<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------- --------------
COMMISSION FILE NUMBER 0-28104
JAKKS PACIFIC, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4527222
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
22761 PACIFIC COAST HIGHWAY
MALIBU, CALIFORNIA 90265
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
ISSUER'S TELEPHONE NUMBER: (310) 456-7799
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
-------------- ---------------------
<S> <C>
COMMON STOCK, $.001 PAR VALUE NONE
</TABLE>
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
[X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $41,944,921.
The aggregate market value of the voting and non-voting common equity (the
only such common equity being Common Stock, $.001 par value) held by
non-affiliates (computed by reference to the closing sale price of the Common
Stock on April 13, 1998): $36,237,354.
The number of shares outstanding of the issuer's Common Stock (being the
only class of common equity) is 5,882,092 (as of 4/13/98).
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
================================================================================
<PAGE> 2
JAKKS PACIFIC, INC.
INDEX TO ANNUAL REPORT ON FORM 10-KSB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
ITEMS IN FORM 10-KSB
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Facing page
PART I
Item 1. Description of Business..................................... 2
Item 2. Description of Property..................................... 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.... 11
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Item 7. Financial Statements........................................ 18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 36
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act....................................................... 36
Item 10. Executive Compensation...................................... 38
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................ 39
Item 12. Certain Relationships and Related Transactions.............. 40
Item 13. Exhibits and Reports on Form 8-K............................ 40
Signatures............................................................ 44
</TABLE>
1
<PAGE> 3
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
JAKKS Pacific, Inc. (the "Company") designs, develops and markets licensed
and brand name toys, including action figures, dolls and die-cast vehicles. The
Company's product lines are designed to appeal to a broad segment of consumers
by providing basic, brand name items at a low price. With its recent acquisition
of the Remco and Child Guidance trademarks, the Company will be expanding its
die-cast vehicle product line and will be adding a new line of pre-school age
child development toys. Through acquisitions and new product introductions, the
Company increased net sales and net income from $12.1 million and $1.2 million,
respectively, for 1996, to $41.9 million and $2.8 million, respectively, for
1997.
The Company has been able to identify and acquire previously
underperforming brands and licenses of toy products, expand and develop those
brands and licenses by the introduction of new items and product lines, and
market those brands and licensed products through its existing channels of
distribution. For example, the Company acquired the license for its WWF line of
toy and collectible action figures and since its introduction during the second
quarter of 1996, the Company has expanded the WWF line by adding new characters,
new features, varied sizes and accessories. The Company also acquired Road
Champs, a designer and marketer of the Road Champs line of collectible and toy
die-cast vehicles in February 1997 and the Company believes that the acquisition
of the Remco line of toy die-cast vehicles will complement the Road Champs line
and allow the Company to significantly enhance selling efficiency by leveraging
the Company's existing distribution channels.
The Company sells its products primarily to domestic retail chain stores,
department stores, toy specialty stores and wholesalers. In addition, the
Company sells its line of Road Champs vehicles to independent hobby shops and
specialty retailers. During 1997, the Company's five largest customers were Toys
'R Us, Wal Mart, Kay-Bee Toys, Kmart and Target, which in aggregate represented
approximately 61.7% of the Company's net sales.
INDUSTRY OVERVIEW
According to the Toy Manufacturers of America, Inc. ("TMA"), an industry
trade group, total domestic shipments of toys, excluding video games and
accessories, were approximately $15.2 billion in 1997. According to the TMA, the
United States is the world's largest toy market, followed by Japan and Western
Europe. The three largest U.S. toy companies in 1997 were Mattel, Inc.
("Mattel"), Hasbro, Inc. ("Hasbro") and Tyco Toys, Inc. ("Tyco") (which merged
into Mattel in March 1997). In recent years, the toy industry has experienced a
period of consolidation, both at the retail and manufacturing level. However,
many smaller companies continue to compete in the design and development of new
toys, the procurement of licenses, the improvement and expansion of previously
introduced products and product lines and the marketing and distribution of toy
products.
Many factors influence the success of a given toy or product line,
including product design, play value, pricing, marketing, in-store exposure and
product availability. While the success of some toy categories vary from year to
year, other toy categories consistently perform well. Toys which form the
backbone of the toy business are generally referred to as "evergreens," "core"
or "staple" toys. Toys with relatively successful but short life cycles are
generally referred to as "fad" items. Along with providing opportunities for fun
and learning, toys traditionally mirror technological progress, changes in
social attitudes and current customs and values from the adult world. Many of
the toys which garner the most attention reflect the latest technological
advances, incorporate characters made popular in other mediums or are innovative
extensions of core toy products.
Toy production is a labor-intensive process requiring molding and shaping
or cutting and sewing, coloring, painting or detailing, assembling, inspecting,
packaging, shipping and warehousing. The substantial majority of the toys sold
in the U.S. are manufactured, either in whole or in part, overseas where labor
rates are comparatively lower than in the U.S. The largest foreign manufacturing
market is the People's Republic of China, followed by Japan and Taiwan. Most
foreign production is performed by independent contractors
2
<PAGE> 4
which use tools, molds and designs provided by U.S. toy companies and which
manufacture products under exclusive contracts. While foreign manufacturing
operations generally have relatively inexpensive labor costs, such operations
require greater lead times than domestic manufacturing operations and also
result in greater shipping costs, particularly for larger toys. The design,
production and sales of toy products in the U.S. are subject to various
regulations.
Toy manufacturers sell their products either directly to retailers or to
wholesalers who carry the product lines of many manufacturers. There are
thousands of retail outlets in the United States which sell toys and games.
These outlets include mass merchandisers, small, independent toy stores, gift
and novelty shops, warehouse clubs and mail order catalogues. Despite the broad
number of toy outlets, retail toy sales have become increasingly generated by a
small number of large chains, such as Toys 'R Us, Wal Mart, Kay-Bee Toys, Kmart
and Target. These chains generally feature a large selection of toys, some at
discount prices, and seek to maintain lean inventories to reduce their own
inventory risk. This concentration has tended to favor larger manufacturers
which are able to offer these retail chains broader product offerings, higher
levels of advertising and marketing support, and consistent product support
through electronic data interchange and just-in-time delivery programs. The
Company believes that the leading toy retailers desire to have a greater number
of toy suppliers which offer a variety of quality, branded product lines and
which have the financial strength to support the retailers' product distribution
requirements.
While toys are sold year round, toy industry retail sales are heavily
weighted toward calendar third and fourth quarters, when many toys are purchased
as holiday gifts. Each calendar year begins with a major international toy fair
held in Hong Kong in the first week in January, and during the January/February
period, additional toy fairs are held throughout the United States and Europe.
The toy fairs allow manufacturers to display their current lines and begin the
process of generating purchase orders for the important holiday season. Due to
the seasonality and long lead times required for foreign production, retailer
buying activity tends to significantly lead production and shipment.
The Company's product lines principally fall into three categories within
the toy industry. According to the TMA, for the calendar years ended December
31, 1993, 1994, 1995, 1996 and 1997, these categories had approximate domestic
manufacturers' shipments as follows:
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Action figures and accessories....... $ 641,000 $ 867,000 $ 716,000 $ 790,000 $1,002,000
Vehicles (excludes electric
trains)............................ 237,000 282,000 261,000 313,000 415,000
Pre-school........................... 1,103,000 1,157,000 1,329,000 1,384,000 1,378,000
</TABLE>
STRATEGY
The Company's objective is to leverage its relationship with retail
outlets, toy manufacturers and toy designers into a leadership position among
toy companies. To accomplish these objectives the Company has developed the
following strategy:
Develop Evergreen Products. The Company seeks to develop and build upon toy
products which it believes are everyday product lines. The Company believes that
certain toy categories, including vehicles, action figures, and child
development toys, maintain a broad consumer appeal and are fundamental products
of the toy industry. As a result, the Company develops toys which it believes
historically have generated more consistent sales from year to year and have
been less sensitive to toy fads and trends.
Utilize Established Brand Names. The Company believes that utilizing
licenses and brand names allows the Company to establish recognizable products
characterized by a longer product life than is typical in the toy industry. The
Company currently markets products pursuant to licensing and trademark
agreements which allow it to use such names as Ford, Chevrolet, Jeep, Kawasaki,
Yamaha, Pepsi, Goodyear, Hershey, and the World Wrestling Federation ("WWF"). In
addition, the Company owns the trademarks for the Child Guidance (pre-school age
child development toys) and Road Champs and Remco (toy and collectible vehicles)
product lines. The Company intends to continue to expand its product offerings
under its existing
3
<PAGE> 5
brand names and to seek to develop licensing agreements whereby products may be
offered under new brand names.
Pursue Strategic Acquisitions. The Company actively pursues strategic
acquisitions of unique businesses, product lines or trademarks that management
believes have an inherent broad based consumer appeal and can be sold through
the Company's existing distribution channels or through new complementary
distribution channels. In particular, the Company seeks to acquire brands which
it believes have recognizable names but may have been under-marketed in the
recent past. The Company believes that this strategy allows it to increase its
sales while leveraging the combined companies' operating expenses.
Maintain Limited Corporate Infrastructure. The Company maintains operating
practices, including outsourcing product manufacturing, manufacturing against
orders backed by letters of credit and utilizing commissioned independent sales
representatives, that enhance its flexibility and efficiency and reduce its
fixed cost structure. The Company's management believes that the variable nature
of the Company's production and sales effort allows it to respond quickly to
changing market conditions and to allocate resources efficiently. The Company
believes that its current infrastructure can accommodate significant further
business expansion without a corresponding increase in fixed operating costs.
Pursue International Expansion. During 1997, approximately 8.9% of the
Company's net sales were to international customers. The Company believes that
markets outside of the United States present significant opportunities and are
generally less competitive than the United States market. As a result, the
Company intends to increase its international sales, primarily in Europe through
existing and new retail channels and the use of new commissioned sales
representatives.
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.
ACQUISITIONS
Remco/Child Guidance Acquisition. In October 1997, the Company purchased
from Azrak-Hamway International, Inc. ("AHI") all of AHI's world-wide rights to
the Remco, Child Guidance and certain other related trademarks, trade rights and
intellectual property (the "Trademarks") for an aggregate purchase price of
$13.4 million, of which $10.6 million was paid at the closing, $1.2 million is
to be paid in five equal quarterly installments from December 31, 1997 to
December 31, 1998, $0.3 million related to legal and accounting fees and $1.3
million related to reserves for liabilities. The obligation to pay the deferred
portion of the purchase price is represented by a note bearing interest at the
rate of 10% per annum (the "Note"). In addition, the Company entered into a
Manufacturing and Supply Agreement with AHI, pursuant to which AHI will, during
a 30-month period ending in April 2000, make available to the Company AHI's
tools, dies, molds, forms and other manufacturing equipment (the "Tools") for
the manufacture of products sold under the Trademarks (the "Products"), and
manufacture or arrange for the manufacture of Products upon request of the
Company or, if the Company does not agree with AHI as to the price or other
terms under which AHI would be willing to supply Products to the Company, the
Company may arrange for alternative sources to manufacture and supply Products,
in which event, AHI is obligated to make the Tools available to such other
sources. In consideration therefor, the Company is to pay $1.4 million to AHI in
ten quarterly installments, the first four of which are in the amount of
$110,000 and the remaining six of which are in the amount of $160,000, subject
to certain adjustments, and pay for any Products supplied by AHI under such
agreement at AHI's cost. Certain of the Company's obligations to AHI, including
the Note are secured by a security interest in the Trademarks in favor of AHI.
