<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1997
FILE NO. 333-22583
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
JAKKS PACIFIC, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3944 95-4527222
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
24955 PACIFIC COAST HIGHWAY, #B202, MALIBU, CALIFORNIA 90265 (310) 456-7799
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
24955 PACIFIC COAST HIGHWAY, #B202, MALIBU, CALIFORNIA 90265
(ADDRESS OF PRINCIPAL OR INTENDED PRINCIPAL PLACE OF BUSINESS)
JACK FRIEDMAN, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
JAKKS PACIFIC, INC.
24955 PACIFIC COAST HIGHWAY, #B202, MALIBU, CALIFORNIA 90265 (310) 456-7799
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MURRAY L. SKALA, ESQ. ROBERT K. MONTGOMERY, ESQ.
GABRIEL KASZOVITZ, ESQ. EBEN PAUL PERISON, ESQ.
FEDER, KASZOVITZ, ISAACSON, WEBER, SKALA & BASS, GIBSON, DUNN & CRUTCHER LLP
LLP 2029 CENTURY PARK EAST, SUITE 4000
750 LEXINGTON AVENUE LOS ANGELES, CALIFORNIA 90067-3026
NEW YORK, NEW YORK 10022-1200 (310) 552-8500
(212) 888-8200 FAX: (310) 551-8741
FAX: (212) 888-7776
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================
AMOUNT OF SHARES PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock par value $.001.......... 600,000 $8.50 $5,100,000 $1,545.45
- ------------------------------------------------------------------------------------------------------------------
Common Stock par value $.001(2)....... 90,000 $8.50 $765,000 $231.81
- ------------------------------------------------------------------------------------------------------------------
Representative's Warrants............. 42,000 $.001 $42 $.01
- ------------------------------------------------------------------------------------------------------------------
Common Stock par value $.001
underlying Representative's
Warrants............................ 42,000 $11.05 $464,100 $140.64
- ------------------------------------------------------------------------------------------------------------------
Total................................. $6,329,142 $1,917.91(3)
==================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457.
(2) Represents 90,000 shares of Common Stock which the Underwriters have the
option to purchase from two of the Company's stockholders to cover
over-allotments, if any.
(3) $7,445.69 has been paid in registration fees.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE AN AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION"), ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
JAKKS PACIFIC, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM SB-2 ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS
- ------------------------------------------------- -----------------------------------------
<C> <S> <C>
1. Front of Registration Statement and
Outside Front Cover of Prospectus........ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus Cover Pages................ Inside Front and Outside Back
3. Summary Information and Risk Factors..... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................... Use of Proceeds
5. Determination of Offering Price.......... Outside Front Cover Page; Underwriting
7. Selling Security Holders................. Principal and Selling Stockholders;
Additional Registered Shares
8. Plan of Distribution..................... Outside Front and Outside Back Cover
Pages; Inside Front Cover Page;
Underwriting
9. Legal Proceedings........................ Business -- Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons...................... Management; Certain Relationships and
Related Transactions
11. Security Ownership of Certain Beneficial
Owners and Management.................... Principal and Selling Stockholders
12. Description of the Securities............ Prospectus Summary; Description of
Securities
13. Interest of Named Experts and Counsel.... Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Underwriting;
Management -- Indemnification of Officers
and Directors
15. Organization within Last Five Years...... Management; Principal and Selling
Stockholders; Certain Relationships and
Related Transactions
16. Description of Business.................. Prospectus Summary; Business
17. Management's Discussion and Analysis or
Plan of Operations....................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
18. Description of Property.................. Business -- Properties
19. Certain Relationships and Related
Transactions............................. Certain Relationships and Related
Transactions
20. Market for Common Equity and Related
Stockholder Matters...................... Prospectus Summary; Risk Factors;
Capitalization; Description of
Securities; Shares Eligible for Future
Sale; Price Range of Common Stock and
Dividend Policy
21. Executive Compensation................... Management
22. Financial Statements..................... Prospectus Summary; Consolidated
Financial Statements; Capitalization
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 24, 1997
PROSPECTUS
600,000 SHARES
LOGO
COMMON STOCK (TM)
All of the 600,000 shares of Common Stock offered hereby (the "Offering")
are being sold by JAKKS Pacific, Inc., a Delaware corporation (the "Company" or
"JAKKS"). The Common Stock of the Company is traded on the Nasdaq National
Market System under the symbol "JAKK." On April 22, 1997, the last reported sale
price of the Common Stock was $6.69.
------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
================================================================================================
Per Share................................. $ $ $
- ------------------------------------------------------------------------------------------------
Total (3)................................. $ $ $
================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. The
Company has also agreed to sell to Cruttenden Roth Incorporated, the
representative (the "Representative") of the Underwriters, for nominal
consideration, warrants to purchase up to 42,000 shares of Common Stock
exercisable at a per share price equal to 130% of the Price to Public (the
"Representative's Warrants"). See "Underwriting."
(2) Before deducting other expenses of this Offering payable by the Company,
estimated to be $650,000.
(3) Two of the Company's stockholders have granted the Underwriters an option,
exercisable within 45 days from the date of this Prospectus, to purchase up
to an aggregate of 90,000 additional shares of Common Stock on the same
terms as set forth above, solely for the purpose of covering
over-allotments, if any. If the Underwriters' over-allotment option is
exercised in full, the total Price to the Public, Underwriting Discounts and
Commissions, and Proceeds to the Company and such stockholders will be
$ , $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to certain other conditions. It is expected that
delivery of the certificates representing the shares of Common Stock will be
made against payment therefor at the offices of the Representative, 18301 Von
Karman, Suite 100, Irvine, California 92612, or through the facilities of
Depository Trust Company, on or about , 1997.
CRUTTENDEN ROTH
INCORPORATED
The date of this Prospectus is , 1997
<PAGE> 4
[PICTURES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING BIDS AND PURCHASES, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety and should carefully consider the matters set forth
in "Risk Factors."
THE COMPANY
JAKKS Pacific, Inc. (the "Company") develops, manufactures and markets toys
and related products. The Company's principal products are (i) toys and action
figures featuring licensed characters, including characters from the World
Wrestling Federation ("WWF"), (ii) die cast collectible and toy vehicles
marketed under the name Road Champs, (iii) fashion dolls with related
accessories, (iv) electronic toys designed for children and (v) new lines of
radio controlled and battery-operated vehicles.
The Company commenced operations in July 1995, having acquired the doll and
electronic toy operations of Justin Products Limited ("Justin"). In February
1997, the Company acquired the die cast collectible and toy vehicle operations
of the Road Champs Companies. See "Business -- Acquisitions." Including Justin's
operations in the first six months of 1995 and Road Champs operations in 1995
and 1996, the pro forma net sales of the businesses now operated by the Company
have grown from $25.1 million to $27.6 million, respectively, and the pro forma
net earnings of such businesses have grown from $1.2 million to $2.5 million,
respectively.
The Company sells its products through its employees and independent sales
representatives. Purchasers of the Company's products include retail chain
stores, department stores, toy specialty stores and wholesalers. The Road Champs
products are also sold to smaller hobby shops and specialty retailers. The
Company's six largest customers are Toys "R" Us, Wal Mart, Kay-Bee Toys, Kmart,
Target and Caldor.
Over the past few years, the toy industry has experienced substantial
consolidation among both toy companies and toy retailers. The Company believes
that this consolidation provides increased growth opportunity due to retailers'
desires not to be entirely dependent on a few dominant toy companies. Retailer
concentration also enables the Company to ship product, manage account
relationships and track retail sales more effectively with a smaller staff. In
addition, the Company believes that management's experience in the toy industry,
the Company's flexibility and its recent success in developing and marketing
products make it more attractive to toy inventors and developers.
These industry trends and developments lead the Company to believe that it
is well positioned for future growth. The Company's business strategy consists
of the following elements:
- - Develop Core Products. In 1997, the Company is expanding the number of items
it offers as part of its core products. These core products include WWF action
figures, the Road Champs product lines of die cast collectible and toy
vehicles and fashion dolls.
- - Enter New Product Categories. The Company intends to enter into license
agreements in new product categories. The Company recently entered the radio
controlled vehicle category by acquiring the rights to manufacture and sell
Turbo Touch Racer, Reactor and Mini Reactor product lines in North America.
The Company intends to continue to use management's extensive experience in
the toy industry to evaluate toys in new product categories.
- - Strategic Acquisitions. Since inception, the Company has acquired businesses
with proven product lines, such as the Road Champs product lines that have
been sold for over twenty years. Management seeks to continue to acquire
proven product lines with an established history of sales and profitable
operations.
- - Enhance Operating Margins. Management believes that the Company's current
infrastructure can accommodate significant growth without a corresponding
increase in administrative expenses and that such growth will increase
operating margins.
- - Acquire Character and Product Licenses. The Company has licensing agreements
with Titan Sports, Saban Entertainment, Time Warner, Sony and Fox. The Company
intends to continue to pursue new licenses from these and other entertainment
companies.
3
<PAGE> 6
- - Develop International Sales. The Company intends to expand its international
sales by capitalizing on management's experience and relations with foreign
distributors and retailers.
- - Stability and Growth. The Company anticipates that its core products will
continue to provide a consistent revenue source. The Company plans to utilize
a portion of the profits from the sales of its core products to invest in new
products.
The Company was incorporated under the laws of Delaware in January 1995.
The Company's executive offices are located at 24955 Pacific Coast Highway,
#B202, Malibu, California 90265 and its telephone number is (310) 456-7799.
4
<PAGE> 7
THE OFFERING
Common Stock offered by the
Company.................. 600,000 shares
Common Stock to be
outstanding after the
Offering (1)............. 4,782,969 shares
Use of Proceeds............ The Company intends to use the net proceeds of this
offering to repay short-term debt, to acquire
additional character and product licenses, to
acquire other toy businesses and product lines and
for working capital and other general corporate
purposes. See "Use of Proceeds."
Risk Factors............... The shares offered hereby are speculative and
involve a high degree of risk and should not be
purchased by investors who cannot afford the loss
of their entire investment. See "Risk Factors."
Nasdaq National Market
System Trading Symbol...... "JAKK"
- ---------------
(1) Unless otherwise indicated, all share and per share data and information
contained in this Prospectus relating to the number of shares of Common
Stock outstanding does not include: (i) the 568,498 shares reserved for
issuance upon the exercise of options outstanding and options available for
grant; (ii) the 342,000 shares reserved for issuance upon the exercise of
outstanding warrants (including the Representative's Warrants); and (iii)
the 923,077 shares reserved for issuance upon the conversion of convertible
debentures.
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INCLUDING ROAD CHAMPS
ACTUAL --------------------------------
APRIL 1, 1995 PRO FORMA ACTUAL PRO FORMA PRO FORMA
YEAR ENDED (INCEPTION) YEAR ENDED JANUARY 1, 1996 YEAR ENDED YEAR ENDED
DECEMBER 31, TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994(1) 1995(2) 1995(3) 1996(4) 1995(5) 1996(6)
------------- ---------------- --------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS:
Net sales........... $ 4,470 $ 6,077 $ 7,931 $ 12,052 $25,072 $ 27,563
Cost of sales....... 3,121 4,131 5,411 7,231 16,838 16,727
----- ----- ----- ------ ------ ------
Gross profit........ 1,349 1,946 2,520 4,821 8,234 10,836
Selling, general and
administrative
expenses.......... 1,290 1,400 1,901 3,611 6,658 7,754
----- ----- ----- ------ ------ ------
Operating income.... 59 546 619 1,210 1,576 3,082
Interest income and
other, net........ 4 4 4 133 4 133
----- ----- ----- ------ ------ ------
Income before income
taxes............. 63 550 623 1,343 1,580 3,215
Provision for income
taxes............. -- 114 126 163 426 725
----- ----- ----- ------ ------ ------
Net income.......... $ 63 $ 436 $ 497 $ 1,180 $ 1,154 $ 2,490
===== ===== ===== ====== ====== ======
Net income per
share............. $ 0.03 $ 0.20 $ 0.23 $ 0.34 $ 0.48 $ 0.67
Weighted average
number of
shares............ 2,191 2,191 2,191 3,504 2,390 3,702
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------
ACTUAL PRO FORMA(7) AS ADJUSTED(8)
------- ------------ ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................................................... $ 7,824 $ 5,312 $ 8,275
Total assets............................................................ 14,200 28,231 30,168
Short-term debt......................................................... 190 6,117 5,116
Long-term debt.......................................................... -- 6,000 6,000
Stockholders' equity.................................................... 11,746 13,246 16,184
</TABLE>
- ---------------
(1) Reflects statement of operations data of Justin for the year ended December
31, 1994.
(2) Reflects the actual consolidated statement of operations data of JAKKS for
the period from April 1, 1995 (inception) to December 31, 1995. The
acquisition of Justin is accounted for as of July 1, 1995.
(3) Reflects pro forma statements of operations for the Company and Justin and
certain adjustments for the year ended December 31, 1995, as if the
acquisition of Justin occurred on January 1, 1995.
(4) Reflects the actual consolidated statement of operations data of JAKKS for
year ended December 31, 1996.
(5) Reflects pro forma statements of operations for the Company and Road Champs
and certain adjustments for the year ended December 31, 1995, as if the
acquisition of Road Champs occurred on January 1, 1995.
(6) Reflects pro forma statements of operations for the Company and Road Champs
and certain adjustments for the year ended December 31, 1996, as if the
acquisition of Road Champs occurred on January 1, 1996.
(7) Reflects pro forma balance sheet data for the Company and Road Champs and
certain adjustments as of December 31, 1996, as if the acquisition of Road
Champs occurred on January 1, 1996 and reflects the issuance of the
convertible debentures in the amount of $6,000,000 in January 1997.
(8) As adjusted to give effect to the sale of 600,000 shares of Common Stock
offered by the Company at an assumed offering price of $6.50 per share,
after deducting underwriting discounts and estimated offering expenses
payable by the Company and the application of the estimated net proceeds
therefrom.
6
<PAGE> 9
RISK FACTORS
The shares offered hereby are speculative and involve a high degree of
risk. Before making an investment decision, prospective investors should
carefully consider the following risk factors, in addition to other information
in this Prospectus.
DEPENDENCE ON LIMITED NUMBER OF PRODUCT LINES
The Company derives a substantial portion of its revenue from a limited
number of product lines. A decrease in the popularity of a particular product
line or key products within a given product line during any year could have a
material adverse effect on the Company's business, financial condition and
results of operations. Sales of the Road Champs and WWF product lines
represented most of the Company's revenue in 1996 on a pro forma basis. Although
at the present time demand remains strong for the Road Champs and WWF product
lines, there can be no assurance that any of these products will retain their
current popularity. See "Business -- Products" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
CONSUMER PREFERENCES AND NEW PRODUCT INTRODUCTIONS
Consumer preferences in the toy industry are continuously changing and
difficult to predict. Products often have short life cycles and relatively few
achieve market acceptance. There can be no assurance that (i) new products or
product lines introduced by the Company will achieve any significant degree of
market acceptance, (ii) acceptance, if achieved, will be sustained for any
significant amount of time or (iii) such products' life cycles will be
sufficient to permit the Company to recover licensing, manufacturing, marketing
and other costs associated therewith. Failure of new product lines to achieve or
sustain market acceptance could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
success of many of the Company's character related products is dependent on the
popularity of characters generated by movies, television programs and other
media. There can be no assurance that these movies, television programs or other
media will be produced as scheduled, that they will be successful or that such
success will result in substantial promotional value to the Company's products.
See "Business -- Products."
DEPENDENCE ON LICENSING AGREEMENTS
Many of the Company's products are based on characters, designs, concepts
and inventions licensed from third parties. Character licenses permit the
Company to manufacture and market toys based on characters or properties from
movies, television, cartoons, video games, books and magazines. Product licenses
confer rights to exploit original designs, concepts and inventions developed by
toy inventors and designers. The royalty expenses paid under character and
product licenses totaled approximately $762,000 for the fiscal year ended
December 31, 1996. Such expenses were nominal in the fiscal period ended
December 31, 1995.
Competition for desirable licenses is intense. As a result, the Company may
have to pay higher royalties in the future to secure or renew character and
product licenses. No assurance can be made that the Company will be able to
secure or renew character and product licenses on acceptable terms.
Under certain character and product licenses, including the license for
WWF, among others, the Company guarantees minimum royalty payments for a number
of years regardless of the actual sales of the related product. If the Company
fails to sell a sufficient quantity of such products, the Company may incur
losses and might not be able to retain such licenses, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. For the fiscal year ending December 31, 1997, the minimum
guaranteed royalty payments under the Company's existing licenses will be
approximately $730,000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COMPETITION
Competition in the toy industry is intense. Many of the Company's
competitors have greater financial resources, stronger name recognition, larger
sales, marketing and product development departments and greater economies of
scale that may cause their products to be more competitively priced. Competition
7
<PAGE> 10
extends to the procurement of character and product licenses, as well as to the
marketing and distribution of products, including obtaining adequate shelf space
in retail stores. Such competition may result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
No assurance can be made that the Company will be able to compete successfully
against current and future competitors. See "Business -- Competition."
ASSIMILATION OF ROAD CHAMPS
The Company acquired Road Champs in February 1997 (the "Road Champs
Acquisition"). The Road Champs Acquisition involves numerous risks, including
difficulties in the integration and assimilation of distinct product lines,
administrative staff and sales forces and differences in methods of operation.
While the Company intends to move quickly to integrate its acquisition of Road
Champs, such integration and consolidation may require considerable management
time and effort and could result in the diversion of management resources from
other important matters. No assurance can be made that the Road Champs
operations will continue to be profitable on an operating basis. See
"Business -- Acquisitions."
The Company's products are generally not manufactured prior to the
placement of an order by a customer. However, a portion of the customers of the
Road Champs product lines are smaller domestic businesses, and as a result, the
Company must carry inventory for and hold accounts receivable from such
customers. Maintaining inventory in the toy industry requires the Company to
warehouse products at significant costs without assurance of future sales.
LIMITED OPERATING HISTORY
The Company commenced operations in April 1995 and did not have any product
lines or revenues until the Justin Acquisition, effective July 1995.
Accordingly, the Company has limited relevant operating history upon which an
evaluation of the Company's performance and prospects can be made. Although
certain of the Company's product lines acquired from Justin and Road Champs have
demonstrated profitability in the past, there can be no assurance that the
Company can profitably market such product lines in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and "Business -- Acquisitions."
CONCENTRATION OF SALES
Sales of the Company's products to its six largest customers accounted for,
in the aggregate, approximately 64.3% and 73.5% of revenue for the fiscal years
ended December 31, 1996 and 1995, respectively, and approximately 51.4% and
53.7% of the Company's revenue on a pro forma basis when combined with Road
Champs for the same periods. No other customer accounted for more than 3% of the
Company's revenue for such periods. The Company does not have written contracts
with or commitments from any of its customers. A substantial reduction in orders
from any of its largest customers or a termination of any of such customer
relationships could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, pressure by large
customers to provide financial incentives to consumers, reduce prices, bear the
risks and the cost of carrying inventory or change sales terms could also have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Marketing and Distribution."
DEPENDENCE ON KEY PERSONNEL
The Company's success is largely dependent upon the experience and
continued services of Jack Friedman, the Company's President. In the event of
the loss of Mr. Friedman's services, no assurance can be given that the Company
will be able to obtain the services of an adequate replacement, and any such
loss or interruption of his services could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has entered into an employment agreement with Mr. Friedman, expiring on December
31, 2001, which includes, among other things, provisions restricting him from
competing with the Company during the term of his employment and, in certain
circumstances, for a period of
8
<PAGE> 11
one year thereafter. See "Management." In addition, pursuant to the terms of
certain convertible debentures issued by the Company in the amount of
$6,000,000, holders of such debentures have the option to have the Company
redeem part or all of such outstanding debentures in the event of Mr. Friedman's
death. The Company currently maintains key man life insurance in the amount of
$8,000,000 on Mr. Friedman's life. See "Description of Securities -- Renaissance
Debentures."
DEPENDENCE UPON NON-AFFILIATED FOREIGN MANUFACTURERS
The toys sold by the Company are currently produced by nonaffiliated
manufacturers located in the People's Republic of China ("China"). The Company
does not have any long-term contracts with any of these manufacturers. Although
the Company believes that alternate sources of manufacturing are available in
China, Hong Kong, Taiwan and elsewhere if the need were to arise, there can be
no assurance that the supply from such alternate sources would be sufficient to
meet the needs of the Company in the event of a disruption of the Company's
current manufacturing arrangements. See "Business -- Manufacturing and
Supplies."
Since substantially all of the Company's products are manufactured in
China, the Company's operations may be affected by economic, political,
governmental and labor conditions in that country, by China's relationship with
the United States and by fluctuations in the exchange rate of the dollar against
such foreign currency. Furthermore, China currently enjoys "Most Favored Nation"
("MFN") status under U.S. tariff laws. As a result, products imported from China
are subject to normal import duties. China's MFN status is reviewed annually by
Congress, and the renewal of such status may be subject to significant political
uncertainties, with the possibility of non-renewal. The loss of China's MFN
status would result in a substantial increase in the duty on products imported
into the United States from China. China also may be subject to retaliatory
trade restrictions imposed by the United States under various provisions of the
Trade Act of 1974. The United States has in the past threatened the imposition
of punitive 100% tariffs on selected goods and withdrawn the threat of sanctions
only days before sanctions were to take affect. The imposition by the United
States of trade sanctions and subsequent actions by China could result in
manufacturing and distribution disruptions or higher costs to the Company.
The Company maintains offices in Hong Kong to source manufacturing in China
and to monitor production in that country. On July 1, 1997, sovereignty over
Hong Kong will be transferred from the United Kingdom to China. If Hong Kong's
business climate were to significantly change for the worse, such change could
have a material adverse effect on the Company's business, financial condition
and results of operations.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Sales of toys are highly seasonal with a majority of retail sales occurring
during the period of September through December. As a result, approximately 73%
of the Company's 1996 shipments occurred in the third and fourth quarters. Such
seasonality causes the Company's quarterly operating results to fluctuate and
creates an uneven need for working capital. Other factors further contribute to
the fluctuations of the Company's operating results, including new product line
introductions and advertising by the Company and its competitors. See
"Business -- Seasonality and Backlog" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
BROAD DISCRETION AS TO USE OF PROCEEDS
The Company plans to allocate the net proceeds it receives from this
Offering to repay short-term debt, to acquire additional character and product
licenses, to acquire product lines and other toy businesses and for working
capital and other general corporate purposes. Accordingly, management will have
broad discretion with respect to the expenditure of the net proceeds of this
Offering. Purchasers of the securities offered hereby will be entrusting their
funds to the Company's management, upon whose judgment the investors must
depend, with only limited information concerning management's specific
intentions. Although the Company intends to use a portion of the proceeds from
this Offering to acquire additional licenses and to acquire product lines and
other toy businesses, there can be no assurance that suitable acquisitions can
be located, that any such acquisitions can be consummated or that such
acquisitions will be successfully integrated into the Company's operations. See
"Use of Proceeds."
9
<PAGE> 12
GOVERNMENT REGULATION
The Company's operations are subject to various laws, rules and
regulations, including the Federal Hazardous Substances Act, the Consumer
Product Safety Act, the Flammable Fabrics Act and the regulations promulgated
under each such Act. Such laws empower the Consumer Product Safety Commission to
protect children from hazardous toys and other articles. The Consumer Product
Safety Commission has the authority to exclude from the market products that are
found to be hazardous and to require a manufacturer to repurchase such products
under certain circumstances. While the Company oversees a quality control
program designed to ensure that its products comply in all material respects
with such regulations, no assurance can be made that, despite testing, defects
will not be found in the Company's products, resulting in product liability
claims, loss of revenue, diversion of resources, damage to the Company's
reputation or increased warranty costs, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Government and Industry Regulation."
PROPRIETARY RIGHTS
The Company relies on copyright and trade secret protection, nondisclosure
agreements and licensing arrangements to establish, protect and enforce
proprietary rights in its products. Despite the efforts of the Company and its
licensors to safeguard and maintain their proprietary rights, there can be no
assurance that the Company or its licensors will be successful in so doing. In
addition, the laws of certain foreign countries may not protect intellectual
property rights to the same extent or in the same manner as the laws of the
United States. Although the Company and its licensors continue to implement
protective measures and intend to defend their proprietary rights vigorously,
there can be no assurance that these efforts will be successful.
The Company is not a party to any present litigation regarding proprietary
rights. However, there can be no assurance that third parties will not assert
intellectual property claims against the Company in the future. Such claims, if
proven, could have a material adverse effect on the Company's business,
financial condition and results of operations. Although such claims may
ultimately prove to be without merit, the necessary management attention to and
legal costs associated with litigation or other resolution of such claims could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- License and Marketing Agreements."
POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK
Market prices of the securities of toy companies are often volatile. Many
factors may have an impact on the market price of the Company's securities,
including fluctuations in the Company's financial results, the actions of the
Company's customers and competitors (including new product line announcements
and introductions), new regulations affecting foreign manufacturing, other
factors affecting the toy industry generally and sales of the Common Stock into
the public market. In addition, the stock market has, from time to time,
experienced significant price and volume fluctuations that may be unrelated to
the operating performance of particular companies.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, the Company will have 4,782,969 shares
of Common Stock outstanding, of which the 600,000 shares of Common Stock offered
hereby is a part, and 2,657,454 shares will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"). The remaining 2,125,515 shares of Common Stock are
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act. Such shares may only be sold pursuant to a
registration statement under the Securities Act, in compliance with the
exemption provisions of Rule 144 or pursuant to another exemption under the
Securities Act.
The executive officers, directors, certain other shareholders of the
Company and their affiliates have agreed, pursuant to lock-up agreements with
the Representative, that they will not for a period of 45 days from the date of
this Prospectus, without the prior written consent of the Representative, sell
or otherwise dispose of an aggregate of approximately 1,735,984 restricted
shares of Common Stock. In addition, certain other stockholders of the Company
have agreed, pursuant to a lock-up agreement with the Company, that they will
not sell or otherwise dispose of an aggregate of 198,020 restricted shares of
Common Stock prior to February
10
<PAGE> 13
1998. Upon the expiration of these lock-up agreements, such shares of Common
Stock will become eligible for sale in the public market, subject to the
provisions of Rule 144 under the Securities Act.
The Company has also granted certain piggy-back registration and demand
registration rights with respect to 198,020 shares of restricted Common Stock,
342,000 shares of restricted Common Stock issuable upon the exercise of
outstanding warrants and 923,077 shares of restricted Common Stock issuable upon
the conversion of outstanding debentures described below. See "Description of
Securities -- Registration Rights."
No predictions can be made as to the effect, if any, that sales of shares
of restricted Common Stock or even the availability of such shares for sale will
have on the market prices prevailing from time to time. The possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the Company's ability to raise capital through the sale of its equity
securities. In addition, the Company is authorized to issue preferred stock,
without stockholder approval, with such rights, designations and preferences as
are determined by the Board of Directors of the Company (the "Board"). See
"Description of Securities," "Shares Eligible for Future Sale" and
"Underwriting."
The Company has also reserved a total of 910,498 shares of Common Stock for
future issuance upon exercise of options and warrants. These include: (i) an
aggregate of 216,998 shares reserved for issuance to key employees, officers,
directors and consultants upon the exercise of options under the Company's
Amended and Restated 1995 Stock Option Plan (the "Stock Option Plan"), of which
options for 191,750 shares of Common Stock have been previously granted; (ii) an
aggregate of 276,500 shares of Common Stock for issuance upon exercise of
options granted to certain employees prior to adoption of the Stock Option Plan;
(iii) an aggregate of 75,000 shares of Common Stock for issuance upon exercise
of options to a certain consultant outside of the Stock Option Plan; (iv)
150,000 shares for issuance upon exercise of warrants which were issued to the
representatives of the underwriters in the Company's Initial Public Offering in
May 1996 (the "Initial Public Offering"); (v) 150,000 shares for issuance upon
exercise of certain other outstanding warrants; and (vi) 42,000 shares for
issuance upon exercise of the Representative's warrants. The Company has also
reserved 923,077 shares for issuance upon conversion of outstanding debentures
(the "Convertible Debentures").
These options, warrants and debentures, as well as other rights that may be
granted in the future, may hinder future equity financing by the Company.
Further, such rights may be exercised at a time when the Company would otherwise
be able to obtain additional equity capital on terms more favorable to the
Company. See "Description of Securities."
CONTINUING CONTROL BY MANAGEMENT
After this Offering, all executive officers and directors of the Company as
a group will beneficially own, in the aggregate, approximately 35.8% of the
Company's outstanding Common Stock. Accordingly, such stockholders will be able
to exert significant influence in the election of the Board. See "Principal and
Selling Stockholders."
NO DIVIDENDS
The Company has never paid cash or other dividends on its Common Stock. The
Company intends to retain its earnings, if any, to finance the operation and
expansion of its business and, therefore, it does not expect to pay any cash
dividends in the foreseeable future. See "Price Range of Common Stock and
Dividend Policy."
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical fact, including those with respect to the Company's objectives,
plans and strategy set forth under "Prospectus Summary" and
"Business -- Business Strategy" and those preceded by or that include the words
"believes," "expects," "anticipates," "intends," "plans," "is scheduled to" or
similar expressions, are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that those expectations will prove to have
been correct.
11
<PAGE> 14
Important factors that could cause actual results to differ materially from the
Company's expectations ("Cautionary Statements") are disclosed in this
Prospectus in conjunction with the forward-looking statements and under these
"Risk Factors." All written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by those Cautionary Statements.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 600,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$2.9 million at an assumed offering price of $6.50 per share, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The Company will not receive any proceeds from the sale of
Common Stock, if any, pursuant to the over-allotment option.
Of such net proceeds, the Company expects to use approximately $1.0 million
for the repayment of short-term debt incurred primarily in connection with the
Road Champs Acquisition, $0.5 million to acquire additional character and
product licenses and approximately $1.0 million to acquire product lines and
other toy businesses. The remaining net proceeds will be used for working
capital and general corporate purposes.
Proceeds not immediately required for the purposes noted above will be
invested principally in short-term bank certificates of deposit, short-term
investment grade securities, U.S. government obligations or money market
instruments.
Management intends to use the estimated net proceeds as indicated above. In
the event that the Company's plans change, or if the proceeds of this Offering
or cash flow otherwise prove to be insufficient to fund operations, the Company
may find it necessary or advisable to reallocate some of the proceeds within the
categories above noted or may be required to seek additional financing or
curtail its expansion activities.
12
<PAGE> 15
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Since April 14, 1997, the Company's Common Stock has been trading on the
Nasdaq National Market System under the symbol "JAKK." Prior to April 14, 1997,
the Company's Common Stock traded on the Nasdaq SmallCap Market. The following
table sets forth the high and low closing sales prices of the Company's Common
Stock in each of the following quarters as reported by either the Nasdaq
National Market System or the Nasdaq SmallCap Market since inception of trading
on the latter on May 1, 1996.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1996
Second quarter (from May 1)................................. 9 6 1/2
Third quarter............................................... 8 3/4 6 1/4
Fourth quarter.............................................. 9 7 1/4
1997
First quarter............................................... 8 5/8 7 1/8
Second quarter (to April 22)................................ 8 1/4 6
</TABLE>
The Company has not paid, and has no current plans to pay, dividends on its
Common Stock. The Company intends to retain earnings, if any, for use in its
business to finance the operation and expansion of its business.
13
<PAGE> 16
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company; (i) as of December 31, 1996; (ii) on a pro forma basis to reflect
the issuance of the Convertible Debentures in the principal amount of $6.0
million in January 1997, the issuance of 198,020 shares of Common Stock and
incurrence of obligations in connection with the Road Champs Acquisition in
February 1997; and (iii) as adjusted to give effect to the sale of 600,000
shares of Common Stock offered by the Company hereby and the application of the
estimated net proceeds therefrom. See "Use of Proceeds." This table should be
read in conjunction with the Consolidated Financial Statements of the Company
and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt............................................. $ 190 $ 6,117 $ 5,116
======= ======= =======
Long-term debt.............................................. $ -- $ 6,000 $ 6,000
------- ------- -------
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 issued and outstanding, actual;
4,182,969 issued and outstanding, pro forma; 4,782,969
issued and outstanding, as adjusted.................... 4 4 5
Additional paid-in capital................................ 10,321 11,821 14,758
Retained earnings......................................... 1,616 1,616 1,616
------- ------- -------
11,941 13,441 16,379
Less unearned compensation from grant of options.......... 195 195 195
------- ------- -------
Net stockholders' equity.................................. 11,746 13,246 16,184
------- ------- -------
Total capitalization................................... $11,746 $19,246 $22,184
======= ======= =======
</TABLE>
14
<PAGE> 17
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro forma consolidated balance sheet and statement
of operations have been derived from the Company's audited consolidated balance
sheet as of December 31, 1996 and its statement of operations for the year then
ended. Adjustments have been made to such information to give effect to (i) the
issuance of the Convertible Debentures as if such issuance had occurred as of
December 31, 1996 and (ii) the acquisition of Road Champs as if such acquisition
had occurred as of January 1, 1996. The pro forma adjustments are based upon
currently available information and upon certain assumptions that management of
the Company believes are reasonable.
The following unaudited pro forma consolidated financial statements are not
necessarily indicative of future results of operations of the Company or the
results of operations that might have occurred if the acquisition had taken
place as of January 1, 1996. The unaudited consolidated pro forma financial
statements should be read in conjunction with the financial statements of the
Company and Road Champs, including the Notes thereto, included elsewhere herein.
15
<PAGE> 18
JAKKS PACIFIC, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
ADJUSTED FOR THE ISSUANCE OF CONVERTIBLE DEBENTURES
AND ACQUISITION OF ROAD CHAMPS, INC.
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
JAKKS
ACTUAL PRO FORMA PRO FORMA
BALANCE SHEET ADJUSTMENTS BALANCE SHEET
-------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.............................................................. $ 6,355,260 $ 1,872,400 (1)(2) $ 8,227,660
Accounts receivable............................................... 2,420,470 -- 2,420,470
Inventory......................................................... 140,105 1,987,941 (2) 2,128,046
Due from Officers................................................. 120,030 -- 120,030
Prepaid expenses and other current assets......................... 1,241,977 158,373 (2) 1,400,355
----------- ----------- -----------
Total current assets............................................ 10,277,842 4,018,714 14,296,561
----------- ----------- -----------
Property and equipment, net......................................... 1,199,797 603,171 (2) 1,802,968
Deferred offering costs............................................. 85,301 510,000 (1) 595,300
Trademarks.......................................................... 1,000,000 (2) 1,000,000
Goodwill, net....................................................... 2,537,697 7,663,241 (2) 10,200,938
Intangibles and other assets........................................ 99,307 236,159 (2) 335,462
----------- ----------- -----------
Total assets.................................................... $ 14,199,944 $14,031,285 $28,231,229
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................. $ 1,816,074 $ 304,742 (2) $ 2,120,816
Reserve for returns and allowances................................ 175,000 300,000 (2) 475,000
Current portion of acquisition debt............................... 190,008 5,926,543 (2) 6,116,551
Income taxes payable.............................................. 272,605 -- 272,605
----------- ----------- -----------
Total current liabilities....................................... 2,453,687 6,531,285 8,984,972
----------- ----------- -----------
Convertible debentures.............................................. -- 6,000,000 (1) 6,000,000
----------- ----------- -----------
Total liabilities............................................... 2,453,687 12,531,285 14,984,972
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 issued and outstanding, actual; 4,182,969 issued and
outstanding, pro forma.......................................... 3,985 198 (2) 4,183
Additional paid-in capital........................................ 10,321,295 1,499,802 (2) 11,821,097
Retained earnings................................................. 1,616,140 -- 1,616,140
----------- ----------- -----------
11,941,420 1,500,000 13,441,420
Less unearned compensation from grant of options.................. 195,163 -- 195,163
----------- ----------- -----------
Net stockholders' equity........................................ 11,746,257 1,500,000 13,246,257
----------- ----------- -----------
Total liabilities and stockholders' equity...................... $ 14,199,944 $14,031,285 $28,231,229
=========== =========== ===========
</TABLE>
- ---------------
(1) Reflects the net proceeds of Convertible Debentures, as though they were
issued on December 31, 1996, as follows:
<TABLE>
<S> <C>
Total Convertible Debentures........................................................ $ 6,000,000
Less: Placement agent and lender closing fees and expenses.......................... 510,000
-----------
Net proceeds........................................................................ $ 5,490,000
===========
</TABLE>
(2) Reflects the purchase of Road Champs as of January 31, 1997, consideration
paid at closing, and deferred payments to Road Champs stockholders, as
though the acquisition took place on December 31, 1996, as follows:
<TABLE>
<S> <C>
Purchase price...................................................................... $12,045,604
Less consideration paid at closing:
Cash........................................................................... 4,619,061
Common stock of JAKKS.......................................................... 1,500,000
-----------
6,119,061
-----------
Total deferred payments due within twelve months of closing......................... $ 5,926,543
===========
</TABLE>
16
<PAGE> 19
JAKKS PACIFIC, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ADJUSTED FOR THE ACQUISITION OF ROAD CHAMPS, INC.
