1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
-------------
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
JUNE 30, 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
----------------
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 X No
--- ---
- --------------------------------------------------------------------------------
The number of shares outstanding of the Issuer's common stock is 3,984,949 (as
of July 31, 1996).
2
JAKKS PACIFIC, INC. AND SUBSIDIARIES
FORM 10-QSB
June 30, 1996
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - June 30, 1996
(Unaudited) 3
Condensed Consolidated Statement of Operations -
Three and Six months ended June 30, 1996 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 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 8-10
PART II. OTHER INFORMATION
Items 1-6 Other Information, Exhibits and Reports on Form 8-K 11
Signatures 12
2
3
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
June 30, 1996 (Unaudited)
Assets
Current assets
Cash $ 6,710,808
Accounts receivable 1,959,624
Inventory 14,236
Prepaid expenses and other 1,267,935
-----------
Total current assets 9,952,603
-----------
Property and equipment, at cost 555,530
Less accumulated depreciation and amortization 123,541
-----------
Net property and equipment 431,989
-----------
Organization costs, net 40,505
Goodwill, net 2,581,509
Other 29,486
-----------
Total assets $13,036,092
===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 1,425,599
Reserve for returns and allowances 258,194
Income taxes payable 157,592
-----------
Total current liabilities 1,841,385
-----------
Acquisition debt 232,447
Notes payable - officers 77,970
Deferred income taxes 32,655
-----------
Total liabilities 2,184,457
-----------
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;
3,984,949 shares issued and outstanding 3,985
Additional paid-in capital 10,402,836
Retained earnings 657,719
-----------
11,064,540
Less unearned compensation from stock option grants 212,905
-----------
Net stockholders' equity 10,851,635
-----------
Total liabilities and stockholders' equity $13,036,092
===========
See accompanying notes to condensed consolidated financial statements.
3
4
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
For the Three and Six Months Ended June 30, 1996 (Unaudited)
Three Months Six Months
Net sales $2,381,760 $3,216,500
Cost of sales 1,543,184 1,959,958
---------- ----------
Gross profit 838,576 1,256,542
Selling, general and administrative expenses 665,512 1,096,499
---------- ----------
Income from operations 173,064 160,043
Other (income) and expense:
Interest expense 24,433 53,924
Interest income (46,756) (47,139)
---------- ----------
Income before benefit from income taxes 195,387 153,258
Benefit from income taxes 6,149 68,090
---------- ----------
Net income $ 201,536 $ 221,348
========== ==========
Net income per share $ .06 $ .08
========== ==========
Weighted average number of common and common
equivalent shares outstanding 3,375,664 2,790,636
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
5
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
For the Six Months Ended June 30, 1996 (Unaudited)
Cash flows from operating activities:
Net income $ 221,348
----------
Adjustments to reconcile net income to net cash used
by operating activities:
Depreciation and amortization 126,547
Net change in operating assets and liabilities (1,900,479)
----------
Total adjustments (1,773,932)
----------
Net cash used by operating activities (1,552,584)
---------
Cash flows from investing activities:
Purchase of property and equipment (137,122)
Increase in other assets (22,681)
----------
Net cash used by investing activities (159,803)
----------
Cash flows from financing activities:
Payment of acquisition debt (209,209)
Proceeds from convertible notes payable 1,300,000
Offering costs - convertible notes payable (195,306)
Issuance of common stock 9,387,500
Offering costs - common stock (1,636,696)
Payment of notes payable to officers (304,846)
----------
Net cash provided by financing activities 8,341,443
----------
Net increase in cash 6,629,056
Cash, beginning of period 81,752
----------
Cash, end of period $6,710,808
==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 9,100
==========
Interest $ 46,636
==========
See accompanying notes to condensed consolidated financial statements.
5
6
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 1996
The unaudited condensed consolidated financial statements as of June 30, 1996
and for the three and six 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 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 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 89,600 shares of the Company's
common stock.
