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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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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, 1998
[ ] 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 SMALL BUSINESS ISSUER 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 HWY.
MALIBU, CALIFORNIA 90265
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 456-7799
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes x No
--- ---
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The number of shares outstanding of the issuer's common stock is 5,935,792 (as
of August 14, 1998).
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED JUNE 30, 1998
ITEMS IN FORM 10-QSB
Page
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Facing page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet -
June 30, 1998 (Unaudited) 3
Condensed Consolidated Statements of Operations -
Three months and six months ended June 30, 1998
and 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997
(Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and
Analysis or Plan of Operation. 9
Part II OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities and Use of Proceeds. 12
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. 15
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
June 30, 1998 (Unaudited)
Assets
Current assets
Cash and cash equivalents $ 2,114,628
Accounts receivable, net 11,807,929
Inventory, net 2,776,980
Deferred product development costs, net 1,116,487
Advance royalty payments, net 385,322
Prepaid expenses and other current assets 819,706
-----------
Total current assets 19,021,052
-----------
Property and equipment, at cost 5,749,648
Less accumulated depreciation and amortization 1,831,151
-----------
Net property and equipment 3,918,497
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Deferred offering costs, net 537,628
Goodwill, net 10,509,192
Trademarks and Patents, net 13,862,467
Investment in joint venture 1,000,000
Other 486,669
-----------
Total assets $49,335,505
===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 9,607,370
Current portion of debt 480,000
Income taxes payable 849,848
-----------
Total current liabilities 10,937,218
-----------
Convertible Debentures 6,000,000
Deferred income taxes 86,896
-----------
Total liabilities 17,024,114
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Commitments
Stockholders' equity
Preferred stock, $.001 par value; 5,000 shares
authorized, 1,000 shares issued and outstanding 1
Common stock, $.001 par value; 25,000,000 shares authorized;
5,898,892 shares issued and outstanding 5,899
Additional paid-in capital 26,598,354
Retained earnings 5,822,462
-----------
32,426,716
Less unearned compensation from stock option grants 115,325
-----------
Net stockholders' equity 32,311,391
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Total liabilities and stockholders' equity $49,335,505
===========
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 Six Months Ended June 30, 1998 and 1997 (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
Net sales $16,131,480 $8,058,556 $27,161,251 $13,293,752
Cost of sales 10,013,122 4,855,911 16,693,025 8,179,866
----------- ---------- ----------- -----------
Gross profit 6,118,358 3,202,645 10,468,226 5,113,886
Selling, general and administrative expenses 4,692,019 2,481,839 8,274,028 4,220,086
----------- ---------- ----------- -----------
Income from operations 1,426,339 720,806 2,194,198 893,800
Other (income) and expense:
Interest income (42,005) (64,777) (51,049) (168,293)
Interest expense 152,647 181,402 319,430 334,122
----------- ---------- ----------- -----------
Income before income taxes 1,315,697 604,181 1,925,817 727,971
Provision for income taxes 357,732 147,563 505,991 67,936
----------- ---------- ----------- -----------
Net income 957,965 456,618 1,419,826 660,035
=========== ========== =========== ===========
Net income per share - basic $ 0.16 $ 0.10 $ 0.26 $ 0.15
=========== ========== =========== ===========
Net income per share - diluted $ 0.14 $ 0.10 $ 0.22 $ 0.15
=========== ========== =========== ===========
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 Six Months Ended June 30, 1998 and 1997 (Unaudited)
Six Months Ended June 30,
1998 1997
Cash flows from operating activities:
Net income $ 1,419,826 $ 660,035
----------- ----------
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 1,341,897 691,683
Change in accounts receivable (3,072,401) (2,389,125)
Change in inventory (828,730) (1,840,926)
Net change in other operating assets and liabilities 671,811 188,914
----------- ----------
Total adjustments (1,887,423) (3,349,454)
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Net cash used by operating activities (467,597) (2,689,419)
----------- ---------
Cash flows from investing activities:
Purchase of property and equipment (1,793,792) (1,372,365)
Excess of cost over toy business assets acquired (goodwill) -- (6,962,974)
Acquisition cost of trademarks (12,252) (1,000,000)
Investment in joint venture (1,000,000) --
Increase in other assets (168,158) (35,721)
----------- ----------
Net cash used by investing activities (2,974,202) (9,371,060)
----------- ----------
Cash flows from financing activities:
Repayment of bank debt (114,700) --
Proceeds from issuance of convertible debentures -- 6,000,000
Offering costs - convertible debentures -- (528,532)
Proceeds from sale of common stock -- 2,949,316
Offering costs - common stock -- --
Proceeds from sale of convertible preferred stock 5,000,000 --
Offering costs - convertible preferred stock (212,239) --
Proceeds from acquisition debt -- 6,098,939
Repayment of acquisition debt (1,766,376) (2,997,857)
Proceeds from exercise of options 113,817 --
----------- ----------
Net cash provided by financing
activities 3,020,502 11,521,866
----------- ----------
Net decrease in cash and cash equivalents (421,297) (538,613)
Cash and cash equivalents, beginning of period 2,535,925 6,355,260
----------- ----------
Cash and cash equivalents, end of period $ 2,114,628 $5,816,647
=========== ==========
Supplemental disclosure of cash flow information (Note 4):
Cash paid during the period for:
Income taxes $ 259,757 $ --
=========== ==========
Interest $ 357,037 $ 279,178
=========== ==========
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, 1998
Note 1 - Basis of presentation
The accompanying 1998 and 1997 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, 1997 and 1996.
