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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO
_________________
COMMISSION FILE NUMBER - 0-28104
JAKKS PACIFIC, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4527222
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
22761 PACIFIC COAST HWY.
MALIBU, CALIFORNIA 90265
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 456-7799
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
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The number of shares outstanding of the issuer's common stock is 5,959,459 (as
of November 16, 1998).
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED SEPTEMBER 30, 1998
ITEMS IN FORM 10-QSB
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PAGE
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Facing page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet -
September 30, 1998 (Unaudited) 3
Condensed Consolidated Statements of Operations Three months and
nine months ended September 30, 1998
and 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows Nine months ended
September 30, 1998 and 1997
(Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and
Analysis or Plan of Operation. 9
Part II OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities and Use of Proceeds. 13
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to
a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K. 13
Signatures. 15
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
September 30, 1998 (Unaudited)
Assets
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Current assets
Cash and cash equivalents $ 6,601,170
Accounts receivable, net 18,775,495
Inventory, net 3,030,416
Deferred product development costs, net 594,952
Advance royalty payments, net 208,750
Prepaid expenses and other current assets 1,117,172
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Total current assets 30,327,955
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Property and equipment, at cost 6,453,644
Less accumulated depreciation and amortization 2,308,061
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Net property and equipment 4,145,583
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Deferred offering costs, net 428,456
Goodwill, net 10,416,044
Trademarks and Patents, net 13,705,260
Investment in joint venture 1,044,708
Other 367,356
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Total assets $60,435,362
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Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $16,068,105
Current portion of debt 240,000
Income taxes payable 2,056,880
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Total current liabilities 18,364,985
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Convertible Debentures 6,000,000
Deferred income taxes 86,896
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Total liabilities 24,451,881
Commitments
Stockholders' equity
Preferred stock, $.001 par value; 5,000 shares
Authorized, 1,000 shares issued and outstanding 1
Common stock, $.001 par value; 25,000,000 shares authorized;
5,937,292 shares issued and outstanding 5,937
Additional paid-in capital 26,806,223
Retained earnings 9,256,733
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36,068,894
Less unearned compensation from stock option grants 85,413
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Net stockholders' equity 35,983,481
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Total liabilities and stockholders' equity $60,435,362
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See accompanying notes to condensed consolidated financial statements.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1998 and 1997 (Unaudited)
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THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ ------------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
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Net sales $ 34,218,151 $ 15,919,154 $ 61,379,402 $ 29,212,906
Cost of sales 20,976,452 9,299,135 37,669,477 17,479,001
------------- ------------- ------------- -------------
Gross profit 13,241,699 6,620,019 23,709,925 11,733,905
Selling, general and
administrative expenses 8,173,172 4,599,163 16,447,200 8,819,249
------------- ------------- ------------- -------------
Income from operations 5,068,527 2,020,856 7,262,725 2,914,656
Other (income) and expense:
Other expense 319,838 -- 319,838 --
Interest income (47,868) (60,116) (98,917) (228,409)
Interest expense 148,208 173,064 467,638 507,186
------------- ------------- ------------- -------------
Income before income taxes 4,648,349 1,907,908 6,574,166 2,635,879
Provision for income taxes 1,214,078 452,449 1,720,069 520,385
------------- ------------- ------------- -------------
Net income 3,434,271 1,455,459 4,854,097 2,115,494
============= ============= ============= =============
Net income per share - basic $ 0.58 $ 0.30 $ 0.87 $ 0.47
============= ============= ============= =============
Net income per share - diluted $ 0.45 $ 0.29 $ 0.68 $ 0.45
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997 (Unaudited)
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NINE MONTHS ENDED SEPTEMBER 30,
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1998 1997
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Cash flows from operating activities:
Net income $ 4,854,097 $ 2,115,494
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Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 2,643,930 1,042,979
Change in accounts receivable (10,039,967) (5,962,612)
Change in inventory (1,082,166) (2,138,373)
Change in accounts payable and accrued expenses 8,926,848 5,615,264
Net change in other operating assets and liabilities (213,241) (1,052,875)
------------- -------------
Total adjustments 235,404 (2,495,617)
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Net cash provided (used) by operating activities 5,089,501 (380,123)
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Cash flows from investing activities:
Purchase of property and equipment (2,911,011) (1,579,957)
Excess of cost over toy business assets acquired (goodwill) -- (7,063,704)
Acquisition cost of trademarks (12,252) (1,000,000)
Investment in joint venture (1,044,708) --
Increase in other assets (75,350) (39,687)
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Net cash used by investing activities (4,043,321) (9,683,348)
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Cash flows from financing activities:
Repayment of bank debt (114,700) --
Proceeds from issuance of convertible debentures -- 6,000,000
Offering costs - convertible debentures -- (528,532)
Proceeds from sale of common stock -- 4,000,750
Offering costs-- common stock -- (1,026,102)
Proceeds from sale of convertible preferred stock 5,000,000 --
Offering costs - convertible preferred stock (207,570) --
Proceeds from acquisition debt -- 6,391,838
Repayment of acquisition debt (2,006,376) (4,490,641)
Proceeds from exercise of options 347,711 --
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Net cash provided by financing
activities 3,019,065 10,347,313
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Net increase in cash and cash equivalents 4,065,245 283,842
Cash and cash equivalents, beginning of period 2,535,925 6,355,260
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Cash and cash equivalents, end of period $ 6,601,170 $ 6,639,102
============= =============
Supplemental disclosure of cash flow information (Note 4): Cash paid
during the period for:
Income taxes $ 266,803 $ --
============= =============
Interest $ 505,245 $ 460,451
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1998
Note 1 - Basis of presentation
The accompanying 1998 and 1997 unaudited interim condensed consolidated
financial statements included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
prevent the information presented from being misleading. These financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's Form 10-KSB, which contains financial
information for the years ended December 31, 1997 and 1996.