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ACTUAL
ACTUAL ROAD PRO FORMA PRO FORMA
JAKKS CHAMPS COMBINED ADJUSTMENTS RESULTS
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............................. $12,052,016 $15,510,611 $27,562,627 $ -- $27,562,627
Cost of sales......................... 7,231,296 9,564,332 16,795,628 (68,532)(1) 16,727,096
----------- ----------- ----------- ----------- -----------
Gross profit...................... 4,820,720 5,946,279 10,766,999 68,532 10,835,531
Selling, general and administrative
expenses............................ 3,611,471 4,119,424 7,730,895 23,125(1) 7,754,020
----------- ----------- ----------- ----------- -----------
Income from operations............ 1,209,249 1,826,855 3,036,104 45,407 3,081,511
Interest expense...................... 63,171 45,359 108,530 (45,359)(1) 63,171
Interest income....................... 196,966 196,966 196,966
Other income.......................... 2,733,020 2,733,020 (2,733,020)(2) --
Other expenses........................ 923,841 923,841 (923,841)(2) --
----------- ----------- ----------- ----------- -----------
Income before income taxes........ 1,343,044 3,590,675 4,933,719 (1,718,413) 3,215,306
Provision for income taxes............ 163,275 1,615,276 1,778,551 (1,053,597)(3) 724,954
----------- ----------- ----------- ----------- -----------
Net income........................ $ 1,179,769 $ 1,975,399 $ 3,155,168 $ (664,816) $ 2,490,352
=========== =========== =========== =========== ===========
</TABLE>
- ---------------
(1) Reflects the net result from the elimination of certain non-continuing costs
incurred by Road Champs offset by increases in expenses that would have been
incurred by JAKKS had the acquisition been effective as of January 1, 1996.
(2) Primarily reflects the elimination of other income and expense items not
attributable to on-going operations.
(3) To provide for income taxes on Road Champs' adjusted net income.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto which appear elsewhere in
this Prospectus.
OVERVIEW
The Company was founded in early 1995 to develop, manufacture and markets
toys and related products for children. The Company commenced business
operations as of July 1, 1995, when it assumed operating control over Justin and
has included the results of Justin's operations in its consolidated financial
statements from the effective date of such 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 name Road Champs, (iii) fashion dolls with related accessories, (iv)
electronic toys designed for children and (v) new lines of radio controlled and
battery-operated vehicles.
The toys sold by the Company are currently 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. 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 5% of the
wholesale sales price for each unit of a product sold by the Company.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data as a percentage of net sales. As indicated, the
data is based on twelve month results for each year presented. The 1995 data
reflects the pro forma combined results of Justin and the Company as though the
Justin Acquisition was effective January 1, 1995, and the 1996 data relates
exclusively to the Company's operations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
PRO FORMA ACTUAL
1995 1996
--------- ------
<S> <C> <C>
Net sales............................................. 100.0% 100.0%
Cost of sales......................................... 68.2 60.0
--------- ------
Gross profit.......................................... 31.8 40.0
Selling, general and administrative expenses.......... 24.0 30.0
--------- ------
Income from operations................................ 7.8 10.0
Other income.......................................... 0.2 --
Interest, net......................................... (0.1) 1.1
--------- ------
Income before income taxes............................ 7.9 11.1
Provision for income taxes............................ 1.6 1.3
--------- ------
Net income.................................. 6.3% 9.8%
======== =====
</TABLE>
18
<PAGE> 21
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Sales. Net sales were $12.1 million in 1996, an increase of $4.2
million, or 52%, over $7.9 million in 1995. The strong growth in net sales was
due primarily to the introduction of new products including WWF action figures
and Power Rangers ZEO mini vehicles, in addition to the continuing sales of the
Company's other product lines, including fashion dolls and accessories.
Gross Profit. Gross profits were $4.8 million or 40.0% of net sales in
1996. This represents an increase of approximately 148% over gross profits of
$1.9 million or 31.8% of net sales in 1995. This increase is due primarily to
increasing sales of new products featuring licensed characters and properties
with higher after-royalty margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3.6 million in 1996 and $1.9 million in 1995,
constituting 30.0% and 24.0% of net sales, respectively. The increase as a
percentage of net sales was due to the increase in such expenses in support of
the Company's growth including staffing and infrastructure, as well as expenses
incurred in connection with the placement of the Convertible Debentures and the
Road Champs Acquisition. The Company expects that such fixed costs should
decrease as a percentage of net sales as sales volume increases. The overall
dollar increase in 1996 over 1995 was due mainly to the increase in variable
selling expenses, staffing and infrastructure additions in support of the
Company's growth, the placement of the Convertible Debentures and Road Champs
Acquisition. The increase in variable selling expenses, such as freight and
shipping related expenses, sales commissions and travel expenses, are
attributable to significant increases in net sales. Major accounts are serviced
internally, thereby minimizing sales commissions; however, this benefit is
partially offset by increased travel required by the Company to cover those
accounts. Selling expenses are expected to increase as net sales increase due to
the variable nature of such expenses. 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, Net. The Company maintained significantly higher average cash
balances during 1996 than in 1995 resulting in significantly higher interest
income, though offset by interest expense consisting mainly of the interest
incurred on the bridge financing conducted by the Company prior to the Initial
Public Offering and the discount amortization on the Justin Acquisition payable.
See "Business -- Acquisitions."
Provision for Income Taxes. Provision for income taxes in 1996 included
foreign income taxes offset by the tax benefit generated by operating losses for
Federal and state tax purposes. In 1995, the provision included Federal, state
and foreign income taxes. The Company's earnings have benefited from a favorable
overall effective tax rate of 12.2% in 1996 and 20.3% in 1995 as a substantial
portion of the Company's earnings were subject to the Hong Kong Corporation Tax,
a flat 16.5%, on its income arising in, or derived from, Hong Kong. At December
31, 1996, the Company had Federal and state net operating loss carryforwards of
approximately $360,000 and $180,000, respectively, available to offset future
taxable income. This carryforward generally begins to expire in 2011 and may be
subject to annual limitations as a result of changes in the Company's ownership.
There can be no assurance that changes in ownership in future periods or any
future losses will not significantly limit the Company's use of the net
operating loss carryforward. In addition, no valuation allowance for its
deferred tax assets, amounting to approximately $146,000 at December 31, 1996,
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.
QUARTERLY FLUCTUATIONS AND SEASONALITY
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. The operating results
for any quarter are not necessarily indicative of results for any future period.
The first quarter for the Company is typically expected to be the least
profitable as a result of lower net sales but substantially similar fixed
operating expenses. The Company's first quarter performance is
19
<PAGE> 22
thus expected to be consistent with the toy industry, in general, where many
companies may experience only moderate profits and many others may even
experience losses.
The following tables present the unaudited quarterly results for the
Company and the Company pro forma with Justin for the years indicated. The
seasonality of the business is reflected in this quarterly presentation.
<TABLE>
<CAPTION>
1995
PRO FORMA(1) 1996
--------------------------------- ---------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $ 219 $1,634 $3,769 $2,309 $ 835 $2,382 $4,458 $4,377
Gross profit.................... 72 501 989 958 418 839 1,804 1,760
Income (loss) before income
taxes......................... (91) 163 436 115 (42) 195 730 460
Net income (loss)............... (76) 136 359 78 20 202 628 330
Net income (loss) per share..... $(0.03) $ 0.06 $ 0.16 $ 0.04 $ 0.01 $ 0.06 $ 0.15 $ 0.08
</TABLE>
<TABLE>
<CAPTION>
1995
PRO FORMA(1) 1996
--------------------------------- ---------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
------ ------ ------ ------ ------ ------ ------ ------
(IN PERCENTAGES OF NET SALES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.................... 32.9 30.7 26.2 41.5 50.1 35.2 40.5 40.2
Income (loss) before income
taxes......................... (41.6) 10.0 11.6 5.0 (5.0) 8.2 16.4 10.5
Net income (loss)............... (34.7) 8.3 9.5 3.3 2.4 8.5 14.1 7.5
</TABLE>
- ---------------
(1) Pro forma results include Justin's results as though the acquisition took
place as of January 1, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had working capital of $7.8 million,
as compared to a working capital deficit of $0.6 million as of December 31,
1995. Such increase was primarily attributable to the receipt of net proceeds
from the issuance of the Common Stock by the Company in its Initial Public
Offering as well as the placement of the bridge financing in February 1996 and
the subsequent conversion thereof to Common Stock.
Net cash used by operating activities was $0.7 million for the year ended
December 31, 1996. Net cash was used primarily by the increase in accounts
receivable and other current assets, though offset by net earnings, depreciation
and amortization, and increases in accounts payable and accrued expenses. At
December 31, 1996, the Company had cash of $6.4 million.
Net cash provided by operating activities was $1.1 million for the period
from April 1, 1995 (Inception) to December 31, 1995, excluding any effect of
pre-acquisition results of Justin. Net cash was provided primarily from net
earnings and depreciation and amortization as well as from increases in accounts
payable and various other liabilities, offset in part by increases in accounts
receivable and various other assets. As of December 31, 1995, the Company had
cash of $0.1 million.
The Company's investing activities have used net cash of $1.1 million in
1996, consisting primarily of the purchase of 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 January 1, 1997, these agreements require future aggregate
minimum guarantees of $2.4 million, exclusive of $0.3 million in advances
already paid.
The Company's financing activities have provided net cash of $8.0 million
in 1996, consisting primarily of the issuance of the Common Stock in connection
with its Initial Public Offering, which provided $7.7 million, net of offering
costs, and the placement of the bridge financing in February 1996 and the
subsequent
20
<PAGE> 23
conversion thereof to Common Stock, which provided $1.1 million, net of offering
costs, less approximately $0.7 million in debt repaid.
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 923,077 shares of Common Stock, 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 $12.0
million. Consideration paid at closing was approximately $4.6 million in cash
plus the issuance of $1.5 million (198,020 shares) of Common Stock. The balance
of the cash consideration ($5.9 million) is 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 the 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.
The Company believes that its cash flow from operations, cash on hand and
the net proceeds from the issuance of the Convertible Debentures, together with
the net proceeds to the Company from this Offering, 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.
EXCHANGE RATES
The Company sells substantially all of its products in U.S. dollars and
pays for substantially all of the manufacturing costs in either U.S. or Hong
Kong dollars. Operating expenses of the Hong Kong office are paid in Hong Kong
dollars. The exchange rate of the Hong Kong dollar to the U.S. dollar has been
fixed by the Hong Kong government since 1983 at HK$7.80 to US$1.00 and,
accordingly, has not represented a currency exchange risk to the U.S. dollar. No
assurance can be made that the exchange rate between the United States and Hong
Kong currencies will continue to be fixed or that exchange rate fluctuations
will not have a material adverse effect on the Company's business, financial
condition or results of operations. See "Risk Factors -- Dependence Upon
Non-Affiliated Foreign Manufacturers."
RECENT ACCOUNTING PRONOUNCEMENT
The FASB issued a new standard, SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period. Alternatively, the
standard permits entities to continue accounting for employee stock option and
similar equity instruments under APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities that continue to account for stock options using
APB Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied. Management accounts for options under APB Opinion
No. 25. If the alternative accounting-related provisions of SFAS No. 123 had
been adopted at the beginning of 1995, the effect on 1996 and 1995 net income
and earnings per share would have been immaterial.
21
<PAGE> 24
BUSINESS
COMPANY OVERVIEW
The Company develops, manufactures and markets toys and related products.
The Company's principal products are (i) toys and action figures featuring
licensed characters, including characters from the WWF, (ii) die cast
collectible and toy vehicles marketed under the name Road Champs, (iii) fashion
dolls with related accessories, (iv) electronic toys designed for children and
(v) new lines of radio controlled and battery-operated vehicles.
The Company sells its products through its employees and independent sales
representatives. Purchasers of the Company's products include retail chain
stores, department stores, toy specialty stores and wholesalers. The Road Champs
products are also sold to smaller hobby shops and specialty retailers. The
Company's six largest customers are Toys "R" Us, Wal Mart, Kay-Bee Toys, Kmart,
Target and Caldor.
Over the past few years, the toy industry has experienced substantial
consolidation among both toy companies and toy retailers. The Company believes
that this consolidation provides increased growth opportunity due to retailers'
desires not to be entirely dependent on a few dominant toy companies. Retailer
concentration also enables the Company to ship product, manage account
relationships and track retail sales more effectively with a smaller staff. In
addition, the Company believes that management's experience in the toy industry,
its flexibility and its recent success in developing and marketing products make
it more attractive to toy inventors and developers.
INDUSTRY OVERVIEW
According to the Toy Manufacturers of America, Inc. ("TMA"), an industry
trade group, total domestic manufacturers' shipments of toys, excluding video
games and accessories, were approximately $13.9 billion in 1996. According to
the TMA, the United States is the world's largest toy market, followed by Japan
and Western Europe. The Company believes the two largest U.S. toy companies,
Mattel and Hasbro, collectively hold a dominant share of the domestic non-video
toy market. In addition, hundreds of smaller companies compete in the design and
development of new toys, the procurement of character and product licenses, the
improvement and expansion of previously introduced products and product lines
and the marketing and distribution of toy products.
The Company's product lines principally fall into four categories within
the toy industry. According to the TMA, for the calendar years ended December
31, 1993, 1994, 1995 and 1996, these categories had approximate domestic
manufacturers' shipments as follows:
<TABLE>
<CAPTION>
4-YEAR
COMPOUND
ANNUAL
GROWTH
1993 1994 1995 1996 RATE
-------- -------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Male action figures and accessories...... $641,000 $867,000 $ 716,000 $ 790,000 7.2%
Mini vehicles............................ 237,000 282,000 261,000 313,000 9.7%
Radio controlled vehicles................ 242,000 250,000 289,000 293,000 6.6%
Fashion/mini dolls(1).................... 847,000 913,000 1,128,000 1,273,000 14.5%
</TABLE>
- ---------------
(1) The Company believes that most of the sales in the fashion/mini dolls
category were attributable to sales of Mattel's Barbie.
22
<PAGE> 25
BUSINESS STRATEGY
The Company's growth strategy consists of the following elements:
- Develop Core Products. In 1997, the Company is expanding the number of items
it offers as part of its core products. These core products include WWF
action figures, the Road Champs product lines of die cast collectible and
toy vehicles and fashion dolls.
- Enter New Product Categories. The Company intends to enter into license
agreements in new product categories. The Company recently entered the radio
controlled vehicle category by acquiring the rights to manufacture and sell
the Turbo Touch Racer, Reactor and Mini Reactor product lines in North
America. The Company intends to continue to use management's extensive
experience in the toy industry to evaluate toys in new product categories.
- Strategic Acquisitions. Since inception, the Company has acquired businesses
with proven product lines, such as the Road Champs product lines that have
been sold for over twenty years. The Company believes that this line should
constitute a significant portion of the Company's 1997 sales and
significantly expand the Company's position in the mini vehicle category.
Management seeks to continue to acquire proven product lines with an
established history of sales and profitable operations.
- Enhance Operating Margins. Management believes that the Company's current
infrastructure can accommodate significant growth without a corresponding
increase in administrative expenses and that such growth will increase
operating margins.
- Acquire Character and Product Licenses. The Company has licensing agreements
with Titan Sports, Saban Entertainment, Time Warner, Sony and Fox. The
Company intends to continue to pursue new licenses from these and other
entertainment companies. The Company also intends to continue to purchase
additional products and product concepts through its existing network of
product developers.
- Develop International Sales. Management believes that foreign markets,
especially Europe and Canada, offer opportunity for growth. The Company
intends to expand its international sales by capitalizing on management's
experience and relations with foreign distributors and retailers.
- Stability and Growth. The Company anticipates that its core products will
continue to provide a consistent revenue source. The Company plans to
utilize a portion of the profits from the sales of its core products to
invest in new products.
There can be no assurance that the Company will be able to implement all or
any part of its growth strategy or, if the Company is able to implement such
strategy, that it will be successful. For a discussion of important factors that
could affect the Company's ability to successfully implement its strategy in the
future, see "Risk Factors."
23
<PAGE> 26
PRODUCTS
The following chart sets forth the Company's product lines for 1996 and
proposed product lines for 1997:
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
CATEGORIES PRODUCTS
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996 1997
----------------------------------- ----------------------------------
<S> <C> <C>
Male Action World Wrestling Federation (6" World Wrestling Federation (6" and
Figures and Assortments and Figures, Monster 7" Assortments and Figures,
Accessories Ring, Superstar Series 1, 2 and 3, Monster Ring, Superstars Series 3,
Microphone, Limited Edition 4, 5 and 6, Manager Series, Tag
Costumes) Team Series, Microphone, Limited
Edition Figures, 3" Figure Sets
with Wrestling Ring)
Starship Troopers
(Themed wall rollers and pop-ups)
- ----------------------------------------------------------------------------------------------
Mini Vehicles Power Rangers ZEO (Vehicles with Power Rangers ZEO (Vehicles with
attached Figures, Power Launcher, attached Figures, Power Launcher,
Sound Blasters, Stunt Speedsters, Sound Blasters, Stunt Speedsters,
Mini Jet Cycle Stunt Stadium, Mini Mini Jet Cycle Stunt Stadium, Mini
Jet Cycle Play Set) Jet Cycle Play Set)
TURBO Power Rangers (Road
Blasters, Micro Turbo Zords, Turbo
Morpher Wrist Carrying Case)
Road Champs Die Cast Vehicles
(Vehicle, Collection,
Playsets -- including Cars,
Trucks, Motorcycles, Planes,
Helicopters, Buses and Emergency
Vehicles)
Ford/Chevrolet (Road Blasters,
Pocket Road Blasters, Playsets)
- ----------------------------------------------------------------------------------------------
Radio Reactor Mini Reactor Turbo Touch
Controlled Racer TURBO Power Rangers (Turbo
Vehicles Racers)
- ----------------------------------------------------------------------------------------------
Electronic Toys Sky Com (Base stations, walkie- Sky Com (Base stations, walkie-
talkies) talkies)
Audio Kid (Sing-along radios & Audio Kid (Sing-along radios and
cassette players) cassette players)
- ----------------------------------------------------------------------------------------------
Fashion/Mini Holiday Dolls; Themed Play Sets Holiday Dolls; Themed Play Sets
Dolls
Fairytale Favorites (Cinderella,
Snow White, Rapunzel, Princess
Mermaid, Sleeping Beauty)
Starr Model Agency (Midnight Jewel, Starr Model Agency (Shimmer-N-
Fabulous Furs, Prized Pets, Mobile Shine, Floral Sensation, Island
Playset, Carrying Case) Fantasy and Bath & Vanity Dolls;
Sun & Surf, Fun & Fitness and
Stylin' Salon Play Sets)
- ----------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 27
CURRENT PRODUCTS
MALE ACTION FIGURES AND ACCESSORIES
- World Wrestling Federation
The Company has a license with Titan Sports, Inc. ("Titan"), pursuant to
which the Company has the exclusive right to develop and market 6" action
figures of the popular WWF professional wrestlers in the United States
and Canada. These 6" figures feature moveable body parts and real-life
action sounds. A WWF microphone with action background sounds is
available with these figures. This product line, which retails for
approximately $5.99 for the individual figures, was introduced by the
Company in the second quarter of 1996. A second and third series of the
action figures were released in the third and fourth quarters of 1996,
respectively, along with a wrestling ring play set in the fourth quarter
of 1996. The Company intends to expand its current WWF products in 1997,
including seven new series of wrestler figure assortments. Furthermore,
the Company is expanding its WWF product line by introducing lines of 7"
figures, sets of 3" figures with a wrestling ring and a new amplified
microphone.
MINI VEHICLES
- Die Cast Vehicles
Road Champs die cast collectible and toy vehicle products are expected by
management to become the Company's largest product line. The Road Champs
product line consists of die cast new and classic cars, trucks,
motorcycles, emergency and service vehicles (including police cars, fire
trucks and ambulances), buses and aircraft (including propeller planes,
jets and helicopters). As a part of the Road Champs Acquisition, the
Company acquired the right to produce the Road Champs line of collectible
vehicle replicas from Ford, Chevrolet, Jeep, Kawasaki and Yamaha, as well
as the right to use certain corporate names on the die cast vehicles,
such as Pepsi, Goodyear and Hershey. Management believes that these
licenses increase the perceived value of the products. These products are
currently retailing individually from approximately $2.99 to $7.99 and in
play sets from $9.99 to $24.99. See "Risk Factors -- Assimilation of Road
Champs."
- Power Rangers ZEO
The Company has entered into a license agreement with Saban
Merchandising, Inc. and Saban International N.V. (collectively, "Saban")
pursuant to which the Company markets and produces Power Rangers ZEO
vehicles with attached figures, a "Stunt Stadium" and mini vehicles known
as "Sound Blasters" and "Stunt Speedsters." The retail prices for these
products range from approximately $4.99 to $9.99.
FASHION/MINI DOLLS
- Fashion/Mini Dolls
The Company produces various lines of proprietary fashion dolls and
accessories for children between the ages of three and ten. The product
line includes 11 1/2" fashion dolls outfitted to correspond with
particular holidays or events such as Christmas and birthdays and the
Starr Model Agency line comprised of 6 1/2" fashion dolls which come in
various themed outfits such as "Midnight Jewel" and "Prized Pets," as
well as accessories which include mobile play sets, carrying cases and a
sport utility vehicle. In 1997, the Company intends to add to its doll
lines by producing additional Starr Model Agency Playsets, as well as
dolls based on children's classic fairy tales and holidays and other
theme-based play sets.
CHILDREN'S ELECTRONIC TOYS
- Sky Com and Audio Kid
The Company markets and sells a line of children's electronic toys,
including Sky Com base stations and walkie-talkies and Audio Kid
Sing-along radios and cassette players. These products are made of
25
<PAGE> 28
durable plastic, with rounded corners to increase safety for children,
and big colorful buttons. The retail prices of these products range from
$5.99 to $24.99.
NEW PRODUCTS
- TURBO Power Ranger
In 1997, the Company, under agreement with Saban, will market and sell
mini vehicles appearing in the anticipated March 1997 release of the
TURBO Power Rangers feature film and related children's television
program. These mini vehicles include TURBO Power Rangers "Road Blasters"
and Micro TURBO Zords, as well as accessories such as a TURBO Morpher
wrist carrying case and a power launcher. The Company also intends to
introduce a radio controlled vehicle called TURBO Power Rangers "Turbo
Racer." The retail price for these products will range from approximately
$5.99 to $12.99.
- Turbo Touch Racer
The Company has entered into a license agreement with Wow Wee
International ("Wow Wee") to market and distribute a radio controlled car
known as Turbo Touch Racer. The car is controlled by a special glove worn
by the user as opposed to the traditional hand-held transmitter. These
toy vehicles are expected to be sold at retail prices ranging from $29.95
to $34.95. The Company anticipates that it will begin to sell these
products in the Spring of 1997.
- Reactor and Mini Reactor
The Company has entered into an agreement with Quantum Toy Concepts Pty,
Ltd. to market and sell certain radio controlled vehicles, known as
Reactor, and similar vehicles in smaller sizes, known as Mini Reactor.
These products are expected to be sold at retail prices from $59.99 to
$69.99 for Reactor and from $19.99 to $24.99 for Mini Reactor. Initial
shipments of these products are expected to commence in Spring 1997.
- Other Products
The Company plans to market various other toys and products designed for
children including: wall rollers and pop ups related to the Starship
Troopers feature film, which is expected to be released in November 1997;
battery-operated vehicles ("Road Blasters"), based on models from Ford,
Chevrolet and Pontiac; foam mats with licensed cartoon characters,
including Berenstain Bears, Cartoon Network and Looney Tunes Lovables;
and disposable cameras and photo albums with licensed characters,
including Berenstain Bears, The Simpsons and WWF wrestlers.
LICENSE AND MARKETING AGREEMENTS
License Agreements. The Company has entered into a license with Titan for
the use of certain WWF properties and characters of professional wrestlers who
perform in WWF live events broadcast on free and cable television, including
pay-per-view television specials. The Company has the exclusive right to market
those action figures in 7", 6" and 3" sizes in the United States and Canada and
recently acquired the exclusive right to market the same products in Europe,
Africa and Australia. The line also includes related products and accessories.
The Company has been selling WWF products since May 1996. These licenses both
expire on December 31, 1999. The Company has agreed to pay Titan royalties with
certain minimum guarantees. See "Dependence on Licensing Agreements."
The Company has entered into a license agreement with Saban for the use of
the TURBO Power Rangers and Powers Rangers ZEO properties and names on a number
of products. The agreement provides for the sale of such products in mass market
retail stores, specialty stores and toy stores in the United States and Canada.
The agreement terminates on July 31, 1998. The Company pays royalties to Saban
on toys sold with certain minimum guarantees.
Turbo Touch Racer products are sold by the Company under an exclusive
license agreement with Wow Wee. The Company has the rights to market and sell
the Turbo Touch Racer toy vehicles and accessories in the United States. The
agreement expires on June 30, 1998 unless renewed by the Company for additional
twelve month terms. Under that agreement, the Company is obligated to buy
specified amounts of the
26
<PAGE> 29
products from Wow Wee and also pay Wow Wee royalties with certain minimum
guarantees. However, the Company may cancel the agreement by payment of the
guaranteed royalties.
The Company's recent Road Champs Acquisition included numerous licenses for
the use of certain well-known corporate names, marks and logos on its Road
Champs product line. Under such licenses, the Company acquired the right to
produce a line of collectible vehicle replicas of certain well-known vehicles
from companies such as Ford, Chevrolet, Jeep, Kawasaki and Yamaha, as well as
the right to use certain highly recognizable corporate names, such as Pepsi,
Goodyear and Hershey on other of the die cast vehicles. Under the terms of such
licenses, which expire on various dates ranging through May 10, 2001 (many of
which include automatic annual extensions without affirmative action taken by
either party), the Company pays the licensor a royalty based on the Company's
sales of each product bearing such licensed name. While the Company is not
required to pay any royalty on certain of the products, the royalties on a
majority of such products generally range from 1% to 5% of sales.
Marketing Agreements. The radio controlled vehicles known as Reactor and
Mini Reactor are sold by the Company in the United States and Canada pursuant to
an exclusive agreement with Quantum Toy Concepts Pty, Ltd., the owner of these
products. The agreement expires December 31, 1998.
MARKETING AND DISTRIBUTION
The Company sells all of its products through its employees and independent
sales representatives. Purchasers of the Company's products include retail chain
stores, department stores, toy specialty stores and wholesalers. The Road Champs
products are also sold to smaller hobby shops and specialty retailers. The
Company's six largest customers are Toys "R" Us, Wal Mart, Kay-Bee Toys, Kmart,
Target and Caldor. For the year ended December 31, 1996, these customers, in the
aggregate, accounted for approximately 64.3% of the Company's sales and 51.4% of
the the Company's sales on a pro forma basis when combined with Road Champs.
Other than purchase orders, the Company does not have written agreements with
its customers but generally sells products pursuant to letters of credit or, in
certain cases, on open account with payment terms typically varying from 30 to
90 days. The termination by one or more of the customers named above of its
relationship with the Company could have a material adverse effect on the
Company's business, financial condition and results of operations. Although the
Company's policy is not to sell any of its products on consignment, in
accordance with industry practice, the Company may sell, on a case-by-case
negotiated basis, its products on a partial consignment basis. To date, there
have been no consignment sales.
The Company directly, or through sales representatives, obtains orders for
its products from its customers and arranges for the manufacture of its products
as discussed below. Cancellations are generally made in writing, and the Company
takes appropriate steps to notify its manufacturers of such cancellations. Based
upon the sales of the Road Champs products in the past, the Company expects
approximately half of the Road Champs products to be sold domestically through
the Company's warehouse in New Jersey, which maintains an inventory for sale.
The Company maintains a full-time sales and marketing staff, many of whom
make on-site visits to customers for the purpose of soliciting orders for
products, and retains a number of independent sales representatives, many of
which had previously been employed by Road Champs, to sell and promote its
products, both domestically and internationally.
The Company generally budgets approximately 3% of its gross revenues for
the advertising of its products, most of which is in conjunction with retailers
in the form of cooperative advertising. The Company, together with retailers,
sometimes tests the consumer acceptance of new products in selected markets
before committing resources to production. In addition, the Company also
advertises its products in trade and consumer magazines and other publications,
as well as marketing its products at major and regional toy trade shows. The
Company has recently engaged an advertising agency to begin producing television
commercials for its radio controlled vehicle line. If management concludes that
sales of a particular product would support the high cost, it may use television
commercials to advertise certain of its products.
27
<PAGE> 30
PRODUCT DEVELOPMENT
The Company's products are generally acquired by the Company from others or
developed for the Company by non-affiliated third-parties. If the Company
accepts and develops a third-party's concept for a new toy, it generally pays a
royalty on the toys developed from such concept that are sold, and may, on an
individual basis, guarantee a minimum royalty. Royalties payable to such
developers generally range from 1% to 5% of the wholesale sales price for each
unit of a product sold by the Company. The Company believes that utilizing
experienced third-party inventors gives it access to a wide range of development
talent. The Company currently works with several toy inventors and designers for
the development of new and existing products.
Safety testing of the Company's products is done at the manufacturers'
facilities by engineers employed by the Company or independent third-party
contractors engaged by the Company, and is designed to meet safety regulations
imposed by federal and state governmental authorities. The Company also monitors
quality assurance procedures for its products for safety purposes.
MANUFACTURING AND SUPPLIES
The Company's products are currently produced by manufacturers chosen by
the Company on the basis of quality, reliability and price. Consistent with
industry practice, the use of third-party manufacturers enables the Company to
avoid incurring fixed manufacturing costs. All manufacturing services performed
overseas for the Company are paid for by either letter of credit or open account
with such manufacturers. To date, the Company has not experienced any material
delays in the delivery of its products; however, delivery schedules are subject
to various factors beyond the control of the Company and any delays in the
future could adversely affect the Company's sales. The Company believes that
alternative sources of supply are available and that adequate supplies of
manufactured products can be obtained. See "Risk Factors -- Dependence upon Non-
Affiliated Foreign Manufactures."
Although it does not conduct the day-to-day manufacturing of its products,
the Company participates in the design of the prototype product and production
tooling and molds for the products it develops or acquires. The Company seeks to
insure quality control by actively reviewing the production process and testing
the products produced by its manufacturers.
The principal raw materials used in the production and sale of the
Company's toy products are plastics, plush, printed fabrics, zinc alloy, paper
products and electronic components, all of which are currently available at
reasonable prices from a variety of sources. Although the Company does not
manufacture its products, it owns the molds and tooling used to manufacture such
products. Such molds and tooling are transferable among manufacturers if the
Company chooses to employ alternative manufacturers.
TRADEMARKS AND COPYRIGHTS
Most of the Company's products are produced and sold under trademarks owned
by or licensed to the Company, many of which were acquired by the Company as
part of the Justin Acquisition and the Road Champs Acquisition. See
"Acquisitions." The Company typically registers its properties, and seeks
protection under the trademark, copyright and patent laws of the United States
and other countries where its products are produced or sold.
ACQUISITIONS
Road Champs Acquisition. In February 1997, the Company, through a
wholly-owned subsidiary, purchased all of the shares of Road Champs, Inc. ("RC
Inc."), a Pennsylvania corporation, which owns all of the shares of Road Champs
Ltd. ("RC Ltd."), a Hong Kong corporation, and the operating assets of Die Cast
Associates, Inc., a related Florida corporation (collectively, the "Road Champs
Companies"). As part of such acquisition, the Company purchased, among other
things, the Road Champs inventory, product lines, tools and molds and
trademarks. The net purchase price was approximately $12.0 million. Payments of
approximately $4.6 million in cash and $1.5 million through the issuance of
198,020 shares of Common Stock were made at the closing. Payment of
approximately $2.9 million was deferred and is payable in three installments
28
<PAGE> 31
in June and October 1997 and February 1998 with interest at the rate of 7% per
annum. Payment of approximately $2.0 million for the inventory will be made over
the six-month period following the closing. Payment of approximately $1.0
million is due on the earlier of the close of this Offering or May 6, 1997. All
outstanding payments are secured by a pledge of the shares of stock of RC Inc.
and RC Ltd. and a security interest in the Road Champs Companies' assets which
is subordinate to the security interest given by the Company to Renaissance
Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust
PLC (collectively, "Renaissance") to secure payment of the Convertible
Debentures issued by the Company to Renaissance. See "Description of
Securities -- Renaissance Debentures."
Justin Acquisition. In October 1995, the Company acquired substantially all
of the operating assets constituting the toy business of Justin. As part of such
acquisition, the Company purchased, among other things, Justin's inventory,
product lines, tools and molds, and certain of Justin's trademarks. The Company
paid cash consideration of $1,210,435 to Justin, assumed certain of Justin's
liabilities to its creditors in the amount of $718,634, and issued 89,600 shares
of the Common Stock to Justin. The Company further agreed to pay to Justin
percentage payments amounting to 5% of net sales derived from the acquired
product lines through December 31, 1997 and 2.5% of net sales derived from such
products during 1998 and 1999, with minimum annual payments of $250,000 required
for 1995 and 1996. Such percentage payments based on sales in 1995 and 1996
amounted to $264,917 and slightly less than the $250,000 minimum required,
respectively. The Company prepaid $500,000 of such future royalty payments at
the Closing which are to be applied against 100% of percentage payments from
January 1 to June 30 of 1997, 1998 and 1999, and against 50% of percentage
payments for July 1 to December 31 of 1997, 1998 and 1999. The business
operations of Justin are accounted for as operations of the Company as of July
1, 1995, which is the date when the Company assumed operating control over
Justin's business operations.
COMPETITION
Competition in the toy industry is intense. Competition is based on
consumer preferences, quality and price. In recent years, the toy industry has
experienced rapid consolidation driven, in part, by the desire of industry
competitors to offer a range of products across a broader variety of categories.
Many of the Company's competitors have greater financial resources, stronger
name recognition, larger sales, marketing and product development departments
and greater economics of scale that may cause their products to be more
competitively priced. Competition extends to the procurement of character and
product licenses, as well as to the marketing and distribution of products,
including obtaining adequate shelf space in retail stores. See "Risk
Factors -- Competition."
In the toy industry categories in which the Company primarily competes, the
Company's largest competitors are as follows:
<TABLE>
<S> <C>
Male action figures and accessories... Hasbro, Inc., Playmates, Inc. and Mattel, Inc.
Mini vehicles......................... Tyco, Inc. ("Matchbox") and Mattel, Inc. ("Hot Wheels"),
both of which manufacture vehicles smaller in size than
the Company's Road Champs product line, and Racing
Champions, Inc. and Action Performance Cos., Inc., some
of whose products are the same in size as the Company's
Road Champs products.
Radio controlled vehicles............. Tyco, Inc. (a division of Mattel, Inc.), Kenner, Inc. (a
division of Hasbro, Inc.) and Nikko America, Inc.
Fashion/mini dolls.................... Mattel, Inc., the owner of "Barbie."
</TABLE>
The Company also competes with smaller domestic and foreign toy
manufacturers, importers and marketers in each of these categories.
SEASONALITY AND BACKLOG
Sales of toy products are seasonal, with a majority of retail sales
occurring during the period from September through December. Approximately 73%
of the Company's sales in 1996 were made in the third
29
<PAGE> 32
and fourth quarters. Generally, the first quarter is the period of lowest
shipments and revenues in the toy industry and therefore the least profitable
due to certain fixed costs. Seasonality factors may cause the Company's
operating results to fluctuate significantly from quarter to quarter. Due to
these fluctuations, the results of operations for any quarterly period may vary
significantly. The Company's results of operations may also fluctuate as a
result of factors such as the timing of new products (and expenses incurred in
connection therewith) of the Company or its competitors, the advertising
activities of its competitors and the emergence of new market entrants. The
Company believes that most of the Company's products have low retail prices and,
as a result, such products may be less subject to seasonal fluctuations.
The Company generally ships products to customers within three to six
months of the date an order is received. The Company's backlog, exclusive of
Road Champs, at March 8, 1997, was approximately $5.3 million, compared to $2.5
million at March 31, 1996. Because customer orders may be canceled at any time
without penalty, the Company believes that backlog may not accurately indicate
sales for any future period.
GOVERNMENT AND INDUSTRY REGULATION
The Company's products are subject to the provisions of the Consumer
Product Safety Act ("CPSA"), the Federal Hazardous Substances Act ("FHSA"), the
Flammable Fabrics Act ("FFA") and the regulations promulgated under each such
Act. The CPSA and the FHSA enable the Consumer Product Safety Commission
("CPSC") to exclude from the market consumer products that fail to comply with
applicable product safety regulations or otherwise create a substantial risk of
injury and articles that contain excessive amounts of a banned hazardous
substance. The FFA enables the CPSC to regulate and enforce flammability
standards for fabrics used in consumer products. The CPSC may also require the
repurchase by the manufacturer of articles which are banned. Similar laws exist
in some states and cities and in various international markets. The Company
maintains a quality control program designed to ensure compliance in all
material respects with all applicable laws.