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, 1998
Note 2 -- Earnings per share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." This statement, which is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods, 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,
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1998 1997
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
--------- ---------- --------- -------- --------- ---------
Net income per share - basic
Net Income available to common
stockholders.............. $ 957,965 5,882,658 $0.16 $456,618 4,561,636 $0.10
---------- --------- ----- -------- --------- -----
Effect of dilutive securities
Options and warrants......... -- 301,206 -- --
9% convertible debentures.... 93,183 1,043,478 -- 190,512
4% convertible preferred
stock..................... -- -- -- --
7% convertible preferred
stock..................... -- 558,658 -- --
---------- --------- -------- --------
Net income per share - diluted
Income available to common
stockholders plus assumed
conversions................ $1,051,148 7,786,000 $0.14 $456,618 4,752,148 $0.10
========== ========= ===== ======== ========= =====
Six Months Ended June 30,
----------------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
--------- ---------- --------- -------- --------- ---------
Net income per share - basic
Net Income available to common
stockholders.............. $1,419,826 5,423,223 $0.26 $660,035 4,332,698 $0.15
---------- --------- ----- -------- --------- -----
Effect of dilutive securities
Options and warrants......... -- 216,415 -- 206,739
9% convertible debentures.... 186,366 1,043,478 -- --
4% convertible preferred
stock..................... -- 459,555 -- --
7% convertible preferred
stock..................... -- 279,329 -- --
---------- --------- -------- --------
Net income per share - diluted
Income available to common
stockholders plus assumed
conversions................ $1,606,192 7,422,000 $0.22 $660,035 4,539,437 $0.15
========== ========= ===== ======== ========= =====
Note 3 -- Preferred stock and common stock
On March 30, 1998, holders of all of the 3,525 shares of the Company's 4%
Convertible Preferred Stock converted all such shares into 939,998 shares of
the Company's common stock.
On April 1, 1998, the Company issued 1,000 shares of its 7% Series A
Cumulative Convertible Preferred Stock at a price of $5,000 per share in
connection with a private placement to two investors. The Company received net
proceeds of approximately $4.8 million after legal, placement and closing costs.
Such shares are initially convertible into 558,658 shares of common stock based
on a conversion price of $8.95 per share.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 1998
Note 4 -- Supplemental information to condensed consolidated statements
of cash flows
198,020 shares of common stock were issued as partial consideration for toy
business assets acquired totalling $1,500,000 in 1997. The excess of cost over
toy business assets acquired (goodwill) is reflected in the consolidated
statement of cash flows net of the stock issued.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following discussion and analysis should be read together with the Company's
Condensed Consolidated Financial Statements and Notes thereto which appear
elsewhere herein.
OVERVIEW
The Company was founded in early 1995 to develop, manufacture and market
toys and related products for children. The Company commenced business
operations as of July 1, 1995, when it assumed operating control over the toy
business of Justin Products Limited ("Justin") and has included the results of
Justin's operations in its consolidated financial statements from the effective
date of such acquisition (the "Justin Acquisition"). The Justin product lines
accounted for substantially all of the Company's sales for the period from April
1, 1995 (Inception) to December 31, 1995.