The information provided in this report reflects all adjustments (consisting
solely of normal recurring accruals) that are, in the opinion of management,
necessary to present fairly the results of operations for this period. The
results for this period are not necessarily indicative of the results to be
expected for the full year.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries.
Basic earnings per share has been computed using the weighted average number of
common shares. Diluted earnings per share has been computed using the weighted
average number of common shares and common share equivalents (which consist of
warrants, options and convertible securities, to the extent they are dilutive).
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Note 2 -- 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
disclosure of the calculation of each EPS amount.
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THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------------
1998 1997
----------------------------------------------- ----------------------------------------------
WEIGHTED WEIGHTED
AVERAGE PER- AVERAGE PER-
INCOME SHARES SHARE INCOME SHARES SHARE
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income per share - basic
Net Income available to common
Stockholders $ 3,434,271 5,932,673 $ 0.58 $ 1,455,459 4,876,204 $ 0.30
------------- ------------- ============= ------------- ------------- =============
Effect of dilutive securities
Options and warrants -- 337,251 -- --
9% convertible debentures 93,183 1,043,478 -- 215,577
4% convertible preferred
stock -- -- -- --
7% convertible preferred
stock -- 558,658 -- --
------------- ------------- ------------- -------------
Net income per share - diluted
Income available to common
stockholders plus assumed
conversions $ 3,527,454 7,872,060 $ 0.45 $ 1,455,459 5,091,781 $ 0.29
============= ============= ============= ============= ============= =============
</TABLE>
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<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------------
1998 1997
--------------------------------------------- -----------------------------------------------
WEIGHTED WEIGHTED
AVERAGE PER- AVERAGE PER-
INCOME SHARES SHARE INCOME SHARES SHARE
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income per share - basic
Net Income available to common
Stockholders $ 4,854,097 5,595,305 $ 0.87 $ 2,115,494 4,516,519 $ 0.47
------------- ------------- ============= ------------- ------------- =============
Effect of dilutive securities
Options and warrants -- 267,910 -- 178,212
9% convertible debentures 279,549 1,043,478 -- --
4% convertible preferred
stock -- 304,117 -- --
7% convertible preferred
stock -- 373,808 -- --
------------- ------------- ------------- ------------- ------------- -------------
Net income per share - diluted
Income available to common
stockholders plus assumed
conversions $ 5,133,646 7,584,618 $ 0.68 $ 2,115,494 4,694,731 $ 0.45
============= ============= ============= ============= ============= =============
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Note 3 -- Preferred stock and common stock
On March 30, 1998, holders of all of the 3,525 shares of the Company's
4% Convertible Preferred Stock converted all such shares into 939,998 shares of
the Company's common stock.
On April 1, 1998, the Company issued 1,000 shares of its 7% Series A
Cumulative Convertible Preferred Stock at a price of $5,000 per share in
connection with a private placement to two investors. The Company received net
proceeds of approximately $4.8 million after legal, placement and closing costs.
Such shares are initially convertible into 558,658 shares of common stock based
on a conversion price of $8.95 per share.
Note 4 -- Supplemental information to condensed consolidated statements of cash
flows
198,020 shares of common stock were issued as partial consideration for
toy business assets acquired totalling $1,500,000 in 1997. The excess of cost
over toy business assets acquired (goodwill) is reflected in the consolidated
statement of cash flows net of the stock issued.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read together with the Company's
Condensed Consolidated Financial Statements and Notes thereto which appear
elsewhere herein.
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 names Road Champs and Remco, (iii) Child Guidance pre-school toys,
(iv) fashion dolls with related accessories and (v) electronic toys designed for
children.
In February 1997, the Company acquired Road Champs with its line of die
cast collectible and toy vehicles. The Company has included the results of
operations of Road Champs from February 1, 1997, the effective date of the
acquisition.
In October 1997, the Company acquired the Child Guidance and Remco
trademarks, under which the Company markets pre-school toys and metal trucks,
respectively. Such lines contributed nominally in 1997, but have begun 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 a warehouse operated by a non-affiliated third party. 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 product developers generally range from 1% to
6% of the net sales price for each unit of a product sold by the Company.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net Sales. Net sales were $34.2 million in 1998, an increase of $18.3
million, or 115% over $15.9 million in 1997. 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. The
Company's holiday doll line performed comparably with the prior year and its new
lines of Remco toy vehicles and Child Guidance pre-school toys contributed to
net sales in 1998.
Gross Profit. Gross profit was $13.2 million, or 38.7% of net sales, in
1998. This represents an increase of approximately 100% over gross profit of
$6.6 million, or 41.6% of net sales, in 1997. The decrease in gross profit as a
percentage of net sales was due to the change in product mix with lower-margin
non-licensed products accounting for a higher proportion of net sales in 1998
than in 1997. The overall increase in gross profit was attributable to the
significant increase in net sales.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $8.2 million in 1998 and $4.6 million in 1997,
constituting 23.9% and 28.9% of net sales, respectively. The overall significant
increase of $3.6 million in such costs was due in part to costs incurred in
support of the Company's development and marketing of products under its
recently acquired Child Guidance and Remco trademarks. 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
commissions, cooperative advertising and travel expenses, among others. 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. The Company had moderately lower interest-bearing obligations
in 1998 than in 1997 with its convertible debentures and seller note issued to
partially fund the Road Champs Acquisition and Child Guidance/Remco trademark
acquisitions, respectively. In addition, the Company had lower average cash
balances during 1998 than in 1997.