EMPLOYEES
As of April 22, 1997, the Company employed 55 persons, all of whom are
full-time employees, including three executive officers. Twenty-eight of the
Company's employees are located in the United States, while the remaining
twenty-seven are located in Hong Kong. The Company believes that it has good
relationships with its employees. None of the Company's employees are
represented by a union.
PROPERTIES
The Company leases approximately 1,800 square feet of space at 24955
Pacific Coast Highway, #B202, Malibu, California, all of which is currently used
for the Company's principal executive offices. The lease for such premises
expires on August 31, 1997. The current base rent is $4,730 per month. The
Company also leases, pursuant to a lease expiring on April 20, 2003,
approximately 2,100 square feet of showroom and office space at the Toy Center
South, 200 Fifth Avenue, New York, New York, at a current rental of $5,539 per
month. The Company leases two additional locations in the United States acquired
as a part of the Road Champs Acquisition. One such facility is approximately
2,000 square feet and is used as a showroom at the Toy Center North, 1107
Broadway, New York, New York, at a current rent of $4,959 per month. Such lease
expires on April 30, 2001. The other facility of approximately 51,000 square
feet of warehouse and office space, is at 7 Patton Drive, West Caldwell, New
Jersey, has a current monthly rent of $21,235 and expires on May 31, 2000 or
upon six-month prior notice by either party after July 1997.
The Company also leases two locations in Hong Kong. One such location, at
the Chinachen Golden Plaza, 77 Mody Road, Tsimshatsui East, Kowloon, Hong Kong,
consisting of approximately 1,210 square feet, is leased on a month to month
basis and is used as office space for the Company's sourcing operations. The
base rent for such facility is the U.S. dollar equivalent of $5,119 per month.
The Company acquired the lease for the second Hong Kong location in connection
with the Road Champs Acquisition. The property is located at the Peninsula
Center, 67 Mody Road, Tsimshatsui East, Kowloon, Hong Kong. The lease provides
for a
30
<PAGE> 33
monthly rent of the U.S. dollar equivalent of $10,200, consists of approximately
3,200 square feet and is used for office space and expires on March 14, 1998.
The Company will shortly combine all of its Hong Kong operations at the location
previously occupied by Road Champs. The Company expects to lease a modestly
larger space for its offices in California. With such increase, the Company
believes that its facilities in the United States and Hong Kong will be adequate
for its reasonably foreseeable future needs.
ENVIRONMENTAL ISSUES
The Company is subject to legal and financial obligations under
environmental, health and safety laws in the United States and in other
jurisdictions where the Company operates which have such laws. The Company is
not currently aware of any material environmental liabilities associated with
any of its operations. The Company does not believe that any environmental
obligations will have a material adverse impact on the financial condition of
the Company.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
31
<PAGE> 34
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---------------------- --- ----------------------------------------------------
<S> <C> <C>
Jack Friedman......... 57 Chairman, Chief Executive Officer and President
Stephen G. Berman..... 32 Chief Operating Officer, Executive Vice President,
Secretary and Director
Joel M. Bennett....... 35 Chief Financial Officer
Michael G. Miller..... 49 Director
Murray L. Skala....... 50 Director
Robert E. Glick....... 51 Director
</TABLE>
Jack Friedman has been Chairman, Chief Executive Officer and President of
the Company since co-founding it in 1995. From January 1989 until January 1995,
Mr. Friedman was Chief Executive, President, Officer and a director of T-HQ,
Inc., a publicly-held company that develops and sells interactive games and
software. From 1970 to 1989, Mr. Friedman was President and Chief Operating
Officer of LJN Toys, Ltd. ("LJN"), a toy and software company. After LJN was
acquired by MCA/Universal, Inc. ("MCA") in 1986, Mr. Friedman continued as
President until MCA's sale of LJN in late 1989.
Stephen G. Berman has been Chief Operating Officer, Executive Vice
President, Secretary and a director of the Company since co-founding it in 1995.
From October 1991 to August 1995, Mr. Berman was a Vice President and Managing
Director of T-HQ International, Inc., a subsidiary of T-HQ, Inc. From 1988 to
1991, he was President and an owner of Balanced Approach, Inc., a distributor of
personal fitness products and services.
Joel M. Bennett joined the Company in September 1995 as Chief Financial
Officer. From August 1993 to September 1995, he served in several financial
management capacities at Time Warner Entertainment Company, L.P., including
Controller of Warner Brothers Consumer Products Worldwide Merchandising and
Interactive Entertainment. From June 1991 to August 1993, Mr. Bennett was Vice
President and Chief Financial Officer of TTI Technologies, Inc., a direct-mail
computer hardware and software distribution company. From 1986 to June 1991, Mr.
Bennett held various financial management positions at the Walt Disney Company,
including Senior Manager of Finance for the international television syndication
and production division.
Michael G. Miller has been a director of the Company since February 1996.
Since 1979, Mr. Miller has been President and a director of several
privately-held affiliated companies: JAMI Marketing, a list brokerage and list
management consulting firm, JAMI Data, a database management consulting firm,
and JAMI Direct, a direct mail graphic and creative design firm. He is also a
director of Quintel Entertainment, Inc., a publicly-held company in the
telephone entertainment services business.
Murray L. Skala has been a director of the Company since October 1995.
Since 1976, Mr. Skala has been a partner of the law firm Feder, Kaszovitz,
Isaacson, Weber, Skala & Bass LLP, counsel to the Company. Mr. Skala is also a
director of Quintel Entertainment, Inc. and Katz Digital Technologies, Inc., a
publicly-held company in the business of producing digital printing and prepress
services.
Robert E. Glick has been a director of the Company since October 1996. For
more than twenty years, Mr. Glick has been an officer, director and a principal
stockholder in a number of privately-held affiliated companies which manufacture
and market women's apparel.
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Directors currently receive
no cash compensation for serving on the Board other than reimbursement of
reasonable expenses incurred in attending meetings. Directors who are not
employees of the Company are entitled to receive options to purchase shares of
Common Stock upon their election as a director and annually while they serve as
directors. See "Amended and Restated 1995 Stock Option Plan." Officers are
elected annually by the Board and serve at the discretion of the Board.
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<PAGE> 35
Until the Convertible Debentures are fully redeemed or converted,
Renaissance has the right to designate one person for nomination by management
as a director of the Company or as an advisor to the Board. Upon certain events
of default under the loan agreement for the convertible debentures, Renaissance
has the right to designate an additional person as director of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has an Audit Committee, a Compensation Committee and a Stock
Option Committee. The Board does not have a Nominating Committee and performs
the functions of a Nominating Committee itself.
Audit Committee. The functions of the Audit Committee are to recommend the
appointment of the Company's independent certified public accountants and to
review the scope and effect of such audits. Messrs. Miller, Glick and Skala are
the current members of the Audit Committee.
Compensation Committee. The functions of the Compensation Committee are to
make recommendations to the Board regarding compensation of management employees
and to administer plans and programs relating to employee benefits, incentives
and compensation, other than the Stock Option Plan. Messrs. Friedman, Miller and
Skala are the current members of the Compensation Committee.
Stock Option Committee. The function of the Stock Option Committee is to
determine the recipients of and the size of awards granted under the Company's
Stock Option Plan. Messrs. Miller and Glick are the current members of the Stock
Option Committee. Both Stock Option Committee members are non-employee
directors.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware law permits a corporation, through its Certificate of
Incorporation, to exonerate its directors from certain personal liability to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, other than (a) for any breach of the director's duty of
loyalty to the Company or its stockholders; (b) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (c) in connection with payment of any illegal dividend or an illegal stock
repurchase or redemption; or (d) for any transaction from which the director
derived an improper personal benefit. This provision does not apply to equitable
remedies such as injunctive relief. The Company's Certificate of Incorporation
includes a provision exonerating its directors to the fullest extent permitted
by Delaware law.
The Company's Certificate of Incorporation authorizes the Company to
indemnify its directors for certain breaches of fiduciary duty to the Company
and its stockholders, and other liabilities, subject to certain limitations.
Such indemnification does not apply to acts or omissions which are knowingly
fraudulent, deliberately dishonest or arise out of willful misconduct.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company,
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
33
<PAGE> 36
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company for the
Company's fiscal years ending December 31, 1995 and 1996 to its Chief Executive
Officer and to each of its executive officers whose compensation exceeded
$100,000 on an annual basis (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM AWARDS COMPENSATION
ANNUAL COMPENSATION -------------------- PAYOUTS
---------------------------------- ----------------------
(E) (F) (I)
OTHER RESTRICTED (H) ALL
(A) (C) (D) ANNUAL STOCK (G) PLAN OTHER
NAME AND (B) SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- --------------------------------- ---- ------- --------- ------------ ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jack Friedman.................... 1996 226,000 53,722(3) -- -- -- -- --
Chairman, 1995(1) 67,000 -- -- -- -- -- --
Chief Executive Officer and
President
Stephen G. Berman................ 1996 201,000 53,722(3) -- -- -- -- --
Chief Operating Officer, 1995(2) 41,667 -- -- -- -- -- --
Executive Vice President
and Secretary
</TABLE>
- ---------------
(1) Mr. Friedman's employment with the Company commenced on September 1, 1995.
See "Employment Agreements."
(2) Mr. Berman's employment with the Company commenced on September 1, 1995. See
"Employment Agreements."
(3) Bonuses were earned in 1996 but were paid during 1997.
The Company did not have any long-term incentive plans in 1995. Neither of
the Named Officers were granted options under the Company's Stock Option Plan in
1996 or 1995.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. Friedman
expiring on December 31, 2001. Pursuant to this agreement, Mr. Friedman is
employed as Chief Executive Officer and President. The employment agreement
provides for employment on a full-time basis and contains a provision that Mr.
Friedman will not compete or engage in a business competitive with the current
or anticipated business of the Company during the term of the agreement and for
a period of one year thereafter, if his employment is terminated prior to
December 31, 1997 voluntarily or by the Company for cause, as such term is
defined in the employment agreement. Pursuant to such agreement, the Company
agreed to pay Mr. Friedman a base salary of $296,000 per annum until December
31, 1997, with increases of $25,000 per annum thereafter and an annual bonus
equal to 4% of the Company's pre-tax earnings.
The Company has entered into an employment agreement with Mr. Berman
expiring on December 31, 2001. Pursuant to this agreement, Mr. Berman is
employed as Chief Operating Officer, Executive Vice President, and Secretary.
The employment agreement provides for employment on a full-time basis and
contains a provision that Mr. Berman will not compete or engage in a business
competitive with the current or anticipated business of the Company during the
term of the agreement and for a period of one year thereafter, if his employment
is terminated prior to December 31, 1997 voluntarily or by the Company for
cause, as such term is defined in the employment agreement. Pursuant to such
agreement, the Company agreed to pay Mr. Berman a base salary of $271,000 per
annum until December 31, 1997, with increases of $25,000 per annum thereafter
and an annual bonus equal to 4% of the Company's pre-tax earnings.
The Company has obtained key man life insurance policies in the amount of
$8,000,000 on Mr. Friedman's life. See "Description of Securities -- Renaissance
Debentures."
34
<PAGE> 37
AMENDED AND RESTATED 1995 STOCK OPTION PLAN
The Company's Amended and Restated 1995 Stock Option Plan (the "Stock
Option Plan") was adopted and approved by the stockholders in December 1995 and
amended by the Board in November 1996. The Stock Option Plan provides for the
grant of options to purchase up to 216,998 shares of the Company's Common Stock.
Such options are intended to qualify either as incentive stock options
("Incentive Stock Options") within the meaning of Section 422 of the U. S.
Internal Revenue Code or as options that are not intended to meet the
requirements of such section ("Nonstatutory Stock Options"). Under the Stock
Option Plan, Incentive Stock Options may be granted to employees (including
officers) of the Company, and Nonstatutory Stock Options may be granted to
employees (including officers), non-employee directors, consultants or advisors
of the Company.
The Stock Option Plan may be administered by the Board or a committee
chosen by the Board of non-employee directors. The administering body has
discretionary authority to select the persons to whom, the number of shares for
which, the times at which and the exercise price for which options will be
granted.
Stock options granted to an employee expire immediately upon the
termination of employment voluntarily by such employee or for cause by the
Company. Employee stock options may be exercised up to one year after the
termination of employment due to death or disability. Employee stock options may
be exercised up to three months after termination for any other reason. Stock
options granted to a non-employee director expire upon the termination of the
director's services for cause. Non-employee director stock options may be
exercised up to one year after such person is no longer serving as a director
for any other reason.
Incentive Stock Options must have an exercise price greater than or equal
to the fair market value of the shares underlying the option on the date of
grant. Incentive Stock Options granted to the holder of 10% or more of the
Company's Common Stock must have an exercise price of 110% of the underlying
shares' fair market value on the date of grant. The maximum exercise period of
Incentive Stock Options is ten years from the date of grant (five years in the
case of an individual owning more than 10% of the Company's Common Stock). The
aggregate fair market value (determined at the date the option is granted) of
shares with respect to which Incentive Stock Options are exercisable for the
first time by the holder of the option during any calendar year shall not exceed
$100,000. If such amount exceeds $100,000, the Board or the Stock Option
Committee may designate those shares that will be treated as Nonstatutory Stock
Options.
The Stock Option Plan provides for certain grants to non-employee
directors. Non-employee directors serving on the Board when the Stock Option
Plan was adopted each received options to purchase an aggregate of 10,850 shares
of Common Stock at the fair market value of the Common Stock on such date. Newly
appointed non-employee directors receive an option to purchase 10,850 shares at
their then-current fair market value on the date of the appointment. In
addition, every January 1st, each non-employee director receives an option to
purchase 5,425 shares at their then current fair market value.
As of the date of this Prospectus, the Company has granted options to
purchase an aggregate of 191,750 shares of Common Stock under the plan to its
employees and non-employee directors. Pursuant to the terms of the underwriting
agreement with the representatives of the underwriters for the Initial Public
Offering, the option holders at the time of the Initial Public Offering agreed
not to sell or otherwise dispose of shares underlying options until May 1, 1997
without the prior written consent of such representatives. After May 1, 1997,
the Company intends to file a registration statement covering shares issuable
upon exercise of stock options granted under the Stock Option Plan.
35
<PAGE> 38
PRINCIPAL AND SELLING STOCKHOLDERS
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the date of this
Prospectus regarding beneficial ownership of the Company's Common Stock, based
upon information obtained from the persons named below, by (i) each person who
is known by the Company to own beneficially more than 5% of the outstanding
shares of its Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Officers and (iv) all executive officers and directors of the Company
as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY
OWNED
SHARES ----------------------------------
NAME AND ADDRESS BENEFICIALLY PRIOR TO AFTER
OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- --------------------------------------------- ------------ -------------- -------------
<S> <C> <C> <C>
Jack Friedman 1,410,488(1) 33.7% 29.5%
24955 Pacific Coast Highway,
#B202, Malibu, California 90265
Stephen Berman 216,998(2) 5.2 4.5
24955 Pacific Coast Highway,
#B202, Malibu, California 90265
Michael G. Miller 16,275(3) * *
One Blue Hill Plaza
Pearl River, NY 10965
Murray L. Skala 238,696(4) 5.7 5.0
750 Lexington Avenue
New York, NY 10022
Robert E. Glick 23,275(5) * *
1400 Broadway
New York, NY 10018
Renaissance Capital Growth 923,077(6) 18.1 16.2
& Income Fund III, Inc.
and Renaissance US Growth &
Income Trust PLC
8080 N. Central Expressway,
Suite 310/LB59
Dallas, Texas 75206
All Officers and Directors as a Group 1,734,485 40.8% 35.8%
(six persons) (1)(2)(3)(4)(5)(7)
</TABLE>
- ---------------
* Less than 1% of the Company's outstanding shares.
(1) Includes an aggregate of 189,872 shares held by Mr. Skala as trustee under
trusts for the benefit of the children of Mr. Friedman, the Company's
Chairman, Chief Executive Officer and President.
(2) Mr. Berman is the Company's Chief Operating Officer, Executive Vice
President, Secretary and a director.
(3) Represents 16,275 shares which Mr. Miller, a director of the Company, has
the right to acquire pursuant to outstanding stock options.
(4) Includes 27,124 shares owned by Mr. Skala, a director of the Company, 21,700
shares which Mr. Skala has the right to acquire pursuant to outstanding
stock options and an aggregate of 189,872 shares held by Mr. Skala as
trustee under trusts for the benefit of the children of Mr. Friedman.
(5) Includes 16,275 shares which Mr. Glick, a director of the Company, has the
right to acquire pursuant to outstanding stock options.
(6) Consists of 923,077 shares in the aggregate which these two entities have
the right to acquire upon the conversion of an aggregate of $6,000,000 of
convertible debentures owned by them. Each of these entities owns $3,000,000
of such convertible debentures. The Company believes that these two entities
are under common control by a third-party.
(7) Includes 2,000 shares beneficially owned by Joel M. Bennett, the Company's
Chief Financial Officer, and 16,625 shares which Mr. Bennett has the right
to acquire pursuant to outstanding stock options.
Messrs. Friedman and Berman may be deemed "founders" of the Company, as
such term is defined under the federal securities laws.
36
<PAGE> 39
OVER-ALLOTMENT OPTION SELLING STOCKHOLDERS
Two stockholders of the Company have granted an option to the Underwriters,
exercisable within 45 days after the date of this Prospectus, to purchase from
such stockholders up to 90,000 shares of Common Stock at the offering price less
the underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise the option only for the purpose of covering
over-allotments. If the over-allotment option is not exercised in full, such
stockholders will sell the lesser number of over-allotment shares in the same
proportions. The following table, which should be read in conjunction with the
Principal Stockholder Table above, sets forth information regarding such
stockholders' beneficial ownership of the Common Stock prior to the exercise of
any portion of the over-allotment and after the full exercise of the
over-allotment option.
<TABLE>
<CAPTION>
SHARES SHARES
OFFERED BENEFICIALLY OWNED
SHARES AS PART OF AFTER FULL
BENEFICIALLY OWNED OVER-ALLOTMENT EXERCISE OF
PRIOR TO EXERCISE OF OPTION OVER-ALLOTMENT
OVER-ALLOTMENT OPTION ------------- OPTION
NAME AND ADDRESS ----------------------- ---------------------
OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ----------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Jack Friedman 1,410,488(a) 33.7% 70,000 1,340,488(a) 28.0%
24955 Pacific Coast Highway,
#B202, Malibu, California 90265
Stephen Berman 216,998 5.2 20,000 196,998 4.1
24955 Pacific Coast Highway,
#B202, Malibu, California 90265
All Officers and Directors as a
Group (six persons) 1,734,485(a) 40.8% 90,000 1,644,485(a) 33.9%
</TABLE>
- ------------------
* Less than 1% of the Company's outstanding shares.
(a) Includes an aggregate of 189,872 shares held by Mr. Skala as trustee under
trusts for the benefit of the children of Mr. Friedman.
37
<PAGE> 40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has made two loans to Joel M. Bennett, the Company's Chief
Financial Officer, in the amounts of $25,000 and $40,000, respectively. The
$25,000 loan bears interest at the rate of 6.15% and is payable at the earlier
of August 27, 1997 or the termination of Mr. Bennett's employment with the
Company. The $40,000 loan bears interest at the rate of 6.02% and is payable at
the earlier of September 20, 1997 or the termination of Mr. Bennett's
employment.
Mr. Skala, a director of the Company, is a partner in the law firm of
Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP, counsel to the Company. The
Company paid legal fees to Feder, Kaszovitz, Isaacson, Weber, Skala & Bass, LLP
in the amount of approximately $270,000 in 1996 and $75,000 in 1995.
38
<PAGE> 41
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.001 per share, and 5,000 shares of Preferred Stock, par value $.001 per
share. As of the date of this Prospectus, 4,182,969 shares of Common Stock are
outstanding which the Company believes are beneficially owned by approximately
1,400 persons. After an additional 600,000 shares of Common Stock are issued by
the Company in this Offering, 4,782,969 shares will be outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share on all
matters voted on by stockholders, including the election of directors.
Accordingly, holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election if they choose to do so. The Certificate of Incorporation does not
provide for cumulative voting of directors. Holders of Common Stock will be
entitled to receive dividends ratably, if any, as may be declared from time to
time by the Board out of funds legally available therefor. Holders of Common
Stock will be entitled to receive, pro rata, all assets of the Company available
for distribution to them upon liquidation. In addition, holders of Common Stock
have no preemptive, subscription or redemption rights. All outstanding shares of
Common Stock are, and the Common Stock offered hereby, upon issuance and sale,
will be, fully paid and nonassessable.
PREFERRED STOCK
The Certificate of Incorporation provides that the Company is authorized to
issue "blank check" preferred stock, which may be issued from time to time in
one or more series upon authorization by the Board. The Board, without further
approval of the stockholders, is authorized to fix any dividend rights,
conversion rights, voting rights, redemption rights and terms, liquidation
preferences and any other rights, preferences, privileges and restrictions
applicable to each series of preferred stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of the holders of the Common Stock. Under certain circumstances, the issuance of
preferred stock could also make it more difficult for a third party to gain
control of the Company, discourage bids for the Company's Common Stock at a
premium or otherwise adversely affect the market price of the Common Stock. To
date, the Company has not issued any preferred stock.
RENAISSANCE DEBENTURES
In January 1997, the Company issued $6,000,000 of its 9% seven-year
convertible debentures to Renaissance. After payment of a 6% brokerage
commission to Joseph Charles & Associates, Inc. and fees to Renaissance and its
attorneys, net proceeds to the Company were $5,450,000. The debentures are
presently convertible into 923,077 shares of Common Stock. When any shares of
Common Stock are issued by the Company for consideration per share less than the
then existing conversion price of the Convertible Debentures, then in each such
case the conversion price shall be reduced to a new conversion price equal to
the consideration per share received by the Company for such additional shares
of Common Stock; provided however, that prior to such issuance, the Company may
request the holders to waive the right to an adjustment of the conversion price
and in the event such waiver is not granted by the holders, the Company shall
have the right, prior to the issuance of such additional shares, to redeem the
Convertible Debenture at 120% of face value. The number of shares of Common
Stock into which the debentures are convertible are also subject to adjustment
for certain changes in capital structure and other events.
The indebtedness must be repaid in part each month beginning December 1999,
in the amount of 1% of the then unpaid balance, and in full at December 31,
2003. Pursuant to the terms of the Convertible Debentures, holders of such
debentures also have the option to have the Company redeem part or all of such
outstanding debentures in the event of Mr. Friedman's death. The Company
maintains key man life insurance in the amount of $8,000,000 on Mr. Friedman's
life. The indebtedness to Renaissance is secured by all of the
39
<PAGE> 42
Company's assets. The Company has the right to prepay all or part of such
indebtedness in certain events at 120% of their original $6,000,000 face value.
Renaissance has certain demand and piggy-back registration rights for the
shares into which its debentures are convertible that may require the Company to
register for public resale the shares of Common Stock issuable thereunder.
Renaissance also has the right to designate one person for nomination by
management as a director of the Company or as an advisor to the Board. Upon
certain events of default under the loan agreement for the convertible
debentures, Renaissance has the right to designate an additional person as
director of the Company.
WARRANTS AND OPTIONS
In connection with the Initial Public Offering, the Company issued to the
representatives of the underwriters warrants (the "IPO Warrants") to purchase an
aggregate of 150,000 shares of Common Stock at an exercise price of $9.375 per
share. Such warrants expire on May 1, 2001. Holders of such warrants possess
certain demand and incidental registration rights that may require the Company
to register for public resale the shares of Common Stock issuable thereunder.
For its assistance with the Renaissance financing, the Company issued to
Joseph Charles & Associates, Inc. a warrant (the "Renaissance Warrants") to
purchase an aggregate of 150,000 shares of Common Stock at an exercise price of
$8.00 per share. Such warrant expires on January 8, 2002. Holders of such
warrants possess certain demand and incidental registration rights that may
require the Company to register for public resale the shares of Common Stock
issuable thereunder.
The Company has agreed to sell to the Representative or its designees, for
nominal consideration, the Representative's Warrants to purchase up to 42,000
shares of Common Stock at an exercise price equal to 130% of the public offering
price. The Representative or its designees possess certain demand and incidental
registration rights that may require the Company to register for public resale
the shares of Common Stock issuable thereunder. The Representative's Warrants
are exercisable for a period of four years beginning one year from the date of
this Prospectus. See "Underwriting."
Pursuant to the Stock Option Plan, the Company has granted options to
certain of its employees for the purchase of an aggregate of 137,500 shares of
Common Stock, at prices ranging from $6.75 to $8.25 per share, and options to
its non-employee directors to purchase an aggregate of 54,250 shares of Common
Stock, at prices ranging from $4.50 to $8.25 per share. Options granted under
the Stock Option Plan are exercisable for periods of up to ten years and may
contain such other terms as the administering body may determine. The Company
also granted options to certain employees for the purchase of an aggregate of
276,500 shares of Common Stock, at $2.00 per share, prior to the adoption of the
Stock Option Plan, as well as options to purchase 75,000 shares of Common Stock
to a consultant outside of the Stock Option Plan, at prices ranging from $7.50
to $7.625.
REGISTRATION RIGHTS
In connection with the Road Champs Acquisition, the Company issued 198,020
shares of Common Stock to the stockholders of Road Champs, Inc. Such
stockholders are entitled to certain registration rights which provide that the
Company must use its best efforts to file a registration statement under the
Securities Act prior to February 6, 1998 for the public resale of such shares of
Common Stock and use its best efforts to cause such registration statement to
become effective.
Holders of the Convertible Debentures are entitled to certain registration
rights with respect to the shares of Common Stock issuable upon conversion of
the Convertible Debentures. At any time after six months from the date of this
Prospectus, such holders have the right to have such shares registered, but the
costs of such registration shall be at such holder's cost. Beginning in January
1999, such holders may demand registration of such shares on two occasions at
the Company's expense, but not more often than once a year.
Holders of the IPO Warrants are entitled to certain registration rights
with respect to the shares of Common Stock issuable under the IPO Warrants. At
any time after May 1, 1997, holders of the IPO
40
<PAGE> 43
Warrants may request that the Company file a registration statement under the
Securities Act for the public resale of the Common Stock issuable upon exercise
of the IPO Warrants. Upon such request and, subject to certain conditions, the
Company will be required to prepare and file any such registration statement and
to use its best efforts to cause such registration statement to become
effective. The holders of the IPO Warrants have the right to demand registration
as described above on at least two separate occasions.
The Holders of the Renaissance Warrants also possess demand registration
rights with respect to the shares of Common Stock issuable pursuant thereto.
The Holders of the Representative's Warrants possess demand registration
rights with respect to the shares of Common Stock issuable pursuant to the
Representative's Warrants. Such rights are exercisable at any time after one
year from the date of this Prospectus. These rights may be exercised on one
occasion.
In the event the Company proposes to register any of its securities under
the Securities Act, either for its own account or for the account of others, the
holders of the Convertible Debentures, the IPO Warrants, the Renaissance
Warrants and the Representative's Warrants are entitled to notice of such
registration and to include the shares of Common Stock underlying such
debentures and warrants therein. The Company is generally obligated to bear the
expenses, other than underwriting discounts and sales commissions, of the above
described registrations.
TRANSFER AGENT
The transfer agent for the Common Stock is U.S. Stock Transfer Corporation,
Glendale, California 91204.
41
<PAGE> 44
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, the Company will have 4,782,969
shares of Common Stock outstanding. Of such shares, 2,657,454 shares (including
the 600,000 shares of Common Stock offered hereby) will be freely tradeable
without restriction or further registration under the Securities Act, except
shares purchased by an affiliate of the Company. Another 2,125,515 shares of
Common Stock are "restricted securities," as the term is defined under Rule 144.
Such shares were acquired by their owners prior to this Offering in transactions
not involving a public offering. Such shares may only be sold pursuant to a
registration statement under the Securities Act, in compliance with the
exemption provisions of Rule 144, or pursuant to another exemption under the
Securities Act.
The executive officers, directors, certain other shareholders of the
Company and their affiliates have agreed, pursuant to lock-up agreements with
the Representative, that they will not for a period of 45 days from the date of
this Prospectus, without the prior written consent of the Representative, sell
or otherwise dispose of an aggregate of approximately 1,735,984 restricted
shares of Common Stock. The Representative may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject to
any of such lock-up agreements. In addition, certain other shareholders of the
Company have agreed, pursuant to a lock-up agreement with the Company, that they
will not sell or otherwise dispose of an aggregate of 198,020 restricted shares
of Common Stock prior to February 1998. Upon the expiration of these lock-up
agreements, an aggregate of 1,934,004 of such shares of Common Stock will become
eligible for sale in the public market, subject to the provisions of Rule 144
under the Securities Act.
In general, under Rule 144 under the Securities Act, as currently in
effect, a person (or persons whose shares are aggregated) who has beneficially
owned restricted shares (as that term is defined in Rule 144) for at least two
years, including any person who may be deemed to be an affiliate of the Company,
is entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of then-outstanding shares of
Common Stock (approximately 47,829 shares immediately after this Offering) or
the average weekly trading volume in the Common Stock as reported by Nasdaq
during the four calendar weeks preceding such sale. Sales pursuant to Rule 144
also are subject to certain other requirements relating to the manner and notice
of sale and availability of current public information about the Company.
Affiliates may publicly sell shares not constituting restricted securities under
Rule 144 in accordance with the foregoing volume limitations and other
restrictions, but without regard to the two-year holding period. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days immediately preceding a sale by such person, and who
has beneficially owned restricted shares for at least three years, is entitled
to sell such shares under Rule 144 without regard to the volume limitations and
other conditions described above.
The SEC has adopted amendments, effective April 29, 1997, reducing the
required two-year holding period under Rule 144 to one year and reducing the
required three-year holding period under Rule 144(k) to two years. The
amendments may be relied upon by holders of restricted securities on or after
April 29, 1997 and will allow such holders to sell restricted securities in the
open market significantly earlier than currently permitted. Approximately
1,927,495 restricted shares of Common Stock of the Company have been held for
over one year.
An additional 885,250 shares of Common Stock that are issuable upon
exercise of outstanding warrants and options will, under Rule 144, be eligible
for sale into the public securities markets one year after the warrant or option
is exercised and 923,077 shares of Common Stock that are issuable upon
conversion of the Convertible Debentures will be eligible for sale into the
public securities market after January 8, 1998, subject to the volume, manner
and notice of sale and other conditions of Rule 144 described above.
The Company has granted certain piggy-back and demand registration rights
with respect to 198,020 restricted shares outstanding, 342,000 restricted shares
issuable upon the exercise of outstanding warrants and 923,077 restricted shares
issuable upon the conversion of outstanding debentures. See "Description of
Securities -- Registration Rights."
The Company makes no prediction as to the effect, if any, that future sales
of shares or the availability of shares for future sale will have on the
prevailing market price of the Common Stock. Sales of substantial amounts of the
Common Stock in the public market or the perception that such sales could occur
could have an adverse effect on the prevailing market price of the Common Stock.
42
<PAGE> 45
UNDERWRITING
The Underwriters named below, for whom Cruttenden Roth Incorporated is
acting as the representative (the "Representative"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company the number of shares of Common Stock set forth opposite their
respective names below. The nature of the obligations of the Underwriters is
such that if any of such shares are purchased, all must be purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
------------------------------------------------------------- ----------------
<S> <C>
Cruttenden Roth Incorporated.................................
Total.............................................. 600,000
=========
</TABLE>
The Underwriters initially propose to offer the shares of Common Stock
offered hereby to the public at the price set forth on the cover page of this
Prospectus. The Underwriters may allow a concession to selected dealers who are
members of the National Association of Securities Dealers, Inc. (the "NASD") not
in excess of $ per share, and the Underwriters may allow, and such
dealers may reallow, to members of the NASD a concession not in excess of
$ per share.
Two of the Company's stockholders have granted an option to the
Underwriters, exercisable within 45 days after the date of this Prospectus, to
purchase from such stockholders up to 90,000 shares of Common Stock at the
offering price, less the underwriting discount set forth on the cover page of
this Prospectus. The Underwriters may exercise the option only for the purpose
of covering over-allotments. To the extent the Underwriters exercise such
option, each Underwriter will be committed, subject to certain conditions, to
purchase that number of additional shares of Common Stock which is proportionate
to such Underwriter's initial commitment. See "Principal and Selling
Stockholders -- Over-Allotment Option Selling Stockholders."
The Company has agreed to sell to the Representative or its designee, for
nominal consideration, the Representative's Warrants to purchase up to 42,000
shares of Common Stock at an exercise price per share equal to 130% of the Price
to Public set forth on the cover page of this Prospectus. The Representative's
Warrants are exercisable for a period of four years beginning one year from the
date of this Prospectus and are not transferable for a period of one year from
the date of this Prospectus except to officers of the Representative or any
successor thereto. The Representative's Warrants include a net exercise
provision permitting the holder(s), in effect, to pay the exercise price by
receiving fewer shares when exercising the warrants. Under such provision, the
holder(s) would forego a number of shares with a fair market value, after
deducting the exercise price therefore, equal to the aggregate exercise price of
the Representative's Warrants then being exercised. In addition, the Company has
granted certain rights to the holders of the Representative's Warrants to
register the Representative's Warrants and the Common Stock underlying the
Representative's Warrants under the Securities Act.
As underwriting compensation in connection with the Offering, the Company
will pay the Underwriters' legal fees and expenses, estimated to be $200,000. In
addition, the Company will reimburse the underwriters for certain expenses
incurred in connection with the underwriters' "road show."
43
<PAGE> 46
Except in connection with acquisitions, strategic commercial transactions
or pursuant to the exercise of options to purchase up to 216,998 shares of
Common Stock that have been and may be granted under the Company's Stock Option
Plan at an exercise price at least equal to fair market value of the shares of
Common Stock, the Company has agreed, for a period of 45 days from the
consummation of this Offering, that it will not issue or sell any shares of
Common Stock or other equity securities of the Company or purchase any shares of
the Common Stock of the Company without the prior written consent of the
Representative. In addition, the officers, directors and certain stockholders of
the Company have agreed that they will not sell any additional shares of Common
Stock of the Company owned by them, except for their shares offered in this
Offering, the 7,000 registered shares owned by Mr. Glick and the 2,000
registered shares owned by Mr. Bennett, for a period of 45 days from the
consummation of this Offering without the prior written consent of the
Representative, provided that intra-family transfers or transfers to family
trusts shall not be thus restricted.
The Company and certain stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act or to contribute to payments which the Underwriters may be
required to make in respect thereof.
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with the Securities Exchange Act of 1934 pursuant to which such persons may bid
for or purchase Common Stock for the purpose of stabilizing its market price.
The Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such shares of Common Stock or may exercise the
Underwriter's over-allotment option referred to above. In addition, the
Representative, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the Offering), for the account of the
other Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph are required, and, if they are
undertaken, they may be discontinued at any time.
The Representative has advised the Company that the Underwriters do not
expect to confirm any sales by the Underwriters to accounts over which they
exercise discretionary authority.
LEGAL MATTERS
The legality of the Common Stock offered hereby has been passed upon for
the Company and certain stockholders by Feder, Kaszovitz, Isaacson, Weber, Skala
& Bass, LLP, New York, New York. Murray L. Skala, a director of the Company, the
owner of 27,124 shares of Common Stock and a stockholder who has granted a
portion of the Underwriter's over-allotment option, is a partner of Feder,
Kaszovitz, Isaacson, Weber, Skala & Bass, LLP. Gibson, Dunn & Crutcher LLP, Los
Angeles, California, has passed upon certain legal matters for the
Representative in connection with this Offering.
44
<PAGE> 47
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1995 and for the year ended December 31, 1996 and the period from April
1, 1995 (inception) to December 31, 1995 included in this Prospectus have been
audited by Pannell Kerr Forster, Certified Public Accountants, A Professional
Corporation, Los Angeles, California, independent auditors, as stated in their
report appearing herein and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing. The
combined financial statements of Road Champs, Inc. and Subsidiary and Die Cast
Associates, Inc. as of December 31, 1996 and 1995 and for the years then ended
included in this Prospectus have been audited by Pannell Kerr Forster PC, New
York, New York, independent auditors, as stated in their report appearing herein
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
Since May 1, 1996, the Company has been subject to the reporting
requirements of the Exchange Act. In accordance with the Exchange Act, the
Company has and will continue to file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Reports and other information filed by the Company may be inspected and copied
at the public reference facilities of the Commission in Washington, D.C. Copies
of such materials can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549 at prescribed rates. In addition, the
Commission maintains a web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The Company's Common Stock is
listed on the Nasdaq SmallCap Market and reports and information concerning the
Company can be also inspected through such exchange. The Company intends to
furnish its stockholders with annual reports containing audited financial
statements and such other periodic reports as the Company deems appropriate or
as may be required by law.
The Company will provide without charge to each person who receives the
Prospectus, upon written or oral request of such person, a copy of any of the
information that is incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless the
exhibits are themselves specifically incorporated by reference). Such requests
should be directed by mail to Joel M. Bennett, Chief Financial Officer, JAKKS
Pacific, Inc., 24955 Pacific Coast Highway, Suite #B202, Malibu, California
90265 or by telephone at (310) 456-7799.
