in advertising expenses and product
development costs of our various products in 1999 which were offset in part by a
decrease as a percentage of net sales due to the fixed nature of certain of
these expenses in conjunction with the significant increase in net sales. The
overall dollar increase of $6.7 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 26.1%
in 1998 and 26.7% 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.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net Sales. Net sales increased $59.8 million, or 97.4%, to $121.2 million
in 1999 from $61.4 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 the addition of Berk products, which
contributed nominally to operations beginning in the third quarter of 1999.
Contributions made by sales of Road Champs die-cast toy and collectible vehicles
and Remco toy vehicles and fashion and holiday dolls were consistent with the
prior year.
Gross Profit. Gross profit increased $26.5 million, or 111.6%, to $50.2
million in 1999, or 41.4% of net sales, from $23.7 million, or 38.6% 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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $16.9 million, or 102.5%, to $33.3 million, or
27.5% of net sales, in 1999, from $16.4 million, or 26.8% of net sales, in 1998.
Selling, general and administrative expenses increased nominally as a percentage
of net sales due in part to increases in advertising expenses and product
development costs of our various products in 1999, which were offset in part by
a decrease as a percentage of net sales due to the fixed nature of certain of
these expenses in conjunction with the significant increase in net sales. The
overall dollar increase of $16.9 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 26.2%
in 1998 and 26.8% 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 September 30, 1999, we had working capital of $73.8 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 $16.6 million in 1999 as compared
to $5.1 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 an increase in accounts payable and
accrued liabilities, which were offset in part by increases in accounts
receivable and inventory. As of September 30, 1999, we had cash and cash
equivalents of $73.4 million.
Our investing activities used net cash of $10.1 million in 1999, as
compared to $4.0 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 September 30, 1999, these agreements required future
aggregate minimum guarantees of $17.7 million, exclusive of $0.9 million in
advances already paid.
Our financing activities provided net cash of $54.5 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.
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.
In June 1999, we purchased all the outstanding capital stock of Berk
Corporation for approximately $3.1 million. We also agreed to pay an earn-out of
up to $500,000 if sales of Berk products achieve certain prescribed levels over
the 12-month period ending June 30, 2000. Berk is a leading producer of
educational toy foam puzzle mats and blocks featuring popular licensed
characters, including Mickey Mouse, Minnie Mouse, Winnie the Pooh, Blue's Clues,
Barney, Teletubbies, Sesame Street, Looney Tunes and Toy Story II characters,
and non-licensed activity sets and outdoor products.
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 were required 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 replaced internal
software with non-compliant codes with software that is compliant in October
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 implemented in October 1999 a new
software package in our corporate office which the manufacturer has represented
as being Year 2000 compliant. We estimate the cost of this new software,
including implementation and data conversion costs, to be approximately
$120,000. 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 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.
We have addressed the Year 2000 preparedness of our critical suppliers and
major customers and related electronic data interfaces with these third parties.
We have contacted 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 September 30,
1999, we have not used derivative instruments or engaged in hedging activities
to minimize our market risk.
INTEREST RATE RISK
As of September 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our most recent Annual Meeting of Stockholders on August 12, 1999.
At the meeting, our stockholders considered and voted on several matters, as
follows:
1. All five of our incumbent directors were nominated by management for
reelection to the Board. Our stockholders voted in connection with the election
of directors as follows:
Nominee For Against Withheld
- -------- --------- ------- --------
Jack Friedman 8,405,972 0 146,225
Stephen G. Berman 8,405,972 0 146,225
Robert E. Glick 8,405,972 0 146,225
Michael G. Miller 8,405,972 0 146,225
Murray L. Skala 8,405,972 0 146,225
A plurality of the shares represented at the meeting having been voted for each
of these nominees, each of them was elected as a director.