Provision for Income Taxes. Provision for income taxes include Federal,
state and foreign income taxes in 1998 and also include a tax benefit generated
by operating losses for Federal and state purposes in 1997. The Company's
earnings benefit 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.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net Sales. Net sales were $61.4 million in 1998, an increase of $32.2
million, or 110% over $29.2 million in 1997. 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 full year to date contribution made by Road Champs' sales of die-cast toy
and collectible vehicle, 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 lines of Remco toy vehicles and Child
Guidance pre-school toys contributed to net sales in 1998.
Gross Profit. Gross profit was $23.7 million, or 38.6% of net sales, in
1998. This represents an increase of approximately 102% over gross profit of
$11.7 million, or 40.2% of net sales, in 1997. . The decrease in gross profit as
a percentage of net sales was due to the change in product mix with lower-margin
non-licensed products accounting for a higher proportion of net sales in 1998
than in 1997. The overall increase in gross profit was attributable to the
significant increase in net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $16.4 million in 1998 and $8.8 million in 1997,
constituting 26.8% and 30.2% of net sales, respectively. The overall significant
increase of $7.6 million in such costs was due in part to the full year to date
impact of costs associates 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 as well as to costs incurred in
support of the Company's development and marketing of products under its
recently acquired Child Guidance and Remco trademarks. 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
commissions, cooperative advertising and travel expenses, among others. 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.
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Interest. The Company had moderately lower interest-bearing obligations
in 1998 than in 1997 with its convertible debentures and seller note issued to
partially fund the Road Champs Acquisition and Child Guidance/Remco trademark
acquisitions, respectively. In addition, the Company had significantly lower
average cash balances during 1998 than in 1997.
Provision for Income Taxes. Provision for income taxes include Federal,
state and foreign income taxes in 1998 and also include a tax benefit generated
by operating losses for Federal and state purposes in 1997. The Company's
earnings benefit 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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had working capital of $12.0
million, as compared to $3.4 million as of December 31, 1997. Operating
activities provided net cash of $5.1 million in 1998 as compared to having used
net cash of $0.4 million in 1997. In 1998, net cash was provided primarily by
net income and non-cash charges. At September 30, 1998, the Company had cash and
cash equivalents of $6.6 million.
The Company's investing activities have used net cash of $4.0 million in
1998, as compared to $9.7 million in 1997, consisting primarily of the purchase
of molds and tooling used in the manufacture of the Company's products and the
investment in a joint venture. In 1997, the Company's investing activities used
cash principally for the purchase of Road Champs including goodwill, trademarks
and molds and tooling, as well as molds and tooling used in the manufacture of
the Company's products. As part of the Company's strategy to develop and market
new products, the Company has entered into various character and product
licenses with royalties of 1% to 10% payable on net sales of such products. As
of September 30, 1998, these agreements require future aggregate minimum
guarantees of $14.6 million, exclusive of $1.6 million in advances already paid
this year.
The Company's financing activities have provided net cash of $3.0
million in 1998, consisting primarily of the issuance of 1,000 shares of its 7%
Series A Cumulative Convertible Preferred Stock at a price of $5,000 per share
in connection with a private placement to two investors partially offset by the
repayment of various debt issued in connection with the Road Champs and Child
Guidance/Remco trademarks acquisitions.
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 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, Child Guidance 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 were
converted to the Company's common
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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, which commenced 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 September
30, 1998, there were no outstanding advances under the facility.
On April 1, 1998, the Company received approximately $4.8 million in net
proceeds from the issuance of shares of its 7% Series A Cumulative 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.
The Company believes that its cash flow from operations, cash on hand
and the net proceeds from the issuance of the 7% Series A Cumulative 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.
YEAR 2000 PROJECT
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 informational 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 reengineering 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.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
Pursuant to its Second Amended and Restated 1995 Stock Option Plan,
non-employee directors of the Company received automatic quarterly grants of
options to purchase an aggregate amount of 18,750 shares at a purchase price of
$12.00 per share.
Exemption from registration under the Securities Act is claimed for the
sale of all of the securities set forth above in reliance upon the exemption
afforded by Section 4(2) of the Securities Act for transactions not involving a
public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company(1)
3.1.1 Certificate of Designation and Preferences of Series A Cumulative
Convertible Preferred Stock of the Company(2)
3.1.2 Certificate of Elimination of All Shares of 4% Redeemable
Convertible Preferred Stock of the Company(2)
3.2.1 By-Laws of the Company(1)
3.2.2 Amendment to By-Laws of the Company(3)
4.1 JAKKS Pacific, Inc. 9.00% Convertible Debenture issued to
Renaissance Capital Growth & Income Fund III, Inc., dated
December 31, 1996(3)
4.2 JAKKS Pacific, Inc. 9.00% Convertible Debenture Issued To
Renaissance US Growth & Income Trust PLC, Dated December 31,
1996(3)
10.1 Supplemental lease dated August 10, 1998 between Malibu Vista
Partners and the Company(4)
10.2 Office lease dated September 24, 1998 between Astoria Investment
Company Limited and Road Champs Limited(4)
27 Financial Data Schedule(4)
</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 Current Report on Form
8-K, filed April 7, 1998, and incorporated herein by reference.
(3) 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.
(4) Filed herewith.
