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
SEPTEMBER 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 November 8, 1996).
2
JAKKS PACIFIC, INC. AND SUBSIDIARIES
FORM 10-QSB
September 30, 1996
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - September 30, 1996
(Unaudited) 3
Condensed Consolidated Statement of Operations -
Three months ended September 30, 1995 and 1996
and Nine months ended September 30, 1996 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows -
Nine months ended September 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
September 30, 1996 (Unaudited)
Assets
Current assets
Cash $ 6,491,311
Accounts receivable 2,212,048
Inventory 75,263
Prepaid expenses and other 1,449,200
-----------
Total current assets 10,227,822
-----------
Property and equipment, at cost 1,098,438
Less accumulated depreciation and amortization 181,582
-----------
Net property and equipment 916,856
-----------
Organization costs, net 38,171
Goodwill, net 2,559,955
Other 29,486
-----------
Total assets $13,772,290
===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 1,625,638
Reserve for returns and allowances 244,386
Income taxes payable 281,271
-----------
Total current liabilities 2,151,295
-----------
Acquisition debt 185,367
Deferred income taxes 32,655
-----------
Total liabilities 2,369,317
-----------
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 10,321,295
Retained earnings 1,286,162
-----------
11,611,442
Less unearned compensation from stock option grants 208,469
-----------
Net stockholders' equity 11,402,973
-----------
Total liabilities and stockholders' equity $13,772,290
===========
See accompanying notes to condensed consolidated financial statements.
3
4
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
For the Three Months Ended September 30, 1995 and 1996
and the Nine Months Ended September 30, 1996 (Unaudited)
Three Months Ended September 30, Nine Months
1995 1996
Net sales $3,769,000 $4,458,458 $7,674,958
Cost of sales 2,780,000 2,654,552 4,614,510
---------- ---------- ----------
Gross profit 989,000 1,803,906 3,060,448
Selling, general and administrative expenses 553,000 1,144,306 2,240,805
---------- ---------- ----------
Income from operations 436,000 659,600 819,643
Other (income) and expense:
Interest expense -- 4,606 58,530
Interest income -- (74,782) (121,921)
---------- ---------- ----------
Income before benefit from income taxes 436,000 729,776 883,034
Provision for income taxes 77,000 (101,333) (33,243)
---------- ---------- ----------
Net income $ 359,000 $ 628,443 $ 849,791
========== ========== ==========
Net income per share $ 0.16 $ 0.15 $ 0.26
========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding 2,191,923 4,217,722 3,271,999
========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
4
5
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended September 30, 1996 (Unaudited)
Cash flows from operating activities:
Net income $ 849,791
----------
Adjustments to reconcile net income to net cash used
by operating activities:
Depreciation and amortization 213,117
Change in accounts receivable (1,636,559)
Net change in other operating assets and liabilities (444,290)
----------
Total adjustments (1,867,732)
----------
Net cash used by operating activities (1,017,941)
---------
Cash flows from investing activities:
Purchase of property and equipment (680,030)
Increase in other assets (22,681)
----------
Net cash used by investing activities (702,711)
----------
Cash flows from financing activities:
Payment of acquisition debt (260,930)
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 (1,718,237)
Payment of notes payable to officers (382,816)
----------
Net cash provided by financing activities 8,130,211
----------
Net increase in cash 6,409,559
Cash, beginning of period 81,752
----------
Cash, end of period $6,491,311
==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 10,520
==========
Interest $ 49,638
==========
See accompanying notes to condensed consolidated financial statements.
5
6
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1996
The unaudited condensed consolidated financial statements as of September 30,
1996 and for the three and nine 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) on May 1, 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.
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 ("Justin"). 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% of net
sales 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 to officers
"Notes payable to officers" relates to officers and stockholders of the Company
who advanced cash to the Company. Such notes bore interest at approximately 6%,
which was equal to the Applicable Federal Rate, as defined, in effect on the
date of each advance. The notes were paid prior to their March 31, 1997
maturity.
6
7
Notes to Condensed Consolidated Financial Statements (continued)
September 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 $190,000
1997 284,000
1998 10,000
--------
Total $484,000
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 Justin.
Net proceeds to the Company were $7,654,263 after related issuance costs.