In 1996, the Company expanded its product lines to include products based
on licensed characters and properties such as WWF action figures and Power
Rangers ZEO mini vehicles. Presently, the Company's products include (i) toys
and action figures featuring licensed characters, including action figures based
on characters from the WWF, (ii) die cast collectible and toy vehicles marketed
under the names Road Champs and Remco, (iii) Child Guidance pre-school toys,
(iv) fashion dolls with related accessories, (v) electronic toys designed for
children and (vi) battery-operated vehicles.
In February 1997, the Company acquired Road Champs with its line of die
cast collectible and toy vehicles. The Company has included the results of
operations of Road Champs from February 1, 1997, the effective date of the
acquisition.
In October 1997, the Company acquired the Child Guidance and Remco
trademarks, under which the Company markets pre-school toys and metal trucks,
respectively. Such lines contributed nominally in 1997, but have begun to
contribute more significantly to operations in 1998.
The toys sold by the Company are currently primarily produced by
non-affiliated manufacturers located in China on letter of credit basis or on
open account and are shipped F.O.B. Hong Kong. These methods allow the Company
to keep certain operating costs down and reduce working capital requirements.
However, through the Company's Road Champs division, a portion of the Company's
sales are made on a domestic basis, for which the Company holds certain
inventory in a warehouse operated by a non-affiliated third party. To date,
substantially all of the Company's sales have been to domestic customers. The
Company intends to expand distribution of its products internationally.
The Company's products are generally acquired from others or developed for
the Company by non-affiliated third parties, thus minimizing operating costs.
Royalties payable to such developers generally range from 1% to 6% of the
wholesale sales price for each unit of a product sold by the Company.
RESULTS OF OPERATIONS
9
10
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Net Sales. Net sales were $16.1 million in 1998, an increase of $8.1
million, or 100% over $8.0 million in 1997. The significant growth in net sales
was due primarily to the continuing growth of the WWF action figure product line
with its expanded product offerings and frequent character releases. The
Company's holiday doll line performed comparably with the prior year and its new
lines of Remco toy vehicles and Child Guidance pre-school toys contributed to
net sales in 1998.
Gross Profit. Gross profits were $6.1 million, or 37.9% of net sales, in
1998. This represents an increase of approximately 91% over gross profits of
$3.2 million, or 39.7% of net sales, in 1997. The decrease in gross profit as a
percentage of net sales was due to the change in product mix with lower-margin
non-licensed products accounting for a higher proportion of net sales in 1998
than in 1997. The overall increase in gross profit was attributable to the
significant increase in net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $4.7 million in 1998 and $2.5 million in 1997,
constituting 29.1% and 30.8% of net sales, respectively. The overall significant
increase of $2.2 million in such costs was due to costs incurred in support of
the Company's development and marketing of products under its recently acquired
Child Guidance and Remco trademarks. Selling, general and administrative
expenses decreased as a percentage of net sales due in part to the fixed nature
of certain of these expenses. The overall dollar increase was also due to the
significant increase in net sales with its proportionate impact on variable
selling costs such as freight and shipping related expenses, sales commissions,
cooperative advertising and travel expenses, among others. From time to time,
the Company may increase its advertising efforts, including the use of more
expensive advertising media such as television, if the Company deems it
appropriate for particular products. Such advertising costs may be substantial,
and there is no certainty as to the effectiveness of such advertising or whether
any resultant sales would be sufficient to cover such costs.
Interest. The Company had moderately lower interest-bearing obligations in
1998 than in 1997 with its convertible debentures and seller note issued to
partially fund the Road Champs Acquisition and Child Guidance/Remco trademark
acquisitions, respectively. In addition, the Company had lower average cash
balances during 1998 than in 1997.
Provision for Income Taxes. Provision for income taxes include Federal,
state and foreign income taxes in 1998 and also include a tax benefit generated
by operating losses for Federal and state purposes in 1997. The Company's
earnings benefit from a flat 16.5% Hong Kong Corporation Tax on its income
arising in, or derived from, Hong Kong. At December 31, 1997, the Company had
Federal and state net operating loss carryforwards of $727,000 and $306,000,
respectively, available to offset future taxable income. The carryforwards
generally expire through 2012 and may be subject to annual limitations as a
result of changes in the Company's ownership. There can be no assurances that
changes in ownership in future periods or any future losses will not
significantly limit the Company's use of the net operating loss carryforwards.