(b) Reports on Form 8-K
No Current Report on Form 8-K was filed in the fiscal quarter ended
September 30, 1998.
13
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Registrant:
JAKKS PACIFIC, INC.
Date: November 16, 1998 By: /s/ Jack Friedman
-------------------
Chairman
(Principal Executive Officer)
Date: November 16, 1998 By: /s/ Joel M. Bennett
--------------------
Chief Financial Officer
(Principal Financial and
Accounting Officer)
14
<PAGE> 1
Exhibit 10.1
SUPPLEMENTAL LEASE DATED AUGUST 10, 1998
This Supplemental Lease is made this 10th Day of August, by and between Malibu
Vista Partners, a California general partnership, herein called "Lessor," and
JAKKS Pacific, Inc., herein called "Lessee."
RECITALS
A. By Lease dated June 18, 1997, Lessor leased to Lessee Suite 226 located
on the second floor in Lessor's office building located at 22761 Pacific
Coast Highway, Malibu, California.
B. Lessee now desires to add Suite 280, consisting of 2,141 rentable square
feet to its existing premises.
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
1. The Supplemental Lease term shall end on August 31, 2002, the same
expiration date of the original Lease.
2. Lessor shall deliver possession of Suite 280 to Lessee upon the
execution of this Supplemental Lease.
3. The base rent for Suite 280 shall be $4,817.25 and shall commence on
October 1, 1998, provided tenant improvements referred to in Section 6
are completed by such date. The commencement shall be delayed one day
for each day after October 1, 1998 such improvements are not completed.
4. Upon the execution of this Supplemental Lease, Lessee shall pay Lessor
the sum of $9,634.50, constituting rent for October 1998, in the amount
of $4,817.25 and a security deposit in the amount of $4,817.25, which
will be held by Lessor pursuant to the terms of Paragraph 5 of the
original Lease.
5. In addition to rent, Lessee shall pay to Lessor its proportionate share
of building expenses, which shall be calculated on 2,141 rentable square
feet.
6. Lessor shall, at Lessor's sole expense, provide the tenant improvements
shown on the attached tenant improvement space plan ("Plan"). Both
Lessor and Lessee shall initial the Plan to indicate their approval.
7. The first annual base year rent increase for Suite 280, as provided in
section 1.7 of the Lease, shall become effective September 1, 1999, and
shall continue thereafter on each September 1.
8. Lessor is currently obtaining entitlements to build an approximately
10,400 rentable square foot, three story office building on the
adjoining lot located at 22751 Pacific Coast Highway. Lessee is hereby
granted an option to lease any one or more of the entire floors of 22751
Pacific coast Highway under the following terms and conditions:
<PAGE> 2
(a) At any time after the commencement of construction, Lessor shall
notify Lessee in writing of the approximate anticipated
completion date and the rent for each of the floors, which shall
not exceed $3.00 per rentable square foot. If Lessee, within 60
days after receipt of Lessor's notice, indicates in writing its
agreement to lease one or more floors (the "New Space") for a
term of 5 years or more, the parties shall enter into a lease in
the form of the existing original Lease for the space, which
shall include the same annual rent adjustment provision as is
contained in the original Lease.
(b) The Lease for the New Space shall require a security deposit
equal to one month's rent.
(c) Lessee shall receive a $40 per rentable square foot tenant
improvement allowance.
(d) Rent shall commence upon the delivery of possession of the New
Space after substantial completion of the tenant improvements.
(e) Lessee shall have the option by 30 days' written notice to
Lessor to terminate its original Lease and/or this Supplemental
Lease effective at any time after accepting possession of the
New Space, provided, that the square footage of the New Space is
equal to or greater than the square footage of the terminated
space.
Except as modified herein, all other terms and conditions of the Lease
dated June 18, 1997, are incorporated herein and shall become a part of this
Supplemental Lease as though fully set forth herein.
LANDLORD
LANDLORD: TENANT:
Malibu Vista Partners JAKKS Pacific, Inc.
By: /s/ Gil Peled By: /s/ Stephen G. Berman
------------------------------- -------------------------------
Gil Peled, Partner Stephen Berman, President
Date: August 18, 1998 Date: August 18, 1998
<PAGE> 1
Exhibit 10.2
THIS AGREEMENT made the 24th day of September, One thousand
nine hundred and ninety-eight
BETWEEN
ASTORIA INVESTMENT COMPANY LIMITED whose registered office is situate at Room
2703, Wing on House, 71 Des Voeux Road, Central, Hong Kong (hereinafter called
"the Landlord") of the one part and
ROAD CHAMPS LIMITED whose registered office is situate at Units 1008-9, 10/F.,
Peninsula Centre, 67 Mody Road, Tsimshatsui East, Kowloon, Hong Kong
(hereinafter called "the Tenant") of the other part.
WHEREBY IT IS AGREED by and between the parties hereto as follows: -
1. The Landlord hereby lets to the Tenant and the Tenant takes from
the Landlord the premises known as Unit 1014 on 10th Floor, Peninsula Centre,
No. 67 Mody Road, Kowloon, Hong Kong (hereinafter called "the said premises")
Together with the right in common with the Landlord and others having the like
right to use go pass and repass up down over and upon the common parts including
inter alia entrance passages halls staircases and lifts so far as the same are
necessary for the proper enjoyment of the said premises subject to the term and
conditions hereinafter contained TO HOLD the same unto the Tenant for the term
of ONE YEAR SIX MONTHS AND FOURTEEN DAYS commencing from the 1st day of
September 1998 and expiring on the 14th day of March 2000 at a rent of HONG KONG
DOLLARS THIRTY-THREE THOUSAND AND EIGHTY-TWO ONLY (HK$33,082.00) Hong Kong
Currency per calendar month payable in advance on the 1st day of each and every
calendar month without deduction Provided Further that the last of such payment
shall be made pro-rate according to the number of days then unexpired in the
month on which such payment is made.