Road Champs Acquisition. In February 1997, the Company, through a
wholly-owned subsidiary, purchased all of the shares of Road Champs, Inc., a
Pennsylvania corporation ("RC Inc."), which owns all of the shares of Road
Champs Ltd., a Hong Kong corporation ("RC Ltd."), 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 $11.7 million. Payments
of approximately $4.7 million in cash and $1.5 million through the issuance of
198,020 shares of Common Stock were
4
<PAGE> 6
made at the closing. The deferred portion of the purchase price has been paid in
full. All outstanding payments were 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
Company's 9% Convertible 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.
PRODUCTS
Action Figures and Accessories
The Company has a license with Titan Sports, Inc. ("Titan"), pursuant to
which the Company has the exclusive right to develop and market various products
including 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 has expanded its
current WWF products in 1997, including seven new series of wrestler figure
assortments, and sets of 3" figures with a wrestling ring and a new amplified
microphone. Furthermore, the Company is expanding its WWF product line by
introducing lines of 7" figures, large soft body figures, and figures with
special features.
VEHICLES
Road Champs
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.
Remco
The Remco product line is comprised of a diverse group of inexpensive, high
play-value, die-cast, steel and plastic toy cars and trucks, ranging in size
from approximately 5" to 18", some featuring sound, light and/or voice. These
products are currently retailing individually from $2.49 to $10.99 and in play
sets from $6.99 to 14.99.
5
<PAGE> 7
CHILD GUIDANCE PRE-SCHOOL TOYS
The Child Guidance product line consists of electronic pre-school toys
featuring lights, action, sound and/or music in various forms, including
animals, dolls and vehicles among others. The products are sold in "try me"
packaging whereby consumers are able to activate the electronic function on the
products prior to purchasing the item. The products are approved by and,
accordingly, carry the Good Housekeeping Seal of Approval, which the Company
believes increases the perceived value of the products. These products are
currently retailing from approximately $5.99 to $12.99.
OTHER PRODUCTS
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
added 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.
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 currently sell at
retail prices ranging from $19.95 to $34.95. The Company launched these products
in the Summer of 1997.
LICENSE 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 and is currently marketing 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. These licenses both expire on December 31,
2002. The Company has agreed to pay Titan royalties 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 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 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 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 vehicle marks 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. The Company is required to pay
royalties on certain of the products; the royalties on such products generally
range from 1% to 10% of sales.
6
<PAGE> 8
MARKETING AND DISTRIBUTION
The Company sells primarily all of its products to domestic retail chain
stores, department stores, toy specialty stores and wholesalers. The Road Champs
products are also sold to smaller hobby shops and specialty retailers.
Historically, the Company's five largest customers have been Toys 'R Us, Wal
Mart, Kay-Bee Toys, Kmart and Target. For the years ended December 31, 1997 and
1996, these customers, in the aggregate, accounted for approximately 61.7% of
the Company's sales and 47.5% of the Company's sales on a pro forma basis when
combined with Road Champs for 1996. 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. Notwithstanding common industry practice, the Company, in
accordance with its long-standing policy, has not sold any products on
consignment. However, it may sell on consignment, on a case-by-case negotiated
basis, in the future.
In order to minimize inventory on hand, the Company typically obtains
orders for its products from its customers and then arranges for the manufacture
of the specific ordered products, although approximately half of the Road Champs
product orders are filled from the Company's warehouse in New Jersey, which
maintains an inventory for sale.
Six of the Company's employees are engaged full-time in sales and marketing
efforts, principally in the domestic market. In addition, the Company retains a
number of independent sales representatives 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. In
1997, the Company engaged an advertising agency to produce 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.
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 6% 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 numerous toy inventors and designers
for the development of new and existing products.
PRODUCT SAFETY
The Company's products are designed, manufactured, packaged and labeled to
conform with the safety requirements of the Consumer Product Safety Commission.
Safety testing of the Company's products is performed 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. The Company
carries product liability insurance coverage with a limit of $2 million per
occurrence. The Company has never received a product liability claim.
7
<PAGE> 9
MANUFACTURING AND SUPPLIES
The Company contracts with third party manufacturers in the Far East,
principally within the People's Republic of China, to manufacture its products.
The Company's senior management negotiates the majority of its manufacturing
contracts without using agents. The Company maintains an office in Hong Kong to
enhance the Company's product development and purchasing capabilities, to aid in
the management of quality control and shipping schedules and to expand its
vendor base in the Far East. The Far East is the largest and most widely used
manufacturing center of toys in the world. Decisions related to the choice of
manufacturer are based on quality of merchandise, the ability of a manufacturer
to meet the Company's timing requirements for delivery and price. The Company is
not a party to long-term contractual or other arrangements with any manufacturer
and often uses more than one manufacturer to produce a single product. The
majority of the Company's manufacturing is arranged directly by the Company with
the manufacturing facilities and all manufacturing services for the Company are
paid for by either letters of credit or open account with such manufacturer.
The Company is continuously developing new tooling and molds to produce its
figures and die-cast products. The Company's engineering staff works closely
with outside tool makers to design and create new tooling. Depending on the size
and complexity of the model, tools can cost from $20,000 to $120,000. The
Company owns or has the right to use all necessary tools and provides them to
manufacturers during production. Tools are returned to the Company when a
product is no longer in production and are typically stored for future use.
The Company has entered into a Manufacturing and Supply Agreement with AHI,
pursuant to which AHI will, during a 30-month period ending in April 2000, make
the Tools available to the Company for the manufacture of Products, and
manufacture or arrange for the manufacture of Products upon request of the
Company or, if the Company does not agree with AHI as to the price or other
terms under which AHI would be willing to supply Products to the Company, the
Company may arrange for alternative sources to manufacture and supply Products,
in which event, AHI is obligated to make the Tools available to such other
sources. In consideration therefor, the Company is required to pay $1.4 million
to AHI in ten quarterly installments, the first four of which are in the amount
of $110,000 and the remaining six of which are in the amount of $160,000,
subject to certain adjustments, and pay for any Products supplied by AHI under
such agreement at AHI's cost.
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. These materials are generally purchased by
manufacturers who deliver completed products to the Company. The Company
believes that an adequate supply of materials used in the manufacture of its
products is readily available at reasonable prices from a variety of sources.
In 1997, the Company outsourced toy production to approximately twelve
manufacturers. While the Company believes that it is not dependent on any single
manufacturer in the Far East, the Company could be materially, adversely
affected by political or economic disruptions affecting the business or
operations of third party manufacturers located in the Far East.
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, Road Champs Acquisition and Child Guidance/Remco
Acquisition. 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.
8
<PAGE> 10
The Company's most familiar trademarks and brand names include:
<TABLE>
<CAPTION>
OWNED LICENSED
----- --------
<S> <C>
Child Guidance World Wrestling Federation
Remco Good Housekeeping Seal of Approval
Road Champs
</TABLE>
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 economies 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.
The Company's principal competitors are Mattel, Inc. and Hasbro, Inc.
which, the Company believes, are the dominant companies in the industry. The
Company also competes with smaller domestic and foreign toy manufacturers,
importers and marketers.
SEASONALITY AND BACKLOG
Sales of toy products are seasonal, with a majority of retail sales
occurring during the period from September through December. Approximately 68.3%
of the Company's sales in 1997 were made in the third 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.
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 resulting in backlogs. However, 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 operations are subject to various laws, including the Federal
Hazardous Substances Act, the Consumer Product Safety Act, the Flammable Fabrics
Act and the rules and regulations promulgated thereunder. Such laws are
administered by the Consumer Product Safety Commission, which has the authority
to exclude from the market products that are found to be hazardous and can
require a manufacturer to repurchase such products under certain circumstances.
There can be no assurance that defects in the Company's products will not be
alleged or found. Any such allegations or findings could result 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.
EMPLOYEES
As of December 31, 1997, the Company had 63 full-time employees, including
three executive officers. Thirty-six of the Company's employees are located in
the United States, while the remaining 27 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.
9
<PAGE> 11
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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 5,000 square feet of space at 22761
Pacific Coast Highway, #226, Malibu, California, all of which is currently used
for the Company's principal executive offices. The lease for such premises
expires on August 31, 2002. The current base rent is $10,000 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. The Company provided such notice
and will vacate the facility by May 31, 1998. The office will relocate to a
leased facility located at 1600 Route 22, Union, New Jersey. Such facility
consists of approximately 3,415 square feet of office space. The lease provides
for a base monthly rent of $4,852 and a term of one year commencing June 1,
1998.
The Company also leases office space in Hong Kong which is used for the
Company's sourcing operations. The property is located at the Peninsula Center,
67 Mody Road, Tsimshatsui East, Kowloon, Hong Kong. The lease provides for a
monthly rent of the U.S. dollar equivalent of $8,700, consists of approximately
3,200 square feet and expires on March 14, 2000. The Company believes that its
facilities in the United States and Hong Kong will be adequate for its
reasonably foreseeable future needs.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
<PAGE> 12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Since April 14, 1997, the Company's Common Stock has been trading on the
Nasdaq National Market System under the symbol "JAKK." From May 1, 1996 to April
13, 1997, the 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.
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ---- ---
<S> <C> <C>
Second quarter (from May 1)................................. 9 6 1/2
Third quarter............................................... 8 3/4 6 1/4
Fourth quarter.............................................. 9 7 1/4
</TABLE>
<TABLE>
<CAPTION>
1997 HIGH LOW
---- ---- ---
<S> <C> <C>
First quarter............................................... 8 5/8 7 1/8
Second quarter.............................................. 8 1/4 4 1/2
Third quarter............................................... 10 13/16 5 3/4
Fourth quarter.............................................. 11 1/8 7 5/8
</TABLE>
SECURITY HOLDERS
To the best knowledge of the Company, at March 27, 1998, there were 91
record holders of the Company's Common Stock. The Company believes there are
numerous beneficial owners of the Company's Common Stock whose shares are held
in "street name." To the best knowledge of the Company, the number of beneficial
owners as of December 31, 1997 was 1,525.
DIVIDENDS
The Company has not paid, and has no current plans to pay, dividends on its
Common Stock. The payment of dividends on the Common Stock (other than dividends
payable in shares of Common Stock) is prohibited (i) under the Loan Agreement
relating to the Company's 9% Convertible Debentures and (ii) for so long as
shares of the Company's 4% Redeemable Convertible Preferred Stock remained
outstanding, until all accumulated dividends accruing at the rate of 4% per
annum on the Company's 4% Redeemable Convertible Preferred Stock are paid in
full. All such shares were converted into Common Stock on March 30, 1998. The
Company intends to retain earnings, if any, for use in its business to finance
the operation and expansion of its business.
SALES OF UNREGISTERED SECURITIES
Dated December 31, 1996, but effective January 8, 1997, the Company issued
$6,000,000 in aggregate, of 9% seven-year convertible debentures ("Debentures")
to 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 $568,000. The debentures are convertible into 1,043,478 shares of
the Company's Common Stock at a conversion price of $5.75 per share, which is
subject to adjustment if the Company issues shares of its stock at a price less
than such conversion price. 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.
In 1997, the Company sold warrants at a price of $0.001 per share to: (i)
Joseph Charles & Associates, Inc. to purchase an aggregate of 150,000 shares of
the Company's Common Stock at an exercise price of $7.50 per share in connection
with the placement of the Debentures, and (ii) Cruttenden Roth Inc. to purchase
an
11
<PAGE> 13
aggregate of 60,000 shares of the Company's Common Stock at a price of $7.475
per share, in connection with a public offering of the Company's Common Stock.