The Company has filed with the Commission a Registration Statement on Form
SB-2 and all schedules and exhibits thereto under the Securities Act with
respect to the Common Stock offered by this Prospectus. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and this
Offering, reference is made to such Registration Statement, including the
exhibits filed therewith, which may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the Registration Statement may be obtained from the Commission at its
principal office upon payment of prescribed fees. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and, where the content or other document has been filed as
an exhibit to the Registration Statement, each such statement is qualified in
all respects by reference to the applicable document filed with the Commission.
45
<PAGE> 48
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact, including those with
respect to the Company's objectives, plans and strategy set forth under
"Prospectus Summary" and "Business -- Business Strategy" and those preceded by
or that include the words "believes," "expects," "anticipates," "intends,"
"plans," "is scheduled to" or similar expressions, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
those expectations will prove to be correct. Important factors that could cause
actual results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed in this Prospectus in conjunction with the
forward-looking statements and under "Risk Factors." All written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by those Cautionary Statements.
46
<PAGE> 49
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
JAKKS Pacific, Inc. and Subsidiaries
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets......................................................... F-3
Consolidated Statements of Operations............................................... F-4
Consolidated Statements of Stockholders' Equity..................................... F-5
Consolidated Statements of Cash Flows............................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
Road Champs, Inc. and Subsidiary and Die Cast Associates, Inc.
Independent Auditors' Report........................................................ F-17
Combined Balance Sheets............................................................. F-18
Combined Statements of Operations................................................... F-19
Combined Statements of Stockholders' Equity......................................... F-20
Combined Statements of Cash Flows................................................... F-21
Notes to Combined Financial Statements.............................................. F-22
</TABLE>
F-1
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
The Stockholders
JAKKS Pacific, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of JAKKS
Pacific, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year and nine months then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of JAKKS
Pacific, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and cash flows for the year and nine months then ended, in
conformity with generally accepted accounting principles.
PANNELL KERR FORSTER
Certified Public Accountants
A Professional Corporation
Los Angeles, California
January 23, 1997, except for note 15, for which
the date is February 6, 1997
F-2
<PAGE> 51
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
Current assets:
Cash............................................................. $ 6,355,260 $ 81,752
Accounts receivable.............................................. 2,420,470 575,489
Inventory........................................................ 140,105 86,128
Deferred product development costs............................... 515,870 89,171
Prepaid expenses and other....................................... 450,107 129,735
Advanced royalty payments........................................ 276,000 50,000
Advances to officers............................................. 120,030 --
----------- ----------
Total current assets..................................... 10,277,842 1,012,275
Property and equipment
Office furniture and equipment................................... 121,305 92,156
Molds and tooling................................................ 1,350,949 325,577
Leasehold improvements........................................... 4,808 675
----------- ----------
Total.................................................... 1,477,062 418,408
Less accumulated depreciation and amortization................... 277,265 55,448
----------- ----------
Net property and equipment............................... 1,199,797 362,960
Deferred offering and acquisition costs............................ 85,301 74,915
Intangibles and deposits, net...................................... 91,776 51,977
Deferred income taxes.............................................. 7,531 --
Goodwill, net...................................................... 2,537,697 2,626,014
----------- ----------
Total assets....................................................... $14,199,944 $4,128,141
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 1,610,987 $ 711,058
Accrued expenses................................................. 205,087 178,038
Reserve for returns and allowances............................... 175,000 460,513
Current portion of acquisition debt.............................. 190,008 202,485
Income taxes payable............................................. 272,605 80,983
----------- ----------
Total current liabilities................................ 2,453,687 1,633,077
Long-term portion of acquisition debt.............................. -- 229,889
Notes payable to officer........................................... -- 382,816
Deferred income taxes.............................................. -- 32,655
----------- ----------
Total liabilities............................................. 2,453,687 2,278,437
----------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 5,000 shares authorized, no
shares issued................................................. -- --
Common stock, $.001 par value; 25,000,000 shares authorized,
issued and outstanding 3,984,949 and 2,000,000 shares,
respectively.................................................. 3,985 2,000
Additional paid-in capital....................................... 10,321,295 1,624,238
Retained earnings................................................ 1,616,140 436,371
----------- ----------
11,941,420 2,062,609
Unearned compensation from grant of options...................... 195,163 212,905
----------- ----------
Net stockholders' equity................................. 11,746,257 1,849,704
----------- ----------
Total liabilities and stockholders' equity......................... $14,199,944 $4,128,141
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 52
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
APRIL 1,
1995
(INCEPTION)
YEAR ENDED TO
DECEMBER DECEMBER
31, 31,
1996 1995
----------- ----------
<S> <C> <C>
Net sales.......................................................... $12,052,016 $6,077,763
Cost of sales...................................................... 7,231,296 4,130,997
----------- ----------
Gross profit....................................................... 4,820,720 1,946,766
Selling, general and administrative expenses....................... 3,611,471 1,400,368
----------- ----------
Income from operations............................................. 1,209,249 546,398
Interest expense................................................... 63,171 8,971
Other income....................................................... 196,966 13,382
----------- ----------
Income before provision for income taxes........................... 1,343,044 550,809
Provision for income taxes......................................... 163,275 114,438
----------- ----------
Net income......................................................... $ 1,179,769 $ 436,371
----------- ----------
Net income per share............................................... $ .34 $ .20
----------- ----------
Weighted average common shares outstanding
and common equivalent shares..................................... 3,503,767 2,191,423
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 53
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996 AND APRIL 1, 1995 (INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
UNEARNED
COMPENSATION
PAR FROM
COMMON VALUE ADDITIONAL GRANT TOTAL
SHARES PER STOCK PAID-IN RETAINED OF STOCKHOLDERS'
OUTSTANDING SHARE AMOUNT CAPITAL EARNINGS OPTIONS EQUITY
--------- ----- ------ ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1995
(Inception)......... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock for cash...... 1,896,925 .001 1,897 843,103 -- -- 845,000
Issuance of common
stock in partial
consideration for
purchase of toy
business assets..... 75,951 .001 76 559,924 -- -- 560,000
Issuance of common
stock for
services............ 27,124 .001 27 8,306 -- -- 8,333
Grant of compensatory
stock options....... -- -- -- 212,905 -- (212,905) --
Net income............ -- -- -- -- 436,371 -- 436,371
--------- ----- ------ ---------- --------- --------- -----------
Balance, December 31,
1995................ 2,000,000 .001 2,000 1,624,238 436,371 (212,905) 1,849,704
Issuance of common
stock for cash...... 1,502,000 .001 1,502 7,652,761 -- -- 7,654,263
Issuance of common
stock from bridge
financing
conversion.......... 469,300 .001 469 1,044,310 -- -- 1,044,779
Issuance of common
stock in partial
consideration for
purchase of toy
business assets..... 13,649 .001 14 (14) -- -- --
Earned compensation
from grant of
options............. -- -- -- -- -- 17,742 17,742
Net income............ -- -- -- -- 1,179,769 -- 1,179,769
--------- ----- ------ ---------- --------- --------- -----------
Balance, December 31,
1996................ 3,984,949 $.001 $3,985 $10,321,295 $1,616,140 $(195,163) $11,746,257
========= ===== ====== ========== ========= ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 54
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
APRIL 1,
1995
(INCEPTION)
YEAR ENDED TO
DECEMBER DECEMBER
31, 31,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 1,179,769 $ 436,371
----------- -----------
Adjustments to reconcile net income to net cash (used) provided
by operating activities:
Depreciation and amortization................................ 338,032 101,203
Earned compensation from stock option grants................. 17,742 --
Changes in operating assets and liabilities:
Accounts receivable........................................ (1,844,981) (575,489)
Inventory.................................................. (53,977) (86,128)
Prepaid expenses and other................................. (973,076) (268,906)
Advances to officers....................................... (120,030) --
Accounts payable........................................... 899,929 711,058
Accrued expenses........................................... 27,049 178,038
Income taxes payable....................................... 191,622 80,983
Reserve for returns and allowances......................... (285,513) 460,513
Deferred income taxes...................................... (40,186) 32,655
----------- -----------
Total adjustments..................................... (1,843,389) 633,927
----------- -----------
Net cash (used) provided by operating activities...... (663,620) 1,070,298
----------- -----------
Cash flows from investing activities
Property and equipment.......................................... (1,058,653) (418,408)
Intangibles and deposits........................................ (49,129) (45,143)
Excess of cost over toy business assets acquired (goodwill)..... -- (2,110,270)
----------- -----------
Net cash (used) by investing activities............... (1,107,782) (2,573,821)
----------- -----------
Cash flows from financing activities
Deferred costs.................................................. (85,301) (74,915)
Proceeds from sale of common stock.............................. 7,669,263 845,000
Proceeds from convertible notes payable......................... 1,104,694 --
Proceeds from (repayments of) note payable to officer........... (382,816) 382,816
Proceeds from (repayments of) acquisition debt.................. (260,930) 432,374
----------- -----------
Net cash provided by financing activities............. 8,044,910 1,585,275
----------- -----------
Net increase in cash.............................................. 6,273,508 81,752
Cash, beginning of year and at inception.......................... 81,752 --
----------- -----------
Cash, at end of year and at December 31, 1995..................... $ 6,355,260 $ 81,752
=========== ===========
Cash paid during the period for:
Interest........................................................ $ 49,638 $ 335
=========== ===========
Income taxes.................................................... $ 11,839 $ 800
=========== ===========
</TABLE>
See note 17 for supplemental information to consolidated statements of cash
flows.
See notes to consolidated financial statements.
F-6
<PAGE> 55
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- PRINCIPAL INDUSTRY
JAKKS Pacific, Inc. (the "Company") is engaged in the development,
manufacture and marketing of toys and children's electronics products, some of
which are based on character and product licenses. The Company commenced
operations in July 1995 through the purchase of substantially all of the assets
of a Hong Kong toy company. The Company is marketing its product lines
domestically and internationally.
The Company was incorporated under the laws of the State of Delaware in
January 1995.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include accounts of the Company and
its wholly-owned subsidiaries, JAXXS (HK) Limited, JP (HK) Limited, both Hong
Kong Corporations, J-X Enterprises, Inc., a New York Corporation, and JAKKS
Acquisition Corp., a Delaware Corporation. In consolidation, all significant
intercompany balances and transactions are eliminated.
Cash and cash equivalents
The Company considers all highly liquid assets, having an original maturity
of less than three months, to be cash equivalents.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenue and expenses during the
reporting periods. Actual future results could differ from those estimates.
Revenue recognition
Revenue of the Company's products is recognized upon shipment to its
customers. The Company provides allowances for estimated returns at the time of
sales.
Deferred product development costs
The Company defers certain costs related to the preliminary activities
associated with the manufacture of its products, which the Company has
determined have future economic benefit. These costs are then expensed in the
period in which the initial shipment of the related product is made. Management
periodically reviews and revises, when necessary, its estimate of the future
benefit of these costs, and expenses them if it is deemed there no longer is a
future benefit.
Deferred offering and acquisition costs
During 1996, costs incurred for an additional public offering, convertible
debenture offering, and certain acquisition costs were deferred. The deferred
costs will be offset against respective proceeds received and upon completion of
an on-going acquisition to the costs of the new affiliate (note 15).
In 1995, offering costs incurred directly related to the issuance of
convertible promissory notes pursuant to its private offering and costs incurred
directly related to its public offering were capitalized. The Company
F-7
<PAGE> 56
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
completed the private offering and public offering in February and May 1996,
respectively, and offset these deferred offering costs against the respective
proceeds received.
Inventory
Inventory is valued at the lower of cost (first-in, first-out) or market.
Property and equipment
Property and equipment are stated at cost and are being depreciated using
the straight-line method over their estimated useful lives as follows:
<TABLE>
<S> <C>
Personal computers................................ 5 years
Office equipment.................................. 5 years
Furniture and fixtures............................ 5 years
Molds and tooling................................. 3 - 4 years
Leasehold improvements............................ Shorter of length of lease or 10 years
</TABLE>
Advertising
Production costs of commercials and programming are charged to operations
in the year during which the production is first aired. The costs of other
advertising, promotion and marketing programs are charged to operations in the
year incurred. Advertising expense for the year ended December 31, 1996 was
approximately $22,000.
Income taxes
The Company does not file a consolidated return with its foreign
subsidiaries. The Company files Federal and state returns and its foreign
subsidiaries file Hong Kong returns. Deferred taxes are provided on a liability
method whereby deferred tax assets are recognized as deductible temporary
differences and operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Translation of foreign currencies
Monetary assets and liabilities denominated in Hong Kong dollars are
translated into United States dollars at the rates of exchange ruling at the
balance sheet date. Transactions during the period are translated at the rates
ruling at the dates of the transactions.
Profits and losses resulting from the above translation policy are
recognized in the consolidated statements of operations.
Goodwill
Goodwill represents the excess purchase price paid over the fair market
value of the assets acquired of a Hong Kong toy company. Goodwill is being
amortized over 30 years on a straight-line basis. Accumulated amortization at
December 31, 1996 totalled $133,301.
F-8
<PAGE> 57
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The carrying value of goodwill is based on management's current assessment
of recoverability. Management evaluates recoverability using both objective and
subjective factors. Objective factors include management's best estimates of
projected future earnings and cash flows and analysis of recent sales and
earnings trends. Subjective factors include competitive analysis and the
Company's strategic focus.
Intangible assets
Intangible assets consist of organizational costs, product technology
rights and patents. Intangible assets are amortized on a straight-line basis,
over five to six years, the estimated economic lives of the related assets.
Accumulated amortization as of December 31, 1996 and 1995 was $10,834 and
$1,500, respectively.
Reverse stock split
The Company effected a reverse split of its common stock of approximately
one-for-1.843333. All common stock and common stock equivalent shares and per
share amounts have been adjusted retroactively to give effect to the reverse
stock split.
Net income per share
Net income per share is computed using the weighted average number of
shares outstanding of common stock and common equivalent shares from stock
options using the treasury stock method.
NOTE 3 -- 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 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% of
the net sales of the acquired product lines during each of the calendar years
1998 and 1999. Such percentage payments are subject to offset against $500,000
in cash consideration paid. The 1996 minimum percentage payment has been
discounted at 10% and is presented at net as a long-term liability (note 8).
Percentage payments for the year and period ended December 31, 1996 and 1995,
respectively, amounted to $250,000 and $264,917, respectively.
The assets acquired from JPL were as follows:
<TABLE>
<S> <C>
Furniture and fixtures........................................... $ 47,500
Office equipment................................................. 12,500
Molds and tooling................................................ 250,000
Goodwill......................................................... 2,655,353
----------
Total assets acquired............................................ $2,965,353
==========
</TABLE>
NOTE 4 -- CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to concentration of credit
risk are cash equivalents and trade receivables. Cash equivalents consist
principally of short-term money market funds. These instruments are short-term
in nature and bear minimal risk. To date, the Company has not experienced losses
on these instruments.
F-9
<PAGE> 58
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The Company maintains cash balances at financial institutions located in
California and Hong Kong. Accounts located in California institutions are
insured by the Federal Deposit Insurance Corporation up to $100,000. At December
31, 1996, the Company's uninsured cash balance totaled $6,476,475.
The Company performs on-going credit evaluations of its customers financial
condition but does not require collateral to support customer receivables. Most
goods are sold on irrevocable letter of credit basis.
Included in the Company's consolidated balance sheets at December 31, 1996
and 1995, are the Company's operating net assets, most of which are located in
facilities in Hong Kong and China and which total approximately $3,531,379 and
$1,019,077, for 1996 and 1995, respectively.
NOTE 5 -- ADVANCES TO OFFICERS
Advances to officers represent balances of $55,030 and $65,000 due from two
of the Company's officers. The $55,030 is due on demand and bears no interest.
The amount of $65,000 relates to two notes receivable, $25,000 and $40,000, that
are due on the earlier of August 27 and September 20, 1997, respectively, or
immediately upon the termination of the officer's employment with the Company
for any reason; the notes receivable bear interest of approximately 6 percent.
See note 18.
NOTE 6 -- ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Bonuses................................................ $107,444 $ --
Insurance.............................................. -- 36,972
Hong Kong subsidiaries accruals........................ -- 36,531
Reserve for vendor claims arising from the Justin
acquisition.......................................... -- 98,476
Royalties.............................................. 78,060 --
Other.................................................. 19,583 6,059
-------- --------
$205,087 $178,038
======== ========
</TABLE>
NOTE 7 -- RESERVE FOR RETURNS AND ALLOWANCES
The Company provides allowances for estimated sales returns and allowances
at the time of sales. In 1996, the balance of the reserve for returns and
allowance was $175,000. In 1995, the reserve for returns and allowances includes
actual amounts due to customers for pre-acquisition obligations assumed by the
Company of $260,513, and an estimated reserve for returns and allowances of
$200,000.
NOTE 8 -- LONG-TERM DEBT
Long-term debt, entirely due in 1997, consists of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Asset purchase obligation.............................. $191,555 $452,485
Less amount representing interest...................... 1,547 20,111
-------- --------
Present value of asset purchase obligation............. 190,008 432,374
Less current portion................................... 190,008 202,485
-------- --------
Long-term portion of asset purchase obligation......... $ -- $229,889
======== ========
</TABLE>
F-10
<PAGE> 59
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 9 -- INCOME TAXES
The provision differs from the expense that would result from applying
Federal statutory rates to income before taxes because of the inclusion of a
provision for state income taxes, and the income of the Company's foreign
subsidiaries is taxed at a rate of 16.5% applicable in Hong Kong. In addition,
the provision includes deferred income taxes resulting from adjustments in the
amount of temporary differences.
Temporary differences arise primarily from differences in timing in the
deduction of state income taxes and the use of the straight-line method of
depreciation for financial reporting purposes and accelerated methods of
depreciation for tax purposes.
The Company does not file a consolidated return with its foreign
subsidiaries. The Company files Federal and state returns and its foreign
subsidiaries file Hong Kong returns. Income taxes reflected in the accompanying
consolidated statements of operations is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Federal...................................................... $ -- $ 3,030
State and local.............................................. 1,350 2,870
Hong Kong.................................................... 277,994 75,883
--------- --------
279,344 81,783
Deferred..................................................... (116,069) 32,655
--------- --------
$ 163,275 $114,438
========= ========
</TABLE>
As of December 31, 1996, the Company has Federal and state net operating
loss carryovers of approximately $360,000 and $180,000, respectively, available
to offset future taxable income. The carryovers expire through 2011.
<TABLE>
<S> <C> <C>
Deferred tax assets resulting from deductible temporary
differences from loss carryforwards, noncurrent............ $ 145,692 $ --
Deferred tax liabilities resulting from taxable temporary
differences, noncurrent.................................... (138,161) (32,655)
--------- --------
$ 7,531 $(32,655)
========= ========
</TABLE>
No valuation allowance for deferred tax assets has been provided for as of
December 31, 1996, since, in the opinion of the Company's management,
realization of the future benefit is probable.
A reconciliation of the statutory United States Federal income tax rate to
the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Statutory income tax rate.................................... 35% 35%
State and local income taxes, net of Federal income tax
effect..................................................... 1 1
Effect of net operating loss carryovers...................... (40) --
Income taxes on foreign earnings at rates other than the
United States Statutory rate not subject to United States
income taxes............................................... 16 (15)
--- ---
12% 21%
=== ===
</TABLE>
F-11
<PAGE> 60
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The components of earnings before income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Domestic..................................................... $ (360,040) $ 16,555
Foreign...................................................... 1,703,084 534,254
---------- --------
$1,343,044 $550,809
========== ========
</TABLE>
NOTE 10 -- NOTES PAYABLE -- OFFICER
Notes payable -- officer, is due to a Company officer and stockholder. The
officer advanced monies to the Company totaling $382,816 at an interest rate of
approximately 6%. During 1996, additional advances of $50,000 and $25,000 had
been made to the Company by two of its officers under the same terms disclosed
above. All notes payable were repaid, including accrued interest, during 1996.
See note 18.
NOTE 11 -- LEASES
The Company leases office facilities and certain equipment under operating
leases. The following is a schedule of minimum lease payments.
<TABLE>
<S> <C>
1997.............................................. $111,342
1998.............................................. 73,402
1999.............................................. 70,682
2000.............................................. 68,925
2001.............................................. 66,467
Thereafter........................................ 132,934
--------
$523,752
========
</TABLE>
Rent expense for the year and period ended December 31, 1996 and 1995
totalled $182,690 and $89,737, respectively.
NOTE 12 -- COMMON STOCK AND PREFERRED STOCK
All references to the number of shares of the Company's common stock and
per share amounts have been retroactively restated in the accompanying
consolidated financial statements to reflect the effect of the approximately
one-for-1.843333 reverse stock split.
The Company has 25,005,000 authorized shares of stock consisting of
25,000,000 shares of $.001 par value common stock and 5,000 shares of $.001 par
value preferred stock.
During 1995, the Company issued JPL 75,951 shares of common stock, and an
additional 13,649 shares in connection with the Company's public offering in May
1996, pursuant to the asset purchase agreement (note 3), and has also issued
27,124 shares, valued at $8,333, to the Company's legal counsel for services
rendered.
The Company has entered into a letter of intent with a certain underwriter
relating to a contemplated additional public offering of its Common Stock.
NOTE 13 -- COMMITMENTS
The Company entered into various license agreements whereby the Company may
use certain characters and properties in conjunction with its products. Such
license agreements call for royalties to be paid at 5 to
F-12
<PAGE> 61
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10% 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:
<TABLE>
<S> <C>
1997............................................. $ 730,451
1998............................................. 714,166
1999............................................. 949,667
----------
Total.................................. $2,394,284
==========
</TABLE>
NOTE 14 -- STOCK OPTION PLAN
Under the Company's Amended and Restated 1995 Stock Option Plan, the
Company has reserved 216,998 shares of the Company's Common Stock for issuance
under the Plan. Under the Amended and Restated 1995 Stock Option Plan, employees
(including officers), nonemployee directors and independent consultants may be
granted options to purchase shares of Common Stock. Prior to the adoption of the
Plan in 1995, options for 276,500 shares have been granted at an exercise price
of $2.00 per share. The Company has recorded deferred compensation costs and a
related increase in paid-in capital of $212,905 for the difference between the
grant price and the deemed fair market value of the Common Stock of $2.77 per
share at the date of grant. Such compensation costs will be recognized on a
straight-line basis over the vesting period of the options, which is 25% per
year commencing twelve months after the grant date of such options. In 1996, the
fair value of each employee option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used: risk-free rate of interest of 6.0%; dividend yield of 0%; and expected
lives of 5 years. See note 19.
As of December 31, 1996 and 1995, 91,523 and 206,148 shares were available
for future grant, respectively. Additional shares may become available for grant
to the extent that options presently outstanding under the Plan terminate or
expire unexercised.
Stock option activity pursuant to the Amended and Restated 1995 Plan is
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, April 1, 1995 (Inception)................... -- $ --
Granted................................................ 10,850 4.50
Exercised.............................................. -- --
Canceled............................................... -- --
-------
Outstanding, December 31, 1995........................... 10,850 4.50
Granted................................................ 114,625 6.70
Exercised.............................................. -- --
Canceled............................................... -- --
------- -----
Outstanding, December 31, 1996........................... 125,475 $ 6.51
======= =====
</TABLE>
F-13
<PAGE> 62
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Stock option activity outside of the Amended and Restated 1995 Plan is
summarized as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding, April 1, 1995 (Inception)............. -- $ --
Granted.......................................... 276,500 2.00
Exercised........................................ -- --
Canceled......................................... -- --
-------
Outstanding, December 31, 1995..................... 276,500 2.00
Granted.......................................... 75,000 7.54
Exercised........................................ -- --
Canceled......................................... -- --
------- -----
Outstanding, December 31, 1996..................... 351,500 $ 3.18
======= =====
</TABLE>
The weighted average fair value of options granted to employees in 1996 and
1995 was $2.30 and $0.77 per share, respectively.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
OUTSTANDING
-------------------------------------------
WEIGHTED EXERCISABLE
AVERAGE ------------------------------
NUMBER WEIGHTED AVERAGE EXERCISE NUMBER WEIGHTED AVERAGE
OPTION PRICE RANGE OF SHARES LIFE PRICE OF SHARES EXERCISE PRICE
------------------ --------- ---------------- -------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 2.00 - $8.25 476,975 6.1 years $ 4.06 182,100 $ 5.03
</TABLE>
At December 31, 1995, options were exercisable for 10,850 shares at a
weighted average exercise price of $4.50 per share.
In addition, in 1996, 150,000 shares were reserved for issuance upon
exercise of warrants granted to the representatives of the underwriters of the
Company's Initial Public Offering exercisable at $9.375 per share.
NOTE 15 -- SUBSEQUENT EVENTS
On January 8, 1997, the Company issued two $3,000,000 convertible
debentures for a total of $6,000,000. Interest on the principal amounts
outstanding will accrue at 9.0% per annum with the first monthly installment
payable on February 1, 1997. If not sooner redeemed or converted into common
stock, the debentures shall mature on December 31, 2003. Commencing on December
31, 1999, and the first day of each successive month thereafter prior to
maturity, mandatory principal redemption installments, each of such installment
to be in the amount of $10 per $1,000 of the then remaining principal amount of
the debenture. Such debentures are convertible at $8.50 per share into 705,882
shares of the Company's common stock, subject to reset and anti-dilution
provisions. A stock pledge agreement from the Company pledging as security all
outstanding shares of a certain entity being acquired, upon acquisition thereof
from use of loan proceeds, and all of the outstanding shares of the Company's
wholly-owned subsidiaries. In addition, all marketing and manufacturing licenses
acquired or to be acquired, and all machinery and equipment to the extent
assignable by the Company are also to be pledged as security. As compensation
paid to an investment banker, 6% of the gross proceeds was paid in cash and
warrants for the purchase of 150,000 shares of common stock, exercisable at
$8.00 per share, were sold for $0.001 per share.
On February 6, 1997, the Company acquired all of the stock of Road Champs,
Inc. and all of the operating assets of an affiliated company for approximately
$12,045,000. Consideration paid at closing was approximately $4,619,000 in cash
plus the issuance of $1,500,000 (198,020 shares) of the Company's common stock.
The balance of the adjusted purchase price of approximately $2,937,000 is to be
paid in three equal
F-14
<PAGE> 63
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
installments, with the third installment payable one year after the closing of
the transactions all of which will carry interest at a rate of 7.0% per annum.
In addition, the payment for inventory of approximately $1,988,000, without
interest, is payable within 30 days of shipment to customers and the balance is
payable no later than August 6, 1997, and a payment of $1,001,000 is due seven
days after the close of an additional public offering of the Company's common
stock, but not later than May 6, 1997. Outstanding balances will be secured by
all acquired shares and assets, however, they will be subordinated to the
security interest for the convertible debentures noted above.
NOTE 16 -- MAJOR CUSTOMERS
Sales to major customers were as follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------- -------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- ---------- ---------- ---------- ----------
<S> <C> <C> <C>
$3,398,059 28.2% $1,890,184 31.1%
1,679,281 13.9 729,332 12.0
1,007,590 8.4 686,787 11.3
847,392 7.0 577,387 9.5
508,941 4.2 571,310 9.4
- ---------- ---- ---------- ----
$7,441,263 61.7% $4,455,000 73.3%
========== ==== ========== ====
</TABLE>
NOTE 17 -- SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
469,300 shares of common stock were issued in 1996 pursuant to the
conversion of bridge financing promissory notes which provided net proceeds of
$1,044,779.
Shares of common stock were issued as partial consideration for toy
business assets acquired totalling $560,000 in 1995. The excess of cost over toy
business assets acquired (goodwill) is reflected in the consolidated statement
of cash flows net of the stock issued.
27,124 shares of stock valued at $8,333 were issued in consideration for
legal services in connection with the Company's organizational start-up during
1995.
NOTE 18 -- RELATED PARTY TRANSACTIONS
A director of the Company is a partner in the law firm that acts as counsel
to the Company. The Company paid legal fees to the law firm in the amounts of
approximately $270,000 in 1996 and $75,000 in 1995. Also see footnotes 5 and 10
for other related party transactions.
NOTE 19 -- RECENT ACCOUNTING PRONOUNCEMENT
The FASB issued a new standard, SFAS No. 123 "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period. Alternatively, the
standard permits entities to continue accounting for employee stock option and
similar equity instruments under APB Opinion No. 25, " Accounting for Stock
Issued to Employees." Entities that continue to account for stock options using
APB Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied. Management accounts for options under APB Opinion
No. 25. If the alternative accounting-related provisions of SFAS No. 123 had
been adopted as of the beginning of 1995, the effect on 1996 and 1995 net income
and earnings per share would have been immaterial. See note 14.
F-15
<PAGE> 64
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of " ("Statement
121"). Statement 121 addresses the accounting for the impairment of long-lived
assets, certain identifiable intangible and goodwill related to those assets to
be held and used. It also addresses the accounting for long-lived assets and
certain identifiable intangibles to be disposed of. Statement 121 establishes
guidance for recognizing and measuring impairment losses and requires that the
carrying amount of impaired assets be reduced to fair value. Statement 121 was
effective for fiscal years beginning after December 15, 1995. The impact of the
adoption of Statement 121 did not have a material adverse effect on the
Company's financial condition or results of operations.
F-16
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Road Champs, Inc.
and Subsidiary and Die Cast Associates, Inc.
We have audited the accompanying combined balance sheets of Road Champs,
Inc. and Subsidiary and Die Cast Associates, Inc. as of December 31, 1996 and
1995 and the related combined statements of operations, stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Road
Champs, Inc. and Subsidiary and Die Cast Associates, Inc. as of December 31,
1996 and 1995, and the results of their combined operations and cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
PANNELL KERR FORSTER PC
New York, New York
February 12, 1997
F-17
<PAGE> 66
ROAD CHAMPS, INC. AND SUBSIDIARY
AND
DIE CAST ASSOCIATES, INC.
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 2,792,336 $ 2,779,649
Investments (notes 1 and 4)..................................... 6,032,816 3,591,664
Accounts receivable, net of allowance for doubtful accounts of
$65,266 and $83,008 at December 31, 1996 and 1995,
respectively................................................. 1,958,344 3,142,352
Loan receivable affiliated entity (notes 1 and 9)............... 1,034,784 695,535
Inventory (note 3).............................................. 1,961,068 2,401,014
Prepaid expenses and other...................................... 158,373 156,992
Deferred tax asset (note 6)..................................... 72,615 --
----------- -----------
Total current assets.................................... 14,010,336 12,767,206
----------- -----------
Property and equipment
Office furniture and equipment.................................. 463,067 712,258
Molds and tooling............................................... 4,749,085 4,771,572
Leasehold improvements.......................................... 81,250 --
----------- -----------
Total................................................... 5,293,402 5,483,830
Less accumulated depreciation and amortization.................. 4,690,231 4,629,009
----------- -----------
Net property and equipment.............................. 603,171 854,821
----------- -----------
Deposits.......................................................... 138,322 156,755
----------- -----------
Total assets............................................ $14,751,829 $13,778,782
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 507,541 $ 662,870
Accrued expenses (note 7)....................................... 1,139,613 253,211
Notes payable -- stockholder (note 8)........................... 375,000 375,000
Income taxes payable............................................ 689,106 37,578
Deferred tax liability (note 6)................................. -- 415,725
----------- -----------
Total current liabilities............................... 2,711,260 1,744,384
Commitments (note 7)
Stockholders' equity:
Common stock (note 5)........................................... 9,750 9,750
Additional paid-in capital...................................... 104,000 104,000
Unrealized holding gain on securities net of deferred taxes of
$3,719 and $713,577 in 1996 and 1995, respectively (note
4)........................................................... 133,157 1,175,472
Retained earnings............................................... 11,793,662 10,745,176
----------- -----------
Total stockholders' equity.............................. 12,040,569 12,034,398
----------- -----------
Total liabilities and stockholders' equity.............. $14,751,829 $13,778,782
=========== ===========
</TABLE>
See notes to combined financial statements.
F-18
<PAGE> 67
ROAD CHAMPS, INC. AND SUBSIDIARY
AND
DIE CAST ASSOCIATES, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net sales......................................................... $15,510,611 $17,141,445
Cost of sales..................................................... 9,564,332 11,427,162
----------- -----------
Gross profit...................................................... 5,946,279 5,714,283
Selling, general and administrative expenses...................... 4,119,424 5,022,977
----------- -----------
Income from operations............................................ 1,826,855 691,306
Interest expense.................................................. 45,359 48,072
Other income (note 4)............................................. 2,733,020 125,456
Other expenses (note 7)........................................... 923,841 --
----------- -----------
Income before provision for income taxes.......................... 3,590,675 768,690
Provision for income taxes (note 6)............................... 1,615,276 246,417
----------- -----------
Net income........................................................ $ 1,975,399 $ 522,273
=========== ===========
</TABLE>
See notes to combined financial statements.
F-19
<PAGE> 68
ROAD CHAMPS, INC. AND SUBSIDIARY
AND
DIE CAST ASSOCIATES, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
COMMON COMMON ADDITIONAL GAIN ON TOTAL
SHARES PAR VALUE STOCK PAID-IN RETAINED SECURITIES STOCKHOLDERS'
OUTSTANDING PER SHARE AMOUNT CAPITAL EARNINGS NET OF TAXES EQUITY
----------- --------- ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994...................... 195 $50 $9,750 $104,000 $10,611,152 $ 1,472,351 $12,197,253
Net income.................. -- -- -- -- 522,273 -- 522,273
Dividends paid.............. -- -- -- -- (320,000) -- (320,000)
Unrecoverable advances due
from former subsidiary.... -- -- -- -- (68,249) -- (68,249)
Net change in unrealized
holding gain on
securities, net of taxes
of $237,784............... -- -- -- -- -- (296,879) (296,879)
--- --- ------ -------- ----------- ----------- -----------
Balance, December 31,
1995...................... 195 50 9,750 104,000 10,745,176 1,175,472 12,034,398
Net income.................. -- -- -- -- 1,975,399 -- 1,975,399
Dividends paid.............. -- -- -- -- (817,598) -- (817,598)
Unrecoverable advances due
from former subsidiary.... -- -- -- -- (109,315) -- (109,315)
Net change in unrealized
holding gain on
securities, net of taxes
of $709,858............... -- -- -- -- -- (1,042,315) (1,042,315)
--- --- ------ -------- ----------- ----------- -----------
Balance, December 31,
1996...................... 195 $50 $9,750 $104,000 $11,793,662 $ 133,157 $12,040,569
=== === ====== ======== =========== =========== ===========
</TABLE>
See notes to combined financial statements.
F-20
<PAGE> 69
ROAD CHAMPS, INC. AND SUBSIDIARY
AND
DIE CAST ASSOCIATES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 1,975,399 $ 522,273
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization............................... 510,316 656,210
Deferred taxes.............................................. 221,518 224,003
Provision for doubtful accounts............................. (17,742) (157,280)
Gain on sale of investments................................. (2,501,857) --
Changes in certain assets and liabilities
Accounts receivable....................................... 1,201,750 225,102
Inventory................................................. 438,946 967,451
Prepaid expenses and other................................ 11,917 (11,532)
Deposits.................................................. 18,433 159,272
Accounts payable.......................................... (155,329) 275,224
Accrued expenses.......................................... 886,402 (23,311)
Income taxes payable...................................... 651,528 10,874
------------ -----------
Net cash provided by operating activities.............. 3,241,281 2,848,286
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment............................. (270,963) (412,997)
Sale of investments............................................ 8,401,624 150,000
Purchase of investments........................................ (10,093,093) (102,536)
Loan receivable affiliated entity.............................. (339,249) (340,530)
Unrecoverable advances due from former subsidiary.............. (109,315) (68,249)
------------ -----------
Net cash (used) by investing activities................ (2,410,996) (774,312)
------------ -----------
Cash flows from financing activities:
Notes payable -- bank.......................................... -- (975,000)
Dividends paid................................................. (817,598) (320,000)
------------ -----------
Net cash (used) by financing activities................ (817,598) (1,295,000)
------------ -----------
Net increase in cash and cash equivalents.............. 12,687 778,974
Cash and cash equivalents -- beginning of year................... 2,779,649 2,000,675
------------ -----------
Cash and cash equivalents -- end of year......................... $ 2,792,336 $ 2,779,649
============ ===========
Supplemental disclosure of cash flow information
Cash paid for interest......................................... $ 45,359 $ 59,020
============ ===========
Cash paid for income taxes..................................... $ 729,850 $ 31,415
============ ===========
</TABLE>
See notes to combined financial statements.
F-21
<PAGE> 70
ROAD CHAMPS, INC. AND SUBSIDIARY
AND
DIE CAST ASSOCIATES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and description of business
The combined financial statements include the accounts of Road Champs, Inc.
(Road Champs) and its wholly-owned subsidiary Road Champs, Ltd. (Limited) and
Die Cast Associates, Inc. (Die Cast). Road Champs, located in New Jersey is a
toy wholesaler principally in the United States. Limited, a Hong Kong
corporation, is a toy wholesaler that sells worldwide principally on an F.O.B.
