<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1999
REG. NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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JAKKS PACIFIC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4527222
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
22761 PACIFIC COAST HIGHWAY, MALIBU, CALIFORNIA 90265 (310) 456-7799
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JACK FRIEDMAN, CHAIRMAN
JAKKS PACIFIC, INC.
22761 PACIFIC COAST HIGHWAY, MALIBU, CALIFORNIA 90265 (310) 456-7799
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MURRAY L. SKALA, ESQ. CHRISTOPHER T. JENSEN, ESQ.
FEDER, KASZOVITZ, ISAACSON, WEBER, SKALA & BASS LLP MORGAN, LEWIS & BOCKIUS LLP
750 LEXINGTON AVENUE, NEW YORK, NY 10022-1200 101 PARK AVENUE, NEW YORK, NY 10178-0060
(212) 888-8200 FAX: (212) 888-7776 (212) 309-6000 FAX: (212) 309-6273
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO OFFERING PRICE PER AGGREGATE AMOUNT OF
REGISTERED BE REGISTERED UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$.001 per share........ 3,105,000 Shares(2) $26.00 $80,730,000 $22,442.94
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457.
(2) Includes 405,000 shares of common stock, par value $.001 per share, which
the underwriters have the option to purchase to cover over-allotments, if
any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE
ARE PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES
USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY
THEM UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE
SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY
THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR
LEGAL.
SUBJECT TO COMPLETION -- NOVEMBER 4, 1999
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PROSPECTUS
, 1999
[JAKKS PACIFIC, INC. LOGO]
2,700,000 SHARES OF COMMON STOCK
- --------------------------------------------------------------------------------
JAKKS PACIFIC:
- - We are a multi-line toy company that designs, develops, produces and markets
toys and related products under evergreen and other well-recognized brands for
children and collectors.
- - Our portfolio of proprietary and licensed trademarks and brand names include
World Wrestling Federation(R), Flying Colors(R), Road Champs(R), Remco(R) and
Child Guidance(R).
- - JAKKS Pacific, Inc.
22761 Pacific Coast Highway
Malibu, California 90265
(310) 456-7799
www.jakkspacific.com
- - NASDAQ NATIONAL MARKET SYMBOL: JAKK
THE OFFERING:
- - JAKKS is offering 2,200,000 of the shares and selling stockholders are
offering 500,000 of the shares. (The number of shares being offered gives
effect to a three-for-two stock split effected on November 4, 1999.)
- - The underwriters have an option to purchase an additional 405,000 shares from
JAKKS and the selling stockholders to cover over-allotments.
- - There is an existing trading market for our shares. The last reported sale
price on November 3, 1999 was $38 15/16 ($26, after giving effect to the stock
split) per share.
- - We plan to use the proceeds we will receive from this offering to enhance
existing products and to develop new products; for the acquisition of new
character or product licenses, new products or product lines or other toy
companies or businesses; and for working capital and other general corporate
purposes. We will not receive any proceeds from the sale of shares by the
selling stockholders.
- - Closing: , 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Per Share Total
- --------------------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to JAKKS:
Proceeds to the selling stockholders:
</TABLE>
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This investment involves risks. See "Risk Factors" beginning on page 7.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
ADVEST, INC.
MORGAN KEEGAN & COMPANY, INC.
DLJDIRECT INC.
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<PAGE> 3
[PICTURES OF VARIOUS TOYS EACH ACCOMPANIED BY
THE RELEVANT BRAND NAME OR PRODUCT LINE DESCRIPTION]
<PAGE> 4
IN THIS PROSPECTUS, REFERENCES TO THE "COMPANY," "JAKKS," "WE," "US" AND
"OUR" REFER TO JAKKS PACIFIC, INC. AND ITS SUBSIDIARIES. ALL SHARE AND PER SHARE
INFORMATION IN THIS PROSPECTUS REFLECTS A 3-FOR-2 STOCK SPLIT (EFFECTED BY A
DIVIDEND OF 1/2 SHARE OF OUR COMMON STOCK FOR EACH SHARE OF OUR COMMON STOCK
OUTSTANDING ON OCTOBER 27, 1999, WHICH WAS PAID ON NOVEMBER 4, 1999).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary................ 3
Risk Factors...................... 7
Disclosure Regarding
Forward-Looking Statements...... 14
Use of Proceeds................... 15
Price Range of Common Stock and
Dividend Policy................. 16
Capitalization.................... 17
Selected Consolidated Financial
Data............................ 18
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 20
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business.......................... 30
Management........................ 42
Principal and Selling
Stockholders.................... 45
Certain Relationships and Related
Transactions.................... 46
Description of Securities......... 46
Underwriting...................... 48
Legal Matters..................... 50
Experts........................... 50
Where You Can Find More
Information..................... 51
Index to Financial Statements..... F-1
</TABLE>
We own or have rights to various trademarks and brand or trade names that
we use in conjunction with the sale of our products. These include World
Wrestling Federation, Road Champs, Remco, Child Guidance, Flying Colors, Barbie,
Rugrats, Blue's Clues, Hello Kitty, Ford, Chevrolet, Car and Driver and B.A.S.S.