In 1997, the Company granted (i) options under its Second Amended and
Restated 1995 Stock Option Plan to 11 persons (8 employees, including 3
executive officers, and 3 non-employee directors) to purchase an aggregate of
405,025 shares of the Company's Common Stock at exercise prices ranging from
$8.00 to $10.725 per share and (ii) options outside the 1995 Stock Option Plan
to two consultants to purchase an aggregate of 60,000 shares of the Company's
Common Stock at an exercise price of $6.875 per share.
On October 24, 1997, the Company issued 3,525 shares of its 4% Redeemable
Convertible Preferred Stock in a private placement to 10 investors at a price of
$2,000 per share. Net proceeds to the Company after legal, placement and closing
fees were approximately $6.8 million. Holders of the preferred stock are
entitled to receive cumulative cash dividends at an annual rate of $80 per share
payable as and when declared by the Company's Board of Directors. Commencing on
January 1, 1998 each share of preferred stock may be converted, at the option of
the holder, into 266 2/3 shares of Common Stock. At any time on or after April
1, 1998, (a) the preferred stock will be redeemable by the Company at a
redemption price of $2,000 per share, plus the amount accrued but unpaid
dividends thereon, on 30 days prior written notice. In addition, the preferred
stock is convertible into Common Stock at the option of the Company if the
closing price of the Common Stock equals or exceeds $8.50 per share for ten
consecutive trading days within a period of 30 trading days beginning on or
after March 1, 1998 and ending on the fifth day prior to the day of giving
notice of conversion ("Reference Period") at a conversion price equal to the
average market price over the Reference Period, but in no event less than $7.50
per share. All such shares were converted into Common Stock on March 30, 1998.
12
<PAGE> 14
ITEM 6. 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 Report.
OVERVIEW
The Company was founded in early 1995 to develop, manufacture and market
toys and related products for children. The Company commenced business
operations as of July 1, 1995, when it assumed operating control over the toy
business of Justin Products Limited ("Justin") and has included the results of
Justin's operations in its consolidated financial statements from the effective
date of such acquisition (the "Justin Acquisition"). The Justin product lines
accounted for substantially all of the Company's sales for the period from April
1, 1995 (Inception) to December 31, 1995.
In 1996, the Company expanded its product lines to include products based
on licensed characters and properties such as WWF action figures and Power
Rangers ZEO mini vehicles. Presently, the Company's products include (i) toys
and action figures featuring licensed characters, including action figures based
on characters from the WWF, (ii) die-cast collectible and toy vehicles marketed
under the 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.
In October 1997, the Company acquired the Child Guidance and Remco
trademarks, under which the Company expects to market pre-school toys and metal
trucks, respectively. Such lines contributed nominally in 1997, but are expected
to contribute more significantly to operations in 1998.
The toys sold by the Company are currently primarily produced by
non-affiliated manufacturers located in China on letter of credit basis or on
open account and are shipped F.O.B. Hong Kong. These methods allow the Company
to keep certain operating costs down and reduce working capital requirements.
However, through the Company's Road Champs division, a portion of the Company's
sales are made on a domestic basis, for which the Company holds certain
inventory in its New Jersey facility. To date, substantially all of the
Company's sales have been to domestic customers. The Company intends to expand
distribution of its products internationally.
The Company's products are generally acquired from others or developed for
the Company by non-affiliated third parties, thus minimizing operating costs.
Royalties payable to such developers generally range from 1% to 6% of the
wholesale sales price for each unit of a product sold by the Company.
RESULTS OF OPERATIONS
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 and 1997 data
relates exclusively to the Company's operations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
PRO FORMA ACTUAL ACTUAL
1995 1996 1997
--------- ------ ------
<S> <C> <C> <C>
Net sales................................................ 100.0% 100.0% 100.0%
Cost of sales............................................ 68.2 60.0 61.7
----- ----- -----
Gross profit............................................. 31.8 40.0 38.3
Selling, general and administrative expenses............. 24.0 30.0 28.4
----- ----- -----
Income from operations................................... 7.8 10.0 9.9
Other income (expense)................................... 0.2 -- (0.8)
Interest, net............................................ (0.1) 1.1 (0.9)
----- ----- -----
Income before income taxes............................... 7.9 11.1 8.2
Provision for income taxes............................... 1.6 1.3 1.6
----- ----- -----
Net income............................................... 6.3% 9.8% 6.6%
===== ===== =====
</TABLE>
13
<PAGE> 15
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Sales. Net sales were $41.9 million in 1997, an increase of $29.8
million, or 248% over $12.1 million in 1996. The significant growth in net sales
was due primarily to the continuing growth of the WWF action figure product line
with its expanded product offerings and frequent character releases, as well as
to the contribution made by Road Champs' sales of die-cast toy and collectible
vehicles, which have been included from the effective day of the acquisition,
February 1, 1997. The Company's holiday doll line performed comparably with the
prior year and its new line of radio-controlled vehicles made modest
contributions to net sales in 1997.
Gross Profit. Gross profit was $16.1 million, or 38.3% of net sales, in
1997. This represents an increase of approximately 233% over gross profit of
$4.8 million, or 40.0% of net sales, in 1996. The overall increase in gross
profit is attributable to the significant increase in net sales. The decline in
the gross profit margin of 1.7% of net sales is due in part to the changing
product mix, which includes products, such as Road Champs and radio controlled
vehicles, with lower margins than some of the Company's other products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $11.9 million in 1997 and $3.6 million in 1996,
constituting 28.4% and 30.0% of net sales, respectively. The overall significant
increase of $8.3 million in such costs is due in large part to the costs
associated with the infrastructure added in connection with the Road Champs
acquisition, with its sales, administration and warehousing operations in the
United States and Hong Kong. The Company has since combined the operations in
Hong Kong with that of its existing operations and may achieve other
efficiencies in its operations. As expected, selling, general and administrative
expenses decreased as a percentage of net sales due in part to the fixed nature
of certain of these expenses. The overall dollar increase was also due to the
significant increase in net sales with its proportionate impact on variable
selling costs such as freight and shipping-related expenses, sales commission
and travel expenses, among others. Additionally, the Company produced television
commercials in support of several of its products including WWF action figures
and radio controlled-vehicles. 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 had significantly higher interest-bearing
obligations in 1997 than in 1996 with its convertible debentures and seller note
issued to partially fund and as part of the Road Champs acquisition. In
addition, the Company had lower average cash balances during 1997 than in 1996
due to significant cash payments made and the working capital employed in
connection with the Road Champs acquisition.
Provision for Income Taxes. Provision for income taxes include state and
foreign income taxes in 1997 and also include a tax benefit generated by
operating losses for Federal and state purposes in 1996. The Company's earnings
were subject to effective tax rates of 18.8% and 12.2% in 1997 and 1996,
respectively, benefiting from a flat 16.5% Hong Kong Corporation Tax on its
income arising in, or derived from, Hong Kong. At December 31, 1997, the Company
had Federal and state net operating loss carryforwards of $727,000 and $306,000,
respectively, available to offset future taxable income. The carryforwards
generally expire through 2012 and may be subject to annual limitations as a
result of changes in the Company's ownership. There can be no assurances that
changes in ownership in future periods or any future losses will not
significantly limit the Company's use of the net operating loss carryforwards.
In addition, no valuation allowance for its deferred tax assets, amounting to
approximately $258,000 at December 31, 1997, has been provided for since, in the
opinion of management, realization of the future benefit is probable. In making
this determination, management considered all available evidence, both positive
and negative, as well as the weight and importance given to such evidence.
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
14
<PAGE> 16
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 profit was $4.8 million, or 40.0% of net sales, in
1996. This represented an increase of approximately 91% over gross profit of
$2.5 million, or 31.8% of net sales, in 1995. This increase was 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 the Road
Champs acquisition. The increase in variable selling expenses, such as freight
and shipping-related expenses, sales commissions and travel expenses, were
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 Company's
initial public offering in May 1996 and the discount amortization on the Justin
Acquisition payable.
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
$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 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.
15
<PAGE> 17
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 1997
------------------------------- ------------------------------- -----------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
---- ------ ------ ------ ---- ------ ------ ------ ------ ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ $219 $1,634 $3,769 $2,309 $835 $2,382 $4,458 $4,377 $5,235 $8,059 $15,919 $12,732
Gross profit............. 72 501 989 958 418 839 1,804 1,760 1,911 3,203 6,620 4,336
Income (loss) before
income taxes........... (91) 163 436 115 (42) 195 730 460 124 604 1,908 793
Net income (loss)........ (76) 136 359 78 20 202 628 330 203 457 1,455 671
</TABLE>
<TABLE>
<CAPTION>
1995
PRO FORMA(1) 1996 1997
----------------------------- ----------------------------- -----------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(IN PERCENTAGES OF NET SALES)
<S> <C> <C> <C> <C> <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% 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 36.5 39.7 41.6 34.1
Income (loss) before
income taxes.......... (41.6) 10.0 11.6 5.0 (5.0) 8.2 16.4 10.5 2.4 7.5 12.0 6.2
Net income (loss)....... (34.7) 8.3 9.5 3.3 2.4 8.5 14.1 7.5 3.9 5.7 9.1 5.3
</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, 1997, the Company had working capital of $3.4 million,
as compared to $7.8 million as of December 31, 1996. Such decrease was primarily
attributable to the significant disbursements of cash consideration in
connection with the Road Champs and Child Guidance/Remco acquisitions in
February 1997 and October 1997, respectively, though offset by the net proceeds
received from the issuance of the 9% convertible debentures and the 4%
convertible preferred stock.
Operating activities provided net cash of $3.2 million in 1997, as compared
to having used $0.5 million in 1996. Net cash was provided primarily by net
income and non-cash charges, though offset in part by changes in operating
assets and liabilities. At December 31, 1997, the Company had cash and cash
equivalents of $2.5 million.
The Company's investing activities have used net cash of $24.4 million in
1997, as compared to $1.3 million in 1996, consisting primarily of the purchase
of trademarks in connection with the acquisitions of Road Champs and Child
Guidance/Remco and goodwill in connection with the acquisition of Road Champs,
as well as molds and tooling used in the manufacture of the Company's products.
In 1996, the Company's investing activities used cash principally for the
purchase of molds and tooling. 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, 1998, these agreements require future aggregate minimum guarantees
of $2.0 million, exclusive of $0.3 million in advances already paid.
The Company's financing activities have provided net cash of $17.4 million
in 1997, consisting of the issuance of the 4% convertible preferred stock in
October 1997, which provided $6.8 million, net of offering costs, the placement
of the 9% convertible debentures in January 1997, which provided $5.5 million,
net of offering costs, and various notes and other debt issued in connection
with the Company's acquisitions in 1997, less approximately $5.2 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 1,043,478 shares of
16
<PAGE> 18
common stock at a conversion price of $5.75 per share, subject to anti-dilution
provisions. Such debentures bear interest at 9% per annum, payable monthly, and
are due in December 2003.
In February 1997, the Company acquired Road Champs for approximately $11.7
million. Consideration paid at closing was approximately $4.7 million in cash
plus the issuance of $1.5 million (198,020 shares) of common stock. The balance
of the cash consideration ($5.5 million) was payable during the twelve-month
period ending in February 1998. This acquisition provided the Company with
immediate significant growth in the mini vehicle product category with Road
Champs' product line of die-cast collectible and toy vehicles. Assets included
in the purchase were molds and tooling, office and warehouse equipment and other
operating assets, as well as license agreements, trade name and goodwill.