Other consideration included 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
$1,300,000 principal amount unsecured convertible promissory notes originally
issued in February 1996 pursuant to a private placement were converted into
469,300 shares of the Company's common stock on the consummation of the initial
public offering of the Company's common stock in May 1996. (See Note 5.)
Note 3 - Notes payable - officers
Notes payable - officers, are due to Company officers and stockholders who
advanced cash to the Company. 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.
6
7
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 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 $169,500
1997 276,500
1998 10,000
--------
Total $456,000
Note 5 - Initial Public Offering
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. Net
proceeds to the Company were $7,735,804 after related issuance costs.
7
8
JAKKS PACIFIC, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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 July 1, 1995, the inception date of the
Company, the results of operations of the Company for the three and six months
ended June 30, 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
Three Months Ended June 30, 1995 and 1996
Net income for the three months ended June 30, 1996 totaled $201,536, or $.06
per share, compared to net income of $177,408, or $141,509 on a pro forma basis
which excludes non-recurring other income of $35,899, for the comparable period
in 1995. This variance is attributable to the following:
Net Sales. Net sales were $2,381,760 in 1996 and $1,634,605 in 1995, an increase
of $747,155, or 45.7%. This increase in net sales was primarily the result of
continued sales of Starr Model Agency dolls and accessories, youth electronics,
and Gloobee dolls, as well as the launch of the new World Wrestling Federation
action figures.
Gross Profit. Gross profit increased as a percentage of net sales from 30.6% in
1995 to 35.2% in 1996. This increase as a percentage of net sales was due to the
increased sales of higher-margin dolls and action figures in 1996 as compared to
1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $359,266 in 1995 and $665,512 in 1996, constituting
22% and 27.9% of net sales, respectively. The increase as a percentage of net
sales was due primarily to the increase in the fixed portion of these expenses,
predominantly staffing and infrastructure in support of increased operations.
The overall dollar increase from 1995 to 1996 of $306,246 was due to the
increase in variable selling
8
9
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 expected to turn around commencing
in the third quarter of 1996.
Six Months Ended June 30, 1995 and 1996
Net income for the six months ended June 30, 1996 totaled $221,348, or $.08 per
share, compared to net income of $86,590, or $50,691 on a pro forma basis which
excludes non-recurring other income of $35,899, for the comparable period in
1995. This variance is attributable to the following:
Net Sales. Net sales were $3,216,500 in 1996 and $1,853,115 in 1995, an increase
of $1,363,385, or 73.6%. This increase in net sales was primarily the result of
continued sales of Starr Model Agency dolls and accessories, youth electronics,
and Gloobee dolls, as well as the introduction of new products including the new
World Wrestling Federation action figures.
Gross Profit. Gross profit increased as a percentage of net sales from 30.9% in
1995 to 39.1% in 1996. This increase as a percentage of net sales was due to the
lower sales of lower-margin electronics and increased sales of higher-margin
dolls and action figures 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 $522,496 in 1995 and $1,096,499 in 1996,
constituting 28.2% and 34.1% of net sales, respectively. The increase as a
percentage of net sales was due primarily to the increase in the fixed portion
of these expenses, predominantly staffing and infrastructure in support of
increased operations. The overall dollar increase from 1995 to 1996 of $574,003
was due primarily to the increase in variable selling 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 expected to turn around commencing
in the third quarter of 1996.
9
10
Liquidity and Capital Resources
As of June 30, 1996 the Company had working capital of $8,111,218 as compared to
a deficit of $620,802 at December 31, 1995. The improvement was due to the
issuance of the convertible notes payable pursuant to a private offering and the
issuance of the Company's common stock for cash pursuant to its initial public
offering. During the six months ended June 30, 1996, operating activities of the
Company used cash of $1,552,584, of which $1,384,135 resulted from the increase
in accounts receivable due to higher sales at the end of the second quarter as
compared to the end of fourth quarter of 1995. Such accounts receivable are
primarily letters of credit in the process of collection.