Hong Kong basis against letters of credit. Die Cast, a Florida corporation, acts
as the sales agent and product development consultant for Road Champs and
Limited. Road Champs and Die Cast (collectively the Company) are owned and/or
controlled by the same stockholder who, on January 21, 1997 agreed to sell the
stock of Road Champs, Inc. and Subsidiary and certain operating assets of Die
Cast for approximately $12,045,000 plus the value of certain defined assets less
defined liabilities. The sale closed on February 6, 1997.
The businesses under common control and which are being sold have been
combined for financial statement purposes. All significant intercompany
transactions and balances have been eliminated. Road Champs Die Casting Factory
(Factory), a Hong Kong corporation, operates a die cast toy manufacturing
facility in China and is the principal supplier of merchandise to Road Champs
and Limited. Factory is under the same common ownership as the Company but was
not part of the aforementioned sales transaction and, accordingly, is excluded
from the combined financial statements. During 1996 and 1995, Road Champs had
net advances of $109,315 and $68,249, respectively, due from Factory which were
deemed unrecoverable and are reflected in stockholders' equity in the combined
financial statements.
Cash and cash equivalents
The Company considers all highly liquid assets, having an original maturity
of three months or less to be cash equivalents. The Company maintains its cash
in bank deposits which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. The Company believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Revenue recognition
Revenue from sales of the Company's products is recognized upon shipment to
its customers.
Inventory
Inventory generally is valued at the moving average cost basis and is
stated at the lower of cost or market.
Investments
Investments consists of equity securities and bonds. These investments are
classified as available-for-sale and are stated at fair value. The Company
computes gains/losses on sales of its investments using the specific
identification method.
F-22
<PAGE> 71
ROAD CHAMPS, INC. AND SUBSIDIARY
AND
DIE CAST ASSOCIATES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Property and equipment
Property and equipment are stated at cost and are being depreciated using
accelerated methods over their estimated useful lives as follows:
<TABLE>
<S> <C>
Office furniture and equipment............................ 5-7 years
Molds and tooling......................................... 3-4 years
Leasehold improvements.................................... 5 years
</TABLE>
Income taxes
Road Champs accounts for income taxes using the liability method. Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using enacted
tax rates and laws expected to be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to reduce the
carrying amount of deferred tax assets to their net realizable value.
Die Cast has elected to be treated as an "S" Corporation for Federal and
New Jersey income tax purposes. Consequently, it does not record income taxes
(except for capital gains, certain passive investment income, and certain
investment credit recapture). The stockholder is liable for the individual
income taxes of Die Cast's taxable income (even though such income is not
distributed) or include a share of Die Cast's net operating loss in the
individual's income tax return. Die Cast records New Jersey income taxes at the
reduced "S" Corporation rate.
Foreign Currency Translation
Foreign currency financial statements of the Road Champ's Hong Kong
subsidiary are converted into United States dollars by translating balance sheet
accounts at the current exchange rate at year end and statement of operations
accounts at the average exchange rate for the year.
Use of estimates
The preparation of the combined financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
The Company's cash and cash equivalents, accounts and loan receivables and
notes payable -- stockholder represent financial instruments. The carrying value
of these financial instruments is a reasonable approximation of fair value.
Split Dollar Insurance Plan
An insurance trust was created for the Road Champs majority stockholder in
December 1993. The terms of the trust require that it pay premiums equal to the
current term rate for the insured's age multiplied by the excess of the current
death benefit over Road Champs current premium advance. This amount, also
referred
F-23
<PAGE> 72
ROAD CHAMPS, INC. AND SUBSIDIARY
AND
DIE CAST ASSOCIATES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
to as the "economic value", is a fringe benefit expense of Road Champs. The
remaining amount of the premium is recorded as a loan receivable from the
insurance trust, an affiliated entity.
International operations
Limited operates in Hong Kong. As a result, a significant portion of Road
Champs sales and operations are subject to certain risks, including adverse
developments in the foreign political and economic environment, exchange rates,
tariffs and other trade barriers, staffing and managing foreign operations and
potentially adverse tax consequences. There can be no assurance that any of
these factors will not have a material adverse effect on the Company's financial
condition or results of operations in the future. Net sales of Limited totaled
$10,361,376 and $12,051,301 for the years ended December 31, 1996 and 1995.
NOTE 2 -- RISK CONCENTRATIONS
Accounts receivable and sales
A significant amount of the accounts receivable and sales of Road Champs
are from a limited number of customers. Four customers owed 37%, 17%, 12% and
10%, respectively, of the total accounts receivable at December 31, 1995, and
two customers owed 22% and 21%, respectively, of the total accounts receivable
at December 31, 1996. Two customers had 21% and 26%, respectively of total sales
in 1995, and one customer had 15% of total sales in 1996.
NOTE 3 -- INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Packaging........................................... $ 117,817 $ 182,688
Finished goods...................................... 1,843,251 2,218,326
---------- ----------
Total inventory........................... $1,961,068 $2,401,014
========== ==========
</TABLE>
NOTE 4 -- INVESTMENTS
The following is a summary of the Company's available-for-sale securities
at December 31, 1996 and 1995.
DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
SECURITIES AVAILABLE-FOR-SALE COST GAINS (LOSSES) FAIR VALUE
- --------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common Stock....................................... $2,362,922 $ 137,505 $ -- $2,500,427
U.S. Government Obligations........................ 179,201 320 -- 179,521
Municipal Bonds.................................... 3,353,817 409 (1,358) 3,352,868
---------- -------- ------- ----------
Total.................................... $5,895,940 $ 138,234 $ (1,358) $6,032,816
========== ======== ======= ==========
</TABLE>
Proceeds from the sale of available for sale securities amounted to
$8,401,624 in 1996, while realized gains on the sale of available-for-sale
securities amounted to $2,501,857 during 1996. The change in unrealized holding
gain on available-for-sale securities in 1996 amounted to $1,752,173.
F-24
<PAGE> 73
ROAD CHAMPS, INC. AND SUBSIDIARY
AND
DIE CAST ASSOCIATES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
DECEMBER 31, 1995
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
SECURITIES AVAILABLE-FOR-SALE COST GAINS (LOSSES) FAIR VALUE
- ------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common Stock..................................... $1,600,079 $1,893,745 $ (6,015) $3,487,809
Municipal Bonds.................................. 102,536 1,319 -- 103,855
---------- ---------- ------- ----------
Total.................................. $1,702,615 $1,895,064 $ (6,015) $3,591,664
========== ========== ======= ==========
</TABLE>
Proceeds from the sale of available-for-sale securities amounted to
$150,000. Realized gain on the sale of available-for-sale securities were not
significant during 1995. The change in unrealized holding gains on
available-for-sale securities in 1995 amounted to $534,663.
The amortized cost and estimated fair value of debt securities classified
as available-for-sale at December 31, 1996 and 1995 by contractual maturity are
as follows:
<TABLE>
<CAPTION>
1995
1996 -------------------
----------------------- ESTIMATED
AMORTIZED ESTIMATED AMORTIZED FAIR
MATURITY COST FAIR VALUE COST VALUE
- --------------------------------------------------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Less than one year................................. $1,307,442 $1,307,018 $ -- $ --
One to five years.................................. 25,576 25,371 102,536 103,855
Greater than ten years............................. 2,200,000 2,200,000 -- --
---------- ---------- -------- --------
$3,533,018 $3,532,389 $102,536 $103,855
========== ========== ======== ========
</TABLE>
NOTE 5 -- COMMON STOCK
Common stock at December 31, 1996 and 1995 consists of:
<TABLE>
<CAPTION>
SHARES
--------------------------
ISSUED AND
PAR VALUE AUTHORIZED OUTSTANDING
--------- ---------- -----------
<S> <C> <C> <C> <C>
Road Champs, Inc................................. $50 100 95 $4,750
Die Cast Associates, Inc. ....................... 50 100 100 5,000
--- --- ------
200 195 $9,750
=== === ======
</TABLE>
NOTE 6 -- INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Current
Federal............................................ $1,045,811 $ 22,414
State.............................................. 347,947 --
---------- --------
1,393,758 22,414
Deferred............................................. 221,518 224,003
---------- --------
$1,615,276 $246,417
========== ========
</TABLE>
F-25
<PAGE> 74
ROAD CHAMPS, INC. AND SUBSIDIARY
AND
DIE CAST ASSOCIATES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The provision for income taxes generated for year end 1996 and 1995 differ
from amounts which would result from applying the Federal statutory tax rate to
pretax income as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Income before provision for income taxes............ $3,590,675 $ 768,690
Items not includible/deductible for tax purposes
(income) losses of Die Cast Associates Inc. -- Sub
"S" Corp....................................... 52,511 (147,715)
---------- ---------
Adjusted pretax income......................... 3,643,186 620,975
Federal statutory tax rate.......................... 34% 34%
---------- ---------
Provision for income tax at statutory rate..... 1,238,683 211,131
State income taxes, net of Federal income tax
benefit........................................... 229,645 36,886
Effects of foreign tax rate and other............... 146,948 (1,600)
---------- ---------
Provision for income taxes..................... $1,615,276 $ 246,417
========== =========
</TABLE>
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
1996 1995
------- ---------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards................. $76,334 $ 339,227
------- ---------
Deferred tax liabilities
Property and equipment........................... -- (41,375)
Unrealized holding gain on investments........... (3,719) (713,577)
------- ---------
(3,719) (754,952)
------- ---------
Net deferred tax asset (liability)............ $72,615 $(415,725)
======= =========
</TABLE>
At December 31, 1996, Limited had available net operating loss
carryforwards of approximately $259,050 which have no expiration date.
NOTE 7 -- COMMITMENTS
a. Leases
Road Champs leases its New Jersey office and warehouse and its New York
showroom under lease agreements which expire May 2000 and April 2001,
respectively. The leases call for additional charges based upon utilities, real
estate taxes and repairs, as defined. The New Jersey building is owned by a
limited partnership controlled by the majority shareholder of Road Champs.
Limited leases its Hong Kong office space under a lease agreement which
expires March 1998.
F-26
<PAGE> 75
ROAD CHAMPS, INC. AND SUBSIDIARY
AND
DIE CAST ASSOCIATES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The following is a schedule by year of the future minimum rent, exclusive
of escalations, required by the leases:
<TABLE>
<S> <C>
1997........................................... $ 484,922
1998........................................... 395,169
1999........................................... 371,550
2000........................................... 195,150
2001........................................... 23,050
----------
$1,469,841
==========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1995 amounted to
$304,871 and $446,229, respectively.
b. Stock Appreciation Plan
Road Champs had a nonqualified Stock Appreciation Plan (Plan) with two of
its key employees which vest upon the death or retirement of a participant, or
the change in control of Road Champs, as defined.
In contemplation of the sale of the Company, Road Champs and the two key
employees reached a cash settlement to terminate the Plan totalling
approximately $917,000, which was accrued at December 31, 1996 and included in
other expenses in the accompanying combined statement of operations.
c. Line-of-credit
Road Champs has established a line-of-credit with a commercial bank in the
amount of $3,000,000 expiring September 1997. Borrowings against the
line-of-credit bear interest at LIBOR plus 150 basis points and are
collateralized by accounts receivable and inventory and guaranteed by Limited
and Die Cast.
NOTE 8 -- NOTES PAYABLE -- STOCKHOLDER
The notes payable -- stockholder are unsecured, payable on demand, and
bears interest at 10% per annum. Interest paid during each of the years 1996 and
1995 amounted to $37,500.
NOTE 9 -- SPLIT DOLLAR INSURANCE PLAN
The total premiums required to be paid annually under the Plan, (see note
1) aggregate $366,129. The fringe benefit expense to Road Champs included in the
total was $26,879 and $25,599 for 1996 and 1995, respectively. Premiums in
excess of the fringe benefit expense are recorded as a loan receivable from the
insurance trust, an affiliated entity.
F-27
<PAGE> 76
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED BY THIS
PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY, BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION
IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 12
Price Range of Common Stock and
Dividend Policy..................... 13
Capitalization........................ 14
Pro Forma Financial Information....... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 22
Management............................ 32
Principal and Selling Stockholders.... 36
Certain Relationships and Related
Transactions........................ 38
Description of Securities............. 39
Shares Eligible for Future Sale....... 42
Underwriting.......................... 43
Legal Matters......................... 44
Experts............................... 45
Additional Information................ 45
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS
IN THE SHARES OF COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
600,000 SHARES
'JAKKS LOGO'
(TM)
COMMON STOCK
------------------------
PROSPECTUS
------------------------
CRUTTENDEN ROTH
INCORPORATED
, 1997
======================================================
<PAGE> 77
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that the personal
liability of the directors of the Company shall be limited to the fullest extent
permitted by the provisions of Section 102(b)(7) of the General Corporation Law
of the State of Delaware ("DGCL"). Section 102(b)(7) of the DGCL generally
provides that no director shall be liable personally to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that the Certificate of Incorporation does not eliminate the liability
of a director for (i) any breach of the director's duty of loyalty to the
Company or its stockholders; (ii) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law; (iii) acts or
omissions in respect of certain unlawful dividend payments or stock redemptions
or repurchases; or (iv) any transaction from which such director derives
improper personal benefit. The effect of this provision is to eliminate the
rights of the Company and its stockholders to recover monetary damages against a
director for breach of her or his fiduciary duty of care as a director
(including breaches resulting from negligent or grossly negligent behavior)
except in the situations described in clauses (i) through (iv) above. The
limitations summarized above, however, do not affect the ability of the Company
or its stockholders to seek nonmonetary remedies, such as an injunction or
rescission, against a director for breach of her or his fiduciary duty.
In addition, the Certificate of Incorporation provides that the Company
shall, to the fullest extent permitted by Section 145 of the DGCL, indemnify all
persons whom it may indemnify pursuant to Section 145 of the DGCL. Section 145
of the DGCL permits a company to indemnify an officer or director who was or is
a party or is threatened to be made a party to any proceeding because of his or
her position, if the officer or director acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of the
Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
The Company maintains a directors' and officers' liability insurance policy
covering certain liabilities that may be incurred by any director or officer in
connection with the performance of his or her duties and certain liabilities
that may be incurred by the Company, including the indemnification paid to any
director or officers. This policy provides for $1 million in maximum aggregate
coverage including defense costs. The entire premium for such insurance is paid
by the Company.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Reference is hereby made to Section 8 of the Underwriting Agreement, filed
as Exhibit 1.1, to this Registration Statement, pursuant to which the
Underwriters have agreed to indemnify and hold harmless the Company and its
directors, officers and controlling persons against certain liabilities.
II-1
<PAGE> 78
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all estimated costs and expenses in
connection with the issuance and distribution of the securities being
registered, other than underwriting discounts. All such expenses will be paid by
the Company; none will be paid by the Company's stockholders. As underwriting
compensation in connection with the issuance and distribution of the securities
being registered, the Company will pay the Underwriters' legal fees and
expenses.
<TABLE>
<S> <C>
SEC Registration fee................................................... $ 7,445.69
NASD filing fee........................................................ 2,957.08
*Blue sky fee and expenses (including legal fees)....................... 50,000.00
Nasdaq National Market System listing fee.............................. 31,144.92
*Printing expenses...................................................... 110,000.00
*Accountants' fees and expenses......................................... 35,000.00
*Attorneys' fees and expenses........................................... 175,000.00
*Underwriters' legal fees............................................... 200,000.00
*Miscellaneous.......................................................... 38,452.31
-----------
*TOTAL........................................................ $650,000.00
==========
</TABLE>
- ---------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information relating to the sale of all
unregistered securities of the Company since its inception in January 1995:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF
COMMON STOCK OR
PRINCIPAL AMOUNT
NAME OR CLASS APPROXIMATE DATE OF DEBT
OF PURCHASERS OF ISSUANCE SECURITIES(1) CONSIDERATION
- ------------------------- ---------------- ---------------- -----------------------------------
<S> <C> <C> <C>
Jack Friedman Apr.-Oct. 1995 1,627,486 $500,000
Stephen G. Berman May 1, 1995 216,998 $50,000
Murray L. Skala Apr. 1, 1995 27,124 Issued in consideration for
services, in the amount of $8,333
Justin Products Limited Oct. 19, 1995 75,951 Issued in partial consideration
for the Company's acquisition of
certain product lines, in the
amount of $560,000(2)
William Lee Oct. 30, 1995 90,416 $250,000
Robert Johnson Nov. 15, 1995 16,275 $45,000
Justin Products Limited May 1, 1996 13,649 Adjustment to reflect the offering
price in the Initial Public
Offering for the partial
consideration for the acquisition
of certain product lines
Shareholders of Feb. 6, 1997 198,020 $1,500,000
Road Champs, Inc.
</TABLE>
- ---------------
(1) Number of shares issued prior to December 29, 1995 reflects a 1.843333-for-1
reverse stock split effected on that date.
(2) The fair market value of stock given in partial consideration for assets
acquired.
On February 14, 1996, the Company conducted a private placement bridge
financing in which 39 investors invested an aggregate of $1,300,000 for
Unsecured Subordinated Promissory Notes (convertible into 469,300 shares of the
Company's Common Stock). Of such 469,300 shares, 223,000 shares were sold as
part
II-2
<PAGE> 79
of the Initial Public Offering, and the remaining 246,300 shares were listed as
additional registered shares in the Prospectus relating thereto.
Effective January 8, 1997 the Company issued $6,000,000 in aggregate, of 9%
seven-year convertible debentures to Renaissance Capital Growth Income Fund III,
Inc. and Renaissance US Growth & Income Trust PLC (together "Renaissance"). Net
proceeds to the Company after payment of a 6% brokerage commission to Joseph
Charles & Associates, Inc. and fees to Renaissance and its attorneys were
$5,450,000. The debentures are convertible into 923,077 shares of the Company's
Common Stock based on a conversion price of $6.50 per share. When any shares of
Common Stock are issued by the Company for consideration per share less than the
then existing conversion price of the Convertible Debentures, then in each such
case the conversion price shall be reduced to a new conversion price equal to
the consideration per share received by the Company for such additional shares
of Common Stock; provided however, that prior to such issuance, the Company may
request the holders to waive the right to an adjustment of the conversion price
and in the event such waiver is not granted by the holders, the Company shall
have the right, prior to the issuance of such additional shares, to redeem the
Convertible Debenture at 120% of face value. The number of shares of Common
Stock into which the debentures are convertible are also subject to adjustment
for certain changes in capital structure and other events. The indebtedness must
be repaid in part each month beginning December 1999, in the amount of 1% of the
then unpaid balance and in full at December 31, 2003. The Company has the right
to prepay all or part of such indebtedness in certain events at 120% of their
original $6,000,000 face value.
For its assistance with the Renaissance financing, the Company issued to
Joseph Charles & Associates, Inc. a warrant to purchase an aggregate of 150,000
shares of Common Stock at an exercise price of $8.00 per share. Such warrant
expires on January 8, 2002. Holders of such warrants possess certain demand and
incidental registration rights that may require the Company to register for
public resale the shares of Common Stock issuable thereunder.
Exemption from registration under the Securities Act is claimed for the
sale of all of the securities set forth above in reliance upon the exemption
afforded by Section 4(2) of the Securities Act and, in the case of Promissory
Notes sold on February 14, 1996, Regulation D under the Securities Act, for
transactions not involving a public offering. Each certificate evidencing such
shares of Common Stock, Promissory Notes and Convertible Debentures originally
bore, and some continue to bear, bears an appropriate restrictive legend, and
"stop transfer" orders were originally (and some shares still are) maintained on
the Company's stock transfer records for such shares of Common Stock.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------
<S> <C>
1.1 Form of Underwriting Agreement (1)
3.1 Restated Certificate of Incorporation of the Company (2)
3.2.1 By-Laws of the Company (2)
3.2.2 Amendment to By-Laws of the Company (3)
4.1 Form of certificate evidencing shares of Common Stock (2)
4.2 JAKKS Pacific, Inc. 9.00% Convertible Debenture issued to Renaissance Capital Growth
& Income Fund III, Inc. dated December 31, 1996 (3)
4.3 JAKKS Pacific, Inc. 9.00% Convertible Debenture issued to Renaissance US Growth &
Income Trust PLC dated December 31, 1996 (3)
4.4 Form of Warrant for 42,000 shares of Common Stock of the Company issuable to the
Representative, to be dated the date of the Prospectus (1)
5.1 Opinion, with consent, of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP,
counsel for the Registrant (1)
</TABLE>
II-3
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------
<S> <C>
10.1 Amended and Restated 1995 Stock Option Plan (3)
10.2 Employment Agreement by and between the Company and Jack Friedman dated January 1,
1997 (3)
10.3 Employment Agreement by and between the Company and Stephen G. Berman dated January
1, 1997 (3)
10.4 Asset Purchase Agreement dated October 19, 1995 (as of July 1, 1995) between the
Company, JP (HK) Limited and Justin (2)
10.5 Convertible Loan Agreement by and between the Company and Renaissance Capital Growth
& Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC dated December
31, 1996 (3)
10.6 Purchase Agreement among JAKKS Pacific, Inc. and JAKKS Acquisition Corp. and Road
Champs, Inc., Road Champs Ltd. and Die Cast Associates, Inc. and the shareholders of
Road Champs, Inc. for the purchase of all of the shares of stock of Road Champs,
Inc. and Road Champs Ltd. and the operating assets of Die Cast Associates, Inc.
dated January 21, 1997 (4)
10.7.1 Lease of the Company's offices at 24955 Pacific Coast Highway, Malibu, California
(2)
10.7.2 Amendment to Lease of Company's offices at 24955 Pacific Coast Highway, Malibu,
California (3)
10.8 Lease of the Company's warehouse space at 7 Patton Drive, West Caldwell, New Jersey
and amendment thereto(4)(P)
10.9 Lease of the Company's showroom at the Toy Center South, 200 Fifth Avenue, New York,
New York (2)
10.10 Lease of the Company's showroom at the Toy Center North, 1107 Broadway, New York,
New York (4)(P)
10.11 Lease of the Company's office space at the Peninsula Center, 67 Mody Road,
Tsimshatsui East, Kowloon, Hong Kong (3)
10.12.1 License Agreement with Titan Sports, Inc. dated October 24, 1995 (2)
10.12.2 Amendments to License Agreement with Titan Sports, Inc. dated April 22, 1996 and
January 21, 1997 (3)
10.12.3 International License Agreement with Titan Sports, Inc. dated February 24, 1997(3)
10.13 License Agreement with Saban Merchandising, Inc. and Saban International N.V. with
amendment dated (3)
10.14 License Agreement with Wow Wee International dated June 1, 1996 (3)
10.15 Agreement with Quantum Toy Concepts Pty, Ltd. dated July 1996 (3)
21 Subsidiaries of the Company (3)
23.1 Consent of Pannell Kerr Forster, Certified Public Accountants, A Professional
Corporation, Los Angeles, California (1)
23.2 Consent of Pannell Kerr Forster PC, New York, New York (1)
23.3 Consent of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP (included in Exhibit
5.1) (1)
24 Power of Attorney (included in Part II to this Registration Statement) (3)
27 Financial Data Schedule (3)
</TABLE>
- ---------------
(1) Filed herewith.
(2) Filed previously as an exhibit to the Company's Registration Statement on
Form SB-2 (File no. 333-2048-LA) dated May 1, 1996, and incorporated herein
by reference in its entirety.
II-4
<PAGE> 81
(3) Previously filed as part of this Registration Statement on Form SB-2.
(4) Filed previously as an exhibit to the Company's Current Report on Form 8-K,
filed February 21, 1997 or as schedule 4.2(iii) thereto.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 28. UNDERTAKINGS
The Registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act of 1933, as amended (the "Securities Act"), the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in the volume of securities offered
(or if the total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in "Calculation
of Registration Fee," table in the effective registration statement; and
(c) To include any additional or changed material information on
the plan of distribution.
(4) To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provision, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-5
<PAGE> 82
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby
appoints Joel M. Bennett as attorney-in-fact with full power of substitution, to
execute in the name and on behalf of the Registrant and each such person,
individually and in each capacity stated below, one or more amendments
(including post-effective amendments) to this Registration Statement as the
attorney-in-fact acting in the premises deems appropriate and to file any such
amendment to this Registration Statement with the Commission.
II-6
<PAGE> 83
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Malibu, California, on the 23rd day of April 1997.
JAKKS PACIFIC, INC.
By: /s/ JACK FRIEDMAN
------------------------------------
Jack Friedman
President
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ----------------------------- ---------------
<C> <S> <C>
/s/ JACK FRIEDMAN Chairman, Chief Executive April 23, 1997
- ----------------------------------------------- Officer (Principal Executive
Jack Friedman Officer) and President
/s/ STEPHEN G. BERMAN Chief Operating Officer, April 23, 1997
- ----------------------------------------------- Executive Vice President,
Stephen G. Berman Secretary and Director
/s/ JOEL M. BENNETT Chief Financial Officer April 23, 1997
- ----------------------------------------------- (Principal Financial and
Joel M. Bennett Accounting Officer)
/s/ MICHAEL G. MILLER Director April 23, 1997
- -----------------------------------------------
Michael G. Miller
/s/ MURRAY L. SKALA Director April 23, 1997
- -----------------------------------------------
Murray L. Skala
/s/ ROBERT E. GLICK Director April 23, 1997
- -----------------------------------------------
Robert E. Glick
</TABLE>
II-7
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------
<S> <C>
1.1 Form of Underwriting Agreement (1)
3.1 Restated Certificate of Incorporation of the Company (2)
3.2.1 By-Laws of the Company (2)
3.2.2 Amendment to By-Laws of the Company (3)
4.1 Form of certificate evidencing shares of Common Stock (2)
4.2 JAKKS Pacific, Inc. 9.00% Convertible Debenture issued to Renaissance Capital Growth
& Income Fund III, Inc. dated December 31, 1996 (3)
4.3 JAKKS Pacific, Inc. 9.00% Convertible Debenture issued to Renaissance US Growth &
Income Trust PLC dated December 31, 1996 (3)
4.4 Form of Warrant for 42,000 shares of Common Stock of the Company issuable to the
Representative, to be dated the date of the Prospectus (1)
5.1 Opinion, with consent, of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP,
counsel for the Registrant (1)
10.1 Amended and Restated 1995 Stock Option Plan (3)
10.2 Employment Agreement by and between the Company and Jack Friedman dated January 1,
1997 (3)
10.3 Employment Agreement by and between the Company and Stephen G. Berman dated January
1, 1997 (3)
10.4 Asset Purchase Agreement dated October 19, 1995 (as of July 1, 1995) between the
Company, JP (HK) Limited and Justin (2)
10.5 Convertible Loan Agreement by and between the Company and Renaissance Capital Growth
& Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC dated December
31, 1996 (3)
10.6 Purchase Agreement among JAKKS Pacific, Inc. and JAKKS Acquisition Corp. and Road
Champs, Inc., Road Champs Ltd. and Die Cast Associates, Inc. and the shareholders of
Road Champs, Inc. for the purchase of all of the shares of stock of Road Champs,
Inc. and Road Champs Ltd. and the operating assets of Die Cast Associates, Inc.
dated January 21, 1997 (4)
10.7.1 Lease of the Company's offices at 24955 Pacific Coast Highway, Malibu, California
(2)
10.7.2 Amendment to Lease of Company's offices at 24955 Pacific Coast Highway, Malibu,
California (3)
10.8 Lease of the Company's warehouse space at 7 Patton Drive, West Caldwell, New Jersey
and amendment thereto(4)(P)
10.9 Lease of the Company's showroom at the Toy Center South, 200 Fifth Avenue, New York,
New York (2)
10.10 Lease of the Company's showroom at the Toy Center North, 1107 Broadway, New York,
New York (4)(P)
10.11 Lease of the Company's office space at the Peninsula Center, 67 Mody Road,
Tsimshatsui East, Kowloon, Hong Kong (3)
10.12.1 License Agreement with Titan Sports, Inc. dated October 24, 1995 (2)
10.12.2 Amendments to License Agreement with Titan Sports, Inc. dated April 22, 1996 and
January 21, 1997 (3)
10.12.3 International License Agreement with Titan Sports, Inc. dated February 24, 1997(3)
</TABLE>
<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------
<S> <C>
10.13 License Agreement with Saban Merchandising, Inc. and Saban International N.V. with
amendment dated (3)
10.14 License Agreement with Wow Wee International dated June 1, 1996 (3)
10.15 Agreement with Quantum Toy Concepts Pty, Ltd. dated July 1996 (3)
21 Subsidiaries of the Company (3)
23.1 Consent of Pannell Kerr Forster, Certified Public Accountants, A Professional
Corporation, Los Angeles, California (1)
23.2 Consent of Pannell Kerr Forster PC, New York, New York (1)
23.3 Consent of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP (included in Exhibit
5.1) (1)
24 Power of Attorney (included in Part II to this Registration Statement) (3)
27 Financial Data Schedule (3)
</TABLE>
- ---------------
(1) Filed herewith.
(2) Filed previously as an exhibit to the Company's Registration Statement on
Form SB-2 (File no. 333-2048-LA) dated May 1 1996, and incorporated herein
by reference in its entirety.
(3) Previously filed as part of this Registration Statement on Form SB-2.
(4) Filed previously as an exhibit to the Company's Current Report on Form 8-K,
filed February 21 1997 or as schedule 4.2(iii) thereto.
<PAGE> 1
EXHIBIT 1.1
JAKKS PACIFIC, INC.
600,000 Shares1
Common Stock
UNDERWRITING AGREEMENT
April ___, 1997
CRUTTENDEN ROTH INCORPORATED
As Representative of the Several Underwriters
18301 Von Karman, Suite 100
Irvine, California 92715
Dear Sirs:
JAKKS Pacific, Inc., a Delaware corporation (the "Company"), the
persons named in Schedule 1-A hereto (the "Management Selling Stockholders")
and the persons named in Schedule 1-B hereto (the "Non-Management Selling
Stockholders") hereby confirm their agreement with the several underwriters
named in Schedule 2 hereto (the "Underwriters"), for whom you have been duly
authorized to act as representative (in such capacity, the "Representative"),
as set forth below. If you are the only Underwriters, all references herein to
the Representative shall be deemed to be to the Underwriters. The Management
Selling Stockholders and the Non-Management Selling Stockholder are each
referred to herein as a "Selling Stockholder" and are collectively referred to
herein as the "Selling Stockholders."
1. Securities. Subject to the terms and conditions
herein contained, the Company proposes to sell to the several Underwriters an
aggregate of 600,000 shares (the "Firm Securities") of the Company's Common
Stock, $.001 par value per share (the "Common Stock"). The Firm Securities
consist of 600,000 shares of Common Stock to be issued and sold by the Company
and no shares of Common Stock to be sold by the Selling Stockholders. The
Selling Stockholders also severally propose to sell to the several Underwriters
not more than 90,000 additional shares of Common Stock if requested by the
Representative as provided in Section 3 of this Agreement. Any and all shares
of Common Stock to be purchased by the Underwriters pursuant to such option are
referred to herein as the "Option Securities." The Option Securities, if any,
consist of up to 90,000 shares of Common Stock to be issued and sold by each of
the Selling Stockholders in the amounts set forth opposite the name of such
Selling Stockholder in Schedules 1-A or 1-B hereto. The Firm Securities and any
Option Securities are collectively referred to herein as the "Securities."
2. Representations and Warranties of the Company and
Selling Stockholders.
(a) The Company and each of the Management Selling
Stockholders jointly and severally represent and warrant to, and agree with,
each of the several Underwriters that:
__________________________________
(1) Plus an option to purchase up to 90,000 additional shares to cover
over-allotments, if any.
<PAGE> 2
(i) registration statement on Form SB-2 (File No. 333-22583) with
respect to the Securities, including a prospectus subject to completion, has
been filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and one
or more amendments to such registration statement may have been so filed.
After the execution of this Agreement, the Company will file with the
Commission either (A) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act,
either (1) if the Company relies on Rule 434 under the Act, a Term Sheet (as
hereinafter defined) relating to the Securities, that shall identify the
Preliminary Prospectus (as hereinafter defined) that it supplements containing
such information as is required or permitted by Rules 434, 430A and 424(b)
under the Act or (2) if the Company does not rely on Rule 434 under the Act, a
prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been filed, in such
registration statement), with such changes or insertions as are required by
Rule 430A under the Act or permitted by Rule 424(b) under the Act, and in the
case of either clause (A)(1) or (A)(2) of this sentence, as have been provided
to and approved by the Representative prior to the execution of this Agreement,
or (B) if such registration statement, as it may have been amended, has not
been declared by the Commission to be effective under the Act, an amendment to
such registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Representative prior to the
execution of this Agreement. The Company may also file a related registration
statement with the Commission pursuant to Rule 462(b) under the Act for the
purpose of registering certain additional Securities, which registration
statement shall be effective upon filing with the Commission. As used in this
Agreement, the term "Original Registration Statement" means the registration
statement initially filed relating to the Securities, as amended at the time
when it was or is declared effective, including all financial schedules and
exhibits thereto and including any information omitted therefrom pursuant to
Rule 430A under the Act and included in the Prospectus (as hereinafter
defined); the term "Rule 462(b) Registration Statement" means any registration
statement filed with the Commission pursuant to Rule 462(b) under the Act
(including the Registration Statement and any Preliminary Prospectus or
Prospectus incorporated therein at the time such Registration Statement becomes
effective); the term "Registration Statement" includes both the Original
Registration Statement and any Rule 462(b) Registration Statement; the term
"Preliminary Prospectus" means each prospectus subject to completion filed with
such registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the term
"Prospectus" means: (x) if the Company relies on Rule 434 under the Act, the
Term Sheet relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Act, together with the Preliminary Prospectus identified
therein that such Term Sheet supplements; (y) if the Company does not rely on
Rule 434 under the Act, the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Act; or (z) if the Company does not rely on Rule 434
under the Act and if no prospectus is required to be filed pursuant to Rule
424(b) under the Act, the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(ii) The Commission has not issued or, to the best knowledge of the
Company, threatened or contemplated any order preventing or suspending the use
of any Preliminary Prospectus; no stop order suspending the sale of the
Securities in any jurisdiction has been issued
2
<PAGE> 3
and no proceedings for that purpose are pending or, to the best knowledge of
the Company, threatened or contemplated, and any request of the Commission for
additional information (to be included in the Registration Statement, any
Preliminary Prospectus or the Prospectus or otherwise) has been complied with.
When any Preliminary Prospectus was filed with the Commission it (A) contained
all statements required to be stated therein in accordance with, and complied
in all material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (B) did not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement or any
amendment thereto was or is declared effective, it (A) contained or will
contain all statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements of, the
Act and the rules and regulations of the Commission thereunder and (B) did not
or will not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. When
the Prospectus or any Term Sheet that is a part thereof or any amendment or
supplement to the Prospectus is filed with the Commission pursuant to Rule
424(b) (or, if the Prospectus or any part thereof or such amendment or
supplement is not required to be so filed, when the Registration Statement or
the amendment thereto containing such amendment or supplement to the Prospectus
was or is declared effective) and on the Firm Closing Date and any Option
Closing Date (both as hereinafter defined), the Prospectus, as amended or
supplemented at any such time, (A) contained or will contain all statements
required to be stated therein in accordance with, and complied or will comply
in all material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (B) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (ii) do not apply to statements or omissions made
in any Preliminary Prospectus, the Registration Statement or any amendment
thereto or the Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through the Representative specifically for use therein.
(iii) If the Company has elected to rely on Rule 462(b), (A) the
Company has filed a Rule 462(b) Registration Statement in compliance with Rule
462(b), which is effective upon filing pursuant to Rule 462(b), and has
received confirmation of its receipt and (B) the Company has given irrevocable
instructions for transmission of the applicable filing fee in connection with
the filing of the Rule 462(b) Registration Statement, in compliance with Rule
111 promulgated under the Act or the Commission has received payment of such
filing fee.
(iv) The Company and each of its subsidiaries have been duly
organized and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation and are duly qualified
to transact business as foreign corporations and are in good standing under the
laws of all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses requires
such qualification, except where the failure to be so qualified does not result
in a material adverse change in the condition (financial or otherwise),
business, prospects, net worth or results of operations of the Company and its
subsidiaries, taken as a whole (a "Material Adverse Effect").
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<PAGE> 4
(v) The Company and each of its subsidiaries have full power
(corporate and other) to own or lease their respective properties and conduct
their respective businesses as described in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus); the Company has full power (corporate and other) and
authority to enter into this Agreement and to carry out all the terms and
Provisions hereof to be carried out by it; and the Company has full power
(corporate and other) and authority to execute and deliver the warrants to
purchase Common Stock to be issued and sold to the Representative under the
terms of the Warrant Agreement (as hereinafter defined) in accordance with
Section 5(o) hereto (the "Representative's Warrants").
(vi) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and are owned beneficially by the Company free and clear of any
security interests, liens, encumbrances, equities or claims. The Warrant
Agreement and the Representative's Warrants, as of the Closing Date, will have
been duly authorized and validly issued, and when executed and delivered by the
Company will be valid and binding obligations enforceable against the Company
in accordance with their terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors' rights generally or by general equitable principles.