In October 1997, the Company acquired the Child Guidance and Remco
trademarks for approximately $13.4 million. Consideration paid at closing was
$10.6 million in cash plus the issuance of a note payable in the amount of $1.2
million, which is payable in five quarterly installments ending December 31,
1998 and bears interest at 10% per annum. In addition, the Company incurred
legal and accounting fees of approximately $0.3 million and reserves of $1.3
million. This acquisition provided the Company with immediate expanded growth in
the toy vehicle category, which complements the collectible and toy nature of
the Road Champs line. In addition, the Child Guidance acquisition enabled the
Company to enter the pre-school toy category with a quality name. The
acquisition was funded in part by the issuance of the Company's 4% convertible
preferred stock, which was converted to the Company's common stock on March 30,
1998. Also in connection with this acquisition, the Company entered into a
manufacturing and supply agreement whereby the seller of the trademarks will
provide the tools and other manufacturing resources for the production of
products under the trademarks. Such agreement provides for payments to the
seller of four quarterly payments of $110,000 followed by six quarterly payments
of $160,000 commencing on December 31, 1997.
In October 1997, the Company entered into a credit facility agreement with
Norwest Bank Minnesota, N.A., which provides the Company's Hong Kong
subsidiaries with a working capital line of credit and letters of credit for the
purchase of products and the operation of the subsidiaries. The facility has an
overall limit of $5.0 million, but is subject to other limitations based on
advance rates on letters of credit and open accounts receivable. As of December
31, 1997, aggregate advances under the facility amounted to approximately $0.1
million.
On April 1, 1998, the Company received $4.8 million in net proceeds from
the issuance of shares of its 7% convertible preferred stock to two investors in
a private placement, which are convertible into 558,658 shares of the Company's
common stock at a conversion price of $8.95 per share. The use of proceeds is
for working capital and general corporate purposes.
Many computer systems process dates in application software and data files
based on two digits for the year of a transaction rather than a full four
digits. These systems are unable to properly process dates in the year 2000. The
Company has developed plans to address the impact of replacing or modifying its
key financial information and operational systems to deal with this issue.
Several new information technologies have been and are being installed to
achieve further productivity and cost improvements. These systems will be year
2000 compliant. The Company believes that all systems necessary to manage the
business effectively will be replaced, modified or upgraded before the year
2000. Because of the system replacement and business reeingineering expenditures
currently underway, the Company believes the costs to modify current systems to
be year 2000 compliant will not be significant to the Company's financial
results.
The Company believes that its cash flow from operations, cash on hand and
the net proceeds from the issuance of the 7% convertible preferred stock,
together with the availability on the Norwest facility, will be sufficient to
meet working capital and capital expenditure requirements and provide the
Company with adequate liquidity to meet its anticipated operating needs for the
foreseeable future. Although operating activities are expected to provide cash,
to the extent the Company grows significantly in the future, its operating and
investing activities may use cash and, consequently, such growth may require the
Company to obtain additional sources of financing. There can be no assurance
that any necessary additional financing will be available to the Company on
commercially reasonable terms, if at all.
17
<PAGE> 19
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.
RECENT ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued a new standard, SFAS No.
128, "Earnings per Share," which is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. This
statement establishes simplified standards for computing and presenting earnings
per share (EPS). It requires dual presentation of basic and diluted EPS on the
face of the income statement of entities with complex capital structures and
disclosures of the calculation of each EPS amount.
ITEM 7. FINANCIAL STATEMENTS
The financial statements begin on the following page.
18
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
The Stockholders
JAKKS Pacific, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of JAKKS
Pacific, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years 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, 1997 and 1996, and the results
of their operations and cash flows for the years then ended, in conformity with
generally accepted accounting principles.
PANNELL KERR FORSTER
Certified Public Accountants
A Professional Corporation
February 12, 1998, except for note 17,
for which the date is April 1, 1998
19
<PAGE> 21
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 2,535,925 $ 6,355,260
Accounts receivable, net of allowance for doubtful
accounts of $51,153 and nil for 1997 and 1996,
respectively............................................ 8,735,528 2,420,470
Inventory................................................. 1,948,250 140,105
Deferred product development costs........................ 807,603 515,870
Prepaid expenses and other................................ 632,315 450,107
Advanced royalty payments................................. 252,603 276,000
Due from officers......................................... 15,112 120,030
----------- -----------
Total current assets............................... 14,927,336 10,277,842
Property and equipment
Office furniture and equipment............................ 217,786 121,305
Molds and tooling......................................... 3,647,638 1,350,949
Leasehold improvements.................................... 90,432 4,808
----------- -----------
Total.............................................. 3,955,856 1,477,062
Less accumulated depreciation and amortization............ 1,099,207 277,265
----------- -----------
Net property and equipment......................... 2,856,649 1,199,797
Deferred offering and acquisition costs..................... 626,713 85,301
Intangibles and deposits, net............................... 318,511 91,776
Deferred income taxes....................................... -- 7,531
Goodwill, net............................................... 10,695,488 2,537,697
Trademarks, net............................................. 14,180,118 --
----------- -----------
Total assets....................................... $43,604,815 $14,199,944
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 4,266,456 $ 1,610,987
Accrued expenses.......................................... 2,467,246 205,087
Reserve for returns and allowances........................ 1,860,821 175,000
Current portion of debt................................... 2,361,076 190,008
Income taxes payable...................................... 603,614 272,605
----------- -----------
Total current liabilities.......................... 11,559,213 2,453,687
Long-term portion of debt................................... 6,000,000 --
Deferred income taxes....................................... 86,896 --
----------- -----------
Total liabilities.................................. 17,646,109 2,453,687
----------- -----------
Commitments and contingencies
Stockholders' equity
Common stock, $.001 par value; 25,000,000 shares
authorized; issued and outstanding 4,942,094 and
3,984,949 shares, respectively.......................... 4,942 3,985
Convertible preferred stock, $.001 par value; 5,000 shares
authorized; issued and outstanding 3,525 and nil,
respectively............................................ 4 --
Additional paid-in capital................................ 21,693,061 10,321,295
Retained earnings......................................... 4,402,636 1,616,140
----------- -----------
26,100,643 11,941,420
Less unearned compensation from grant of options.......... 141,937 195,163
----------- -----------
Total stockholders' equity......................... 25,958,706 11,746,257
----------- -----------
Total liabilities and stockholders' equity......... $43,604,815 $14,199,944
=========== ===========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 22
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales................................................... $41,944,921 $12,052,016
Cost of sales............................................... 25,874,784 7,231,296
----------- -----------
Gross profit................................................ 16,070,137 4,820,720
Selling, general and administrative expenses................ 11,895,260 3,611,471
----------- -----------
Income from operations...................................... 4,174,877 1,209,249
Interest expense............................................ 687,341 63,171
Other (income) expense...................................... 58,091 (196,966)
----------- -----------
Income before provision for income taxes.................... 3,429,445 1,343,044
Provision for income taxes.................................. 642,949 163,275
----------- -----------
Net income.................................................. $ 2,786,496 $ 1,179,769
=========== ===========
Basic earnings per share.................................... $ .60 $ .36
=========== ===========
Diluted earnings per share.................................. $ .52 $ .34
=========== ===========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 23
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
UNEARNED
CONVERTIBLE PAR COMPENSATION
COMMON PREFERRED VALUE ADDITIONAL FROM TOTAL
SHARES SHARES PER STOCK PAID-IN RETAINED GRANT STOCKHOLDERS'
OUTSTANDING OUTSTANDING SHARE AMOUNT CAPITAL EARNINGS OF OPTIONS EQUITY
----------- ----------- ----- ------ ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Issuance of common stock
for cash................. 690,000 -- .001 690 2,921,063 -- -- 2,921,753
Exercise of options........ 69,125 -- .001 69 132,555 -- -- 132,624
Issuance of common stock in
partial consideration for
purchase of toy
business................. 198,020 -- .001 198 1,499,802 -- -- 1,500,000
Issuance of convertible
preferred stock for
cash..................... -- 3,525 .001 4 6,818,346 -- -- 6,818,350
Earned compensation from
grant of options......... -- -- -- -- -- -- 53,226 53,226
Net income................. -- -- -- -- -- 2,786,496 -- 2,786,496
--------- ----- ----- ------ ----------- ---------- --------- -----------
Balance, December 31,
1997..................... 4,942,094 3,525 $.001 $4,946 $21,693,061 $4,402,636 $(141,937) $25,958,706
========= ===== ===== ====== =========== ========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 24
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 2,786,496 $ 1,179,769
------------ -----------
Adjustments to reconcile net income to net cash provided
(used) by operating activities
Depreciation and amortization........................... 1,605,226 338,032
Earned compensation from stock option grants............ 53,226 17,742
Loss on disposal of property and equipment.............. 328,139 --
Changes in operating assets and liabilities
Accounts receivable.................................. (6,315,058) (1,844,981)
Inventory............................................ (1,808,145) (53,977)
Prepaid expenses and other........................... (450,545) (973,076)
Accounts payable..................................... 2,655,469 899,929
Accrued expenses..................................... 2,262,159 27,049
Income taxes payable................................. 331,009 191,622
Reserve for returns and allowances................... 1,685,621 (285,513)
Deferred income taxes................................ 94,427 (40,186)
------------ -----------
Total adjustments.................................. 441,528 (1,723,359)
------------ -----------
Net cash provided (used) by operating activities... 3,228,024 (543,590)
------------ -----------
Cash flows from investing activities:
Deferred costs............................................ -- (85,300)
Property and equipment.................................... (2,934,935) (1,058,654)
Due from officers......................................... 104,918 (120,030)
Other assets.............................................. (241,572) (49,129)
Trademarks................................................ (14,352,556) --
Cash paid in excess of cost over toy business assets
acquired (goodwill)..................................... (7,006,753) --
------------ -----------
Net cash used by investing activities.............. (24,430,898) (1,313,113)
------------ -----------
Cash flows from financing activities:
Proceeds from sale of common stock........................ 2,946,603 7,669,263
Proceeds from convertible preferred stock, net............ 6,818,350 --
Proceeds from debt........................................ 13,413,659 1,104,694
Repayments of note payable to officer..................... -- (382,816)
Proceeds from stock options exercised..................... 132,624 --
Repayments of debt........................................ (5,245,665) (260,930)
Deferred financing costs.................................. (682,032) --
------------ -----------
Net cash provided by financing activities.......... 17,383,539 8,130,211
------------ -----------
Net increase (decrease) in cash and cash equivalents........ (3,819,335) 6,273,508
Cash and cash equivalents, beginning of year................ 6,355,260 81,752
------------ -----------
Cash and cash equivalents, end of year...................... $ 2,535,925 $ 6,355,260
============ ===========
Cash paid during the period for:
Interest.................................................. $ 648,187 $ 49,638
============ ===========
Income taxes.............................................. $ 217,213 $ 11,839
============ ===========
</TABLE>
See note 16 for additional supplemental information to consolidated statements
of cash flows.
See notes to consolidated financial statements.
23
<PAGE> 25
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- PRINCIPAL INDUSTRY
JAKKS Pacific, Inc. (the "Company"), a Delaware corporation, is engaged in
the development and marketing of toys and children's electronics products, some
of which are based on highly recognized entertainment properties and character
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. 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. 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.
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 an allowance for estimated markdowns and
defective 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, financing and acquisition costs
During 1997, financing costs were incurred in obtaining a line of credit
facility. The deferred financing costs are being amortized over the term of the
credit facility.