2. Our stockholders ratified the appointment of Pannell Kerr Forster,
Certified Public Accountants, A Professional Corporation, as our independent
auditors for our current fiscal year by a majority vote as follows:
Broker
For Against Abstain Non-Votes
--------- -------- -------- ---------
8,534,490 10,370 7,340 0
3. Our stockholders ratified and approved the 1999 Amendment to our Third
Amended and Restated 1995 Stock Option Plan by a majority vote as follows:
Broker
For Against Abstain Non-Votes
--------- -------- -------- ---------
7,773,894 774,104 14,180 30,022
4. Our stockholders ratified and approved the employment agreements
between us and Jack Friedman and Stephen G. Berman, respectively, by a majority
vote as follows:
Broker
For Against Abstain Non-Votes
--------- -------- -------- ---------
8,318,400 187,641 16,137 30,022
ITEM 5. OTHER INFORMATION
EXECUTIVE EMPLOYMENT AGREEMENTS
On July 1, 1999, we entered into employment agreements with Jack Friedman
and Stephen G. Berman, respectively, pursuant to which Mr. Friedman serves as
our Chairman and Chief Executive Officer and Mr. Berman serves as our President
and Chief Operating Officer. Mr. Friedman's annual base salary in 1999 is
$521,000 and Mr. Berman's is $496,000. Their annual base salaries are subject to
annual increases in an amount, not less than $25,000, determined by our Board of
Directors. Each of them is also entitled to receive an annual bonus equal to 4%
of our pre-tax income, but not more than $1,000,000, if our pre-tax earnings are
at least $2,000,000. If we terminate Mr. Friedman's or Mr. Berman's employment
other than "for cause" or if he resigns because of our material breach of the
employment agreement or because we cause a material change in his employment, we
are required to make a lump-sum severance payment in an amount equal to his base
salary and 4% bonus during the balance of the term of the employment agreement,
based on his then applicable annual base salary and 4% bonus. In the event of
the termination of his employment under certain circumstances after a "Change of
Control" (as defined in the employment agreement), we are required to make to
him a one-time payment of an amount equal to 2.99 times his "base amount"
determined in accordance with the applicable provisions of the Internal Revenue
Code.
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1999 AMENDMENT TO THIRD AMENDED AND RESTATED 1995 STOCK OPTION PLAN
On August 12, 1999, the 1999 Amendment to our Third Amended and Restated
1995 Stock Option Plan became effective. As so amended, our plan provides for
up to 1,750,000 shares of our common stock to be available for issuance upon
the exercise of options granted under the plan; for each of our non-employee
directors to receive in 2000 and subsequent years automatic annual grants of
options to purchase 6,250 shares of our common stock; and, subject to certain
conditions, for accelerated vesting of options granted under our plan if we are
involved in a merger, consolidation, reorganization, sale of assets or certain
other transactions.
STOCK DIVIDEND
On November 4, 1999, we will distribute to holders of record at the close
of business on October 27, 1999 a dividend of 1/2 share of our common stock for
each share of our common stock outstanding on such date (except that cash will
be paid in lieu of fractional shares at the rate of $40 5/8 per share).
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)
10.1* Employment Agreement dated as of July 1, 1999 between the
Company and Jack Friedman(5)
10.2* Employment Agreement dated as of July 1, 1999 between the
Company and Stephen G. Berman(5)
10.3* 1999 Amendment to Third Amended and Restated 1995 Stock Option
Plan of the Company(6)
27 Financial Data Schedule(5)
- -------------------------
* Compensatory plan, contract or arrangement.
(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.
(6) Filed previously as exhibit 4.1 to the Company's Registration Statement
on Form S-8 (File No. 333-90055), filed on November 1, 1999 and
incorporated herein by reference.
(b) Reports on Form 8-K
No Current Report on Form 8-K was filed in the fiscal quarter ended
September 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: November 2, 1999 By: /s/ Joel M. Bennett
--------------------
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)
10.1* Employment Agreement dated as of July 1, 1999 between the
Company and Jack Friedman(5)
10.2* Employment Agreement dated as of July 1, 1999 between the
Company and Stephen G. Berman(5)
10.3* 1999 Amendment to Third Amended and Restated 1995 Stock
Option Plan of the Company(6)
27 Financial Data Schedule(5)
- -------------------------
* Compensatory plan, contract or arrangement.
(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.
(6) Filed previously as exhibit 4.1 to the Company's Registration Statement
on Form S-8 (File No. 333-90055), filed on November 1, 1999 and
incorporated herein by reference.