The Common Stock issuable pursuant to the Representative's Warrants, when
issued in accordance with the terms thereof, will be duly authorized, validly
issued, fully paid and nonassessable. The Representative's Warrants and the
shares of Common Stock issuable thereunder were not and will not be issued in
violation of any preemptive rights of any security holder of the Company. The
Company has reserved a sufficient number of shares of Common Stock for issuance
pursuant to the Representative's Warrants. The holders of the Common Stock
issuable pursuant to the Representative's Warrants will not be subject to
personal liability solely by reason of being such holders. The issuance and
sale of the Common Stock pursuant to the Representative's Warrants will be made
in conformity with the applicable registration requirements or exemptions
therefrom under federal and applicable state securities law.
(vii) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). All of the issued shares
of capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable. The Firm Securities and the Option
Securities have been duly authorized and at the Firm Closing Date or the
related Option Closing Date (as the case may be), after payment therefor in
accordance herewith, will be validly issued, fully paid and nonassessable. At
the Firm Closing Date or the Option Closing Date, no holders of outstanding
shares of capital stock of the Company will be entitled as such to any
preemptive or other rights to subscribe for any of the Securities, and no
holder of securities of the Company has any right which has not been fully
exercised or waived to require the Company to register the offer or sale of any
securities owned by such holder under the Act in the public offering
contemplated by this Agreement.
(viii) The capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), and
this Agreement, the Warrant Agreement and the Representative's Warrants conform
in all material respects to the descriptions thereof contained in
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<PAGE> 5
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(ix) Except as disclosed in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there are no
outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such subsidiary, (B) warrants, rights or options to subscribe
for or purchase from the Company or any such subsidiary any such capital stock
or any such convertible or exchangeable securities or obligations, or (C)
obligations of the Company or any such subsidiary to issue any shares of
capital stock, any such convertible or exchangeable securities or obligations,
or any such warrants, rights or options. The information in the Registration
Statement and the Prospectus insofar as it relates to the Representative's
Warrants, in each case as of the date on which the Registration Statement is
declared effective by the Commission, the Closing Date and any Option Closing
Date, is true, correct and complete in all material respects.
(x) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) fairly present the financial position of
the Company and its consolidated subsidiaries and the results of operations and
cash flows as of the dates and periods therein specified. The combined
financial statements and schedules of Road Champs, Inc., Die Cast Associates,
Inc. and their consolidated subsidiaries (collectively, "Road Champs") included
in the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) fairly present the
financial position of Road Champs and the results of operations and cash flows
as of the dates and periods therein specified. Such financial statements and
schedules have been prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied throughout the periods involved
(except as otherwise noted therein). The selected financial data set forth
under the captions "Summary Consolidated Financial Data" and "Capitalization"
in the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present, in accordance with GAAP, as applicable,
on the basis stated in the Prospectus (or such Preliminary Prospectus), the
information included therein. No other financial statements or schedules are
required to be included in the Registration Statement.
(xi) Pannell Kerr Forster, P.C., which has audited certain
financial statements of the Company and its consolidated subsidiaries and Road
Champs and its consolidated subsidiaries and delivered their report with
respect to the audited consolidated financial statements and audited combined
financial statements included in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), are independent public accountants as required by the Act and the
applicable rules and regulations thereunder.
(xii) The execution and delivery of this Agreement, the Warrant
Agreement and the Representative's Warrants have been duly authorized by the
Company; this Agreement, the Warrant Agreement and the Representative's
Warrants have been duly executed and delivered by the Company and are the valid
and binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except as such enforceability may be
limited by the effect of bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to rights and remedies of creditors or by general
equitable principles.
(xiii) No legal or governmental proceedings are pending to which the
Company or
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<PAGE> 6
any of its subsidiaries is a party or to which the property of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not described therein (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus),
and, to the Company's knowledge, no such proceedings have been threatened
against the Company or any of its subsidiaries or with respect to any of their
respective properties; and no contract or other document is required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement that is not described therein (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) or
filed as required.
(xiv) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement and of the
Representative's Warrants to the Representative by the Company pursuant to the
Warrant Agreement; the execution and delivery of this Agreement, the Warrant
Agreement and the Representative's Warrants by the Company; the compliance by
the Company with the provisions of this Agreement, the Warrant Agreement and
the Representative's Warrants; and the consummation of all transactions
contemplated therein do not (A) require the consent, approval, authorization,
registration or qualification of or with any court, government or governmental
authority, domestic or foreign, except such as have been obtained, such as may
be required under state securities or blue sky laws, such as may be required by
the National Association of Securities Dealers, Inc. (the "NASD") and, if the
Registration Statement filed with respect to the Securities (as amended) is not
effective under the Act as of the time of execution hereof, such as may be
required (and shall be obtained as provided in this Agreement) under the Act,
or (B) conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which the Company or any of its subsidiaries
or any of their respective properties are bound, or the charter documents or
by-laws of the Company or any of its subsidiaries, or any statute or any
judgment, decree, order, rule or regulation of any court or other governmental
authority or any arbitrator applicable to the Company or any of its
subsidiaries, which would have a Material Adverse Effect.
(xv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), neither the
Company nor any of its subsidiaries has sustained any loss or interference with
their respective businesses or properties having or resulting in a Material
Adverse Effect from fire, flood, hurricane, accident or other calamity, whether
or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding and there has not been any event, circumstance, or
development that results in, or that the Company believes would result in, a
Material Adverse Effect, except in each case as described in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(xvi) The Company has not, directly or indirectly (except for the
sale of Securities under this Agreement), (i) taken any action designed to
cause or to result in, or that has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities or
(ii) since the filing of the Registration Statement (A) sold, bid for,
purchased, or paid anyone any compensation for soliciting purchases of, the
Securities or (B) paid or agreed to pay to any person
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<PAGE> 7
any compensation for soliciting another to purchase any other securities of the
Company.
(xvii) (a) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses except
where the failure to possess any such item would not have a Material Adverse
Effect, and (b) neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit that, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a Material
Adverse Effect, except as described in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus).
(xviii) The Company is not an investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and this transaction will not
cause the Company to become an investment company subject to registration under
the 1940 Act.
(xix) The Company has filed all foreign, federal, state and local
tax returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a Material
Adverse Effect) and has paid all taxes required to be paid by it and any other
assessment, fine or penalty levied against it, to the extent that any of the
foregoing is due and payable, except for any such assessment, fine or penalty
that is currently being contested in good faith or as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(xx) Except for the shares of capital stock of each of the
subsidiaries owned by the Company, neither the Company nor any such subsidiary
owns any shares of stock or any other equity securities of any corporation or
has any equity interest in any firm, partnership, association or other entity.
All shares of stock or other equity securities of the subsidiaries are
wholly-owned directly or indirectly by the Company.
(xxi) The books, records and accounts of the Company and each of its
subsidiaries accurately and fairly reflect, in reasonable detail, the
transactions in and dispositions of the assets of the Company and each of its
subsidiaries, respectively. The books, records and accounts of Road Champs and
each of its subsidiaries accurately and fairly reflect, in reasonable detail,
the transactions in and dispositions of the assets of Road Champs and each of
its subsidiaries, respectively. The Company, Road Champs and each of their
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (A) transactions are executed in accordance
with management's general or specific authorizations; (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability; (C) access to assets is permitted only in accordance with
management's general or specific authorization; and (D) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(xxii) Except as described in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), no default exists and no event has occurred that, with
notice or lapse of time or both, would constitute a default, in the due
performance and observance of any term, covenant or condition of any contract,
indenture, mortgage, deed of trust, lease or other agreement or instrument to
which the Company or any of
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<PAGE> 8
its subsidiaries is a party or by which the Company or any of its subsidiaries
or any of their respective properties is bound or may be affected, in any
respect that would have a Material Adverse Effect. The agreements to which the
Company or any of its subsidiaries is a party described in the Registration
Statements are valid agreements, enforceable by the Company or such subsidiary,
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles and,
to the best of the Company's knowledge, the other contracting party or parties
thereto are not in material breach or material default under any of such
agreements.
(xxiii) The Company has not distributed and, prior to the later of (A)
the Firm Closing Date or any Option Closing Date and (B) the completion of the
distribution of the Securities, will not distribute any written offering
material in connection with the offering and sale of the Securities other than
the Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or Term Sheet or any amendment or supplement
thereto, or other materials, if any, permitted by the Act.
(xxiv) The description of the Company's and its subsidiaries' real
property contained in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), is
true and complete in all material respects and the Company and its subsidiaries
have good and marketable title to all real and personal property owned by each
of them, in each case free and clear of any security interests, liens,
encumbrances, equities, claims and other defects, except for those relating to
debts of the Company or such subsidiary described in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and those that do not interfere with the use made or
proposed to be made of such property by the Company or such subsidiary, and any
real property and buildings held under lease by the Company or any such
subsidiary are held under valid, subsisting and enforceable leases (except as
enforceability may be limited by the effect of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to rights and
remedies of creditors or by general equitable principles), with such exceptions
as are not material and do not interfere with the use made or proposed to be
made of such property and buildings by the Company or such subsidiary, in each
case except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus). The
Company and its subsidiaries own or lease all such properties as are necessary
to its operations as now conducted and as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(xxv) No labor dispute with the employees of the Company or any of
its subsidiaries exists or to the Company's knowledge, is threatened or
imminent that could result in a Material Adverse Effect, except as described in
or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), and the Company is not aware of an
existing, imminent or threatened labor disturbance by the employees of any
principal suppliers, manufacturers, contractors or others that that could
result in a Material Adverse Effect, except as described in or contemplated by
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxvi) The Company and its subsidiaries own or possess all material
trademarks,
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<PAGE> 9
service marks, trade names, licenses, copyrights and proprietary or other
confidential information currently employed by them in connection with their
respective businesses, and neither the Company nor any such subsidiary has
received any notice of infringement of or conflict with asserted rights of any
third party with respect to any of the foregoing which, singly or in the
aggregate, if the subject of unfavorable decisions, rulings or findings, would
have a Material Adverse Effect, except as described in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
The description of the Company's licensing and marketing agreements contained
in the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), is true and complete in
all material respects. All such licensing and marketing agreements are valid,
binding and in full force and effect and neither the Company nor any subsidiary
is, or has received any notice that it is, in default (or with the giving of
notice or lapse of time or both, would be in default) under any such licensing
or marketing agreements.
(xxvii) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which
they are engaged; and neither the Company nor any such subsidiary has any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a Material Adverse Effect, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(xxviii) The Common Stock is registered pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and is quoted on the Nasdaq Small Cap and, upon completion of the Offering,
will be quoted on the Nasdaq National Market, and the Company has taken no
action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from the Nasdaq Small Cap or that could in the future cause the Common
Stock to be delisted from the Nasdaq National Market, nor has the Company
received any notification that the Commission or NASD is contemplating
terminating such registration or listing. The Company has timely filed all
reports required to be filed by it under the Exchange Act.
(xxix) The Company has not at any time during the last five (5) years
(A) made any unlawful contribution to any candidate for foreign office or
failed to disclose fully any contribution in violation of law, or (B) made any
payment to any federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof.
(xxx) Any pro forma financial or other information and related notes
included in the Registration Statement, each Preliminary Prospectus and the
Prospectus comply (or, if the Prospectus has not been filed with the
Commission, as to the Prospectus, will comply) in all material respects with
the requirements of the Act and the rules and regulations of the Commission
thereunder and present fairly the pro forma information shown, as of the dates
and for the periods covered by such pro forma information. Such pro forma
information, including any related notes and schedules, has been prepared on a
basis consistent with the historical financial statements and other historical
information, as applicable, included in the Registration
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Statement, the Preliminary Prospectus and the Prospectus, except for the pro
forma adjustments specified therein, and give effect to assumptions made on a
reasonable basis to give effect to historical and, if applicable, proposed
transactions described in the Registration Statement, each Preliminary
Prospectus and the Prospectus.
(xxxi) Except as set forth in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there are no
outstanding loans, advances or guaranties of indebtedness by the Company or its
subsidiaries to or for the benefit of any of (i) its "affiliates," as such term
is defined in the Act and the rules and regulations thereof or (ii) any of the
members of the families of any of them.
(xxxii) The Company and its subsidiaries have no liability, absolute
or contingent, relating to: (A) public health or safety; (B) worker health or
safety; (C) product defect or warranty (except, as to product defect or
warranty, as is disclosed in the Registration Statement and Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus));
or (D) pollution, damage to or protection of the environment, including,
without limitation, relating to damage to natural resources, emissions,
discharges, releases or threatened releases of hazardous materials into the
environment (including, further without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or otherwise relating to the
manufacture, processing, use, treatment, storage, generation, disposal,
transport or handling of any hazardous materials. As used herein, "hazardous
material" includes chemical substances, wastes, pollutants, contaminants,
hazardous or toxic substances, constituents, materials or wastes, whether
solid, gaseous or liquid in nature.
(b) Each of the Selling Stockholders represents and
warrants to, and agrees with, each Underwriter that:
(i) Such Selling Stockholder is the lawful owner of the
Securities to be sold by such Selling Stockholder hereunder and upon
sale and delivery of, and payment for, such Securities, as provided
herein, such Selling Stockholder will convey good and marketable title
to such Securities, free and clear of all liens, encumbrances, equities
and claims whatsoever.
(ii) Such Selling Stockholder has not taken and will not
take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result,
under the Exchange Act or otherwise, in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of the Securities and has not effected any sales of shares of
Common Stock which, if effected by the issuer, would be required to be
disclosed in response to Item 701 of Regulation S-B.
(iii) The execution and delivery of this Agreement have been duly
authorized by such Selling Stockholder, and this Agreement has been
duly executed and delivered by such Selling Stockholder and is the
valid and binding agreement of such Selling Stockholder, enforceable
against such Selling Stockholder in accordance with its terms, except
as such enforceability may be limited by the effect of bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating
to rights and remedies of creditors or by general equitable
principles.
(iv) Certificates in negotiable form for such Selling Stockholder's
Securities have
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<PAGE> 11
been placed in custody, for delivery pursuant to the terms of this
Agreement, under a Custody Agreement duly authorized, executed and
delivered by such Selling Stockholders, in the form heretofore
furnished to you (the "Custody Agreement") with US Stock Transfer
Corporation of Glendale, California, as Custodian (the "Custodian");
the Securities represented by the certificates so held in custody for
each of the Selling Stockholders are subject to the interests
hereunder of the Underwriters, the Company and the other Selling
Stockholders, if any; the arrangements for custody and delivery of
such certificates, made by such Selling Stockholder hereunder and
under the Custody Agreement, are not subject to termination by any
acts of such Selling Stockholder, or by operation of law, whether by
the death or incapacity of such Selling Stockholder or the occurrence
of any other event; and if any such death, incapacity or any other
such event shall occur before the delivery of such Securities
hereunder, certificates for the Securities will be delivered by the
Custodian in accordance with the terms and conditions of this
Agreement and the Custody Agreement as if such death, incapacity or
other event had not occurred, regardless of whether or not the
Custodian shall have received notice of such death, incapacity or
other event.
(v) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by such
Selling Stockholder of the transactions contemplated herein, except
such as may have been obtained under the Act and such as may be
required under the blue sky laws of any jurisdiction in connection
with the purchase and distribution of the Securities by the
Underwriters and such other approvals as have been obtained.
(vi) Neither the sale of the Securities being sold by such Selling
Stockholder nor the consummation of any other of the transactions
herein contemplated by such Selling Stockholder or the fulfillment of
the terms hereof by such Selling Stockholder will conflict with or
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any indenture, mortgage, deed of trust,
lease or other agreement or instrument to which such Selling
Stockholder is a party or by which such Selling Stockholder is bound,
or the charter documents or by-laws of such Selling Stockholder, or
any statute or any judgment, decree, order, rule or regulation of any
court or other governmental authority or any arbitrator applicable to
such Selling Stockholder.
(vii) Such Selling Stockholder has delivered to the Representative
an agreement to the effect that such person or entity will not, except
to the extent otherwise specifically permitted by the terms of each
such person's or entity's agreement, directly or indirectly, without
the prior written consent of the Representative, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of an option to purchase or other sale
or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common
Stock for a period of 45 days after the date of this Agreement;
provided, however, that intra-family transfers or transfers to trust
for estate planning purposes shall not be so restricted.
(c) Any certificate signed by any officer of the Company
or any Selling Stockholder and delivered to the Representative or to counsel
for the Underwriters shall be deemed a representation and warranty by the
Company or such Selling Stockholder, respectively, to each Underwriter, as to
the matters covered thereby.
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3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, (i) the Company agrees to issue and sell 600,000
Firm Securities, and (ii) each of the Underwriters, severally and not jointly,
agrees to purchase from the Company, at a purchase price of [$ ] per share,
an aggregate number of Firm Securities set forth opposite the name of such
Underwriter in Schedule 2 hereto. One or more certificates in definitive form
for the Firm Securities that the several Underwriters have agreed to purchase
hereunder from the Company, in such denomination or denominations and registered
in such name or names as the Representative requests upon notice to the Company
at least 48 hours prior to the Firm Closing Date, shall be delivered by or on
behalf of the Company to the Representative for the respective accounts of the
Underwriters, against payment by or on behalf of the Underwriters of the
aggregate purchase price therefor by wire transfer in same day funds (the "Wired
Funds") to the account of the Company. The certificates for the Option
Securities that the several Underwriters have agreed to purchase hereunder from
the Selling Stockholders shall be delivered in accordance with the terms of the
custody agreement by or on behalf of the Selling Stockholders to the
Representative for the respective accounts of the Underwriters against payment
by or on behalf of the Underwriters of the aggregate purchase price therefor at
any such closing. Such delivery of and payment for the Firm Securities shall be
made at the offices of Gibson, Dunn & Crutcher LLP, 2029 Century Park East, Los
Angeles, California 90067, at 6:30 A.M., Pacific time, on April __, 1997, or at
such other place, time or date as the Representative and the Company may agree
upon or as the Representative may determine pursuant to Section 9 hereof, such
time and date of delivery against payment being herein referred to as the "Firm
Closing Date." The Company will make such certificate or certificates for the
Firm Securities available for checking and packaging by the Representative at
the offices of the Company's transfer agent or registrar at least 24 hours prior
to the Firm Closing Date or, if available, will coordinate the transfer of the
Firm Securities to the Underwriters through the facilities of the Depository
Trust Company.
(b) For the sole purpose of covering any over-allotments
in connection with the distribution and sale of the Firm Securities as
contemplated by the Prospectus, on the basis of the several (and not joint)
covenants and agreements of the Underwriters contained in this Agreement and
subject to the terms and conditions set forth in this Agreement, each of the
Selling Stockholders hereby grants to the several Underwriters an option to
purchase, severally and not jointly, so many of the Option Securities set forth
opposite the name of such Selling Stockholder in Schedules 1-A and 1-B. The
purchase price to be paid for any Option Securities shall be the same price per
share as the price per share for the Firm Securities set forth above in
paragraph (a) of this Section 3. The option granted hereby may be exercised as
to all or any part of the Option Securities from time to time within forty-five
days after the date of the Prospectus (or, if such 45th day shall be a Saturday
or Sunday or a holiday, on the next business day thereafter when the Nasdaq
National Market is open). The Underwriters shall not be under any obligation to
purchase any of the Option Securities prior to the exercise of such option. The
Representative may from time to time exercise the option granted hereby by
giving notice in writing or by telephone (confirmed within 24 hours in writing)
to the Company and each of the Selling Stockholders setting forth the aggregate
number of Option Securities as to which the several Underwriters are then
exercising the option and the date and time for delivery of and payment for such
Option Securities. Any such date of delivery shall be
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<PAGE> 13
determined by the Representative but shall not be earlier than two business days
or later than five business days after such exercise of the option and, in any
event, shall not be earlier than the Firm Closing Date. The time and date set
forth in such notice, or such other time on such other date as the
Representative and the Company may agree upon or as the Representative may
determine pursuant to Section 9 hereof, is herein called the "Option Closing
Date" with respect to such Option Securities. Upon exercise of the option as
provided herein, each of the Selling Stockholders shall become obligated to sell
to each of the several Underwriters, and, subject to the terms and conditions
herein set forth, each of the Underwriters (severally and not jointly) shall
become obligated to purchase from each of the Selling Stockholders, the same
percentage of the total number of the Option Securities as to which the several
Underwriters are then exercising the option as such Underwriter is obligated to
purchase of the aggregate number of Firm Securities, as adjusted by the
Representative in such manner as it deems advisable to avoid fractional shares.
If the option is exercised as to all or any portion of the Option Securities,
one or more certificates in definitive form for such Option Securities, and
payment therefor, shall be delivered on the related Option Closing Date in the
manner, and upon the terms and conditions, set forth in paragraph (a) of this
Section 3, except that reference therein to the Firm Securities and the Firm
Closing Date shall be deemed, for purposes of this paragraph 3(b), to refer to
such Option Securities and Option Closing Date, respectively.
(c) It is understood that you, individually and not as
the Representative, may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such
Underwriter or Underwriters from any of its or their obligations hereunder.
(d) The Company and each of the Selling Stockholders
hereby acknowledge that the wire transfer by or on behalf of the Underwriters
of the purchase price for any Securities does not constitute closing of a
purchase and sale of the Securities. Only execution and delivery of a receipt
(by facsimile or otherwise) for the Securities by the Underwriters indicates
completion of the closing of a purchase of the Securities from the Company or
the Selling Stockholders. Furthermore, in the event that the Underwriters wire
funds to the Company or the Selling Stockholders prior to the completion of the
closing of a purchase of Securities, the Company and each of the Selling
Stockholders hereby acknowledge that until the Underwriters execute and deliver
a receipt for the Securities, by facsimile or otherwise, the Company and each
of the Selling Stockholders will not be entitled to the wired funds and each
shall return the wired funds received by them to the Underwriters as soon as
practicable (by wire transfer of same-day funds) upon demand. In the event
that the closing of a purchase of Securities is not completed and the wire
funds are not returned by the Company or the Selling Stockholders to the
Underwriters on the same day the wired funds were received by the Company or
the Selling Stockholders, the Company and each of the Selling Stockholders
agree to pay to the underwriters in respect of each day the wire funds are not
returned by it, in same-day funds, interest at the Prime Rate as stated in the
Wall Street Journal on the date hereof on the amount of such wire funds
received by them.
4. Offering by the Underwriters. Upon your authorization of the
release of the Firm Securities, the several Underwriters propose to offer the
Firm Securities for sale to the public upon the terms set forth in the
Prospectus.
5. Covenants of the Company. The Company covenants and agrees
with each of the
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<PAGE> 14
Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, to become effective as promptly as possible. If required, the
Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under the
Act. During any time when a prospectus relating to the Securities is required
to be delivered under the Act, the Company (i) will comply with all
requirements imposed upon it by the Act and the rules and regulations of the
Commission thereunder to the extent necessary to permit the continuance of
sales of or dealings in the Securities in accordance with the provisions hereof
and of the Prospectus, as then amended or supplemented, and (ii) will not file
with the Commission the Prospectus, Term Sheet or the amendment referred to in
the second sentence of Section 2(a)(i) hereof, any amendment or supplement to
such Prospectus, Term Sheet or any amendment to the Registration Statement or
any Rule 462(b) Registration Statement of which the Representative shall not
previously have been advised and furnished with a copy for a reasonable period
of time prior to the proposed filing and as to which filing the Representative
shall not have given its consent. The Company will prepare and file with the
Commission, in accordance with the rules and regulations of the Commission,
promptly upon request by the Representative or counsel for the Underwriters,
any amendments to the Registration Statement or amendments or supplements to
the Prospectus that may be deemed necessary or advisable in connection with the
distribution of the Securities by the several Underwriters, and will use its
best efforts to cause any such amendment to the Registration Statement to be
declared effective by the Commission as promptly as possible. The Company will
advise the Representative, promptly after receiving notice thereof, of the time
when the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto has
been filed and will provide to the Representative copies of each such filing.
(b) The Company will advise the Representative, promptly
after receiving notice or obtaining knowledge thereof, of (i) the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (ii) the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, (iii) the institution, threatening or
contemplation of any proceeding for any such purpose, or (iv) any request made
by the Commission for amending the Original Registration Statement or any Rule
462(b) Registration Statement, for amending or supplementing the Prospectus or
for additional information. The Company will use its best efforts to prevent
the issuance of any such stop order and, if any such stop order is issued, to
obtain the withdrawal thereof as promptly as possible.
(c) The Company will arrange for the qualification of the
Securities for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representative may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities; provided, however, that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction. If, after
the public offering of the Securities by the Underwriters and during such
period, the Underwriters propose to vary the terms of offering thereof by
reason of changes in general market conditions or otherwise, the Representative
will advise the Company in writing of the proposed
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<PAGE> 15
variation and if, in the opinion either of counsel for the Company or counsel
for the Underwriters, such proposed variation requires that the Prospectus be
supplemented or amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended Prospectus setting
forth such variation. The Company authorizes the Underwriters and all dealers
to whom any of the Securities may be sold by the Underwriters to use the
Prospectus, as from time to time so amended or supplemented, in connection with
the sale of the Securities in accordance with the applicable provisions of the
Act and the rules and regulations thereunder for such period.
(d) If, at any time prior to the later of (i) the final
date when a prospectus relating to the Securities is required to be delivered
under the Act or (ii) the Option Closing Date, any event occurs as a result of
which the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if for any other reason it is
necessary at any time to amend or supplement the Prospectus to comply with the
Act or the rules or regulations of the Commission thereunder, the Company will
promptly notify the Representative thereof and, subject to Section 5(a) hereof,
will prepare and file with the Commission, at the Company's expense, an
amendment to the Registration Statement or an amendment or supplement to the
Prospectus that corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representative and to counsel for the Underwriters a signed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) and any Rule 462(b)
Registration Statement, (ii) to each other Underwriter, a conformed copy of
such registration statement and any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (iii) so long as
a prospectus relating to the Securities is required to be delivered under the
Act, as many copies of each Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto as the Representative may reasonably request;
without limiting the application of clause (iii) of this sentence, the Company
shall, as soon as practicable following the determination of the public
offering price, deliver to the Underwriters, without charge, as many copies of
the Prospectus and any amendment or supplement thereto as the Representative
may reasonably request for purposes of confirming orders that are expected to
settle on the Firm Closing Date. The Company will provide or cause to be
provided to each of the Representative, and to each Underwriter that so
requests in writing, a copy of each report on Form SR filed by the Company as
required by Rule 463 under the Act.
(f) If the Company elects to rely on Rule 462(b), the
Company shall both transmit a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) and pay the applicable fees in
accordance with Rule 111 promulgated under the Act by the earlier of (i) 10:00
P.M., Eastern time on the date of this Agreement and (ii) the time
confirmations are sent or given, as specified by Rule 462(b)(2).
(g) The Company, as soon as practicable, will make
generally available to its security holders and to the Representative a
consolidated earnings statement of the Company and its subsidiaries that
satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder.
(h) The Company will apply the net proceeds from the sale
of the Securities as set forth under "Use of Proceeds" in the Prospectus.
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<PAGE> 16
(i) The Company will not, directly or indirectly, without
the prior written consent of the Representative on behalf of the Underwriters,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale
or disposition) of any shares of Common Stock or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock for a period
of 45 days after the date hereof, except pursuant to this Agreement, issuances
pursuant to warrants, options and convertible debentures outstanding prior to
the date hereof, stock options granted under the company's stock option plan to
officers, employees, directors and consultants at an exercise price equal to
fair market value and any stock issued on exercise thereof or issuances in
connection with an acquisition. If the Company plans to issue any Common Stock
or other securities in connection with an acquisition, the Company shall
provide the Representative with three days' advance written notice of its
intention to so issue such securities including the terms of any such proposed
transaction.
(j) The Company will not, directly or indirectly, (i)
take any action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or (ii) for a period of 45 days after the date
hereof (A) sell, bid for, purchase, or pay anyone any compensation for
soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company. The Company will not, directly or indirectly, without the
prior written consent of the Representative on behalf of the Underwriters,
offer, purchase, offer to purchase, contract to purchase, grant any option to
sell or otherwise purchase or acquire (or announce any offer, purchase, offer
of purchase, contract to purchase, grant of any option to sell or other
purchase or acquisition of) any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock
for a period of 45 days after the date hereof.
(k) The Company will obtain the lockup agreements
described in Section 7(g) and Section 7(h) hereof prior to the Firm Closing
Date.
(l) The Company will cause the Securities to be duly
included for quotation on the Nasdaq National Market prior to the Firm Closing
Date. The Company will use its best efforts to ensure that the Securities
remain included for quotation on the Nasdaq National Market following the Firm
Closing Date.
(m) During a period of five years commencing with the
date of this Agreement, the Company will promptly furnish to the Representative
and to each Underwriter who may so request in writing copies of (i) all
periodic and special reports furnished by it to Stockholders of the Company,
(ii) all information, documents and reports filed by it with the Commission,
Nasdaq National Market, any securities exchange or the NASD, (iii) all press
releases and material news items or articles in respect of the Company, its
products or affairs released or prepared by the Company (other than promotional
and marketing materials disseminated solely to customers and potential
customers of the Company in the ordinary course of business) and (iv) any
additional information concerning the Company or its business which the
Representative may reasonably request.
(n) The Company will use its best efforts to maintain
insurance of the types and in the amounts which it deems adequate for its
business consistent with insurance coverage maintained by companies of similar
size and engaged in similar businesses including, but not limited to, general
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<PAGE> 17
liability insurance covering all real and personal property owned or leased by
the Company and its subsidiaries against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against.
(o) On the Closing Date, the Company will sell to the
Representative, at a purchase price of $0.001 per warrant, warrants to purchase
42,000 shares of Common Stock. Such Representative's Warrants will be issued
pursuant to the terms of the Warrant Agreement and will have an exercise price
equal to [$_____], subject to adjustment, will be exercisable during the period
beginning on the first anniversary of the Effective Date and ending on the fifth
anniversary of the Effective Date and will contain customary anti-dilution and
registration rights provisions.
6. Expenses. The Company will pay all costs and expenses incident
to the performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the Registration Statement originally filed with
respect to the Securities and any amendment thereto, any Rule 462(b)
Registration Statement, any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii)
all arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company and the
fees and disbursements of counsel to the Representative, (iv) preparation,
issuance and delivery to the Underwriters of any certificates evidencing the
Securities, including transfer agent's and registrar's fees, (v) the
qualification of the Securities under state securities and blue sky laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto, (vi) the filing fees of the Commission and the NASD relating
to the Securities; (vii) any quotation of the Securities on the Nasdaq National
Market; (viii) the Company's travel expenses in connection with meetings with
the brokerage community and institutional investors and expenses associated with
hosting such meetings, including meeting rooms, meals, facilities and ground
transportation expenses; and (ix) the cost of preparing two bound volumes of the
public offering documents for the Representative and its counsel; provided,
however, that if the Agreement is terminated in accordance with Section
11(a)(iv), the Company shall not pay the fees and disbursements of counsel to
the Representative. If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 7 hereof is not satisfied, because this Agreement is terminated
pursuant to Sections 11(a)(i), (a)(ii) or (a)(iii) hereof or because of any
failure, refusal or inability on the part of the Company to perform all
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder other than by reason of a default by any of the Underwriters, the
Company will reimburse the Representative upon demand for all reasonable
out-of-pocket expenses (including counsel fees and disbursements) that shall
have been incurred by it in connection with the proposed purchase and sale of
the Securities. The Company shall not in any event be liable to any of the
Underwriters for the loss of anticipated profits from the transactions covered
by this Agreement. If the sale of the Securities provided for herein is
consummated, the Underwriters shall pay all of their own out-of-pocket expenses
(other than fees and disbursements of counsel) and the Company shall have no
obligation therefor.
7. Conditions of the Underwriters' Obligations. The obligations
of the several Underwriters to purchase and pay for the Firm Securities shall
be subject, in the sole discretion of the Representative, to the accuracy of
the representations and warranties of the Company and the Selling Stockholders
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers made pursuant
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to the provisions hereof, to the performance by the Company and the Selling
Stockholders of their covenants and agreements hereunder and to the following
additional conditions:
(a) If the Original Registration Statement or any
amendment thereto filed prior to the Firm Closing Date has not been declared
effective as of the time of execution hereof, the Registration Statement or
such amendment, and if the Company has elected to rely upon Rule 462(b), the
Rule 462(b) Registration Statement, shall have been declared effective not
later than the earlier of (i) 11:00 A.M., Eastern time, on the date on which
the amendment to the Registration Statement originally filed with respect to
the Securities or to the Registration Statement, as the case may be, containing
information regarding the offering price of the Securities has been filed with
the Commission, and (ii) the time confirmations are sent or given as specified
by Rule 462(b) or, with respect to the Original Registration Statement, such
later time and date as shall have been consented to by the Representative; if
required, the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto shall have been filed with the Commission
in the manner and within the time period required by Rules 434 and 424(b) under
the Act; no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto shall have been issued, and no proceedings
for that purpose shall have been instituted or threatened or, to the knowledge
of the Company or the Representative, shall be contemplated by the Commission;
and the Company shall have complied with any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise).
(b) The Representative shall have received an opinion,
dated the Firm Closing Date, of Feder, Kaszovitz, Isaacson, Weber, Skala and
Bass LLP, counsel for the Company, dated the Closing Date (and stating that it
may be relied on by Gibson, Dunn & Crutcher LLP, Underwriter's Counsel, in
rendering their opinion), to the effect that:
(i) the Company and each of its subsidiaries listed in
Schedule 3 hereto (the "Subsidiaries") have been duly organized and are
validly existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing under
the laws of all other jurisdictions where, to counsel's knowledge, the
ownership or leasing of their respective properties or the conduct of
their respective businesses requires such qualification, except where the
failure to be so qualified does not or would not have a Material Adverse
Effect;
(ii) the Company and each of the Subsidiaries have
corporate power to own or lease their respective properties and conduct
their respective businesses as described in the Registration Statement and
the Prospectus, and the Company has the corporate power to enter into this
Agreement and to carry out all the terms and provisions hereof to be
carried out by it;
(iii) the issued and outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable and are owned by the Company free and clear
of any perfected security interests (other than those disclosed in the
Prospectus) and, to such counsel's knowledge, the Prospectus accurately
describes, to the extent so described, any material corporation,
association, or other entity owned or controlled, directly or indirectly,
by the Company;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued and
outstanding shares of capital stock of the Company
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<PAGE> 19
have been duly authorized and validly issued and are fully paid and
nonassessable, and were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities;
the Firm Securities have been duly authorized by all necessary corporate
action of the Company and, when issued and delivered to and paid for by
the Underwriters pursuant to this Agreement, will be validly issued, fully
paid and nonassessable; to counsel's knowledge, no holders of outstanding
shares of capital stock of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the Securities; and, to
such counsel's knowledge, no holders of securities of the Company are
entitled to have such securities registered under the Registration
Statement except for those which have been so registered; the statements
set forth under the heading "Description of Securities" in the Prospectus,
insofar as such statements purport to summarize certain provisions of the
capital stock and registration rights of the Company, provide a fair
summary of such provisions; and the statements set forth under the heading
"Business--License and Marketing Agreements," "Business--Government and
Industry Regulation," "Business--Acquisitions," "Indemnification of
Officers and Directors," "Amended and Restated 1995 Stock Option Plan,"
"Certain Relationships and Related Transactions," "Shares Eligible for
Future Sale," "Risk Factors--Shares Eligible for Future Sale" and "Risk
Factors--Government Regulation" in the Prospectus, insofar as such
statements constitute a summary of the legal matters, documents or
proceedings referred to therein, provide a fair summary of such legal
matters, documents and proceedings in all material respects;
(v) the execution and delivery of this Agreement and the
Warrant Agreement have been duly authorized by all necessary corporate
action of the Company, and this Agreement and the Warrant Agreement have
been duly executed and delivered by the Company and, assuming due
authorization, execution and delivery by you, are binding agreements
of the Company, enforceable in accordance with their terms, except insofar
as indemnification provisions may be limited by applicable law and to
which counsel need not express any opinion and except as enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws relating to or affecting creditors' rights generally or by
general equitable principles;
(vi) to counsel's knowledge, (A) no legal or governmental
proceedings are pending to which the Company or any of the Subsidiaries is
a party or to which the property of the Company or any of the Subsidiaries
is subject that are required to be described in the Registration Statement
or the Prospectus and are not described therein, and no such proceedings
have been threatened against the Company or any of the Subsidiaries or
with respect to any of their respective properties and (B) no contract or
other document is required to be described in the Registration Statement
or the Prospectus or to be filed as an exhibit to the Registration
Statement that is not described therein or filed as required;
(vii) to counsel's knowledge, subsequent to the respective
dates as of which information is given in the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), (A) the Company and its Subsidiaries have not
incurred any material liability or obligation, direct or contingent, nor
entered into any material transaction not in the ordinary course of
business; and (B) the Company has not purchased any of its outstanding
capital stock, nor declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock, except in each case as
described in or contemplated by the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus);
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(viii) the issuance, offering and sale of the Securities to
the Underwriters by the Company pursuant to this Agreement and of warrants
to the Representative by the Company pursuant to the Warrant Agreement;
the compliance by the Company with the other provisions of this Agreement
and the Warrant Agreement; and the consummation of the other transactions
contemplated in such agreements do not (A) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained and such as may be required
under state securities or blue sky laws and by the NASD, or (B) conflict
with or result in a breach or violation of any of the terms and provisions
of, or constitute a default under, any material contract, indenture,
mortgage, deed of trust, lease or other agreement or instrument known to
such counsel to which the Company or any of the Subsidiaries is a party or
by which the Company or any of the Subsidiaries or any of their respective
properties are bound, or the charter documents or by-laws of the Company
or any of the Subsidiaries, or, so far as it is known to such counsel, any
statute or any judgment, decree, order, rule or regulation of any court or
other governmental authority or any arbitrator having jurisdiction over
the Company or any of the Subsidiaries; and no further approval or
authorization of the stockholders or the Board of Directors of the Company
is required for (Y) the issuance and sale of the Securities to be sold by
the Company or the transfer and sale of the shares of Common Stock to be
sold by the Selling Stockholders pursuant to this Agreement or (Z) the
issuance and sale of the shares of Common Stock issuable upon exercise of
the Warrant Agreement;
(ix) the Registration Statement is effective under the
Act; any required filing of the Prospectus, or any Term Sheet that
constitutes a part thereof, pursuant to Rules 434 and 424(b) has been made
in the manner and within the time period required by Rules 434 and 424(b);
and, to such counsel's best knowledge, no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto has
been issued, and no proceedings for that purpose have been instituted or
threatened or are contemplated by the Commission;
(x) the Registration Statement originally filed with
respect to the Securities and each amendment thereto, any Rule 462(b)
Registration Statement and the Prospectus (in each case, other than the
financial statements and other financial and statistical information
contained therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the applicable
requirements of the Act and the rules and regulations of the Commission
thereunder;
(xi) if the Company elects to rely on Rule 434, the
Prospectus is not "materially different," as such term is used in Rule
434, from the prospectus included in the Registration Statement at the
time of its effectiveness or an effective post-effective amendment thereto
(including such information that is permitted to be omitted pursuant to
Rule 430A);
(xii) the Company is not, and the transactions contemplated
by this Agreement will not cause the Company to become, an investment
company subject to registration under the 1940 Act;
(xiii) the specimen stock certificate of the Company filed
as an exhibit to the Registration Statement is in due and proper form to
evidence shares of Common Stock, has been duly authorized and approved by
the Board of Directors of the Company and complies with all legal
requirements applicable under the Delaware General Corporation Law;
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(xiv) the descriptions in the Registration Statement and
the Prospectus of the charter and bylaws of the Company and of statutes
are accurate and fairly present the information required to be presented
by the Act and the applicable rules and regulations (provided that counsel
need not express any opinion as to their completeness);
(xv) to such counsel's knowledge, except as described in
the Prospectus, no holders of Common Stock or other securities of the
Company have registration rights with respect to securities of the
Company; and
(xvi) counsel has no reason to believe that the offer and
sale of all securities of the Company made within the last three years as
set forth in Item 26 of the Registration Statements were not exempt from
the registration requirements of the Securities Act, pursuant to the
provisions set forth in such Item, and from the registration or
qualification requirements of all relevant state securities laws.