During 1996, costs incurred for a follow-on offering, debenture notes
offering and certain acquisition costs were deferred. The deferred acquisition
costs were reclassified to investment costs upon completion of
24
<PAGE> 26
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
the Road Champs, Inc. acquisition. The debenture notes deferred offering costs
are being amortized over the term of the notes, or will be written off upon
conversion (note 8).
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 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.
Fair value of financial instruments
The Company's cash and cash equivalents, accounts receivable and notes
payable represent financial instruments. The carrying value of the these
financial instruments is a reasonable approximation of fair value.
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 years ended December 31, 1997 and
1996 was approximately $1,304,000 and $22,000, respectively.
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.
25
<PAGE> 27
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 of acquired toy companies. Goodwill is being amortized over
30 years on a straight-line basis. Accumulated amortization at December 31, 1997
and 1996 totaled $482,263 and $133,301, respectively.
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 trademarks. Intangible assets are amortized on a straight-line basis,
over five to thirty years, the estimated economic lives of the related assets.
Accumulated amortization as of December 31, 1997 and 1996 was $192,606 and
$10,834, respectively.
Reserve for returns and allowances
The Company provides allowances for estimated sales returns and allowances
at the time of sales.
Reverse stock split
The Company effected a reverse split of its common stock in 1996 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.
Earnings per share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." This statement, which is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods, establishes simplified standards for computing and presenting earnings
per share (EPS). It requires dual presentation of basic and diluted EPS on the
face of the income statement for entities with complex capital structures and
disclosures of the calculation of each EPS amount.
26
<PAGE> 28
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income available to common
stockholders.................. $2,786,496 4,621,369 $.60 $1,179,769 3,284,432 $.36
---- ---------
Effect of dilutive securities
Options and warrants............ -- 274,336 -- 219,335
9% convertible debentures....... 363,286 1,023,411 -- --
4% convertible preferred
stock......................... -- 175,904 -- --
---------- --------- ---------- ---------
Diluted EPS
Income available to common
stockholders plus assumed
conversions................... $3,149,782 6,095,020 $.52 $1,179,769 3,503,767 $.34
========== ========= ==== ========== ========= ====
</TABLE>
NOTE 3 -- ACQUISITIONS
Effective July 1, 1995, the Company acquired substantially all of the
assets constituting the toy business of Justin Products Limited, a Hong Kong
corporation (JPL). Total consideration paid of $2,965,353 consisted of cash,
assumption of liabilities and the issuance of 89,600 shares of the Company's
common stock.
Other consideration included percentage payments equal to 5% of the net
sales of the acquired product lines during each of the calendar years 1995, 1996
and 1997, with minimums of $250,000 for each of 1997 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 ended December 31, 1997 and 1996 amounted to $2,816 and
$250,000, respectively.
The assets acquired from JPL were as follows:
<TABLE>
<S> <C>
Furniture and fixtures................................... $ 47,500
Office equipment......................................... 12,500
Molds.................................................... 250,000
Goodwill................................................. 2,655,353
----------
Total assets acquired.......................... $2,965,353
==========
</TABLE>
On February 6, 1997, the Company acquired all of the stock of Road Champs,
Inc. (RCI) and all of the operating assets of an affiliated company for
$11,723,924. Consideration paid at closing was $4,719,413 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 $3,079,026 is to be paid in three
equal installments, with the third installment payable one year after the
closing of the transactions, all of which bear interest at a rate of 7% per
annum. In addition, the payment for inventory of $2,188,778, without interest,
is payable within 30 days of shipment to customers and the balance was payable
no later than August 6, 1997, and a payment of $1,009,225 was due on May 6,
1997. Professional fees totaling $236,707 were incurred as part of the
acquisition costs. Outstanding balances will be secured by all acquired shares
and assets; however, they will be subordinated to the debentures notes payable
due December 31, 2003 (note 8).
27
<PAGE> 29
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The assets acquired and liabilities assumed from Road Champs, Inc. were as
follows:
<TABLE>
<S> <C>
Inventory, net of reserve of $200,000................... $ 1,956,358
Prepaids................................................ 226,881
Property and equipment.................................. 694,788
Deposits................................................ 105,461
Trademarks.............................................. 1,000,000
Goodwill................................................ 8,506,753
Liabilities assumed..................................... (766,317)
-----------
Total assets acquired......................... $11,723,924
===========
</TABLE>
The following unaudited pro forma information represents the Company's
consolidated results of operations as if the acquisition of RCI had occurred on
January 1, 1996 and after giving effect to certain adjustments including the
elimination of other income and expense items not attributable to on-going
operations, interest and depreciation expense, and related tax effects. Such pro
forma information does not purport to be indicative of operating results that
would have been reported had the acquisition of RCI occurred on January 1, 1996
or future operating results.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales......................................... $42,562,160 $27,562,627
=========== ===========
Net income........................................ $ 2,587,951 $ 2,490,352
=========== ===========
Basic earnings per share.......................... $ .55 $ .72
=========== ===========
Diluted earnings per share........................ $ .48 $ .53
=========== ===========
</TABLE>
On October 24, 1997, the Company acquired the right, title and interest in
and to the Remco and Child Guidance (R&CG) trademarks, and all registrations and
applications for registration thereof, throughout the world. Total costs of the
trademarks included:
<TABLE>
<S> <C>
Cash.................................................... $10,600,000
Promissory note......................................... 1,200,000
Liabilities assumed..................................... 1,350,000
Professional service fees............................... 202,556
-----------
$13,352,556
===========
</TABLE>
The total purchase price paid the seller was the cash and promissory note
for a total of $11,800,000. The liabilities assumed include a reserve for
returns and allowances of $750,000 and a reserve of $600,000, that represents
the Company's contributions to the seller's settlement with its Hong Kong
representative agent for early termination of its service contract, due to sale
of trademarks. Costs incurred in professional service fees of $202,556 are
attributed to executing the acquisition of the trademarks. The Company also
entered into a firm price commitment, manufacturing and supply agreement with
seller (note 12).
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.
28
<PAGE> 30
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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, 1997
and 1996 are the Company's operating net assets, most of which are located in
facilities in Hong Kong and China and which total $8,948,131 and $3,531,379 for
1997 and 1996, respectively.
NOTE 5 -- DUE FROM OFFICERS
Due from officers represents balances of $15,112 and of $65,000 and
$55,030, at December 31, 1997 and 1996, respectively, due from two of the
Company's officers. The $15,112 and $55,030 for 1997 and 1996, respectively, are
due on demand and bear no interest. The amount of $65,000 is for two notes
receivable, $25,000 and $40,000, that were 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
carried interest of approximately 6% per annum.
NOTE 6 -- ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Bonuses.............................................. $ 254,737 $107,444
Trademarks acquisition reserve....................... 600,000 --
Interest expense..................................... 37,607 18,564
Royalties and commissions............................ 1,130,512 78,060
Hong Kong subsidiaries accruals...................... 384,747 --
Other................................................ 59,643 1,019
---------- --------
$2,467,246 $205,087
========== ========
</TABLE>
NOTE 7 -- 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 amount of
approximately $151,000 in 1997 and $270,000 in 1996. Also see note 5 for other
related party transactions.
29
<PAGE> 31
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 8 -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Convertible debenture loans, interest on the principal
amounts outstanding at 9% per annum with the first monthly
installment payable on February 1, 1997. If not sooner
redeemed or converted into common stock, the debenture
shall mature on December 31, 2003. Commencing on December
31, 1999, mandatory monthly principal redemption
installments are to be made in the amount of $10 per
$1,000 of the then remaining principal amount of the
debenture. Such debentures are convertible into 1,043,478
shares of the Company's common stock at $5.75 per share.
The debentures are secured by all outstanding shares of
the Company's wholly owned subsidiaries and substantially
all operating assets of the Company (note 2).............. $6,000,000 $ --
Note payable, due in five quarterly principal installments
of $240,000 starting December 31, 1997, with interest at
10% per annum. The note is secured by the Child
Guidance/Remco trademarks................................. 1,200,000 --
Note payable, due in three principal payments with the final
installment due February 6, 1998, with interest at 7% per
annum. The note is secured by RCI assets.................. 1,046,376 --
Line of credit facility (note 12)........................... 114,700 --
Asset purchase obligation, net of amount representing
interest of $1,547........................................ -- 190,008
---------- --------
8,361,076 190,008
Less current portion........................................ 2,361,076 190,008
---------- --------
Long-term portion of debt................................... $6,000,000 $ --
========== ========
</TABLE>
NOTE 9 -- INCOME TAXES
The provision for income taxes 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>
1997 1996
-------- ---------
<S> <C> <C>
Federal................................................. $ -- $ --
State and local......................................... 26,000 1,350
Hong Kong............................................... 522,522 277,994
-------- ---------
548,522 279,344
Deferred................................................ 94,427 (116,069)
-------- ---------
$642,949 $ 163,275
======== =========
</TABLE>
30
<PAGE> 32
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
As of December 31, 1997, the Company has Federal and state net operating
loss carryovers of approximately $727,000 and $306,000, respectively, available
to offset future taxable income. The carryovers expire through 2012.
<TABLE>
<S> <C> <C>
Deferred tax assets resulting from deductible temporary
differences from loss carryforwards, noncurrent........ $258,239 $145,692
Deferred tax liabilities resulting from taxable temporary
differences, noncurrent................................ (345,135) (138,161)
-------- --------
$(86,896) $ 7,531
======== ========
</TABLE>
The Company's management concluded that a deferred tax asset valuation
allowance as of December 31, 1997 was not necessary.
A reconciliation of the statutory United States Federal income tax rate to
the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<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..................... (35) (40)
Income taxes on foreign earnings at rates other than the
United States statutory rate not subject to United States
income taxes.............................................. 18 16
--- ---
19% 12%
=== ===
</TABLE>
The components of earnings before income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Domestic............................................ $ 16,216 $ (360,040)
Foreign............................................. 3,413,229 1,703,084
---------- ----------
$3,429,445 $1,343,044
========== ==========
</TABLE>
NOTE 10 -- LEASES
The Company leases office facilities and certain equipment under operating
leases. The following is a schedule of minimum lease payments. Rent expense for
the years ended December 31, 1997 and 1996 totalled $582,766 and $182,690,
respectively.
<TABLE>
<S> <C>
1998............................. $ 417,158
1999............................. 257,652
2000............................. 255,752
2001............................. 207,816
2002............................. 147,980
Thereafter....................... 22,660
----------
$1,309,018
==========
</TABLE>
NOTE 11 -- 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 on the accompanying
consolidated financial statements to reflect the effect of the approximately
one-for-1.843333 reverse stock split.
31
<PAGE> 33
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 1997, the Company issued 690,000 shares of its common stock in a
public offering. The Company also issued 198,020 shares as partial payment of
the RCI acquisition (note 3).
During 1997, in a private placement, the Company issued 3,525 shares of its
4% Redeemable Convertible Preferred Stock, at a purchase price of $2,000 per
share. Holders of the preferred stock are entitled to receive cumulative cash
dividends at an annual rate of $80 per share payable as and when declared by the
Company's Board of Directors. Commencing on January 1, 1998, each share of
preferred stock may be converted, at the option of the holder, into 266 2/3
shares of common stock. At any time on or after April 1, 1998, the preferred
stock will be redeemable by the Company at a redemption price of $2,000 per
share, plus the amount accrued but unpaid dividends thereon, on 30 days prior
written notice. In addition, the preferred stock is convertible into common
stock at the option of the Company if the closing price of the common stock
equals or exceeds $8.50 per share for ten consecutive trading days within a
period of 30 trading days beginning after March 1, 1998 and ending on the fifth
day prior to the day of giving notice of conversion (the "Reference Period") at
a conversion price equal to the average market price over the Reference Period,
but in no event less than $7.50 per share.