In addition, no valuation allowance for its deferred tax assets, amounting to
approximately $258,000 at December 31, 1997, has been provided for 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, 1998 AND 1997
Net Sales. Net sales were $27.2 million in 1998, an increase of $13.9
million, or 104% over $13.3 million in 1997. The significant growth in net sales
was due primarily to the continuing growth of the WWF action figure product line
with its expanded product offerings and frequent character releases, as well as
to the full year to date contribution made by Road Champs' sales of die-cast toy
and collectible vehicle, which have been included from the effective day of the
acquisition, February 1, 1997. The Company's holiday doll line performed
comparably with the prior year and its new lines of Remco toy vehicles and Child
Guidance pre-school toys contributed to net sales in 1998.
Gross Profit. Gross profits were $10.5 million, or 38.5% of net sales, in
1998. This represents an increase of approximately 105% over gross profits of
$5.1 million, or 38.5% of net sales, in 1997. While the gross profit margin is
comparable between 1998 and 1997, the overall increase in gross profit was
attributable to the significant increase in net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $8.3 million in 1998 and $4.2 million in 1997,
constituting 30.5% and 31.7% of net sales, respectively. The overall significant
increase of $4.1 million in such costs was due in part to the full year to date
impact of costs associates with the infrastructure added in connection with the
Road Champs Acquisition, with its sales, administration and warehousing
operations in the United States and Hong Kong as well as to costs incurred in
support of the Company's development and marketing of products under its
recently acquired Child Guidance and Remco trademarks. Selling, general and
administrative expenses decreased as a percentage of net sales due in part to
the fixed nature of certain of these expenses. The overall dollar increase was
also due to the significant increase in net sales with its proportionate impact
on variable selling costs such as freight and shipping related expenses, sales
commissions, cooperative advertising and travel expenses, among others. From
time to time, the Company may increase its advertising efforts, including the
use of more expensive advertising media such as television, if the Company deems
it appropriate for particular products. Such advertising costs may be
substantial, and there is no certainty as to the effectiveness of such
advertising or whether any resultant sales would be sufficient to cover such
costs.
Interest. The Company had moderately lower interest-bearing obligations in
1998 than in 1997 with its convertible debentures and seller note issued to
partially fund the Road Champs Acquisition and Child Guidance/Remco trademark
acquisitions, respectively. In addition, the Company had significantly lower
average cash balances during 1998 than in 1997.
Provision for Income Taxes. Provision for income taxes include Federal,
state and foreign income taxes in 1998 and also include a tax benefit generated
by operating losses for Federal and state purposes in 1997. The Company's
earnings benefit from a flat 16.5% Hong Kong Corporation Tax on its income
arising in, or derived from, Hong Kong. At December 31, 1997, the Company had
Federal and state net operating loss carryforwards of $727,000 and $306,000,
respectively, available to offset future taxable income. The carryforwards
generally expire through 2012 and may be subject to annual limitations as a
result of changes in the Company's ownership. There can be no assurances that
changes in ownership in future periods or any future losses will not
significantly limit the Company's use of the net operating loss carryforwards.
In addition, no valuation allowance for its deferred tax assets, amounting to
approximately $258,000 at December 31, 1997, has been provided for 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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11
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had working capital of $8.1 million, as
compared to $3.4 million as of December 31, 1997. Operating activities used net
cash of $0.5 million in 1998 as compared to having used $2.7 million in 1997.
Net cash was used primarily by changes in operating assets and liabilities
partially offset by net income and non-cash charges. At June 30, 1998, the
Company had cash and cash equivalents of $2.1 million.
The Company's investing activities have used net cash of $3.0 million in
1998, as compared to $9.4 million in 1997, consisting primarily of the purchase
of molds and tooling used in the manufacture of the Company's products and the
investment in the joint venture. In 1997, the Company's investing activities
used cash principally for the purchase of Road Champs including goodwill,
trademarks and molds and tooling, as well as molds and tooling used in the
manufacture of the Company's products. As part of the Company's strategy to
develop and market new products, the Company has entered into various character
and product licenses with royalties of 1% to 10% payable on net sales of such
products. As of June 30, 1998, these agreements require future aggregate minimum
guarantees of $16.6 million, exclusive of $1.6 million in advances already paid
this year.
