1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 QUARTER ENDED
MARCH 31, 1996
/ / 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.)
24955 PACIFIC COAST HWY., #B202, MALIBU, CA 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 of 1934 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 No X
--- ---
- --------------------------------------------------------------------------------
The number of shares outstanding of the Issuer's common stock is 3,984,949 (as
of June 6, 1996).
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
FORM 10-QSB
March 31, 1996
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - March 31, 1996
(Unaudited) 3
Condensed Consolidated Statement of Operations -
Three months ended March 31, 1996 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows -
Three months ended March 31, 1996 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II. OTHER INFORMATION
Items 1-6 Other Information, Exhibits and Reports on Form 8-K 10
Signatures 11
2
3
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
March 31, 1996 (Unaudited)
Assets
Current assets
Cash $ 457,415
Accounts receivable 168,575
Inventory 40,955
Prepaid expenses and other 581,748
----------
Total current assets 1,248,693
----------
Property and equipment, at cost 419,882
Less accumulated depreciation and amortization 87,960
----------
Net property and equipment 331,922
----------
Deferred offering costs 274,345
Organization costs, net 42,838
Goodwill, net 2,603,762
Other 7,473
----------
Total assets $4,509,033
==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 182,601
Reserve for returns and allowances 358,194
Income taxes payable 96,767
----------
Total current liabilities 637,562
----------
Convertible notes payable 1,300,000
Acquisition debt 234,530
Notes payable - officers 434,770
Deferred income taxes 32,655
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Total liabilities 2,639,517
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Commitments
Stockholders' equity
Preferred stock, $.001 par value; 5,000 shares
authorized, no shares issued --
Common stock, $.001 par value; 25,000,000 shares authorized;
2,000,000 shares issued and outstanding 2,000
Additional paid-in capital 1,624,238
Retained earnings 456,183
----------
2,082,421
Less unearned compensation from stock option grants 212,905
----------
Net stockholders' equity 1,869,516
----------
Total liabilities and stockholders' equity $4,509,033
==========
See accompanying notes to condensed consolidated financial statements.
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4
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
For the Three Months Ended March 31, 1996 (Unaudited)
Net sales $ 834,740
Cost of sales 416,774
----------
Gross profit 417,966
Selling, general and administrative expenses 430,987
----------
Loss from operations (13,021)
Other (income) and expense:
Interest expense 29,491
Interest income (383)
----------
Loss before benefit from income taxes (42,129)
Benefit from income taxes 61,941
----------
Net income $ 19,812
==========
Net income per share $ .01
==========
Weighted average number of common and common
equivalent shares outstanding 2,193,579
==========
See accompanying notes to condensed consolidated financial statements.
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5
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 1996 (Unaudited)
Cash flows from operating activities:
Net income $ 19,812
---------
Adjustments to reconcile net income to net cash used
by operating activities:
Depreciation and amortization 61,739
Net change in operating assets and liabilities (653,785)
---------
Total adjustments (592,046)
---------
Net cash used by operating activities (572,234)
---------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (1,474)
Increase in other assets (668)
---------
Net cash used by investing activities (2,142)
---------
Cash flows from financing activities:
Deferred offering costs (199,430)
Payment of acquisition debt (202,485)
Proceeds from convertible notes payable 1,300,000
Proceeds from notes payable to officers 51,954
---------
Net cash provided by financing activities 950,039
---------
Net increase in cash 375,663
Cash, beginning of period 81,752
---------
Cash, end of period $ 457,415
---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 9,100
=========
See accompanying notes to condensed consolidated financial statements.
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6
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 1996
The unaudited condensed consolidated financial statements as of March 31, 1996
and for the three months then ended 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 principals 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 SB-2,
which contains financial information for the period from April 1, 1995
(inception) through December 31, 1995, as filed with the SEC (file number
333-2048-LA).
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 is not necessarily indicative of the results to be
expected for the full year.