Such counsel shall also state that such counsel has participated in conferences
with officers and other representatives of the Company, the independent public
accountants of the Company, the Representative and counsel to the Underwriters,
at which conferences the contents of the Registration Statement and the
Prospectus and related matters were discussed and, they have no reason to
believe that the Registration Statement, as of its effective date, contained
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus, as of its date or the date of such opinion,
included or includes any untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (except such counsel need express no view as to the financial
statements and notes thereto, schedules and reports thereon, and other
financial and statistical data included or incorporated by reference in the
Registration Statement or Prospectus).
In rendering any such opinion, such counsel may rely, as to matters of fact, to
the extent such counsel deem(s) proper, on certificates or opinions of
responsible officers of the Company and public officials, and may limit its
opinions to the laws of the United States of America and the States of New York
and Delaware, as appropriate.
References to the Registration Statement and the Prospectus in this paragraph
(b) shall include any amendment or supplement thereto at the date of such
opinion.
(c) The Representative shall have received an opinion,
dated the Firm Closing Date, of Feder, Kaszovitz, Isaacson, Weber, Skala and
Bass LLP, counsel for the Selling Stockholders, dated the Closing Date (and
stating that it may be relied on by Gibson, Dunn & Crutcher LLP, Underwriter's
Counsel, in rendering their opinion), to the effect that:
(i) this Agreement, the Custody Agreement and the
Power-of-Attorney have been duly authorized, executed and delivered by the
Selling Stockholders and constitute the legal, valid and binding agreement
of such Selling Stockholder, enforceable against such Selling Stockholder
in accordance with its terms, except as such enforceability may be limited
by the effect of bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to rights and remedies of creditors or by
general equitable principles; and each of the Selling Stockholders has
full legal right and authority to sell, transfer and deliver in the manner
provided in this Agreement
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<PAGE> 22
and the Custody Agreement the Securities being sold by such Selling
Stockholder hereunder;
(ii) the delivery by each of the Selling Stockholders to
the several Underwriters of certificates for the Securities being sold
hereunder by such Selling Stockholder against payment therefor as provided
herein will pass good and marketable title to such Securities to the
several Underwriters, free and clear of all liens, encumbrances, equities
and claims whatsoever;
(iii) no consent, approval, authorization or order of any
governmental agency or body or, to such counsel's knowledge, of any court,
is required for the consummation by any Selling Stockholder of the
transactions contemplated herein, except such as may have been obtained
under the Act and such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the
Securities by the Underwriters and such other approvals (specified in such
opinion) as have been obtained;
(iv) neither the sale of the Securities being sold by any
Selling Stockholder nor the consummation of any other of the transactions
herein contemplated by any Selling Stockholder nor the fulfillment of the
terms hereof by any Selling Stockholder will conflict with, result in a
breach or violation of, or constitute a default under any law or the terms
of any indenture or other agreement or instrument known to such counsel
and to which any Selling Stockholder is a party or bound, or any judgment,
order or decree known to such counsel to be applicable to any Selling
Stockholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over any Selling
Stockholder; and
(v) there are no transfer or other taxes (other than
income taxes) known to such counsel payable in connection with the sale
and delivery of the Securities.
In rendering any such opinion, such counsel may rely, as to matters of fact, to
the extent such counsel deem(s) proper, on certificates or opinions of the
Selling Stockholders and public officials, and may limit its opinions to the
laws of the United States of America and the States of New York and Delaware,
as appropriate.
References to the Registration Statement and the Prospectus in this paragraph
(c) shall include any amendment or supplement thereto at the date of such
opinion.
(d) The Representative shall have received from Pannell
Kerr Forster, P.C. a letter or letters dated, respectively, the date hereof and
the Firm Closing Date, in form and substance satisfactory to the
Representative, to the effect that:
(i) they are independent accountants with respect to the
Company and its consolidated subsidiaries and Road Champs within the
meaning of the Act and the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements, the audited combined financial statements and the pro forma
financial statements examined by them and included in the Registration
Statement and the Prospectus comply in form in all material respects with
the applicable accounting requirements of the Act and the related
published rules and regulations;
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<PAGE> 23
(iii) on the basis of carrying out certain specified
procedures (which do not constitute an examination made in accordance with
generally accepted auditing standards) that would not necessarily reveal
matters of significance with respect to the comments set forth in this
paragraph (iii), a reading of the minute books of the stockholders, the
board of directors and any committees thereof of the Company and each of
its consolidated subsidiaries and Road Champs, and inquiries of certain
officials of the Company and its consolidated subsidiaries and Road Champs
who have responsibility for financial and accounting matters, nothing came
to their attention that caused them to believe that at a specific date not
more than five business days prior to the date of such letter, there were
any changes in the capital stock or total debt of the Company and its
consolidated subsidiaries and Road Champs or any decreases in total assets
or stockholders' equity of the Company and its consolidated subsidiaries
and Road Champs, in each case compared with amounts shown on the December
31, 1996 consolidated balance sheet and on the December 31, 1996 combined
balance sheet included in the Registration Statement and the Prospectus,
or for the period from January 1, 1997 to such specified date there were
any decreases, as compared with the same period in the prior year, in
total revenues, net income or net income per share, respectively, of the
Company and its consolidated subsidiaries and Road Champs, except in all
instances for changes, decreases or increases set forth in such letter;
(iv) they have carried out certain specified procedures,
not constituting an audit, with respect to certain amounts, percentages
and financial information that are derived from the general accounting
records of the Company and its consolidated subsidiaries and Road Champs
and are included in the Registration Statement and the Prospectus, and
have compared such amounts, percentages and financial information with
such records of the Company and its consolidated subsidiaries and Road
Champs and with information derived from such records and have found them
to be in agreement, excluding any questions of legal interpretation; and
(v) their review of the system of internal controls of
the Company and its consolidated subsidiaries and Road Champs, to the
extent they deemed necessary in establishing the scope of their
examination of the Company's financial statements as of December 31, 1996
and the Road Champs combined financial statements as of December 31, 1996,
did not disclose any weaknesses in internal controls that they considered
to be material weaknesses.
In the event that the letters referred to above set forth any
such changes, decreases or increases which, in the reasonable discretion of the
Representative, are likely to result in a Material Adverse Effect, it shall be
a further condition to the obligations of the Underwriters that such letters
shall be accompanied by a written explanation of the Company as to the
significance thereof, unless the Representative deem such explanation
unnecessary.
References to the Registration Statement and the Prospectus in
this paragraph (d) with respect to either letter referred to above shall
include any amendment or supplement thereto by the date of such letter.
(e) The Representative shall have received a certificate,
dated the Firm Closing Date, of Jack Friedman, Stephen Berman and Joel M.
Bennett in their capacities as the Chief Executive Officer, Chief Operating
Officer and Chief Financial Officer, respectively, of the Company and as
Management Selling Stockholders to the effect that:
(i) the representations and warranties of the Company in
this Agreement are true
23
<PAGE> 24
and correct as if made on and as of the Firm Closing Date; the Registration
Statement, as amended as of the Firm Closing Date, does not include any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein not misleading, and the Prospectus, as amended or
supplemented as of the Firm Closing Date, does not include any untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and the Company has performed all covenants and
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or, to the best of the
Company's knowledge, threatened or, are contemplated by the Commission;
and
(iii) after the respective dates as of which
information is given in the Registration Statement and the Prospectus,
no material adverse change or development involving a prospective adverse
change in or affecting particularly the business, properties, condition
(financial or otherwise), results of operations or prospects of the
Company, whether or not arising in the ordinary course of business, has
occurred which would, in the Company's reasonable belief, make the
offering or the delivery of the Securities impracticable or inadvisable;
(f) The Representative shall have received a certificate,
dated the Firm Closing Date, of each of the Selling Stockholders, in such
capacity, to the effect that the representations and warranties of such Selling
Stockholder in this Agreement are true and correct as if made on and as of the
Firm Closing Date and that such Selling Stockholder has performed all covenants
and agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Firm Closing Date.
(g) The Representative shall have received from each
officer and director of the Company and the persons and entities listed in
Schedule 4 an agreement to the effect that such person or entity will not,
except to the extent otherwise specifically permitted by the terms of each such
person's or entity's agreement, directly or indirectly, without the prior
written consent of the Representative, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of an
option to purchase or other sale or disposition) of any shares of Common Stock
or any securities convertible into, or exchangeable or exercisable for, shares
of Common Stock for a period of 45 days after the date of this Agreement;
provided, however, that intra-family transfers or transfers to trust for estate
planning purposes shall not be so restricted.
(h) The Representative shall have received from each of
the Selling Stockholders an agreement to the effect that such person or entity
will not, except to the extent otherwise specifically permitted by the terms of
each such person's or entity's agreement, directly or indirectly, without the
prior written consent of the Representative, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of an option to purchase or other sale or disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock for a period of 45 days after the date of this
Agreement; provided, however, that intra-family transfers or transfers to trust
for estate planning purposes shall not be so restricted.
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<PAGE> 25
(i) On or before the Firm Closing Date, the
Representative and counsel for the Underwriters shall have received such
further certificates, documents or other information as they may have
reasonably requested from the Company.
(j) Upon consummation of the offering of the Securities,
the Securities shall have been included for trading on the Nasdaq National
Market.
(k) The Representative shall have received an opinion,
dated the Firm Closing Date, of Gibson, Dunn & Crutcher LLP, counsel for the
Underwriters, with respect to the issuance and sale of the Firm Securities, the
Registration Statement and Prospectus, and such other related matters as the
Representative may reasonably require, and the Company shall have furnished to
such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.
(l) The Company shall have executed and delivered a
Warrant Agreement in a form satisfactory to the Representative (the "Warrant
Agreement"), and there shall have been tendered to the Representative all of
the Representative's Warrants described in Section 5(o) hereof to be purchased
by the Representative on the Closing Date.
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representative and
counsel for the Underwriters. The Company shall furnish to the Representative
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representative and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
8. Indemnification and Contribution.
(a) The Company and the Management Selling Stockholders
jointly and severally agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, against any losses, claims,
damages or liabilities to which such Underwriter or such controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon:
(i) any breach by the Company or any Management Selling
Stockholder of its representations or warranties set forth in Section 2(a)
and (b) of this Agreement;
(ii) any untrue statement or alleged untrue statement of
any material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (B) any application or other document,
or any amendment or supplement thereto, executed by the Company or any
Management Selling Stockholder or based upon written information furnished
by or on behalf of the Company or any Management Selling Stockholder filed
in any jurisdiction in order to qualify the Securities under
25
<PAGE> 26
the securities or blue sky laws thereof or filed with the Commission or any
securities association or securities exchange (each, an "Application");
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or
any Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; or
(iv) any untrue statement or alleged untrue statement of
any material fact contained in any audio or visual materials produced by
the Company or any Management Selling Stockholder and used in connection
with the marketing of the Securities, including without limitation,
slides, videos, films, tape recordings, and, such party or parties, as the
case may be, will reimburse, as incurred, each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by
such Underwriter or such controlling person in connection with
investigating, defending against or appearing as a third-party witness in
connection with any such loss, claim, damage, liability or action;
provided, however, that the Company or such Management Selling Stockholder will
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in such Registration
Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto or any Application in reliance upon and
in conformity with written information furnished to the Company or such
Management Selling Stockholder by any Underwriter through the Representative
specifically for use therein; and provided, further, that the Company or such
Management Selling Stockholder will not be liable to any Underwriter or any
person controlling such Underwriter with respect to any such untrue statement
or omission made in any Preliminary Prospectus that is corrected in the
Prospectus (or any amendment or supplement thereto) if the person asserting any
such loss, claim, damage or liability purchased Securities from such
Underwriter but was not sent or given a copy of the Prospectus (as amended or
supplemented) at or prior to the written confirmation of the sale of such
Securities to such person in any case where such delivery of the Prospectus (as
amended or supplemented) is required by the Act, unless such failure to deliver
the Prospectus (as amended or supplemented) was a result of noncompliance by
the Company with Section 5(d) and (e) of this Agreement. This indemnity
agreement will be in addition to any liability that the Company or any
Management Selling Stockholder may otherwise have. The Company and the
Management Selling Stockholders shall not, without the prior written consent of
the Representative, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not any
Underwriter or any person who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act is a party to such
claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of all of the Underwriters and such
controlling persons from all liability arising out of such claim, action, suit
or proceeding.
Each Non-Management Selling Stockholders severally agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, against any losses, claims, damages or liabilities to
which such Underwriter or such controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out
26
<PAGE> 27
of or are based upon any breach by such Non-Management Selling Stockholder of
its representations or warranties set forth in Section 2(b) of this Agreement.
(b) Each Underwriter, severally and not jointly,
will indemnify and hold harmless the Company, each of its directors, each of
its officers who signed the Registration Statement, each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act and each of the Selling Stockholders, against any losses,
claims, damages or liabilities to which the Company or any such director,
officer of the Company, controlling person of the Company or Selling
Stockholder may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon (i) any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application or (ii) the omission or the alleged
omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through the Representative specifically for use therein; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company or any such director, officer, controlling person or Selling
Stockholder in connection with investigating or defending any such loss, claim,
damage, liability or any action in respect thereof. This indemnity agreement
will be in addition to any liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party of the
commencement thereof, but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party,
except to the extent that the indemnifying party demonstrates it has been
irreparably prejudiced by such failure to receive notice.
(d) In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party; provided, however, that if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded or shall have been advised by
its counsel that there may be one or more legal defenses available to it and/or
other indemnified parties that conflict with those available to the
indemnifying party, the indemnifying party shall not have the right to direct
the defense of such action on behalf of such indemnified party or parties and
such indemnified party or parties shall have the right to select separate
counsel to defend such action on behalf of such indemnified party or parties.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and approval by such indemnified
party of counsel appointed to defend such action, the indemnifying party will
not be liable to such indemnified party under this Section 8 for any legal or
other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense
27
<PAGE> 28
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representative in the case of
paragraph (a) of this Section 8, representing the indemnified parties under
such paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the
consent of the indemnifying party.
(e) In circumstances in which the indemnity agreement
provided for in the preceding paragraphs of this Section 8 is unavailable or
insufficient, for any reason, to hold harmless an indemnified party in respect
of any losses, claims, damages or liabilities (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
(i) the relative benefits received by the indemnifying party or parties on the
one hand and the indemnified party on the other from the offering of the
Securities or (ii) if the allocation provided by the foregoing clause (i) is
not permitted by applicable law, not only such relative benefits but also the
relative fault of the indemnifying party or parties on the one hand and the
indemnified party on the other in connection with the statements or omissions
or alleged statements or omissions that resulted in such losses, claims,
damages or liabilities (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters. The relative fault of
the parties shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the Underwriters, the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission, and any other equitable considerations appropriate in the
circumstances. The Company and the Underwriters agree that it would not be
equitable if the amount of such contribution were determined by pro rata or per
capita allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take into account
the equitable considerations referred to above in this paragraph (d).
Notwithstanding any other provision of this paragraph (e), no Underwriter shall
be obligated to make contributions hereunder that in the aggregate exceed the
total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and as between themselves, contributions among Underwriters shall be
governed by the provisions of the Representative's Agreement Among
Underwriters. For the purposes of this paragraph 8(e), each person, if any,
who controls an
28
<PAGE> 29
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter,
and each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
shall have the same rights to contribution as the Company.
9. Default of Underwriters. If one or more Underwriters default
in their obligations to purchase Firm Securities or Option Securities hereunder
and the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, then the other Underwriters may
make arrangements satisfactory to the Representative for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representative), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or
Option Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase. If one or more Underwriters so default with respect to an
aggregate number of Securities that is more than ten percent of the aggregate
number of Firm Securities or Option Securities, as the case may be, to be
purchased by all of the Underwriters at such time hereunder, and if
arrangements satisfactory to the Representative are not made within 36 hours
after such default for the purchase by other persons (who may include one or
more of the non-defaulting Underwriters, including the Representative) of the
Securities with respect to which such default occurs, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or
the Company other than as provided in Section 10 hereof. In the event of any
default by one or more Underwriters as described in this Section 9, the
Representative shall have the right to postpone the Firm Closing Date or the
Option Closing Date, as the case may be, established as provided in Section 3
hereof for not more than seven business days in order that any necessary
changes may be made in the arrangements or documents for the purchase and
delivery of the Firm Securities or Option Securities, as the case may be. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section 9. Nothing herein shall relieve any
defaulting Underwriter from liability for its default.
10. Survival. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers, the Selling Stockholders and the several Underwriters set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, any of its officers or
directors, any Selling Stockholders, any Underwriter or any controlling person
referred to in Section 8 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the
Firm Securities or any Option Securities in the sole discretion of the
Representative by notice to the Company and the Selling Stockholders given
prior to the Firm Closing Date or the related Option Closing Date,
respectively, in
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<PAGE> 30
the event that the Company or any Selling Stockholders shall have failed,
refused or been unable to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder at or prior thereto or, if at
or prior to the Firm Closing Date or, such Option Closing Date, respectively,
(i) after the respective dates as of which information is
given in the Registration Statement and the Prospectus, any material
adverse change or development involving a prospective adverse change in or
affecting particularly the business, properties, condition (financial or
otherwise), results of operations or prospects of the Company, whether or
not arising in the ordinary course of business, occurs which would, in the
Representative's sole judgment, make the offering or the delivery of the
Securities impracticable or inadvisable;
(ii) trading in the Common Stock shall have been suspended
by the Commission or the Nasdaq National Market or minimum or maximum
prices shall have been established on the Nasdaq National Market;
(iii) a banking moratorium shall have been declared by New
York or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation
of hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or material
adverse change in general economic, political or financial conditions
having an effect on the U.S. financial markets that, in the sole judgment
of the Representative, makes it impractical or inadvisable to proceed with
the public offering or the delivery of the Securities as contemplated by
the Registration Statement, as amended as of the date hereof.
(b) Termination of this Agreement pursuant to this
Section 11 shall be without liability of any party to any other party except as
provided in Section 10 hereof.
12. Information Supplied by Underwriters. The statements set
forth in (a) the last paragraph on the front cover page of any Preliminary
Prospectus or the Prospectus, (b) under the heading "Underwriting" in any
Preliminary Prospectus or the Prospectus and (c) on page 2 in any Preliminary
Prospectus or the Prospectus pertaining to stabilization (to the extent such
statements relate to the Underwriters) constitute the only information
furnished by any Underwriter through the Representative to the Company for the
purposes of Section 8 hereof. The Underwriters confirm that such statements
(to such extent) are correct.
13. Notices. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission and confirmed in writing to Cruttenden Roth
Incorporated, 18301 Von Karman, Suite 100, Irvine, California 92715; if sent
to the Company, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to the Company at 24955 Pacific Coast
Highway, #B202 Malibu, California 90265, Attention: Chief Executive Officer;
and if sent to a Selling Stockholder, shall be delivered or sent by mail, telex
or facsimile transmission and confirmed in writing to such Selling Stockholder
at the address listed opposite such Selling Stockholder's name in Schedules 1-A
or 1-B hereto.
14. Successors. This Agreement shall inure to the benefit of and
shall be binding upon the several Underwriters, the Company, the Selling
Stockholders and their respective successors and legal
30
<PAGE> 31
representatives, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (a) the indemnities of the
Company and the Selling Stockholders contained in Section 8 of this Agreement
shall also be for the benefit of any person or persons who control any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and (b) the indemnities of the Underwriters contained in Section 8
of this Agreement shall also be for the benefit of the directors of the
Company, the officers of the Company who have signed the Registration Statement
and any person or persons who control the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act and the Selling Stockholders.
No purchaser of Securities from any Underwriter shall be deemed a successor
because of such purchase.
15. Applicable Law. The validity and interpretation of this
Agreement, and the terms and conditions set forth herein, shall be governed by
and construed in accordance with the laws of the State of California, without
giving effect to any provisions relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of California,
and by execution and delivery of this Agreement, the Company and the Selling
Stockholders accept for theirself and in connection with their respective
properties, generally and unconditionally, the nonexclusive jurisdiction of the
aforesaid courts and waives any defense of forum non conveniens and irrevocably
agree to be bound by any judgment rendered thereby in connection with this
Agreement. The Company designates and appoints Jack Friedman and such other
persons as may hereafter be selected by the Company irrevocably agreeing in
writing to so serve, as its agent to receive on its behalf service of all
process in any such proceedings in any such court, such service being hereby
acknowledged by the Company to be effective and binding service in every
respect. A copy of any such process so served shall be mailed by registered
mail to the Company at its address provided in Section 13 hereof; provided,
however, that, unless otherwise provided by applicable law, any failure to mail
such copy shall not affect the validity of service of such process. If any
agent appointed by the Company refuses to accept service, the Company hereby
agrees that service of process sufficient for personal jurisdiction in any
action against the Company in the State of California may be made by registered
or certified mail, return receipt requested, to the Company at its address
provided in Section 13 hereof, and the Company hereby acknowledges that such
service shall be effective and binding in every respect. Nothing herein shall
affect the right to serve process in any other manner permitted by law or shall
limit the right of any Underwriter to bring proceedings against the Company in
the courts of any other jurisdiction.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
31
<PAGE> 32
If the foregoing correctly sets forth our understanding please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company, each
of the Selling Stockholders and each of the several Underwriters.
Very truly yours,
JAKKS PACIFIC, INC.
By: _________________________________
Jack Friedman
Chief Executive Officer
_________________________________
Jack Friedman
_________________________________
Stephen Berman
32
<PAGE> 33
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
CRUTTENDEN ROTH INCORPORATED
By: _________________________________
Name: ___________________________
Title: _________________________
For itself and as Representative.
33
<PAGE> 34
Schedule 1-A
MANAGEMENT SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Number of Shares of
Management Underwritten Option Securities
Selling Stockholder to be Sold Address
- -------------------------------------- ------------------------------- -----------------------------------
<S> <C> <C>
Jack Friedman 70,000 24955 Pacific Coast Highway, B#202
Malibu, California 90265
Stephen Berman 20,000 24955 Pacific Coast Highway, B#202
Malibu, California 90265
</TABLE>
<PAGE> 35
Schedule 1-B
NON-MANAGEMENT SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Number of Shares of
Non-Management Underwritten Option Securities
Selling Stockholder to be Sold Address
- -------------------------------------- ------------------------------- -----------------------------------
<S> <C> <C>
None.
</TABLE>
<PAGE> 36
Schedule 2
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SECURITIES
UNDERWRITERS TO BE PURCHASED
- ------------------------------------------------------------------------ ----------------
<S> <C>
Cruttenden Roth Incorporated . . . . . . . . . . . . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
=========
</TABLE>
<PAGE> 37
Schedule 3
SUBSIDIARIES
Name Jurisdiction of Incorporation
- ---------------------------- --------------------------------------
Road Champs, Inc. Pennsylvania corporation
JAXXS (HK) Limited Hong Kong corporation
JP (HK) Limited Hong Kong corporation
J-X Enterprises, Inc. New York corporation
JAKKS Acquisition Corp. Delaware corporation
Road Champs Ltd. Hong Kong corporation
<PAGE> 38
Schedule 4
PERSONS AND ENTITIES SUBJECT TO LOCK-UP AGREEMENTS,
OTHER THAN THE COMPANY'S OFFICERS AND DIRECTORS
Name
---------------------------------------------
Natacha Friedman
Trust for Brooke Friedman
Trust for Tony Friedman
Education Trust for Tony Friedman
<PAGE> 1
EXHIBIT 4.4
WARRANT AGREEMENT
This WARRANT AGREEMENT ("Agreement") dated as of April ___, 1997 is by
and between JAKKS Pacific, Inc., a Delaware corporation (the "Company"), and
Cruttenden Roth Incorporated ("Cruttenden" or the "Representative").
WHEREAS, the Representative has agreed pursuant to the Underwriting
Agreement dated April ___, 1997 (the "Underwriting Agreement") to act as the
representative of the several underwriters in connection with the proposed
public offering by the Company and two selling stockholders of up to
690,000 shares in the aggregate of Common Stock, including 90,000 of such
shares covered by an over-allotment option (the "Public Offering"); and
WHEREAS, pursuant to Section 5(o) of the Underwriting Agreement, the
Company has agreed to issue warrants to the Representative (the "Warrants") to
purchase, at a price of $0.001 per warrant, up to an aggregate of 42,000 shares
(hereinafter, and as the number thereof may be adjusted hereto, the "Warrant
Shares"), of the Company's Common Stock, $.001 par value per share (the "Common
Stock"), each Warrant initially entitling the holder thereof to purchase one
share of Common Stock.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein and in the Underwriting Agreement set forth and for other good
and valuable consideration, the parties hereto agree as follows:
1. Issuance of Warrants: Form of Warrant. The Company will issue and
deliver to the Representative, Warrants to purchase 42,000 Warrant Shares on
the Closing Date referred to in the Underwriting Agreement in consideration for,
and as part of the Representative's compensation in connection with, the
Representative acting as the representative of the several underwriters for the
Public Offering pursuant to the Underwriting Agreement. The text of the Warrants
and of the form of election to purchase shares shall be substantially as set
forth in Exhibit A attached hereto. The Warrants shall be executed on behalf of
the Company by the manual or facsimile signature of the present or any future
Chairman of the Board, President or Vice President of the Company, under its
corporate seal, affixed or in facsimile, attested by the manual or facsimile
signature of the Secretary or an Assistant Secretary of the Company.
Warrants bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any one of them shall have ceased to
hold such offices prior to the delivery of such Warrants or did not hold such
offices on the date of this Agreement. Warrants shall be dated as of the date of
execution thereof by the Company either upon initial issuance or upon division,
exchange, substitution or transfer.
2. Registration. The Warrants shall be numbered and shall be registered
on the books of the Company (the "Warrant Register") as they are issued. The
Company shall be entitled to treat the registered holder of any Warrant on the
Warrant Register (the "Holder") as the owner in fact therefor for all purposes
and shall not be bound to recognize any equitable or other claim to
<PAGE> 2
or interest in such Warrant on the part of any other person, and shall not be
liable for any registration or transfer of Warrants which are registered or are
to be registered in the name of a fiduciary or the nominee of a fiduciary unless
made with the actual knowledge that a fiduciary or nominee is committing a
breach of trust in requesting such registration or transfer, or with the
knowledge of such facts that its participation therein amounts to bad faith.
Warrants to purchase 42,000 shares shall be registered initially in the name of
"Cruttenden Roth Incorporated," or in such other denominations as Cruttenden may
request in writing to the Company.
3. Exchange of Warrant Certificates. Subject to any restriction upon
transfer set forth in this Agreement, each Warrant certificate may be exchanged
for another certificate or certificates entitling the Holder thereof to purchase
a like aggregate number of Warrant Shares as the certificate or certificates
surrendered then entitled such Holder to purchase. Any Holder desiring to
exchange a Warrant certificate or certificates shall make such request in
writing delivered to the Company, and shall surrender, properly endorsed, the
certificate or certificates to be so exchanged. Thereupon, the Company shall
execute and deliver to the person entitled thereto a new Warrant certificate or
certificates, as the case may be, as so requested.
4. Transfer of Warrants. Until April ___, 1998, the Warrants will not be
sold, transferred, assigned or hypothecated except to bona fide officers and
partners of the Representative who agree in writing to be bound by the terms
hereof. The Warrants shall be transferable only on the Warrant Register upon
delivery thereof duly endorsed by the Holder or by the Holder's duly authorized
attorney or representative, or accompanied by proper evidence of succession,
assignment or authority to transfer. In all cases of transfer by an attorney,
the original power of attorney, duly approved, or an official copy thereof, duly
certified, shall be deposited with the Company. In case of transfer by
executors, administrators, guardians or other legal representatives, duly
authenticated evidence of their authority shall be produced and may be required
to be deposited with the Company in its discretion. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto.
5. Term of Warrants; Exercise of Warrants.
5.1 Each Warrant entitles the registered owner thereof to purchase one
share of Common Stock at any time from 10:00 a.m., Pacific time, on April ___,
1998 (the "Initiation Date") until 6:00 p.m., Pacific time, on April ___, 2002
(the "Expiration Date") at a purchase price of [$_____], subject to adjustment
(the "Warrant Price"). Notwithstanding the foregoing, if at 6:00 p.m., Pacific
time on the Expiration Date, any Holder or Holders of the Warrants have not
exercised their Warrants and the Closing Price (as defined below) for the Common
Stock on the Expiration Date is greater than the Warrant Price, then each such
unexercised Warrant shall be automatically converted into a number of shares of
Common Stock of the Company equal to: (A) the number of shares of Common Stock
then issuable upon exercise of a Warrant multiplied by (B) a fraction (1) the
numerator of which is the difference between the Closing Price for the Common
Stock on the Expiration Date and the Warrant Price and (2) the denominator of
which is the Closing Price for the Warrant Stock on the Expiration Date.
5.2 The Warrant Price and the number of Warrant Shares issuable upon
exercise of Warrants are subject to adjustment upon the occurrence of certain
events, pursuant to the provisions of Section 11 of this Agreement. Subject to
the provisions of this Agreement, each Holder of Warrants shall have the right,
which may be exercised as expressed in such Warrants, to
2
<PAGE> 3
purchase from the Company (and the Company shall issue and sell to such Holder
of Warrants) the number of fully paid and nonassessable Warrant Shares specified
in such Warrants, upon surrender to the Company, or its duly authorized agent,
of such Warrants, with the form of election to purchase on the reverse thereof
duly filled in and signed, and upon payment to the Company of the Warrant Price,
as adjusted in accordance with the provisions of Section 11 of this Agreement,
for the number of Warrant Shares in respect of which such Warrants are then
exercised. Payment of such Warrant Price shall be made in cash or by certified
or official bank check, or a combination thereof. No adjustment shall be made
for any dividends on any Warrant Shares of stock issuable upon exercise of a
Warrant.
5.3 Upon such surrender of Warrants, and payment of the Warrant Price as
aforesaid, the Company shall issue and cause to be delivered with all reasonable
dispatch to or upon the written order of the Holder of such Warrants and in such
name or names as such registered Holder may designate, a certificate or
certificates for the number of full Warrant Shares so purchased upon the
exercise of such Warrants, together with cash, as provided in Section 12 of this
Agreement, in respect of any fraction of a share otherwise issuable upon such
surrender and, if the number of Warrants represented by a Warrant Certificate
shall not be exercised in full, a new Warrant Certificate, executed by the
Company for the balance of the number of whole Warrant Shares represented by the
Warrant Certificate.
5.4 If permitted by applicable law, such certificate or certificates
shall be deemed to have been issued and any person so designated to be named
therein shall be deemed to have become a holder of record of such shares as of
the date of the surrender of such Warrants and payment of the Warrant Price as
aforesaid. The rights of purchase represented by the Warrants shall be
exercisable, at the election of the registered Holders thereof, either as an
entirety or from time to time for only part of the shares specified therein.
6. Compliance with Government Regulations. The Company covenants that if
any shares of Common Stock required to be reserved for purposes of exercise or
conversion of Warrants require, under any Federal or state law or applicable
governing rule or regulation of any national securities exchange, registration
with or approval of any governmental authority, or listing on any such national
securities exchange before such shares may be issued upon exercise, the Company
will in good faith and as expeditiously as possible endeavor to cause such
shares to be duly registered, approved or listed on the relevant national
securities exchange, as the case may be; provided, however, that (except to the
extent legally permissible with respect to Warrants of which the Representative
is the Holder) in no event shall such shares of Common Stock be issued, and the
Company is hereby authorized to suspend the exercise of all Warrants, for the
period during which such registration, approval or listing is required but not
in effect.
7. Payment of Taxes. The Company will pay all documentary stamp taxes,
if any, attributable to the initial issuance of Warrant Shares upon the exercise
of Warrants; provided, however, that the Company shall not be required to pay
any tax or taxes which may be payable in respect of any transfer involved in the
issue or delivery of any Warrants or certificate for Warrant Shares in a name
other than that of the registered Holder of such Warrants.
3
<PAGE> 4
8. Mutilated or Missing Warrants. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest; but only
upon receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction of such Warrant and, if requested, indemnity or bond also
reasonably satisfactory to the Company. An applicant for such substitute
Warrants shall also comply with such other reasonable regulations and pay such
other reasonable charges as the Company may prescribe.
9. Reservation of Warrant Shares. There have been reserved out of the
authorized and unissued shares of Common Stock a number of shares sufficient to
provide for the exercise of the rights of purchase represented by the Warrants
and the transfer agent for the Common Stock ("Transfer Agent") and every
subsequent Transfer Agent for any shares of the Company's capital stock issuable
upon the exercise of any of the rights of purchase aforesaid are hereby
irrevocably authorized and directed at all times until the Expiration Date to
reserve such number of authorized and unissued shares as shall be required for
such purpose. The Company will keep a copy of this Agreement on file with the
Transfer Agent and with every subsequent Transfer Agent for any shares of the
Company's capital stock issuable upon the exercise of the rights of purchase
represented by the Warrants. The Company will supply such Transfer Agent with
duly executed stock certificates for such purposes and will itself provide or
otherwise make available any cash which may be issuable as provided in Section
12 of this Agreement. The Company will furnish to such Transfer Agent a copy of
all notices of adjustments, and certificates related thereto, transmitted to
each Holder pursuant to Section 11.2 of this Agreement. All Warrants surrendered
in the exercise of the rights thereby evidenced shall be cancelled.
10. Obtaining Stock Exchange Listings. The Company will from time to
time take all action which may be necessary so that the Warrant Shares,
immediately upon their issuance upon the exercise of Warrants, will be listed on
the principal securities exchanges and markets within the United States of
America, if any, on which other shares of Common Stock are then listed.