2. It is hereby agreed and declared that the said premises are let
for the use of an office by the Tenant only.
3. The tenant hereby agrees with the Landlord as follows: -
(a) To pay the said rent at the times and in the manner aforesaid.
(b) To pay and discharge all rates taxes assessments duties charges
impositions and other outgoings now or at any time hereafter to
be imposed or charged by the Government of Hong Kong or other
lawful authority in respect of the said premises upon the owner
or occupier in respect thereof (Government Rent, Property Tax
and all other outgoings of a capital or non-recurring nature
excepted).
(c) To pay all charges for electricity, water and gas consumed by
the Tenant in the said premises and all service, maintenance
charges and management fees
1
<PAGE> 2
payable in respect of the said premises, including the deposits
for the meters therefor.
(d) To well and sufficiently paint maintain and keep in good repair
and condition the interior of the said premises, the furniture
and fittings (if any) and all the Landlord's fixtures and
additions thereto (fair wear and tear expected). In particular,
the Tenant will at its own expense replace any broken or damaged
window panes, fancoils, pipes, wires, drains, taps, wash-basins
and cisterns on the said premises save and except damaged caused
by the agent or servant of the Landlord.
(e) To take all diligent precautions and due care to protect the
interior of the said premises against damage by fire storm
typhoon or the like.
(f) To permit the Landlord and its agents with or without workmen or
others at all reasonable times and upon reasonable notice being
given to the Tenant to enter upon the said premises and to view
the condition thereof and upon notice being given by the
Landlord forthwith to repair in accordance therewith. Upon the
Tenant failing to comply with the said notice the Landlord or
its agents shall be entitled with or without workmen or others
at all reasonable times and upon reasonable notice being given
to the Tenant to enter upon the said premises to carry out any
repair and the Tenant shall be liable to pay the Landlord's cost
of carrying out any such repair and incidental charges provided
that in the event of any emergency the Landlord its servants or
agents may enter without notice and forcibly if necessary,
provided that the Landlord shall keep the Tenant indemnified for
any loss and damages caused by the negligence of the Landlord or
its agents in gaining such entry.
(g) Not without the previous written consent of the Landlord (which
consent shall not be unreasonably withheld or delayed) to erect
install or alter any fixtures partitioning or other erection or
installation in the said premises or any part thereof or without
the like consent to make or permit or suffer to be made
alterations in or additions to the electrical/gas wiring/piping
and installations or to install or permit or suffer to be
installed any equipment apparatus or machinery which imposes a
weight on any part of the flooring in excess of that for which
it is designed or which requires any additional electrical/gas
main wiring/piping or which consumes electricity/gas not metered
through the Tenant's separate meter. The Landlord shall be
entitled to prescribe the maximum weight and permitted locations
of safes and other heavy equipment and to require that the same
stand on supports of such dimensions and material to distribute
the weight as the Landlord may deem necessary.
(h) Not to transfer assign underlet or otherwise part with the
possession of the said premises or any part thereof either by
way of subletting lending sharing or other means whereby any
person or persons not party to this Agreement obtains the use or
possession of the said premises or any part thereof irrespective
of whether any rental or other consideration is given for such
use or possession and in the event of any such transfer
subletting sharing assignment or parting with the possession of
the said premises (whether for monetary consideration or not)
this Agreement shall at the discretion of the Landlord determine
and the Tenant shall forthwith surrender the said premises to
the Landlord. The tenancy shall be
2
<PAGE> 3
personal to the Tenant named in this Agreement and without in
any way limiting the generality of the foregoing, the following
acts and events shall, unless previously approved in writing by
the Landlord (which approval the Landlord shall not be
unreasonably withheld) be deemed to be breaches of this
subclause: -
(1) in the case of a Tenant which is a partnership, the
taking in of one or more new partners whether on the
death or retirement of an existing partner or otherwise.
(2) in the case of a tenant who is an individual (including
a sole surviving partner of a partnership tenant) the
death, insanity or other disability of that individual
to the intent that no right to use, possess, occupy or
enjoy the said premises or any part thereof shall vest
in the executors, administrators, personal
representatives, next of kin, trustee or committee of
any such individual.
(3) in the case of a tenant which is a corporation any
take-over reconstruction, amalgamation, merger,
voluntary liquidation or change in the person or persons
who owns or own a majority of its voting shares or who
otherwise has or have effective control thereof.
(4) the giving by the Tenant of a Power of Attorney or
similar authority whereby the donee of the Power obtains
the right to use, possess, occupy or enjoy the said
premises or any part thereof or does in fact use, occupy
or enjoy the same.
(5) the change of the Tenant's business name without the
previous written consent of the Landlord which consent
shall not be withheld or delayed.
(i) Not to do or permit or suffer to be done in or upon the said
premises or any part thereof any act or thing which may be or
become or cause a nuisance annoyance damage or disturbance to
the Landlord or to any of the tenants or occupiers of the other
parts of the said building or of the neighboring premises or
which shall amount to a breach or non-observance of any of the
covenants and conditions contained in the Government Lease of
the said premises, the Occupation Permit and the Deed of Mutual
Covenant or which shall be in anywise against the laws of
regulations of the Government of Hong Kong.