Note 1 - Acquisition
Effective July 1, 1995, the Company acquired substantially all of the assets
constituting the toy business of Justin Products Limited, a Hong Kong
Corporation ("JPL"). Total consideration paid of $2,965,353 consisted of cash,
assumption of liabilities and the issuance of 75,951 shares of the Company's
common stock. The number of shares of common stock issued to JPL is subject to
adjustment so that the aggregate value will not be less than $560,000 based on
the IPO price.
Other consideration includes percentage payments equal to 5% of the net sales of
the acquired product lines during each of the calendar years 1995, 1996, and
1997, with minimums of $250,000 for each of 1995 and 1996, and 2.5% for each of
the calendar years 1998 and 1999. Such payments are subject to offset against
$500,000 in cash consideration paid. The 1996 minimum payment has been
discounted at 10% and is presented at net as a long-term liability.
Note 2 - Long-term debt
Long-term debt consists of $1,300,000 principal amount unsecured convertible
promissory notes issued in February 1996 pursuant to a private placement. The
notes mature on March 31, 1997 and bear interest at 10% per annum and are
convertible into 469,300 shares of the Company's common stock on the
consummation of the IPO. As these notes will be converted to equity, the
certainty of which is demonstrated by the consummation of the Company's IPO
(see note 5), these notes are classified as long-term in accordance with
SFAS 6, "Classification of Short-Term Obligations Expected to Be Refinanced."
Note 3 - Notes payable - officers
Notes payable - officers, are due to Company officers and stockholders who
advanced cash to the Company totaling $434,770. Such notes bear interest at
approximately 6% which is equal to the Applicable Federal Rate, as defined, in
effect on the date of each advance. The notes mature March 31, 1997.
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Notes to Condensed Consolidated Financial Statements (continued)
March 31, 1996
Note 4 - Commitments
The Company entered into various license agreements whereby the Company may use
certain entertainment properties in conjunction with its products. Such license
agreements call for royalties to be paid at 10 to 12% of net sales with minimum
guarantees and advance payments. Additionally, under one such license, the
Company has committed to spend 12.5% of related net sales, not to exceed
$1,000,000, on advertising per year.
Future minimum royalty guarantees are as follows:
1996 $210,000
1997 250,000
1997 5,000
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Total $465,000
Note 5 - Subsequent event
In May 1996, the Company issued 1,502,000 shares of its Common Stock at a price
of $6.25 per share in connection with its Public Offering. Additional issued
shares included 469,300 for the conversion of $1,300,000 of unsecured
subordinated convertible promissory notes and 13,649 shares issued to JPL.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
The following discussion and analysis should be read together with the Company's
Condensed Consolidated Financial Statements and Notes thereto and Justin
Product Limited's Condensed Financial Statements and Notes thereto which appear
elsewhere herein.
Overview
The Company commenced operations July 1, 1995 through the acquisition of
substantially all of the assets comprising the toy business of Justin Products
Limited ("Justin"), a Hong Kong Corporation, and the Company has included the
results of the operations acquired from Justin in its consolidated financial
statements from the effective date of the acquisition, July 1, 1995. In the
absence of operating results prior to April 1, 1995, the inception date of the
Company, the results of operations of the Company for the three months ended
March 31, 1996 are analyzed against the results of Justin, the predecessor
company, for the comparable period in 1995 due to the vast similarity in
operations and product lines.
Results of Operations
Net income for the three months ended March 31, 1996 totaled $19,812, or $.01
per share, compared to a net loss of $90,818 for the comparable period in
1995. This variance is attributable to the following:
Net Sales. Net sales were $834,740 in 1996 and $218,510 in 1995, an increase of
$616,230, or 282%. This increase in net sales was primarily the result of
continued sales of Starr Model Agency dolls and accessories and Gloobee dolls,
as well as the introduction of new products.
Gross Profit. Gross profit increased as a percentage of net sales from 33.9% in
1995 to 50.1% in 1996. This increase as a percentage of net sales was due to the
minimal sales of lower-margin electronics in 1996 as compared to 1995.