The Company's financing activities have provided net cash of $3.0 million
in 1998, consisting primarily of the issuance of 1,000 shares of its 7% Series A
Cumulative Convertible Preferred Stock at a price of $5,000 per share in
connection with a private placement to two investors partially offset by the
repayment of various debt issued in connection with the Road Champs and Child
Guidance/Remco trademarks acquisitions.
In January 1997, the Company received net proceeds of approximately $5.5
million, net of issuance costs, from the issuance of $6.0 million in convertible
debentures which are convertible into 1,043,478 shares of Common Stock at a
conversion price of $5.75 per share, subject to anti-dilution provisions. Such
debentures bear interest at 9% per annum, payable monthly, and are due in
December 2003.
In February 1997, the Company acquired Road Champs for approximately $11.7
million. Consideration paid at closing was approximately $4.7 million in cash
plus the issuance of $1.5 million (198,020 shares) of Common Stock. The balance
of the cash consideration ($5.5 million) was payable during the twelve-month
period ending in February 1998. This acquisition provided the Company with
immediate significant growth in the mini vehicle product category with Road
Champs product line of die cast collectible and toy vehicles. Assets included in
the purchase were molds and tooling, office and warehouse equipment and other
operating assets, as well as license agreements, trade name and goodwill.
In October 1997, the Company acquired the Child Guidance and Remco
trademarks for approximately $13.4 million. Consideration paid at closing was
$10.6 million in cash plus the issuance of a note payable in the amount of
$1.2 million, which is payable in five quarterly installments ending
December 31, 1998 and bears interest at 10% per annum. In addition, the
Company incurred legal and accounting fees of approximately $0.3 million and
reserves of $1.3 million. This acquisition provided the Company with immediate
expanded growth in the toy vehicle category, which complements the collectible
and toy nature of the Road Champs line. In addition, Child Guidance enabled
the Company to enter the pre-school toy category with a quality name. The
acquisition was funded in part by the issuance of the Company's 4% convertible
preferred stock, which were converted to the Company's common stock on March 30,
1998. Also in connection with this acquisition, the Company entered into a
manufacturing and supply agreement whereby the seller of the trademarks will
provide the tools and other manufacturing resources for the production of
products under the trademarks. Such agreement provides for payments to the
seller of four quarterly payments of $110,000 followed by six quarterly payments
of $160,000 commencing on December 31, 1997.
In October, 1997, the Company entered into a credit facility agreement
with Norwest Bank Minnesota, N.A. which provides the Company's Hong Kong
subsidiaries with a working capital line of credit and letters of credit for
the purchase of products and the operation of the subsidiaries. The facility
has an overall limit of $5.0 million, but is subject to other limitations based
on advance rates on letters of credit and open accounts receivable. As of
March 31, 1998, aggregate advances under the facility amounted to approximately
$0.1 million.
On April 1, 1998, the Company received approximately $4.8 million in net
proceeds from the issuance of shares of its 7% Series A Cumulative Convertible
Preferred Stock to two investors in a private placement, which are convertible
into 558,658 shares of the Company's Common Stock at a conversion price of $8.95
per share. The use of proceeds is for working capital and general corporate
purposes.
The Company believes that its cash flow from operations, cash on hand and
the net proceeds from the issuance of the 7% Series A Cumulative Convertible
Preferred Stock, together with the availability on the Norwest facility, will be
sufficient to meet working capital and capital expenditure requirements and
provide the Company with adequate liquidity to meet its anticipated operating
needs for the foreseeable future. Although operating activities are expected to
provide cash, to the extent the Company grows significantly in the future, its
operating and investing activities may use cash and, consequently, such growth
may require the Company to obtain additional sources of financing. There can be
no assurance that any necessary additional financing will be available to the
Company on commercially reasonable terms, if at all.