(j) Not to keep or store or cause or permit or suffer to be kept or
stored any arms, ammunition, gunpowder, salt-petre, or other
explosive or inflammable substance in the said premises.
(k) Not to use or permit or suffer to be used the said premises or
any part thereof for any illegal or immoral purposes.
(l) To observe and comply with all house rules and regulations made
by the appropriate management authorities relating to the use
and management of the common parts of the said building.
(m) Not to do or permit or suffer to be done anything in or upon the
said building and the said premises which may infringe any laws,
regulations, bye-laws and rules and all notices and requirements
of the Governmental Departments and other competent authorities
in connection with or in relation to the use and occupation of
the said premises and the said building.
3
<PAGE> 4
(n) Not to do or cause or permit or suffer to be done anything
whereby the policy or policies of insurance on the said premises
and/or the said building against damage by fire or against other
damages howsoever caused may be rendered void or voidable or
whereby the premium for such insurance may be liable to be
increased and the Tenant shall indemnify the Landlord against
such increased or additional premium as shall have been brought
about or caused by its act or default.
(o) Not to obstruct or permit any employee or agent to obstruct any
passageway lift staircase entrance exit or other common parts of
the said building, and it is hereby expressly agreed that if any
such obstruction shall happen and the Tenant shall fail to
remove the same immediately upon request either to the Tenant or
to the person then in charge of the said premises on the
Tenant's behalf, the Landlord shall be entitled to dispose of
the same in whatever manner the Landlord shall deem fit
including inter alia destroying and disposing of the same as
rubbish and selling the same on such terms and conditions as the
Landlord may deem fit.
(p) Not to use the verandah of the said premises for the purpose of
drying or hanging any clothing and not to exhibit or display
anything on or near the verandah of the said premises or any
part thereof in such a manner which will affect the appearance
of the said building.
(q) Not to erect or permit to be erected outside the said premises
any wireless or television aerial nor do to permit to be done
anything to the external walls of the said premises which will
affect the appearance of the said building.
(r) Not to place or allow to be placed any showboard name-bill
placard advertisement or notice of any description upon the
external walls and the windows of the said premises.
(s) Not to keep in the said premises any animal or domestic pet
without the prior consent of the Landlord.
(t) To pay and make good to the Landlord all and every loss and
damage whatsoever incurred or sustained by the Landlord as a
consequence of every breach or non-observance of the Tenant's
obligations and stipulations herein contained and to indemnify
the Landlord from and against all actions claims liability costs
and expenses thereby arising.
(u) At the expiration or sooner determination of this Agreement to
deliver up to the Landlord the said premises in particular the
furniture and fittings (if any) in good clean and tenantable
repair and condition (fair wear and tear excepted) as aforesaid
together with any additional erections alterations or
improvements which the Tenant may with the consent of the
Landlord as aforesaid have made upon or in the said premises
without payment of any compensation for such additional
erections alterations or improvements.
(v) To allow at all reasonable times by appointment within three
calendar months immediately preceding the expiration of the said
term prospective Tenants or occupiers to inspect the said
premises.
4. The Landlord hereby agrees with the Tenant as follows: -
4
<PAGE> 5
(a) That the Tenant paying the rent hereby reserved and performing
and observing the terms and conditions herein contained and on
the part of the Tenant to be performed and observed may
peaceably hold and enjoy the said premises during the said term
without any interruption by the Landlord or any person lawfully
claiming through or under it.
(b) To pay Government rent, property tax and all outgoings of a
capital or non-recurring nature which are now or may hereafter
during the said term be imposed by the Government upon the said
premises.
(c) To use its best endeavor at the Landlord's expense to procure
the manager of the said building to maintain the main walls,
main drains and main pipes, main structures, roof, lifts,
electricity cables and all common areas and facilities of the
said building and/or the said premises in good and substantial
repair and condition throughout the said term.
5. PROVIDED ALWAYS AND IT IS HEREBY EXPRESSLY AGREED AND DECLARED as follows: -
(a) If the rent reserved or any part thereof shall be unpaid for
seven (7) days after becoming payable (whether legally or
formally demanded or not) or if the Tenant shall fail or neglect
to perform or observe any term or condition herein contained and
on the Tenant's part to be performed or observed or if the
Tenant shall become bankrupt or in the case of a limited company
shall go into liquidation or if a petition for the Tenant's
bankruptcy or winding up, as the case may be, shall have been
filed or if the Tenant shall enter into any composition or
arrangement with creditors or shall suffer the Tenant's goods or
other property to be levied on execution then and in any of the
said cases it shall be lawful for the Landlord at any time
thereafter to determine this Agreement and to re-enter the said
premises or any part thereof in the name of the whole but
without prejudice to any right of action of the Landlord in
respect of any breach of the Tenant's terms and conditions
herein contained and the deposit paid hereunder shall be
forfeited to the Landlord but without prejudice to the
Landlord's right to claim any further damages which the Landlord
shall have sustained or may sustain and a written notice served
by the Landlord on the Tenant to the effect that the Landlord
thereby exercises the power of re-entry and determination
hereinbefore contained shall be a full and sufficient exercise
of such power.