Financing activities for the six month period ended June 30, 1996 provided cash
of $8,341,443, due primarily to the issuance of convertible notes payable in the
principal amount of $1,300,000 and gross proceeds from the issuance of the
Company's common stock of $9,387,500. Offsetting the proceeds of these offerings
were offering costs related to the notes as well as the initial public offering
and the payment of acquisition debt related to the Justin acquisition and debt
to officers of the Company. The convertible notes payable were converted in full
at the consummation of the initial public offering.
The Company's investing activities for the six month period ended June 30, 1996
were primarily related to the purchase of molds and tooling for its new line of
World Wrestling Federation action figures. 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
continue to invest in this area.
Management believes that the existing cash resources and working capital and
cash expected to be provided from operations 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.
10
11
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
----------- -----------
* 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
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 second quarter of 1996.
11
12
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: August 1, 1996 Joel M. Bennett
Chief Financial Officer
By: /s/ Jack Friedman
--------------------------------
Date: August 1, 1996 Jack Friedman
President and Chief Executive Officer
12
5
6-MOS
DEC-31-1996
JAN-01-1996
JUN-30-1996
6710808
0
1959624
0
14236
9952603
555530
123541
13036092
1841385
310417
0
0
3985
10189931
13036092
3216500
3216500
1959958
1959958
1096499
0
53924
153258
(68090)
221348
0
0
0
221348
0.08
0.08
1
EXHIBIT 28
CONDENSED FINANCIAL STATEMENTS OF JUSTIN PRODUCTS LIMITED, A HONG KONG
CORPORATION, PREDECESSOR COMPANY OF THE REGISTRANT
JUSTIN PRODUCTS LIMITED
Condensed Balance Sheet
June 30, 1995 (Unaudited)
Assets
Current Assets
Cash $ 115,401
Accounts receivable, net 785,262
Accounts receivable from related companies 579,861
Prepaid expenses 19,661
----------
Total current assets 1,500,185
Property and equipment, net 182,504
----------
Total assets $1,682,689
==========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 772,462
Accounts payable to related companies 321,441
----------
Total current liabilities 1,093,903
----------
Shareholders' equity
Share capital - ordinary shares of HK$1, 3,000,000
authorized; 2,300,000 issued and outstanding 297,158
Retained earnings 291,628
----------
Total shareholders' equity 588,786
----------
Total liabilities and shareholders' equity $1,682,689
==========
See accompanying notes to condensed financial statements.
1
2
JUSTIN PRODUCTS LIMITED
Condensed Statement of Operations
For the Three and Six Months Ended June 30, 1995 (Unaudited)
Three Months Six Months
Net sales $1,634,605 $1,853,115
Cost of sales 1,133,868 1,280,014
---------- ----------
Gross profit on sales 500,737 573,101
---------- ----------
Selling, general and administrative
expenses 359,266 522,496
---------- ----------
Operating income 141,471 50,605
---------- ----------
Other income
Interest income 38 86
Other 35,899 35,899
---------- ----------
35,937 35,985
---------- ----------
Net income $ 177,408 $ 86,590
========== ==========
See accompanying notes to condensed financial statements.
2
3
JUSTIN PRODUCTS LIMITED
Condensed Statement of Cash Flows
For the Six Months Ended June 30, 1995 (Unaudited)
Operating activities
Net income $ 86,590
--------
Adjustments to reconcile net income to cash provided
by operating activities
Depreciation 60,876
Net change in operating assets and liabilities (86,692)
--------
Total adjustments (25,816)
--------
Net cash provided by operating activities 60,774
--------
Investing and financing activities 0
--------
Net increase in cash 60,774
Cash in bank, beginning of period 54,627
--------
Cash in bank, end of period $115,401
========
See accompanying notes to condensed financial statements.
3
4
JUSTIN PRODUCTS LIMITED
Notes to Condensed Financial Statements
June 30, 1995
The unaudited condensed financial statements of Justin Products Limited, a Hong
Kong Corporation and predecessor of JAKKS Pacific, Inc., as of June 30, 1995 and
for the three and six 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 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 as an exhibit in Form SB-2
of JAKKS Pacific, Inc., which contains financial information for the period from
January 1, 1995 through June 30, 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.
4