Electronics products historically sell more in the second half of the year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $163,230 in 1995 and $430,987 in 1996, constituting
74.7% and 51.6% of net sales, respectively. The decrease as a percentage of net
sales was due primarily to the significant increase in net sales in light of the
fixed nature of a portion of these expenses. The overall dollar increase from
1994 to 1995 of $267,757 was due primarily to the increase in variable selling
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expenses, including freight, sales commission and travel expenses, which is
attributable to the significant increase in net sales, as well as to staffing
and infrastructure additions for the Company.
Interest Expense. The Company had various interest-bearing notes outstanding
during 1996 whereas there were none in 1995. Such notes included those issued
pursuant to a private offering and notes issued to certain officers of the
Company for cash advanced in the start-up of the Company.
Income Taxes. No provision for income taxes was made in 1995 as Justin had
sufficient tax losses brought forward to offset profits for the period. In 1996,
the Company experienced a tax benefit related to its U.S. operations while the
earnings arising in, or derived from, Hong Kong benefited from a favorable
effective tax rate of 16.5% compared to approximately 45% combined U.S.
effective tax rate. The tax benefit is fully expected to turn around commencing
in the second quarter of 1996.
Liquidity and Capital Resources
As of March 31, 1996 the Company had working capital of $611,131 as compared to
a deficit of $620,802 at December 31, 1995. The improvement was due in large
part to the issuance of the convertible notes payable. During the three months
ended March 31, 1996, operating activities of the Company used cash of $572,234.
Financing activities provided cash of $950,039, due primarily to the issuance of
convertible notes payable in the principal amount of $1,300,000 pursuant to a
private offering. Offsetting the notes payable were offering costs related to
the notes as well as the contemplated initial public offering and the payment of
acquisition debt related to the Justin acquisition.
The Company's investing activities for the three month period ended March 31,
1996 were immaterial. The Company, in keeping with its strategy to develop and
market new products using entertainment properties and characters, is
continually pursuing licenses for such usage and expects to invest in this area.
Management believes that the existing cash resources and working capital, cash
expected to be provided from operations, together with the public offering and
conversion of the convertible notes payable on the consummation thereof, will be
sufficient to meet the cash needs of the Company for at least eighteen months.
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.
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PART II. -- OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
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* 3.1 Restated Certificate of Incorporation of the Company
* 3.2 By-Laws of the Company
* 4.1 Form of certificate evidencing shares of Common Stock
* 4.2 Form of Representative's Warrant Agreement
* 4.3 Private Placement Financing Converted Shares
Registration Rights Agreement
* 10.1 1995 Stock Option Plan
* 10.2 Employment Agreement by and between the Company and
Jack Friedman
* 10.3 Asset Purchase Agreement dated October 19, 1995 (as of
July 1, 1995) between the Company, JP (HK) Limited and
Justin
* 10.4 Lease of the Company's offices at 24955 Pacific Coast
Highway, Malibu, California
* 10.5 Lease of the Company's showroom at the Toy Center
South, 200 Fifth Avenue, New York, NY
* 10.6 Lease of the Company's Hong Kong offices
* 10.7 WWF License Agreement dated October 24, 1995
* 10.8 Correspondence with PMS dated July 21, 1995 to August
24, 1995 with respect to distribution of product
* 10.9 Form of Financial Consulting Agreement
28 Condensed Financial Statements of Justin Products
Limited, a Hong Kong Corporation, predecessor company
of the Company
- --------------------
* Filed as an Exhibit to the Company's Registration Statement on Form SB-2
(File No. 333-2048-LA), or the Amendments thereto, and incorporated herein
by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
JAKKS PACIFIC, INC.
By: /s/ Joel M. Bennett
--------------------------------
Date: June 7, 1996 Joel M. Bennett
Chief Financial Officer
By: /s/ Jack Friedman
--------------------------------
Date: June 7, 1996 Jack Friedman
President and Chief Executive Officer
11
5
3-MOS
DEC-31-1996
JAN-01-1996
MAR-31-1996
457415
0
168575
0
40955
1248693
419882
87960
4509033
637562
1969300
0
0
2000
1411333
4509033
834740
834740
416774
416774
430987
0
29108
(42129)
(61941)
19812
0
0
0
19812
0.01
0.01