(b) In the event of any breach of any term or condition on the part
of the Tenant herein contained, the Landlord shall not by
acceptance of rent or by any other act whatsoever or by any
omission be deemed to have waived any such breach of term or
condition notwithstanding any rule of law or equity to the
contrary and that no consent to or waiver of any breach shall be
binding on the Landlord unless the same is in writing of the
Landlord. Notwithstanding anything hereinbefore contained in the
event of default in payment by the Tenant in respect of any
payments to be made hereunder for a period of seven days from
the date on which the same falls due for payment, the Tenant
shall further pay to the Landlord on demand interest on the
amount in arrears at the rate of 1.5 per cent (1.5)% per
5
<PAGE> 6
month calculated from the date on which the same becomes due for
payment until the date of payment as liquidated damages and not
as penalty provided that the demand and/or receipt by the
Landlord of interest pursuant to this provision shall be without
prejudice to and shall not affect the right of the Landlord to
exercise any other right or remedy hereof (including the right
of re-entry) exercisable under the terms of this Agreement.
(c) For the purpose of this Agreement any act default neglect or
omission of any servant, agent, licensee, visitor and invitee of
the Tenant shall be deemed to be the act default neglect or
omission of the Tenant.
(d) In the event of the said premises or any part thereof at any
time during the said term being damaged or destroyed by acts of
war fire typhoon earthquake flood white ants or subsidence of
the soil so as to render the same unfit for occupation and use
and the cause of which is not attributable to the acts or
omission of the Tenant then the rent hereby reserved or a fair
proportion thereof according to the nature and extent of the
damage sustained shall cease to be payable until the said
premises shall have been again rendered fit for occupation and
use PROVIDED ALWAYS that should the whole of the said premises
or the greater part thereof be so destroyed or damaged by the
happening of any of the above events as to be unfit for use and
occupation the Landlord shall not be required to rebuild or
reinstate the said premises or the said building if by reason of
the condition of the same or any local Regulations or other
circumstances beyond the control of the Landlord it is not
practicable or reasonable to do so Provided that if the Landlord
shall fail to reinstate or cause to be reinstated the said
premises or the said building within six months of receiving a
written notice to reinstate the same from the Tenant or if the
said premises or the greater part thereof or the said building
remain uninhabitable or inaccessible for a period of one month
the Tenant may forthwith or within a reasonable time thereafter
by a written notice terminate this Agreement and thereupon the
same and everything herein contained shall be void as from the
date of occurrence of such damage or destruction and the
Landlord shall forthwith refund to the Tenant the said deposit
or the balance thereof but without prejudice to the rights and
remedies of either party against the other in respect of any
antecedent claim or breach or covenant.
(e) Any notice required to be served hereunder shall be sufficiently
served on the Tenant if delivered or sent by post or left
addressed to it at the said premises or at its registered office
in Hong Kong and any notice to the Landlord shall be
sufficiently served if sent to the Landlord by post at the
Landlord's registered office in Hong Kong. A notice sent by post
shall be deemed to have been received at the time when in due
course of post it would be delivered at the address to which it
is sent.
(f) For the purpose of distress for rent in terms of Part III of the
Landlord and Tenant (Consolidation) Ordinance (Cap. 7) and for
the purpose of this Agreement the rent in respect of the said
premises shall be deemed to be in arrears if not paid in advance
at the time and in the manner hereinbefore provided for payment
thereof.
6
<PAGE> 7
(g) The Tenant shall not be entitled to any compensation or
abatement of rent in respect of any failure howsoever caused in
respect of the lifts, electricity supply or other services
provided to the said building.
(h) The Landlord does not warrant that the light and air to the
premises would not be obstructed.
(i) The Landlord shall not be in any way liable to the Tenant or to
any person or persons claiming any right title or interest under
the Tenant or any person expressly or impliedly authorized by
the Tenant to enter leave or remain on the said building or any
part thereof for any damage to property or injury to person
which may be sustained by the Tenant or any such person or
persons as aforesaid on account of the defective or damaged
condition of the said premises the said building and the
Landlord's fixtures or fittings therein and any part thereof and
in particular the Landlord shall not be responsible to the
Tenant or any person or persons as aforesaid for any damage to
property or injury to person caused by or through or in any way
owing to the overflow of water or water leakage from any floor
flat or premises or any part of the said building any typhoon
electric current water pipes electric wiring or cables situated
upon under or in any way connected with the said premises and/or
the said building or dropping of cigarette ends broken pieces of
glass or other articles from any floor flat premises or any part
of the said building or neighborhood and the Tenant hereby
agrees to indemnify the Landlord against all claims demands
actions costs expenses whatsoever made upon the Landlord by any
person or persons in respect of the matters aforesaid and
further the Tenant shall be responsible for any damage which may
be done to any part of the said premises or to the Landlord's
fixtures and fittings therein.
6. (a) The Tenant shall on or before the signing hereof deposit
with the Landlord the sum specified in the Schedule hereto to
secure the due observance and performance by the Tenant of the
agreements stipulations and conditions herein contained and on
the Tenant's part to be observed and performed. The said deposit
shall be retained by the Landlord throughout the said term free
of any interest to the Tenant and in the event of any breach or
non-observance or non-performance by the Tenant or any of the
agreements stipulations or conditions aforesaid the Landlord
shall be entitled to terminate this Agreement in which event the
said deposit may be forfeited to the Landlord without prejudice
to the Landlord's right of action to claim for any monetary loss
or damage which the Landlord may sustain by reasons of the
aforesaid breach non-observance or non-performance.
Notwithstanding the foregoing the Landlord may in any such event
at its option elect not to terminate this Agreement but to
deduct from the deposit the amount of any monetary loss incurred
by the Landlord in consequence of the breach non-observance or
non-performance by the Tenant in which event the Tenant shall as
a condition precedent to the continuation of the tenancy deposit
with the Landlord the amount so deducted and if the Tenant shall
fail so to do the Landlord shall forthwith be entitled to
re-enter on the said premises or any part thereof in the name of
the whole and to determine this Agreement in which event the
deposit may be forfeited to the Landlord as hereinbefore
provided.