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
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.
NOTE 12 -- 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 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>
1998............................. $1,182,166
1999............................. 859,107
----------
Total............................ $2,041,273
==========
</TABLE>
The Company entered into a firm commitment, manufacturing and supply
agreement, in connection with the acquisition of the R&CG trademarks purchased
in 1997 (note 3). The agreement was entered into with the seller of the
trademarks, to obtain from the seller tools and other manufacturing resources of
the seller for the manufacture of products, upon request by the Company. The
manufacturing and supply agreement has created a firm commitment to the Company
for a minimum of $1,400,000. A minimum payment of $110,000 on the agreement is
due on December 31, 1997, with three additional payments of $110,000 to follow
and six $160,000 payments, thereafter, through March 31, 2000, which is also the
date on which the term of the agreement terminates.
The Company and its subsidiaries are acting as joint and several guarantors
to a $5,000,000 conditional, secured, revolving, short-term trade facility
available to the Company's Hong Kong wholly-owned subsidiaries. Proceeds on the
credit facility are to finance working capital needs and operations, in the
normal course of business. At December 31, 1997, there was an unused amount
available on the line of credit of $4,885,300 and an outstanding balance of
$114,700. Outstanding balances carry interest rates equal to the bank's base
rate of interest plus 1% per annum for advances of open accounts receivable, and
the banks base rate of interest plus 1/2% for advances received under
negotiation of export letters of credit. At December 31, 1997, the credit
32
<PAGE> 34
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
facility carried interest rates of 9.5% and 9%, respectively. Outstanding
balances are collateralized by all assets of the borrower and accounts
receivable and inventory of guarantors. The credit facility expires May 31,
1999, unless terminated sooner (note 8).
NOTE 13 -- STOCK OPTION PLAN AND WARRANTS
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 1997 and
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%; dividends yield of 0%; and
expected lives of 5 years.
Under a second amendment to the Plan, approved in 1997, the number of the
Company's common stock available increased to 750,000 shares from 216,998
shares.
As of December 31, 1997 and 1996, 219,500 and 91,523 shares were available
for future grant, respectively. Additional shares may become available to the
extent that options presently outstanding under the Plan terminate or expire
unexercised.
Stock option activity pursuant to the second amended and restated 1995 Plan
is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, December 31, 1995........................... 10,850 $4.50
Granted................................................ 114,625 6.70
Exercised.............................................. -- --
Canceled............................................... -- --
------- -----
Outstanding, December 31, 1996........................... 125,475 6.51
Granted................................................ 405,025 9.92
Exercised.............................................. -- --
Canceled............................................... -- --
------- -----
Outstanding, December 31, 1997........................... 530,500 $9.12
======= =====
</TABLE>
33
<PAGE> 35
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Stock option activity outside of the second amended and restated 1995 Plan
is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, December 31, 1995........................... 276,500 $2.00
Granted................................................ 75,000 7.54
Exercised.............................................. -- --
Canceled............................................... -- --
------- -----
Outstanding, December 31, 1996........................... 351,500 3.18
Granted................................................ 60,000 6.88
Exercised.............................................. (69,125) 2.00
Canceled............................................... -- --
------- -----
Outstanding, December 31, 1997........................... 342,375 $4.07
======= =====
</TABLE>
The weighted average fair value of options granted to employees in 1997 and
1996 was $5.01 and $2.30 per share, respectively.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------------------------------- --------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
NUMBER AVERAGE EXERCISE NUMBER EXERCISE
OPTION PRICE RANGE OF SHARES LIFE PRICE OF SHARES PRICE
- ------------------ --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$2.00 -- $10.725 872,825 4.5 years $7.14 306,292 $5.94
</TABLE>
Had the compensation cost for the Company's Plan been determined on a basis
consistent with SFAS No. 123, the Company's net income and earnings per share
for 1997 and 1996 would approximate the pro forma amounts below, which are not
indicative of future amounts:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
SFAS No. 123 charge........................... -- $ 132,895 -- $ 18,172
Net income.................................... $2,786,496 2,653,601 $1,179,769 1,161,597
Basic earnings per share...................... 0.60 0.57 0.36 0.35
Diluted earnings per share.................... 0.52 0.50 0.34 0.33
</TABLE>
In addition, as of December 31, 1997, 360,000 shares were reserved for
issuance upon exercise of warrants granted in connection with the Company's
Initial Public Offering, follow-on public offering and private placement of
convertible debentures exercisable at share prices ranging from $7.475 to $9.375
per share.
NOTE 14 -- PROFIT SHARING PLAN
Effective January 1, 1997, the Company adopted a 401(k) profit sharing plan
and trust (Plan). The Plan is for the exclusive benefit of eligible employees
and beneficiaries. Under the Plan, employees may choose to reduce their
compensation and have those amounts contributed to the Plan on their behalf.
Contributions made to the Plan will be held and invested by the Plan's trustee.
The Company will act as the Plan's administrator. The Plan year begins on
January 1st and ends on December 31st. Employees will be eligible to participate
in the Plan as of the effective date. Otherwise, employees will be eligible to
participate in the Plan after they have completed one year of service. The
Company will make matching contributions equal to 50% of the amount of salary
reduction deferred. However, in applying the matching percent, only salary
reductions up to 10% of compensation will be considered. The Company may also
make discretionary contributions to the
34
<PAGE> 36
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Plan each year. A participant may elect to defer up to 15% of their compensation
each year. However, deferrals in any taxable year may not exceed a dollar limit
which is set by law. The limit for 1997 was $9,500. Vesting in the Plan is based
on years of service, vesting schedule is as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE PERCENT VESTED
---------------- --------------
<S> <C>
1......................... 20%
2......................... 40
3......................... 60
4......................... 80
5......................... 100
</TABLE>
Participants are always 100% vested in their salary reduction amounts
contributed to the Plan.
The Company has the right to amend and terminate the Plan at any time. As
of December 31, 1997, the Plan has not been "qualified" by the provisions of the
Internal Revenue Code, and for the year then ended, the Company had contributed
$29,735 in matching contributions to the Plan.
NOTE 15 -- MAJOR CUSTOMERS
Sales to major customers were approximately as follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------- -------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ----------
<S> <C> <C> <C>
$14,689,000.............. 35.0% $3,398,000............... 28.2%
3,422,000.............. 8.2 1,679,000................ 13.9
3,199,000.............. 7.6 1,008,000................ 8.4
2,658,000.............. 6.3 847,000.................. 7.0
1,925,000.............. 4.6 509,000.................. 4.2
- ------------ ------- ----------- -------
$25,893,000.............. 61.7% $7,441,000............... 61.7%
- ------------ ------- ----------- -------
</TABLE>
NOTE 16 -- SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS
In 1997, 198,020 shares of common stock valued at $1,500,000 were issued in
connection with the acquisition of RCI (note 3).
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 common stock valued at $8,333 were issued in consideration
for legal services in connection with the Company's organizational start-up
during 1995.
NOTE 17 -- SUBSEQUENT EVENTS
On March 30, 1998, the 3,525 shares outstanding of 4% convertible preferred
stock were converted into 939,998 shares of the Company's common stock.
On April 1, 1998, the Company sold 1,000 shares of 7% cumulative
convertible preferred stock to two investors for $4,874,000, net of costs. The
shares are initially convertible into common stock at $8.95 per share, or
558,659 shares.
35
<PAGE> 37
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
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.......................... 58 Chairman, Chief Executive Officer and
President
Stephen G. Berman...................... 33 Chief Operating Officer, Executive Vice
President, Secretary and Director
Joel M. Bennett........................ 36 Chief Financial Officer
Michael G. Miller...................... 50 Director
Murray L. Skala........................ 51 Director
Robert E. Glick........................ 52 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 Bros. 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.
36
<PAGE> 38
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. Officers are elected annually by the Board and serve at the
discretion of the Board.
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.
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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the best of the Company's knowledge, all Forms 3, 4 or 5 required to be
filed during the fiscal year ended December 31, 1997 were filed on a timely
basis.
37
<PAGE> 39
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company for the
Company's fiscal years ending December 31, 1997, 1996 and 1995 to its Chief
Executive Officer and to each of its executive officers whose compensation
exceeded $100,000 on an annual basis (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM AWARDS
---------------------------------- ---------------------
(E) (F)
OTHER RESTRICTED
(C) (D) ANNUAL STOCK (G)
(A) (B) SALARY BONUS COMPENSATION AWARDS OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($)
--------------------------- ---- ------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Jack Friedman................. 1997 296,000 130,224 -- -- 125,000
Chairman, Chief Executive 1996 226,000 53,722(4) -- -- --
Officer and President 1995(1) 67,000 -- -- -- --
Stephen G. Berman............. 1997 271,000 130,224 -- -- 125,000
Chief Operating Officer, 1996 201,000 53,722(4) -- -- --
Executive Vice President 1995(2) 41,667 -- -- -- --
and Secretary
Joel M. Bennett............... 1997 110,000 -- -- -- 30,000
Chief Financial Officer 1996 85,000 10,200(4) -- -- --
1995 21,346 -- -- -- 66,500
</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) Mr. Bennett's employment with the Company commenced on September 18, 1995.
(4) Bonuses were earned in 1996 but were paid during 1997.
The following table sets forth certain information regarding the granting
of options to the Named Officers during 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Percent of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in or Base Price
Name Granted(#) Fiscal Year(1) ($/Share) Expiration Date
- ---- ------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Jack Friedman 125,000 33.8 $10.725 10/8/02
Stephen G. Berman 125,000 33.8 9.75 10/8/02
Joel M. Bennett 30,000 8.1 9.75 10/8/02
</TABLE>
- ------------
(1) Options to purchase a total of 370,000 shares of Common Stock were
granted to the Company's employees, including the Named Officers,
during 1997.
The following table sets forth certain information regarding options
exercised and exercisable during 1997 and the value of the options held
as of December 31, 1997 by the Named Officers:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired on Value Options/SARs Options/SARs
Exercise(#) Realized($) at Fiscal Year End(#) at Fiscal Year End($)
----------- ----------- -------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack Friedman 0 -- 0 125,000 -- (3)
Stephen G. Berman 0 -- 0 125,000 -- (3)
Joel M. Bennett 16,625 112,219 16,625 33,250 99,750(2) 199,500(2)
0 30,000 -- (3)
</TABLE>
- ---------------
(1) The difference between (x) the product of the number of exercised options
and $8.75 (the sale price per share of the Common Stock sold on the
exercise date) and (y) the aggregate exercise price of such options.
(2) The difference between (x) the product of the number of unexercised options
and $8.00 (the closing price of the Common Stock on December 31, 1997) and
(y) the aggregate exercise price of such options.
(3) Such options were out-of-the-money as of December 31, 1997.
BOARD COMPENSATION
As a result of the Company's policy to compensate directors who are not
employees of the Company for their services other than by cash payments, the
Company's Second Amended and Restated 1995 Stock Option Plan provides for the
automatic grant to each such director of options to purchase 25,000 shares of
Common Stock upon election to the Board and for additional automatic quarterly
grants to each such director of options to purchase 6,250 shares of Common
Stock (25,000 shares per annum). The exercise price for all of such options is
the market value of the Common Stock on the date of such grant.
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 was 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
was 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.