Note 6 - Road Champs, Inc. Asset Acquisition-Letter of Intent
The Company has signed a letter of intent to acquire certain of the
assets comprising the toy business of Road Champs, Inc., a developer and
marketer of die cast toy and collectible vehicle products. The terms of the
transaction are not finalized and are subject to due diligence and continuing
negotiations.
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8
JAKKS PACIFIC, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 nine months ended
September 30, 1996 are analyzed against pro forma results which include the
results of Justin, the predecessor company, for the six month period ended
June 30, 1995 due to the vast similarity in operations and product lines.
Results of Operations
Three Months Ended September 30, 1995 and 1996
Net income for the three months ended September 30, 1996 totaled $628,443, or
$.15 per share, compared to net income of $359,000, or $.16 per share, for the
comparable period in 1995. This variance is attributable to the following:
Net Sales. Net sales were $4,458,458 in 1996 and $3,769,000 in 1995, an increase
of $689,458 or 18.3%. This increase in net sales was primarily the result of
continued sales of Starr Model Agency dolls and accessories, youth electronics,
and the new World Wrestling Federation action figures, as well as the launch of
the Power Rangers ZEO products.
Gross Profit. Gross profit increased as a percentage of net sales from 26.2% in
1995 to 40.5% 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 $553,000 in 1995 and $1,144,306 in 1996,
constituting 14.7% and 25.7% 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
$591,306 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.
Nine Months Ended September 30, 1995 and 1996
Net income for the nine months ended September 30, 1996 totaled $849,791,
or $.26 per share, compared to net income of $419,372, or $383,743 ($.18 per
share) 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 $7,674,958 in 1996 and $5,622,115 in 1995, an increase
of $2,052,583, or 36.5%. This increase in net sales was primarily the result of
continued sales of Starr Model Agency dolls and accessories and youth
electronics, as well as the introduction of new products including the new
World Wrestling Federation action figures and the Power Rangers ZEO vehicles
with figures.
Gross Profit. Gross profit increased as a percentage of net sales from 27.8% in
1995 to 39.9% 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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1,053,885 in 1995 and $2,240,805 in 1996,
constituting 18.7% and 29.2% 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
$1,186,920 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.
Interest Income. The Company maintained significant cash balances in 1996,
on which interest is earned as compared to 1995. Such balances resulted
primarily from proceeds from the Company's initial public offering.
9
10
Liquidity and Capital Resources
As of September 30, 1996 the Company had working capital of $8,076,527 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 nine months ended September 30, 1996,
operating activities of the Company used cash of $1,017,941, which resulted
from an increase of $1,636,559 in accounts receivable due to higher sales at
the end of the third quarter of 1996 as compared to the end of fourth
quarter of 1995, offset by net income and non-cash charges to income of
$849,791 and $213,117, respectively. Such accounts receivable are primarily
letters of credit in the process of collection.
Financing activities for the nine month period ended September 30, 1996 provided
cash of $8,130,211, due primarily to the issuance of convertible notes payable
in the principal amount of $1,300,000 and the gross proceeds from the issuance
of the Company's common stock of $9,387,500 in the Company's initial public
offering. 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 nine month period ended September 30,
1996 were primarily related to the purchase of molds and tooling for its new
line of World Wrestling Federation action figures and Power Ranger ZEO vehicles
with 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
99 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 quarter ended
September 30, 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: November 14, 1996 Joel M. Bennett
Chief Financial Officer
By: /s/ Jack Friedman
--------------------------------
Date: November 14, 1996 Jack Friedman
President and Chief Executive Officer
12
5
9-MOS
DEC-31-1996
JAN-01-1996
SEP-30-1996
6,491,311
0
2,212,048
0
75,263
10,227,822
1,098,438
181,582
13,772,290
2,151,295
185,367
0
0
3,985
11,398,988
13,772,290
7,674,958
7,674,958
4,614,510
4,614,510
2,240,805
0
58,530
883,034
33,243
849,791
0
0
0
849,791
0.26
0.26
1
EXHIBIT 99
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 Six Months Ended June 30, 1995 (Unaudited)
Six Months
Net sales $1,853,115
Cost of sales 1,280,014
----------
Gross profit on sales 573,101
----------
Selling, general and administrative
expenses 522,496
----------
Operating income 50,605
----------
Other income
Interest income 86
Other 35,899
----------
35,985
----------
Net income $ 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
September 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 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