7
<PAGE> 8
(b) Subject as aforesaid the said deposit shall be refunded to the
Tenant by the Landlord without interest within thirty days after
the expiration or sooner determination of this Agreement and
delivery of vacant possession to the Landlord against the Tenant
for any arrears of rent rates and other charges and for any
breach non-observance or non-performance of any of the covenants
agreements stipulations terms and conditions herein contained
and on the part of the Tenant to be observed or performed
whichever shall be the later.
7. It is hereby expressly declared that no key or construction
money or other premium of a similar nature has been paid by the Tenant or any
person or persons for and on behalf of the Tenant to the Landlord or any other
person for the grant of this tenancy.
8. Where more that one person is party hereto as Landlord or
Tenant, the expression "the Landlord" and "the Tenant" shall where the context
admits include all either or any of such persons and their liability contained
or implied herein shall be joint and several.
9. In this Agreement unless inconsistent with the context, words
denoting persons include corporations and firms; words denoting masculine gender
include feminine gender and neuter gender; and words denoting the singular
number include the plural number and vice versa.
10. Each party shall bear his own solicitors' costs charges and
expenses of and incidental to this Agreement and the stamp duty (including the
counterpart) and registration fee, if any, on this agreement shall be borne
equally by the parties hereto.
11. Notwithstanding anything herein contained, the Landlord hereby
agrees to grant a rent free period to the Tenant from 1st September 1998 to 7th
October 1998 for decoration purpose only. The management fee, air-conditioning
charges, government rates and all outgoings payable in respect of the said
premises for the said rent-free period shall be borne and paid by the Tenant
solely.
12. (a) The Tenant shall have an option to renew the tenancy of the
Premises and Rooms 1008-9 by giving to the Landlord 6 months
prior written notice before the expiration of the term hereby
granted of its desire to renew this Agreement of the Premises
and the respective agreement of Rooms 1008-9 and provided at the
date of service of notice there should be no subsisting breach
or breaches on the part of the Tenant to be observed and
performed and also the Tenant shall have performed and observed
the several covenants hereinbefore contained on its part to be
observed and performed up to the expiration of the term hereby
granted the Landlord shall let the Premises for a further term
of 1 (One) year from the expiration of the term hereby granted.
(b) The tenancy shall be renewed on the same terms and conditions as
this Agreement (save and except this Clause 12 and the rent free
period (if any)) and the monthly rent for the Premises shall be
the same as stated in Clause 1 of this Agreement and
HK$54,468.00 (Hong Kong Dollars Fifty Four Thousand Four Hundred
and Sixty-Eight )for Rooms 1008-9.
8
<PAGE> 9
(c) The rights granted by this Clause are personal to the Tenant
alone and may only be exercised by it.
(d) If the Tenant shall fail to exercise the option to renew on the
terms and conditions aforesaid or be in breach of the terms and
conditions aforesaid or if the Tenant shall vacate or deserted
the Premises during the tenancy without the consent of the
Landlord, this option shall be null and void and the Landlord
shall be at liberty to deal with or otherwise dispose of the
Premises in such manner as it thinks fit.
AS WITNESS the hands of the parties hereto the day and year first above
written.
9
<PAGE> 10
THE SCHEDULE
The deposits in the sum of HK$118,284.00 the breakdown of which
are as follows: -
(a) Rental deposit HK$ 99,246.00
(b) Management fee and
air-conditioning
charges deposit HK$ 19,038.00
-------------
HK$118,284.00
-------------
10
<PAGE> 11
SIGNED by Mr. Lauw Siang Liong ) /s/ Lauw Siang Liong
)
for and on behalf of the Landlord in the )
)
presence of: /s/ Amy Keung )
SIGNED by Stephen G. Berman ) /s/ Stephen G. Berman
)
for and on behalf of the Tenant in the )
)
presence of: /s/ Vincent Kwok )
11
<PAGE> 12
RECEIVED the day and year first above written )
)
of and from the Tenant HONG KONG DOLLARS ONE HUNDRED )
)
EIGHTEEN THOUSAND TWO HUNDRED AND EIGHTY FOUR )
)
ONLY being the rental deposits, management fee )
)
& air-conditioning charges deposits above expressed to be paid by )
)
the Tenant to the Landlord in respect of the said premises )
HK$118,284.00
-------------
/s/ Lauw Siang Liong
-------------------------------
the Landlord
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,601,170
<SECURITIES> 0
<RECEIVABLES> 18,775,495
<ALLOWANCES> 0
<INVENTORY> 3,030,416
<CURRENT-ASSETS> 30,327,955
<PP&E> 6,453,644
<DEPRECIATION> 2,308,061
<TOTAL-ASSETS> 60,435,362
<CURRENT-LIABILITIES> 18,364,985
<BONDS> 6,000,000
0
1
<COMMON> 5,937
<OTHER-SE> 35,977,543
<TOTAL-LIABILITY-AND-EQUITY> 60,435,362
<SALES> 61,379,402
<TOTAL-REVENUES> 61,379,402
<CGS> 37,669,477
<TOTAL-COSTS> 37,669,477
<OTHER-EXPENSES> 16,447,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 467,638
<INCOME-PRETAX> 6,574,166
<INCOME-TAX> 1,720,069
<INCOME-CONTINUING> 4,854,097
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,854,097
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.68
</TABLE>