Effective as of January 1, 1998 the Company entered into new employment
agreements with Mr. Friedman and Mr. Berman that superseded the previous
agreements. The new agreements provide for the continued employment of Mr.
Friedman and Mr. Berman, respectively, on substantially the same employment
38
<PAGE> 40
terms and conditions as the previous agreements, except that (a) the term of
employment of each was extended until December 31, 2004, (b) the base salary of
Mr. Friedman was increased to $446,000 per annum and the base salary of Mr.
Berman was increased to $421,000 per annum, which base salaries are subject to
annual increases in an amount determined by the Company's Board of Directors,
but in no event less than $25,000, (c) each is entitled to receive an annual
bonus equal to 4% of the Company's annual pre-tax earnings, if such pre-tax
earnings equal or exceed $2,000,000, and (d) each is entitled to certain
severance payments in the event of his termination upon a "Change in Control'
(as defined) of the Company or certain other specified events.
The Company has obtained a key-man life insurance policy in the amount of
$8,000,000 on Mr. Friedman's life.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 13, 1998,
with respect to the beneficial ownership of the Company's Common Stock by (i)
each current director and nominee for director of the Company, (ii) each Named
Officer, (iii) all directors and executive officers of the Company as a group,
and (iv) each person known by the Company to own beneficially more than five per
cent (5%) of the outstanding shares of the Company's Common Stock.
<TABLE>
<CAPTION>
PERCENTAGE
AMOUNT AND OF
NATURE OF OUTSTANDING
BENEFICIAL SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OWNED
------------------------------------ ---------- -----------
<S> <C> <C>
Jack Friedman............................................... 1,208,488(1) 20.5
22761 Pacific Coast Highway
Malibu, California 90265
Stephen Berman.............................................. 179,498 3.1
22761 Pacific Coast Highway
Malibu, California 90265
Joel M. Bennett............................................. 17,625(2) *
22761 Pacific Coast Highway
Malibu, California 90265
Murray L. Skala............................................. 214,446(3) 3.6
750 Lexington Avenue
New York, New York 10022
Michael G. Miller........................................... 35,025(4) *
One Blue Hill Plaza
Pearl River, New York 10965
Robert E. Glick............................................. 42,025(5) *
1400 Broadway
New York, New York 10018
Renaissance Capital Growth & Income Fund III, Inc........... 856,934(6) 12.8
8080 N. Central Expressway
Dallas, Texas 75206
Renaissance US Growth & Income Trust PLC.................... 521,739(7) 8.1
8080 N. Central Expressway
Dallas, Texas 75206
Joseph Charles & Associates, Inc............................ 320,000(8) 5.2
9701 Wilshire Boulevard
Beverly Hills, California 90212
All directors and executive officers as a group (six
persons).................................................. 1,549,235(9) 25.8
</TABLE>
- ---------------
* Less than 1% of outstanding shares.
(1) Includes an aggregate of 147,872 shares held in trusts for the benefit of
children of Mr. Friedman.
(2) Includes 16,625 shares which Mr. Bennett has the right to acquire pursuant
to certain stock options.
39
<PAGE> 41
(3) Includes 40,450 shares which Mr. Skala has the right to acquire pursuant to
certain stock options and an aggregate of 147,872 shares held by Mr. Skala
as trustee under trusts for the benefit of children of Mr. Friedman.
(4) Represents shares which Mr. Miller has the right to acquire pursuant to
certain stock options.
(5) Includes 35,025 shares which Mr. Glick has the right to acquire pursuant to
certain stock options.
(6) Consists of 521,739 shares which Renaissance Capital Growth & Income Fund
III, Inc. has the right to acquire upon the conversion of $3,000,000
principal amount of convertible debentures (the "Debentures") held by it (at
a conversion price of $5.75 per share), and 335,195 shares which it has the
right to acquire upon the conversion of 600 shares of the Company's Series A
Cumulative Convertible Preferred Stock held by it (at a conversion price of
$8.95 per share).
(7) Represents shares which Renaissance US Growth & Income Trust PLC has the
right to acquire upon the conversion of $3,000,000 principal amount of
Debentures owned by it (at a conversion price of $5.75 per share).
(8) Consists of 270,000 shares which Joseph Charles & Associates, Inc. has the
right to acquire upon the exercise of certain warrants and 50,000 shares
which it has the right to acquire pursuant to certain stock options.
(9) Includes an aggregate of 147,872 shares held in trusts for the benefit of
children of Mr. Friedman and an aggregate of 127,125 shares which such
directors and executive officers have the right to acquire pursuant to
certain stock options.
Messrs. Friedman and Berman may be deemed "founders" of the Company, as
such term is defined under the federal securities laws.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 $151,000 in 1997, $270,000 in 1996 and $75,000 in
1995.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company(1)
3.1.1 Certificate of Designation of 4% Redeemable Convertible
Preferred Stock of the Company(5)
3.1.2 Certificate of Designation and Preferences of Series A
Cumulative Convertible Preferred Stock of the Company(7)
3.1.3 Certificate of Elimination of All Shares of 4% Redeemable
Convertible Preferred Stock of the Company(7)
3.2 By-Laws of the Company(1)
3.2.1 Amendment to By-Laws of the Company(2)
4.1 9% Convertible Debenture issued to Renaissance Capital
Growth & Income Fund III, Inc. dated December 31, 1996(2)
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.2 9% Convertible Debenture issued to Renaissance US Growth &
Income Trust PLC dated December 31, 1996(2)
10.1 Amended and Restated 1995 Stock Option Plan(2)
10.2 Employment Agreement between the Company and Jack Friedman
dated January 1, 1998(8)
10.3 Employment Agreement between the Company and Stephen G.
Berman dated January 1, 1998(8)
10.4 Asset Purchase Agreement dated October 19, 1995 (as of July
1, 1995) between the Company, JP (HK) Limited and Justin(1)
10.5 Convertible Loan Agreement among the Company and Renaissance
Capital Growth & Income Fund III, Inc. and Renaissance US
Growth & Income Trust PLC dated December 31, 1996(2)
10.6 Purchase Agreement among the Company, JAKKS Acquisition
Corp., Road Champs, Inc., Road Champs Ltd., Die Cast
Associates, Inc. and the shareholders of Road Champs, Inc.
dated January 21, 1997(3)
10.7.1 Office Lease dated June 18, 1997 between the Company and
Malibu Vista Partners(8)(P)
10.8 Lease of the Company's warehouse space at 7 Patton Drive,
West Caldwell, New Jersey and amendment thereto(3)
10.8A Office Lease dated March 27, 1998 between the Company and
Hundal of Union L.P.(8)(P)
10.9 Lease of the Company's showroom at the Toy Center South, 200
Fifth Avenue, New York, New York(1)
10.10 Lease of the Company's showroom at the Toy Center North,
1107 Broadway, New York, New York(3)
10.11 Tenancy Agreement dated March 14, 1998 between the Company
and Astoria Investment Company, Ltd.(8)(P)
10.12 License Agreement with Titan Sports, Inc. dated October 24,
1995(1)
10.12.1 Amendment to License Agreement with Titan Sports, Inc. dated
April 22, 1996(4)
10.12.2 Amendment to License Agreement with Titan Sports, Inc. dated
January 21, 1997(4)
10.12.3 Amendment to License Agreement with Titan Sports, Inc. dated
December 3, 1997(8)
10.12.4 Amendment to License Agreement with Titan Sports, Inc. dated
January 29, 1998(8)
10.13 International License Agreement with Titan Sports, Inc.
dated February 10, 1997(4)
10.13.1 Amendment to International License Agreement with Titan
Sports, Inc. dated December 3, 1997(8)
10.13.2 Amendment to International License Agreement with Titan
Sports, Inc. dated January 29, 1998(8)
10.14 License Agreement with Saban Merchandising, Inc. and Saban
International N.V. dated May 21, 1996, with amendment dated
October 31, 1996(4)
10.15 License Agreement with Wow Wee International dated June 1,
1996(4)
10.16 Agreement with Quantum Toy Concepts Pty, Ltd. dated July
1996(4)
10.17 [RESERVED]
10.18 [RESERVED]
</TABLE>
41
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.19 Warrant to purchase 150,000 shares of Common Stock dated
January 8, 1997 issued to Joseph Charles & Associates,
Inc.(8)
10.20 [RESERVED]
10.21 Option Agreement dated August 28, 1997 between the Company
and Silverman Heller Associates(8)
10.22 Consulting Agreement dated July 30, 1997 between the Company
and Silverman Heller Associates(8)
10.23 Option Agreement dated August 28, 1997 between the Company
and Joseph Charles & Associates, Inc.(5)
10.24 Engagement Letter dated August 28, 1997 between the Company
and Joseph Charles & Associates, Inc.(5)
10.25 Consulting Agreement between the Company and Sheldon Weiner
Sales Organization, Inc. dated June 18, 1996(5)
10.26.1 Stock Option Agreement between the Company and Sheldon
Weiner Sales Organization, Inc. dated June 18, 1996(5)
10.26.2 Restated Stock Option Agreement between the Company and
Sheldon Weiner Sales Organization, Inc. dated June 18,
1996(5)
10.27 Restated Option Agreement between the Company and Murray
Bass dated September 1, 1995(5)
10.28 Restated Option Agreement between the Company and Joel
Bennett dated September 1, 1995(5)
10.29 Restated Option Agreement between the Company and Gina
Hancock dated September 1, 1995(5)
10.30 Restated Option Agreement between the Company and Wills Hon
dated September 1, 1995(5)
10.31 Restated Option Agreement between the Company and Bruce Katz
dated September 1, 1995(5)
10.32 Trademark Purchase Agreement dated October 24, 1997 between
the Company and Azrak-Hamway International, Inc.(6)
10.33 $1,200,000 Promissory Note dated October 24, 1997 of the
Company payable to Azrak-Hamway International, Inc.(6)
10.34 Manufacturing and Supply Agreement dated October 24, 1997
between the Company and Azrak- Hamway International, Inc.(6)
10.35 Security Agreement dated October 24, 1997 between the
Company and Azrak-Hamway International, Inc.(6)
10.36A Debenture dated October 23, 1997 between Norwest Bank
Minnesota, N.A., Hong Kong Branch and Road Champs Limited(8)
10.36B Debenture dated October 23, 1997 between Norwest Bank
Minnesota, N.A., Hong Kong Branch and JP (HK) Limited(8)
10.36C Debentures dated October 23, 1997 between Norwest Bank
Minnesota, N.A., Hong Kong Branch and JAKKS Pacific (H.K.)
Limited(8)
10.37 Guaranty dated October 21, 1997 by the Company in favor of
Norwest Bank Minnesota, National Association(8)
10.38A Guaranty dated October 21, 1997 by Road Champs, Inc. in
favor of Norwest Bank Minnesota, National Association(8)
</TABLE>
42
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.38B Guaranty dated October 21, 1997 by JAKKS Acquisition Corp.
in favor of Norwest Bank Minnesota, National Association(8)
10.38C Guaranty dated October 21, 1997 by J-X Enterprises, Inc. in
favor of Norwest Bank Minnesota, National Association(8)
10.39 Security Agreement dated October 21, 1997 between the
Company and Norwest Bank Minnesota, National Association(8)
10.40A Security Agreement dated October 21, 1997 between Road
Champs, Inc. and Norwest Bank Minnesota, National
Association(8)
10.40B Security Agreement dated October 21, 1997 between JAKKS
Acquisition Corp. and Norwest Bank Minnesota, National
Association(8)
10.40C Security Agreement dated October 21, 1997 between J-X
Enterprises, Inc. and Norwest Bank Minnesota, National
Association(8)
10.41 Purchase Agreement dated April 1, 1998 among the Company,
Renaissance Capital Growth & Income Fund III, Inc. and
ProFutures Bridge Capital Fund, L.P.(7)
21 Subsidiaries of the Company(8)
23 Consent of Pannell Kerr Forster, Certified Public
Accountants, A Professional Corporation, Los Angeles,
California(8)
27.1997 Financial Data Schedule(8)
27.Q296 Restated Financial Data Schedule for the period ended June
30, 1996(8)
27.Q396 Restated Financial Data Schedule for the period ended
September 30, 1996(8)
27.1996 Restated Financial Data Schedule for the period ended
December 31, 1996(8)
27.Q397 Restated Financial Data Schedule for the period ended
September 30, 1997(8)
</TABLE>
- ---------------
(1) Filed previously as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 333-2048-LA), effective May 1, 1996, and incorporated
herein by reference.