11
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
On April 1, 1998, the Company issued and sold 1,000 shares of Series A
Cumulative Convertible Preferred Stock, par value $.001 per share (the "Series A
Preferred Stock"), to Renaissance Capital Growth & Income Fund III, Inc. and
ProFutures Bridge Capital Fund, L.P. at a price of $5,000 per share (for
aggregate proceeds of $5,000,000). Net proceeds to the Company after legal,
placement and closing fees were approximately $4.8 million. The holders of the
Series A Preferred Stock are entitled to receive preferential dividends at an
annual rate of $350 per share; to receive preferential distributions of assets
of the Company up to a liquidation preference of $5,000 per share (plus
accumulated dividends thereon), in the event of the liquidation, dissolution or
winding up of the Company; and to convert their shares into Common Stock
based on a conversion price of $8.95 (subject to adjustment for certain dilutive
events and specified transactions). The Series A Preferred Stock is redeemable,
in whole, but not in part, at par (together with all accrued and unpaid
dividends) at the Company's option if (a) the Common Stock is then traded on the
Nasdaq National Market or the New York Stock Exchange; (b) the average Current
Market Price (as defined) of the Common Stock over a period of 20 Trading Days
(as defined) equals or exceeds $20.00; and (b) the shares of Common Stock
issuable upon conversion of the Series A Preferred Stock are subject to a
registration statement under the Securities Act of 1933 that has become
effective and permits the sale of such shares on a continuous or delayed basis.
The Series A Preferred Stock is also redeemable at par (together with accrued
and unpaid dividends) at the option of any holder thereof upon the occurrence of
certain specified Events of Redemption (as defined). The holders of the Series A
Preferred Stock have no voting rights, other than as required by the Delaware
General Corporation Law; class voting with respect to certain amendments of the
Company's Certificate of Incorporation or By-laws or the authorization or
issuance of certain shares; or in the event of the non-payment of dividends for
two quarters, in which case, the holders may designate or elect two directors of
the Company.
Pursuant to its Second Amended and Restated 1995 Stock Option Plan,
non-employee directors of the Company received automatic quarterly grants of
options to purchase an aggregate amount of 18,750 shares at a purchase price of
$7.94 per share.
In connection with a certain licensing agreement between Titan Sports,
Inc. ("Titan") and a joint venture of which the Company and THQ, Inc. ("THQ")
are to be the members, the Company is to issue warrants, exercisable until
December 31, 2009, to Titan and Stanley Shenker Associates, Inc. to purchase
111,250 and 13,750 shares, respectively, of the Company's common stock. In
connection with the formation of the joint venture, the Company is to issue
warrants, exercisable until June 9, 2003, to THQ to purchase 150,000 shares of
the Company's common stock. All such warrants are to be exercisable at an
exercise price of $10.00 per share. No separate consideration was paid to the
Company for the issuance of such warrants, and no underwriting discounts or
agent's fees or commissions were paid in connection therewith.
Exemption from registration under the Securities Act is claimed for the
sale of all of the securities set forth above in
12
13
reliance upon the exemption afforded by Section 4(2) of the Securities Act for
transactions not involving a 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)
3.2.1 By-Laws of the Company(1)
3.2.2 Amendment to By-Laws of the Company(3)
4.1 JAKKS Pacific, Inc. 9.00% Convertible Debenture issued
to Renaissance Capital Growth & Income Fund III, Inc.,
dated December 31, 1996(3)
4.2 JAKKS Pacific, Inc. 9.00% Convertible Debenture issued
to Renaissance US Growth & Income Trust PLC, dated
December 31, 1996(3)
10.1 Series A Cumulative Convertible Preferred Stock Purchase
Agreement dated April 1, 1998 among the Company,
Renaissance Capital Growth & Income Fund III, Inc. and
ProFutures Bridge Capital Fund, L.P.(4)
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 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.
(4) Filed previously as exhibit 10.1 to the Company's Current Report on
Form 8-K filed on April 7, 1998, and incorporated herein by reference.
(5) Filed herewith.
13
14
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on April 7, 1998 relating to
the conversion and elimination of the Company's 4% Redeemable Convertible
Preferred Stock and the issuance and sale of 1,000 shares of the Company's
Series A Cumulative Convertible Preferred Stock.
14
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Registrant:
JAKKS PACIFIC, INC.
Date: August 14, 1998 By: /s/ Jack Friedman
---------------------------------
President
(Principal Executive Officer)
Date: August 14, 1998 By: /s/ Joel M. Bennett
---------------------------------
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
5
6-MOS
DEC-31-1998
JAN-01-1998
JUN-30-1998
2,114,628
0
11,807,929
0
2,776,980
19,021,052
5,749,648
1,831,151
49,335,505
10,937,218
6,000,000
0
1
5,899
26,598,354
49,335,505
27,161,251
27,161,251
16,693,025
16,693,025
8,274,028
0
319,430
1,925,817
505,991
1,419,826
0
0
0
1,419,826
0.26
0.22