11. Adjustment of Warrant Price and Number of Warrant Shares. The number
and kind of securities purchasable upon the exercise of each Warrant and the
Warrant Price shall be subject to adjustment from time to time upon the
happening of certain events as hereinafter defined. For purposes of this Section
11, "Common Stock" means shares now or hereafter authorized of any class of
common stock of the Company and any other stock of the Company, however
designated, that has the right (subject to any prior rights of any class or
series of preferred stock) to participate in any distribution of the assets or
earnings of the Company without limit as to per share amount.
11.1 Mechanical Adjustments. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Warrant Price shall be subject to
adjustment as follows:
(a) In case the Company shall (i) pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock, (iii) combine its outstanding shares of
Common Stock or (iv) issue by reclassification of its shares of Common Stock
other securities of the Company (including any such reclassification in
4
<PAGE> 5
connection with a consolidation or merger in which the Company is the surviving
corporation), the number of Warrant Shares purchasable upon exercise of each
Warrant immediately prior thereto shall be adjusted so that the Holder of each
Warrant shall be entitled to receive the kind and number of Warrant Shares or
other securities of the Company which he would have owned or would have been
entitled to receive after the happening of any of the events described above,
had such Warrants been exercised immediately prior to the happening of such
event or any record date with respect thereto. An adjustment made pursuant to
this paragraph (a) shall become effective immediately after the effective date
of such event retroactive to the record date, if any, for such event. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(b) In case the Company shall distribute to all holders of its
shares of Common Stock (including any such distribution made in connection with
a consolidation or merger in which the Company is the surviving corporation)
evidences of its indebtedness or assets (excluding cash dividends or
distributions payable out of consolidated earnings or earned surplus and
dividends or distributions referred to in paragraph (a) above or in the
paragraph immediately following this paragraph) or rights, options or warrants,
or convertible or exchangeable securities containing the right to subscribe for
or purchase shares of Common Stock, then in each case the number of Warrant
Shares thereafter purchasable upon the exercise of each Warrant shall be
determined by multiplying the number of Warrant Shares theretofore purchasable
upon the exercise of each Warrant by a fraction, the numerator of which shall be
the then current market price per share of Common Stock (as defined in paragraph
(c) below) on the date of such distribution, and the denominator of which shall
be the then current market price per share of Common Stock, less the then fair
value (as reasonably determined by the Board of Directors of the Company) of the
portion of the assets or evidences of indebtedness so distributed or of such
subscription rights, options or warrants, or of such convertible or exchangeable
securities applicable to one share of Common Stock. Such adjustment shall be
made whenever any such distribution is made and shall become effective on the
date of distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
In the event of a distribution by the Company to all holders of
its shares of Common Stock of a subsidiary or securities convertible into or
exercisable for such stock, then in lieu of an adjustment in the number of
Warrant Shares purchasable upon the exercise of each Warrant, the Holder of each
Warrant, upon the exercise thereof at any time after such distribution, shall be
entitled to receive from the Company, such subsidiary or both, as the Company
shall determine, the stock or other securities to which such Holder would have
been entitled if such Holder had exercised such Warrant immediately prior
thereto, all subject to further adjustment as provided in this Section 11.1;
provided, however, that no adjustment in respect of dividends or interest on
such stock or other securities shall be made during the term of a Warrant or
upon the exercise of a Warrant.
(c) For the purpose of any computation under paragraph (b) of
this Section, the current market price per share of Common Stock at any date
shall be the average of the daily Closing Prices for 20 consecutive trading days
commencing 30 trading days before the date of such computation. The selling
price for each day (the "Closing Price") shall be the last such reported sales
price regular way or, in case no such reported sale takes place on such day, the
average of the closing bid and asked prices regular way for such day, in each
case on the principal
5
<PAGE> 6
national securities exchange on which the shares of Common Stock are listed or
admitted to trading or, if not listed or admitted to trading, the average of the
closing bid and asked prices of the Common Stock in the over-the counter market
as reported by the Nasdaq National Market System or Nasdaq SmallCap System or if
not approved for quotation on the Nasdaq National Market System or Nasdaq
SmallCap System, the average of the closing bid and asked prices as furnished by
two members of the National Association of Securities Dealers, Inc. selected
from time to time by the Company for that purpose.
(d) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of Warrant Shares
purchasable upon the exercise of each Warrant; provided, however, that any
adjustments which by reason of this paragraph (d) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest one-thousandth of a share.
(e) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Warrant Price
payable upon exercise of each Warrant shall be adjusted by multiplying such
Warrant Price immediately prior to such adjustment by a fraction, the numerator
of which shall be the number of Warrant Shares purchasable upon the exercise of
each Warrant immediately prior to such adjustment, and the denominator of which
shall be the number of Warrant Shares purchasable immediately thereafter.
(f) No adjustment in the number of Warrant Shares purchasable
upon the exercise of each Warrant need be made under paragraph (b) if the
Company issues or distributes to each Holder of Warrants the rights, options,
warrants or convertible or exchangeable securities, or evidences of indebtedness
or assets referred to in those paragraphs which each Holder of Warrants would
have been entitled to receive had the Warrants been exercised prior to the
happening of such event or the record date with respect thereto. No adjustment
need be made for a change in the par value of the Warrant Shares.
(g) In the event that at any time, as a result of an adjustment
made pursuant to paragraph (a) above, the Holders shall become entitled to
purchase any securities of the Company other than shares of Common Stock,
thereafter the number of such other shares so purchasable upon exercise of each
Warrant and the Warrant Price of such shares shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Warrant Shares contained in this Section 11, and
the other provisions of this Agreement, with respect to the Warrant and Warrant
Shares, shall apply as nearly equivalent as practicable on like terms to such
other securities.
(h) Upon the expiration of any rights, options, warrants or
conversion or exchange privileges for which an adjustment was made hereunder, if
any thereof shall not have been exercised, the Warrant Price and the number of
shares of Common Stock purchasable upon the exercise of each Warrant shall, upon
such expiration, be readjusted and shall thereafter be such as it would have
been had it been originally adjusted (or had the original adjustment not been
required, as the case may be) as if (i) the only shares of Common Stock so
issued were the shares of Common Stock, if any, actually issued or sold upon the
exercise of such rights, options,
6
<PAGE> 7
warrants or conversion or exchange rights and (ii) such shares of Common Stock,
if any, were issued or sold for the consideration actually received by the
Company upon such exercise plus the aggregate consideration, if any, actually
received by the Company for the issuance, sale or grant of all such rights,
options, warrants or conversion or exchange rights whether or not exercised;
provided, however, that no such readjustment shall have the effect of increasing
the Warrant Price or decreasing the number of shares of Common Stock purchasable
upon the exercise of each Warrant by an amount in excess of the amount of the
adjustment initially made in respect to the issuance, sale or grant of such
rights, options, warrants or conversion or exchange rights.
11.2 Notice of Adjustment. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Warrant Price of such
Warrant Shares is adjusted, as herein provided, the Company shall promptly mail
by first class, postage prepaid, to each Holder notice of such adjustment or
adjustments and a certificate of a firm of independent public accountants
selected by the Board of Directors of the Company (who may be the regular
accountants employed by the Company) setting forth the number of Warrant Shares
purchasable upon the exercise of each Warrant and the Warrant Price of such
Warrant Shares after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation by which such
adjustment was made.
11.3 No Adjustment for Dividends. Except as provided in Section 11.1,
no adjustments in respect of any dividends shall be made during the term of a
Warrant or upon the exercise of a Warrant.
11.4 Preservation of Purchase Rights Upon Merger, Consolidation etc.
In case of any consolidation of the Company with or merger of the Company into
another corporation or in case of any sale, transfer or lease to another
corporation of all or substantially all the property of the Company, the Company
or such successor or purchasing corporation, as the case may be, shall execute
with each Holder an agreement that each Holder shall have the right thereafter
upon payment of the Warrant Price in effect immediately prior to such action to
purchase upon exercise of each Warrant the kind and amount of shares and other
securities, cash and property which he would have owned or would have been
entitled to receive after the happening of such consolidation, merger, sale,
transfer or lease had such Warrant been exercised immediately prior to such
action; provided, however, that no adjustment in respect of dividends, interest
or other income on or from such shares or other securities, cash and property
shall be made during the term of a Warrant or upon the exercise of a Warrant.
Such agreement shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
11. The provisions of this Section 11.4 shall similarly apply to successive
consolidations, mergers, sales transfer or leases.
11.5 Statements on Warrants. Irrespective of any adjustments in the
Warrant Price or the number or kind of shares purchasable upon the exercise of
the Warrants, Warrants theretofore or thereafter issued may continue to express
the same price and number and kind of shares as are stated in the Warrants
initially issuable pursuant to this Agreement.
11.6 Optional Conversion.
(a) In addition to and without limiting the rights of the holders of
the Warrants under the terms of this Agreement and the Warrants, the holder of
the Warrants shall have the right (the "Conversion Right") to convert the
Warrants or any portion thereof into shares of Common Stock as provided in this
Section 11.6 at any time or from time to time after the first anniversary of
the date hereof and prior to its expiration, subject to the restrictions set
forth in paragraph (c) below. Upon exercise of the Conversion right with
respect to a particular number of shares subject to the Warrants (the
"Converted Warrant Shares"), the Company shall deliver to the holder of the
Warrants, without payment by the holder of any exercise price or any cash or
other consideration, that number of shares of Common Stock equal to the
quotient obtained by dividing the Net Value (as hereinafter defined) of the
Converted Warrant Shares by the fair market value (as defined in paragraph (d)
below) of a single share of Common Stock, determined in each case as of the
close of business on the Conversion Date (as hereinafter defined). The "Net
Value" of the Converted Warrant Shares shall be determined by subtraction of
the aggregate warrant purchase price of the Converted Warrant Shares from the
aggregate fair market value of the Converted Warrant Shares. No fractional
shares shall be issuable upon exercise of the Conversion Right, and if the
number of shares to be issued in accordance with the foregoing formula is other
than a whole number, the Company shall pay to the holder of the Warrants an
amount in cash equal to the fair market value of the resulting fractional
share.
(b) The Conversion Right may be exercised by the holder of the
Warrants by the surrender of such Warrants at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right and indicating the number of shares
subject to the Warrants which are being surrendered (referred to in paragraph
(a) above as the Converted Warrant Shares) in exercise of the Conversion Right.
Such conversion shall be effective upon receipt by the Company of the Warrants
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"), not later than the expiration
date of the Warrants. Certificates for the shares of Common Stock issuable upon
exercise of the Conversion Right together with a check in payment of any
fractional share and, in the case of a partial exercise, new warrants
evidencing the shares remaining subject to the Warrants, shall be issued as of
the Conversion Date and shall be delivered to the holder of the Warrants within
7 days following the Conversion Date.
(c) In the event the Conversion Right would, at any time the
Warrants remains outstanding, be deemed by the Company's independent certified
public accountants to give rise to a charge to the Company's earnings for
financial reporting purposes, then the Conversion right shall automatically
terminate upon the Company's written notice to the holder of the Warrants of
such adverse accounting treatment.
(d) For purposes of this paragraph 11.6, the "fair market value" of
a share of Common Stock as of a particular date shall be its "current market
price", calculated as described in paragraph 11.1(c) hereof.
12. Fractional Interests. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for
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<PAGE> 8
exercise in full at the same time by the same holder, the number of full Warrant
Shares which shall be issuable upon the exercise thereof shall be computed on
the basis of the aggregate number of Warrant Shares purchasable on exercise of
the Warrants so presented. If any fraction of a Warrant Share would, except for
the provisions of this Section 12, be issuable on the exercise of any Warrant
(or specified portion thereof), the Company shall pay an amount in cash equal to
the closing price for one share of the Common Stock, as defined in paragraph (c)
of Section 11.1, on the trading day immediately preceding the date the Warrant
is presented for exercise, multiplied by such faction.
13. Registration Under the Securities Act of 1933. The Representative
represents and warrants to the Company that it will not dispose of the Warrants
or the Warrant Shares except pursuant to (i) an effective registration statement
under the Securities Act of 1933, as amended (the "Act"), including a
post-effective amendment to the Registration Statement, (ii) Rule 144 under the
Act (or any similar rule under the Act relating to the disposition of
securities), or (iii) an opinion of counsel, reasonably satisfactory to counsel
of the Company, that an exemption from such registration is available.
14. Certificate to Bear Legends. The Warrant shall be subject to a
stop-transfer order and the certificate or certificates therefore shall bear the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAW. SAID SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT.
The Warrant Shares or other securities issued upon exercise of the
Warrant shall be subject to a stop-transfer order and the certificate or
certificates evidencing any such Warrant Shares or securities shall bear the
following legend:
THE SHARES OR OTHER SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAW. SAID SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT.
15. Registration Rights.
15.1 Demand Registration Rights. The Company covenants and agrees with
the Representative and any subsequent Holders of the Warrants and/or Warrants
Shares that, on one occasion, within 60 days after receipt of a written request
from the Representative or from Holders of more than 25% in interest of the
aggregate of Warrants and/or Warrant Shares issued pursuant to this Agreement
that the Representative or such Holders of the Warrants and/or Warrant Shares
desires and intends to transfer more than 25% in interest of the aggregate
number of the Warrants and/or Warrant Shares under such circumstances that a
public offering, within the
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<PAGE> 9
meaning of the Act, will be involved, the Company shall, on that one occasion,
file a registration statement (and use its best efforts to cause such
registration statement to become effective under the Act at the Company's
expense) with respect to the offering and sale or other disposition of the
Warrant Shares (the "Offered Warrant Shares"); provided, however, that the
Company shall have no obligation to comply with the foregoing provisions of this
Section 15.1 if in the opinion of counsel to the Company reasonably acceptable
to the Holder or Holders, from whom such written requests have been received,
registration under the Act is not required for the transfer of the Offered
Warrant Shares in the manner proposed by such person or persons or that a
post-effective amendment to an existing registration statement would be legally
sufficient for such transfer (in which latter event the Company shall promptly
file such post-effective amendment (and use its best efforts to cause such
amendment to become effective under the Act)). Notwithstanding the foregoing,
the Company shall not be obligated to file a registration statement with respect
to the Offered Warrant Shares on more than one occasion.
The Company may defer the preparation and filing of a registration
statement for up to 90 days after the request for registration is made if the
Board of Directors determines in good faith that such registration or
post-effective amendment would materially adversely affect or otherwise
materially interfere with a proposed or pending transaction by the Company,
including without limitation a material financing or a corporate reorganization,
or during any period of time in which the Company is in possession of material
inside information concerning the Company or its securities, which information
the Company determines in good faith is not ripe for disclosure.
The Company shall not honor any request to register Warrant Shares
pursuant to this Section 15.1 received later than five (5) years from the
effective date of the Company's Registration Statement on Forth SB-2 (File No.
333-22583) (the "Effective Date"). The Company shall not be required (i) to
maintain the effectiveness of the registration statement beyond the earlier to
occur of 90 days after the effective date of the registration statement or the
date on which all of the Offered Warrant Shares have been sold (the "Termination
Date"); provided, however, that if at the Termination Date the Offered Warrant
Shares are covered by a registration statement which also covers other
securities and which is required to remain in effect beyond the Termination
Date, the Company shall maintain in effect such registration statement as it
relates to Offered Warrant Shares for so long as such registration statement (or
any substitute registration statement) remains or is required to remain in
effect for any such other securities, or (ii) to cause any registration
statement with respect to the Warrant Shares to become effective prior to the
Initiation Date. All expenses of registration pursuant to this Section 15.1
shall be borne by the Company (excluding underwriting discounts and commissions
on Warrant Shares not sold by the Company).
The Company shall be obligated pursuant to this Section 15.1 to include
in the registration statement Warrant Shares that have not yet been purchased by
a Holder of Warrants so long as such Holder of Warrants submits an undertaking
to the Company that such Holder intends to exercise Warrants representing the
number of Warrant Shares to be included in such registration statement prior to
the consummation of the public offering with respect to such Warrant Shares. In
addition, such Holder of Warrants is permitted to pay the Company the Warrant
Price for such Warrant Shares upon the consummation of the public offering with
respect to such Warrant Shares.
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<PAGE> 10
15.2 Piggy-back Registration Rights. The Company covenants and agrees
with the Holders and any subsequent Holders of the Warrants and/or Warrant
Shares that in the event the Company proposes to file a registration statement
under the Act with respect to any class of security (other than in connection
with an exchange offer, a non-cash offer or a registration statement on Form S-8
or other unsuitable registration statement form) which becomes or which the
Company believes will become effective at any time after the Initiation Date
then the Company shall in each case give written notice of such proposed filing
to the Holders of Warrants and Warrant Shares at least 30 days before the
proposed filing date and such notice shall offer to such Holders the opportunity
to include in such registration statement such number of Warrant Shares as they
may request, unless, in the opinion of counsel to the Company reasonably
acceptable to any such holder of Warrants or Warrant Shares who wishes to have
Warrant Shares included in such registration statement, registration under the
Act is not required for the transfer of such Warrants and/or Warrant Shares in
the manner proposed by such Holders. The Company shall not honor any such
request to register any such Warrant Shares if the request is received later
than six (6) years from the Effective Date, and the Company shall not be
required to honor any request (a) to register any such Warrant Shares if the
Company is not notified in writing of any such request pursuant to this Section
15.2 within at least 20 days after the Company has given notice to the Holders
of the filing, or (b) to register Warrant Shares that represent in the aggregate
fewer than 25% of the aggregate number of Warrant Shares. The Company shall
permit, or shall cause the managing underwriter of a proposed offering to
permit, the Holders of Warrant Shares requested to be included in the
registration (the "Piggy-back Shares ") to include such Piggy-back Shares in the
proposed offering on the same terms and conditions as applicable to securities
of the Company included therein or as applicable to securities of any person
other than the Company and the Holders of Piggy-back Shares if the securities of
any such person are included therein. Notwithstanding the foregoing, if any such
managing underwriter shall advise the Company in writing that it believes that
the distribution of all or a portion of the Piggy-back Shares requested to be
included in the registration statement concurrently with the securities being
registered by the Company would materially adversely affect the distribution of
such securities by the Company for its own account, then the Holders of such
Piggy-back Shares shall delay their offering and sale of Piggyback Shares (or
the portion thereof so designated by such managing underwriter) for such period,
not to exceed 120 days, as the managing underwriter shall request provided that
no such delay shall be required as to Piggy-back Shares if any securities of the
Company are included in such registration statement for the account of any
person other than the Company and the Holders of Piggy-back Shares. In the event
of such delay, the Company shall file such supplements, post-effective
amendments or separate registration statement, and take any such other steps as
may be necessary to permit such Holders to make their proposed offering and sale
for a period of 90 days immediately following the end of such period of delay
("Piggy-back Termination Date"); provided, however, that if at the Piggy-back
Termination Date the Piggyback Shares are covered by a registration statement
which is, or required to remain, in effect beyond the Piggy-back Termination
Date, the Company shall maintain in effect the registration statement as it
relates to the Piggy-back Shares for so long as such registration statement
remains or is required to remain in effect for any of such other securities. All
expenses of registration pursuant to this Section 15.2 shall be borne by the
Company, except that underwriting commissions and expenses attributable to the
Piggy-back Shares and fees and disbursements of counsel (if any) to the Holders
requesting that such Piggy-
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<PAGE> 11
back Shares be offered will be borne by such Holders.
The Company shall be obligated pursuant to this Section 15.2 to include
in the Piggy-back Offering, Warrant Shares that have not yet been purchased by a
holder of Warrants so long as such Holder of Warrants submits an undertaking to
the Company that such Holder intends to exercise Warrants representing the
number of Warrant Shares to be included in such Piggy-back Offering prior to the
consummation of such Piggy-back Offering. In addition, such Holder of Warrants
is permitted to pay the Company the Warrant Price for such Warrant Shares upon
the consummation of the Piggy-back Offering.
If the Company decides not to proceed with a Piggy-back Offering, the
Company has no obligation to proceed with the offering of the Piggy-back Shares,
unless the Holders of the Warrants and/or Warrant Shares otherwise comply with
the provisions of Section 15.1 hereof (without regard to the 60 days' written
request required thereby). Notwithstanding any of the foregoing contained in
this Section 15.2, the Company's obligation to offer registration rights to the
Piggy-back Shares pursuant to this Section 15.2 shall terminate two (2) years
after the Expiration Date.
15.3 In connection with the registration of Warrants Shares in
accordance with Section 15.1 and 15.2 above, the Company agrees to:
(a) Use its best efforts to register or qualify the Warrant
Shares for offer or sale under the state securities or Blue Sky laws of
such states which the Holders of such Warrant Shares shall designate,
until the dates specified in Section 15.1 and 15.2 above in connection
with registration under the Act; provided, however, that in no event
shall the Company be obligated to quality to do business in any
jurisdiction where it is not now so qualified or to take any action
which would subject it to general service of process in any jurisdiction
where it is not now so subject or to register or get a license as a
broker or dealer in securities in any jurisdiction where it is not so
registered or licensed or to register or qualify the Warrant Shares for
offer or sale under the state securities or Blue Sky laws of any state
other than the states in which some or all of the shares offered or sold
in the Public Offering were registered or qualified for offer and sale.
(b) (i) In the event of any post-effective amendment or other
registration with respect to any Warrant Shares pursuant to Section 15.1
or 15.2 above, the Company will indemnify and hold harmless any Holder
whose Warrant Shares are being so registered, and each person, if any,
who controls such Holder within the meaning of the Act, against any
losses, claims, damages or liabilities, joint or several, to which such
Holder or such controlling person may be subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained, on
the effective date thereof, in any such registration statement, any
preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and will reimburse each such Holder and each such
controlling person for
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<PAGE> 12
any legal or other expenses reasonably incurred by such Holder or such
controlling person in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that
the Company will not be liable in such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged
omission made in any such registration statement, any preliminary
prospectus or final prospectus, or any amendment or supplement thereto,
in reliance upon and in conformity with written information furnished by
such Holder expressly for use in the preparation thereof. The Company
will not be liable to a claimant to the extent of any misstatement
corrected or remedied in any amended prospectus if the Company timely
delivers a copy of such amended prospectus to such indemnified person
and such indemnified person does not timely furnish such amended
prospectus to such claimant. The Company shall not be required to
indemnify any Holder or controlling person for any payment made to any
claimant in settlement of any suit or claim unless such payment is
approved by the Company.
(ii) Each Holder of Warrants and/or Warrant Shares who
participates in a registration pursuant to Section 15.1 or 15.2 will
indemnify and hold harmless the Company, each of its directors, each of
its officers who have signed any such registration statement, and each
person, if any, who controls the Company within the meaning of the Act,
against any losses, claims, damages or liabilities to which the Company,
or any such director, officer or controlling person may become subject
under the Act, or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon any untrue or alleged untrue statement of any material fact
contained in any such registration statement, any preliminary prospectus
or final prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent,
but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any such
registration statement, any preliminary prospectus or final prospectus,
or any amendment or supplement thereto, in reliance upon and in
conformity with written information furnished by such Holder expressly
for use in the preparation thereof; and will reimburse any legal or
other expenses reasonably incurred by the Company, or any such director,
officer or controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that the indemnity agreement contained in this subparagraph
(ii) shall not apply to amounts paid to any claimant in settlement of
any suit or claim unless such payment is first approved by such Holder.
(iii) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this
clause (b)(iii) of Section 15.3 but is judicially determined (by the
entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of
appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this clause (b)(iii) of Section 15.3
provides for indemnification in such case, all the parties hereto shall
contribute to the aggregate losses, claims, damages or liabilities to
which they may be subject (after contribution from others) in such
proportion so that each
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<PAGE> 13
Holder whose Warrant Shares are being registered is responsible pro rata
for the portion represented by the public offering price received by
such Holder from the sale of such Holder's Warrant Shares, and the
Company is responsible for the remaining portion; provided, however,
that (i) no Holder shall be required to contribute any amount in excess
of the public offering price received by such Holder from the sale of
such Holder's Warrant Shares and (ii) no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall
be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. This subsection (b)(iii) shall not be
operative as to any Holder of Warrant Shares to the extent that the
Company has received indemnity under this clause (b)(iii) of Section
15.3.
16. No Rights as Stockholder; Notices to Holders. Nothing contained
in this Agreement or in any of the Warrants shall be construed as conferring
upon the Holders or their transferee(s) the right to vote or to receive
dividends or to consent to or receive notice as stockholders in respect of any
meeting of stockholders for the election of directors of the Company or any
other matter or any rights whatsoever as stockholders of the Company. If,
however, at any time prior to the expiration of the Warrants and prior to their
exercise, any of the following events shall occur:
(a) the Company shall declare any dividend payable in any
securities upon its shares of Common Stock or make any distribution
(other than a cash dividend) to the holders of its shares of Common
Stock; or
(b) the Company shall offer to the holders of its shares of
Common Stock any additional shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock or any right
to subscribe to or purchase any thereof; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation, merger, sale, transfer
or lease of all or substantially all of its property, assets and
business as an entirety) shall be proposed,
then in any one or more of said events the Company shall (i) give notice in
writing of such event to the Holders, as provided in Section 17 hereof and (ii)
if there are more than 100 Holders, cause notice of such event to be published
once in The Wall Street Journal (national edition), such giving of notice and
publication to be completed at least 20 days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution or subscription rights, or
for the determination of stockholders entitled to vote on such proposed
dissolution, liquidation or winding up. Such notice shall specify such record
date or the date of closing the transfer books, as the case may be. Failure to
publish, mail or receive such notice or any defect therein or in the publication
or mailing thereof shall not affect the validity of any action taken in
connection with such dividend, distribution or subscription rights, or such
proposed dissolution, liquidation or winding up.
17. Notices. Any notice pursuant to this Agreement to be given or
made by the registered Holder of any Warrant to or on the Company shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed as follows:
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JAKKS PACIFIC, INC.
24955 Pacific Coast Highway, #B202
Malibu, California 90265
Attn: President
Notices or demands authorized by this Agreement to be given or made by the
Company to the registered Holder of any Warrant shall be sufficiently given or
made (except as otherwise provided in this Agreement) if sent by first-class
mail, postage prepaid, addressed to such Holder at the address of such Holder as
shown on the Warrant Register.
18. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California without giving effect to
principles of conflicts of laws.
19. Supplements and Amendments. The Company and the Representative
may from time to time supplement or amend this Agreement in order to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Representative may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrants and which shall not
adversely affect the interests of the Holders. This Agreement may also be
supplemented or amended from time to time by a writing executed by or on behalf
of the Company and all of the Holders.
20. Successor. All the covenants and provisions of this Agreement by
or for the benefit of the Company or the Holders shall bind and inure to the
benefit of their respective successors and assigns hereunder. Assignments by the
Holders of their rights hereunder shall be made in accordance with Section 4
hereof.
21. Merger or Consolidation of the Company. So long as Warrants
remain outstanding, the Company will not merge or consolidate with or into, or
sell, transfer or lease all or substantially all of its property to, any other
corporation unless the successor or purchasing corporation, as the case may be
(if not the Company), shall expressly assume, by supplemental agreement executed
and delivered to the Holders, the due and punctual performance and observance of
each and every covenant and condition of this Agreement to be performed and
observed by the Company.
22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Holders, any legal or equitable right, remedy or claim under this Agreement, but
this Agreement shall be for the sole and exclusive benefit of the Company and
the Holders of the Warrants and Warrant Shares.
23. Captions. The captions of the sections and subsections of this
Agreement have been inserted for convenience only and shall have no substantive
effect.
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<PAGE> 15
24. Counterparts. This Agreement may be executed in any number of
counterparts each of which when so executed shall be deemed to be an original;
but such counterparts together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day, month and year first above written.
CRUTTENDEN ROTH INCORPORATED
Attest:
By:
- ------------------------------ ------------------------------
Name:
Title:
JAKKS PACIFIC, INC.
Attest:
By:
- ------------------------------ ------------------------------
Name:
Title:
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<PAGE> 16
EXHIBIT A
[Form of Warrant Certificate]
EXERCISABLE ON OR BEFORE APRIL ___, 2002
No. 42,000 Warrants
Warrant Certificate
JAKKS PACIFIC, INC.
This Warrant Certificate certifies that Cruttenden Roth Incorporated, or
registered assigns, is the registered holder of Warrants expiring April __, 2002
(the "Warrants") to purchase Common Stock, $0.001 par value per share (the
"Common Stock"), of JAKKS Pacific, Inc., a Delaware corporation (the "Company").
Each Warrant entitles the holder upon exercise to receive from the Company from
10:00 a.m., Pacific time, on April ___, 1998 through and until 6:00 p.m.,
Pacific time, on April __, 2002, one fully paid and nonassessable share of
Common Stock (a "Warrant Share") at the initial exercise price (the "Warrant
Price") of [$_____] payable in lawful money of the United States of America upon
surrender of this Warrant Certificate and payment of the Warrant Price at the
office of the Company designated for such purpose, but only subject to the
conditions set forth herein and in the Warrant Agreement referred to on the
reverse hereof. The Warrant Price and number of Warrant Shares issuable upon
exercise of the Warrants are subject to adjustment upon the occurrence of
certain events set forth in the Warrant Agreement.
No Warrant may be exercised after 6:00 p.m., Pacific time, on April ___,
2002 (the "Expiration Date"). Notwithstanding the foregoing, if at 6:00 p.m.,
Pacific time on the Expiration Date, any Holder or Holders of the Warrants have
not exercised their Warrants and the Closing Price (as defined in the Warrant
Agreement) for the Common Stock on the Expiration Date is greater than the
Warrant Price, then each such unexercised Warrant shall be automatically
converted into a number of shares of Common Stock of the Company equal to: (A)
the number of shares of Common Stock then issuable upon exercise of a Warrant
multiplied by (B) a fraction (1) the numerator of which is the difference
between the Closing Price for the Common Stock on the Expiration Date and the
Warrant Price and (2) the demoninator of which is the Closing Price for the
Warrant Stock on the Expiration Date.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
This Warrant Certificate shall not be valid unless countersigned by the
Company.
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IN WITNESS WHEREOF, JAKKS Pacific, Inc. has caused this Warrant
Certificate to be signed by its President and by its Secretary and has caused
its corporate seal to be affixed hereunto or imprinted hereon.
Dated: __________, 1997 JAKKS PACIFIC, INC.
By:
----------------------------------
Title:
----------------------------------
By:
----------------------------------
Title:
----------------------------------
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<PAGE> 18
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring April __, 2002 entitling the holder on
exercise to receive shares of Common Stock, $0.001 par value per share, of the
Company (the "Common Stock"), and are issued or to be issued pursuant to a
Warrant Agreement, dated as of April __, 1997 (the "Warrant Agreement"), duly
executed and delivered by the Company, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants. A copy of the Warrant Agreement may be obtained by the holder
hereof upon written request to the Company.
The Warrants may be exercised at any time on or before April ___, 2002.
The holder of Warrants evidenced by this Warrant Certificate may exercise them
by surrendering this Warrant Certificate, with the form of election to purchase
set forth hereon properly completed and executed, together with payment of the
Warrant Price in cash at the office of the Company designated for such purpose.
In the event that upon any exercise of Warrants evidenced hereby the number of
Warrants exercised shall be less than the total number of Warrants evidenced
hereby, there shall be issued to the holder hereof or his assignee a new Warrant
Certificate evidencing the number of Warrants not exercised. No adjustment shall
be made for any dividends on any Common Stock issuable upon exercise of this
Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the number of shares of Common Stock issuable upon the exercise of each
Warrant shall be adjusted. If the number of shares of Common Stock issuable upon
such exercise is adjusted, the Warrant Agreement provides that the Warrant
Price set forth on the face hereof may, subject to certain conditions, be
adjusted. No fractions of a share of Common Stock will be issued upon the
exercise of any Warrants but the Company will pay the cash value thereof
determined as provided in the Warrant Agreement. The Warrant Agreement also
provides that, while the Warrants are exercisable, the holders of the Warrants
shall have an optional conversion right to convert, without payment of any
exercise price or any cash or other consideration by such holders, the Warrants
or any portion thereof into a number of shares of Common Stock as specified in
the Warrant Agreement.
The holders of the Warrants are entitled to certain registration rights
with respect to the Common Stock purchasable upon exercise thereof. Said
registration rights are set forth in full in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Company by
the registered holder thereof in person or by legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
certificate at the office of the Company, a new Warrant certificate or Warrant
certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to other transferee(s) in exchange for this
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<PAGE> 19
Warrant Certificate, subject to the limitations provided in the Warrant
Agreement, without charge except for any tax or other governmental charge
imposed in connection therewith.
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
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[Form of Election to Purchase]
(To be Executed upon Exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive ___________ shares of Common
Stock and herewith tenders payment for such shares to the order of JAKKS
Pacific, Inc., in the amount of $___________ in accordance with the terms
hereof. The undersigned requests that a certificate for such shares be
registered in the name of _____________________________, whose address is
___________________________________________________ and that such shares be
delivered to ____________________________ whose address is
________________________________. If said number of shares is less than all of
the shares of Common Stock purchasable hereunder, the undersigned requests that
a new Warrant certificate representing the remaining balance of such shares be
registered in the name of ________________________________, whose address is
_________________________, and that such Warrant certificate be delivered to
_______________________, whose address is
_______________________________________.
Signature:
Date:
Signature Guaranteed:
20
<PAGE> 1
EXHIBIT 5.1
[FEDER, KASZOVITZ, ISAACSON, WEBER, SKALA & BASS, LLP LETTERHEAD]
April 23, 1997
JAKKS Pacific, Inc.
24955 Pacific Coast Highway
Suite B202
Malibu, CA 90265
Re: Registration Statement on Form SB-2
Gentlemen:
We have acted as counsel for JAKKS Pacific, Inc., a Delaware corporation
(the "Company") in connection with the preparation and filing by the Company of
a registration statement (the "Registration Statement") on Form SB-2, File No.
333-22583, under the Securities Act of 1933, relating to the public offering of
690,000 shares of Common Stock, par value $.001 per share (the "Registered
Shares"), including 90,000 shares which the underwriters have an option to
purchase solely for the purpose of covering over-allotments. Of the 690,000
Registered Shares, 600,000 are to be sold by the Company (the "Company Shares"),
and 90,000 may be sold by certain Selling Stockholders pursuant to the
over-allotment option (the "Selling Stockholder Shares") to underwriters ("the
Underwriters") of which Cruttenden Roth Incorporated is the representative (the
"Representative"). The offering also involves the sale to the Representative of
the Underwriters of a warrant to purchase up to 42,000 shares of the Company's
Common Stock (the "Representative's Warrant").
We have examined the Certificate of Incorporation and the By-Laws of
the Company, the minutes of the various meetings and consents of the Board of
Directors of the Company, drafts of the Underwriting Agreement relating to the
offering of the Common Stock, drafts of the Representative's Warrant and such
other documents, certificates, records, authorizations, proceedings, statutes
and judicial decisions as we have deemed necessary to form the basis of the
opinion expressed below. In such examination, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals and the conformity to originals of all documents submitted to us as
copies thereof.
As to various questions of fact material to such opinion, we have
relied upon statements and certificates of officers and representatives of the
Company and others.
Based on the foregoing, we are of the opinion that:
1. When the Underwriting Agreement between the Underwriters and the
Company is completed (including the insertion therein of pricing terms) and
executed by the Company and the Underwriters, and the Company Shares are sold to
the underwriters and paid for pursuant to the terms of such Underwriting
Agreement, the Company Shares will be duly authorized, legally issued, fully
paid and non-assessable by the Company.
2. The Selling Stockholder Shares are duly authorized, legally
issued, fully paid and non-assessable by the Company.
We hereby consent to be named in the Registration Statement and the
Prospectus as attorneys who have passed upon legal matters in connection with
the offering of the securities offered thereby under the caption "Legal
Matters."
We further consent to your filing a copy of this opinion as an exhibit
to the Registration Statement.
/s/ Feder, Kaszovitz, Isaacson, Weber, Skala & Bass, LLP
--------------------------------------------------------
Feder, Kaszovitz, Isaacson, Weber, Skala & Bass, LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF PANNELL KERR FORSTER
We hereby consent to the inclusion in the Post-Effective Amendment No. 1 to
Registration Statement on Form SB-2 of JAKKS Pacific, Inc. of our report dated
January 23, 1997, except for note 15, for which the date if February 6, 1997, on
our audits of the consolidated financial statements of JAKKS Pacific, Inc. as of
December 31, 1996 and 1995, and for the year and nine months then ended.
We also hereby consent to the reference to our firm as "Experts" in the
Registration Statement.
/s/ PANNELL KERR FORSTER
PANNELL KERR FORSTER
Certified Public Accountants
A Professional Corporation
Los Angeles, California
April 23, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF PANNELL KERR FORSTER PC
We hereby consent to the inclusion in the Post-Effective Amendment No. 1 to
Registration Statement on Form SB-2 of JAKKS Pacific, Inc. of our report dated
February 12, 1997 on our audit of the combined financial statements of Road
Champs, Inc. and Subsidiary and Die Cast Associates, Inc. as of December 31,
1996 and December 31, 1995 and for the years then ended.
We also hereby consent to the reference to our firm under the caption "Experts"
in the Registration Statement.
/s/ PANNELL KERR FORSTER PC
PANNELL KERR FORSTER PC
New York, New York
April 23, 1997