(2) Filed previously as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 333-22583), effective May 1, 1997, and incorporated
herein by reference.
(3) 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, and incorporated
herein by reference.
(4) Filed previously as an exhibit to the Company's Annual Report on Form 10-KSB
for its fiscal year ended December 31, 1997, and incorporated herein by
reference.
(5) Filed previously as an exhibit to the Company's Registration Statement on
Form S-8 (File No. 333-35053), effective September 5, 1997, and incorporated
herein by reference.
(6) Filed previously as an exhibit to the Company's Current Report on Form 8-K,
filed November 7, 1997, and incorporated herein by reference.
(7) Filed previously as an exhibit to the Company's Current Report on Form 8-K,
filed April 7, 1998, and incorporated herein by reference.
(8) Filed herewith.
(P) Filed in paper format pursuant to a hardship exemption under Regulation
232.202 of Regulation S-T.
(b) Report on Form 8-K
The Company filed a Current Report on Form 8-K on November 7, 1997 relating
to the Company's purchase of the Child Guidance/Remco trademarks.
43
<PAGE> 45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: June 10, 1998 JAKKS PACIFIC, INC.
By: /s/ JACK FRIEDMAN
------------------------------------
Jack Friedman
Chairman, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ JACK FRIEDMAN Chairman, President and June 10, 1998
- ----------------------------------------------------- Chief Executive Officer
Jack Friedman (Principal Executive Officer)
/s/ JOEL M. BENNETT Chief Financial Officer June 10, 1998
- ----------------------------------------------------- (Principal Financial Officer and
Joel M. Bennett Principal Accounting Officer)
/s/ STEPHEN G. BERMAN Chief Operating Officer June 10, 1998
- ----------------------------------------------------- Executive Vice President
Stephen G. Berman Secretary and Director
/s/ MURRAY L. SKALA Director June 10, 1998
- -----------------------------------------------------
Murray L. Skala
</TABLE>
44
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company(1)
3.1.1 Certificate of Designation of 4% Redeemable Convertible
Preferred Stock of the Company(5)
3.1.2 Certificate of Designation and Preferences of Series A
Cumulative Convertible Preferred Stock of the Company(7)
3.1.3 Certificate of Elimination of All Shares of 4% Redeemable
Convertible Preferred Stock of the Company(7)
3.2 By-Laws of the Company(1)
3.2.1 Amendment to By-Laws of the Company(2)
4.1 9% Convertible Debenture issued to Renaissance Capital
Growth & Income Fund III, Inc. dated December 31, 1996(2)
4.2 9% Convertible Debenture issued to Renaissance US Growth &
Income Trust PLC dated December 31, 1996(2)
10.1 Amended and Restated 1995 Stock Option Plan(2)
10.2 Employment Agreement between the Company and Jack Friedman
dated January 1, 1998(8)
10.3 Employment Agreement between the Company and Stephen G.
Berman dated January 1, 1998(8)
10.4 Asset Purchase Agreement dated October 19, 1995 (as of July
1, 1995) between the Company, JP (HK) Limited and Justin(1)
10.5 Convertible Loan Agreement among the Company and Renaissance
Capital Growth & Income Fund III, Inc. and Renaissance US
Growth & Income Trust PLC dated December 31, 1996(2)
10.6 Purchase Agreement among the Company, JAKKS Acquisition
Corp., Road Champs, Inc., Road Champs Ltd., Die Cast
Associates, Inc. and the shareholders of Road Champs, Inc.
dated January 21, 1997(3)
10.7.1 Office Lease dated June 18, 1997 between the Company and
Malibu Vista Partners(8)(P)
10.8 Lease of the Company's warehouse space at 7 Patton Drive,
West Caldwell, New Jersey and amendment thereto(3)
10.8A Office Lease dated March 27, 1998 between the Company and
Hundal of Union L.P.(8)(P)
10.9 Lease of the Company's showroom at the Toy Center South, 200
Fifth Avenue, New York, New York(1)
10.10 Lease of the Company's showroom at the Toy Center North,
1107 Broadway, New York, New York(3)
10.11 Tenancy Agreement dated March 14, 1998 between the Company
and Astoria Investment Company, Ltd.(8)(P)
10.12 License Agreement with Titan Sports, Inc. dated October 24,
1995(1)
10.12.1 Amendment to License Agreement with Titan Sports, Inc. dated
April 22, 1996(4)
10.12.2 Amendment to License Agreement with Titan Sports, Inc. dated
January 21, 1997(4)
10.12.3 Amendment to License Agreement with Titan Sports, Inc. dated
December 3, 1997(8)
10.12.4 Amendment to License Agreement with Titan Sports, Inc. dated
January 29, 1998(8)
</TABLE>
45
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.13 International License Agreement with Titan Sports, Inc.
dated February 10, 1997(4)
10.13.1 Amendment to International License Agreement with Titan
Sports, Inc. dated December 3, 1997(8)
10.13.2 Amendment to International License Agreement with Titan
Sports, Inc. dated January 29, 1998(8)
10.14 License Agreement with Saban Merchandising, Inc. and Saban
International N.V. dated May 21, 1996, with amendment dated
October 31, 1996(4)
10.15 License Agreement with Wow Wee International dated June 1,
1996(4)
10.16 Agreement with Quantum Toy Concepts Pty, Ltd. dated July
1996(4)
10.17 [RESERVED]
10.18 [RESERVED]
10.19 Warrant to purchase 150,000 shares of Common Stock dated
January 8, 1997 issued to Joseph Charles & Associates,
Inc.(8)
10.20 [RESERVED]
10.21 Option Agreement dated August 28, 1997 between the Company
and Silverman Heller Associates(8)
10.22 Consulting Agreement dated July 30, 1997 between the Company
and Silverman Heller Associates(8)
10.23 Option Agreement dated August 28, 1997 between the Company
and Joseph Charles & Associates, Inc.(5)
10.24 Engagement Letter dated August 28, 1997 between the Company
and Joseph Charles & Associates, Inc.(5)
10.25 Consulting Agreement between the Company and Sheldon Weiner
Sales Organization, Inc. dated June 18, 1996(5)
10.26.1 Stock Option Agreement between the Company and Sheldon
Weiner Sales Organization, Inc. dated June 18, 1996(5)
10.26.2 Restated Stock Option Agreement between the Company and
Sheldon Weiner Sales Organization, Inc. dated June 18,
1996(5)
10.27 Restated Option Agreement between the Company and Murray
Bass dated September 1, 1995(5)
10.28 Restated Option Agreement between the Company and Joel
Bennett dated September 1, 1995(5)
10.29 Restated Option Agreement between the Company and Gina
Hancock dated September 1, 1995(5)
10.30 Restated Option Agreement between the Company and Wills Hon
dated September 1, 1995(5)
10.31 Restated Option Agreement between the Company and Bruce Katz
dated September 1, 1995(5)
10.32 Trademark Purchase Agreement dated October 24, 1997 between
the Company and Azrak-Hamway International, Inc.(6)
10.33 $1,200,000 Promissory Note dated October 24, 1997 of the
Company payable to Azrak-Hamway International, Inc.(6)
10.34 Manufacturing and Supply Agreement dated October 24, 1997
between the Company and Azrak- Hamway International, Inc.(6)
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.35 Security Agreement dated October 24, 1997 between the
Company and Azrak-Hamway International, Inc.(6)
10.36A Debenture dated October 23, 1997 between Norwest Bank
Minnesota, N.A., Hong Kong Branch and Road Champs Limited(8)
10.36B Debenture dated October 23, 1997 between Norwest Bank
Minnesota, N.A., Hong Kong Branch and JP (HK) Limited(8)
10.36C Debentures dated October 23, 1997 between Norwest Bank
Minnesota, N.A., Hong Kong Branch and JAKKS Pacific (H.K.)
Limited(8)
10.37 Guaranty dated October 21, 1997 by the Company in favor of
Norwest Bank Minnesota, National Association(8)
10.38A Guaranty dated October 21, 1997 by Road Champs, Inc. in
favor of Norwest Bank Minnesota, National Association(8)
10.38B Guaranty dated October 21, 1997 by JAKKS Acquisition Corp.
in favor of Norwest Bank Minnesota, National Association(8)
10.38C Guaranty dated October 21, 1997 by J-X Enterprises, Inc. in
favor of Norwest Bank Minnesota, National Association(8)
10.39 Security Agreement dated October 21, 1997 between the
Company and Norwest Bank Minnesota, National Association(8)
10.40A Security Agreement dated October 21, 1997 between Road
Champs, Inc. and Norwest Bank Minnesota, National
Association(8)
10.40B Security Agreement dated October 21, 1997 between JAKKS
Acquisition Corp. and Norwest Bank Minnesota, National
Association(8)
10.40C Security Agreement dated October 21, 1997 between J-X
Enterprises, Inc. and Norwest Bank Minnesota, National
Association(8)
10.41 Purchase Agreement dated April 1, 1998 among the Company,
Renaissance Capital Growth & Income Fund III, Inc. and
ProFutures Bridge Capital Fund, L.P.(7)
21 Subsidiaries of the Company(8)
23 Consent of Pannell Kerr Forster, Certified Public
Accountants, A Professional Corporation, Los Angeles,
California(8)
27.1997 Financial Data Schedule(8)
27.Q296 Restated Financial Data Schedule for the period ended June
30, 1996(8)
27.Q396 Restated Financial Data Schedule for the period ended
September 30, 1996(8)
27.1996 Restated Financial Data Schedule for the period ended
December 31, 1996(8)
27.Q397 Restated Financial Data Schedule for the period ended
September 30, 1997(8)
</TABLE>
- ---------------
(1) Filed previously as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 333-2048-LA), effective May 1, 1996, and incorporated
herein by reference.
(2) Filed previously as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 333-22583), effective May 1, 1997, and incorporated
herein by reference.
(3) 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, and incorporated
herein by reference.
(4) Filed previously as an exhibit to the Company's Annual Report on Form 10-KSB
for its fiscal year ended December 31, 1997, and incorporated herein by
reference.
(5) Filed previously as an exhibit to the Company's Registration Statement on
Form S-8 (File No. 333-35053), effective September 5, 1997, and incorporated
herein by reference.
47
<PAGE> 49
(6) Filed previously as an exhibit to the Company's Current Report on Form 8-K,
filed November 7, 1997, and incorporated herein by reference.
(7) Filed previously as an exhibit to the Company's Current Report on Form 8-K,
filed April 7, 1998, and incorporated herein by reference.
(8) Filed herewith.
(P) Filed in paper format pursuant to a hardship exemption under Regulation
232.202 of Regulation S-T.
48