Masters, among others. We also refer in this prospectus to trademarks or brand
or trade names that are owned or licensed by other companies.
2
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
business information and financial statements and related notes that appear
elsewhere in this prospectus and in the documents that we incorporate by
reference into this prospectus. The information contained in this prospectus
assumes that the underwriters do not exercise their over-allotment option.
JAKKS PACIFIC, INC.
OVERVIEW
We are a multi-line, multi-brand toy company that designs, develops,
produces and markets licensed and proprietary toys and related products. We
focus our business on evergreen branded products that are less subject to market
fads or trends and feature well-known brand names and simpler, lower-priced toys
and accessories. We believe that our growth results from our well-known brand
names, the breadth, quality and innovation of our product offerings and our
strong relationships with retailers and suppliers. Our net sales have increased
from $41.9 million in 1997 to $85.3 million in 1998, representing a growth rate
of 103.2%. Our net income has increased from $2.8 million in 1997 to $6.4
million in 1998, representing a growth rate of 128.8%. Our pro forma net sales
and net income for the nine months ended September 30, 1999 were $158.0 million
and $13.8 million, respectively, representing growth rates of 68.0% and 118.5%
over the prior period.
Our principal product categories are:
- Action figures and accessories featuring licensed characters, principally
from the World Wrestling Federation;
- Molded plastic activity sets, clay compound playsets and lunch boxes
featuring popular licensed children's characters under the Flying Colors
brand name;
- Wheels division products, including die-cast collectible and toy vehicles
under the Road Champs and Remco brand names;
- Infant and pre-school toys consisting of Child Guidance electronic toys
and educational toy foam puzzle mats and blocks featuring popular
licensed characters; and
- Fashion and mini dolls.
In addition, we have entered the video game market through our
participation in a joint venture with THQ Inc. The joint venture expects to
launch its line of World Wrestling Federation licensed video games in November
1999.
Our portfolio of well-recognized licensed brand names includes World
Wrestling Federation, Car and Driver, Schwinn, GT, Haro, Rod & Custom, Barbie,
Rugrats, Blue's Clues, Mickey Mouse, Barney, Teletubbies, Sesame Street, Looney
Tunes and Toy Story II. We have an exclusive license to develop and market a
broad line of World Wrestling Federation toy products through December 31, 2009.
We sell our products primarily to major U.S. toy and mass-market retail
store chains, department stores, toy specialty stores, wholesalers, hobby shops
and corporate accounts. Our five largest customers are Toys 'R Us, Wal-Mart, Kay
Bee Toys, Kmart and Target, which together accounted for approximately 74.2% of
our pro forma net sales for the nine months ended September 30, 1999. We market
and sell all of our products through our own in-house sales force and a network
of independent commissioned sales representatives. Outside of the U.S., we
currently
3
<PAGE> 6
sell our products primarily in Canada, Great Britain, Latin America, Australia,
Japan and South Africa.
RECENT ACQUISITIONS
In June 1999, we acquired Berk Corporation, which is a leading producer of
educational toy foam puzzle mats and blocks featuring popular licensed
children's characters. Berk had sales of $9.1 million for the year ended
December 31, 1998.
In October 1999, we acquired Flying Colors Toys, Inc., which produces
molded plastic activity sets, play-clay compounds and lunch boxes featuring
popular licensed children's characters such as Barbie, Rugrats, Blue's Clues and
Hello Kitty. Flying Colors Toys had sales of $54.5 million for its fiscal year
ended May 31, 1999.
OUR GROWTH STRATEGY
- Expand core products;
- Enter new product categories;
- Continue to pursue strategic acquisitions;
- Acquire additional character and product licenses;
- Expand international sales; and
- Capitalize on our operating efficiencies.
OUR INDUSTRY
According to Toy Manufacturers of America, the leading industry trade
group, manufacturers' shipments of toys, excluding video games, in the U.S.
totaled approximately $15.2 billion in 1998, and sales by U.S. toy manufacturers
to non-U.S. customers totaled approximately $5.5 billion in 1998.
RECENT STOCK SPLIT
On November 4, 1999, we effected a 3-for-2 stock split by paying a dividend
of 1/2 share of our common stock for each share of our common stock outstanding
at the close of business on October 27, 1999. On November 3, 1999, as adjusted
for the split, our last reported sale price was $26 per share, giving us an
equity market capitalization of approximately $421.3 million based on 16,204,181
shares of our common stock issued and outstanding.
4
<PAGE> 7
THE OFFERING
<TABLE>
Common stock offered by:
<S> <C>
JAKKS............................... 2,200,000 shares
Selling stockholders................ 500,000 shares
---------
Total......................... 2,700,000 shares
Common stock to be outstanding after this
offering............................... 18,596,225(1)
Use of proceeds.......................... We intend to use the estimated net
proceeds of approximately $ million,
based on an offering price of $ per
share and after deducting underwriting
discounts and commissions and estimated
offering expenses, that we will receive
from this offering to enhance existing
products and to develop new products; for
the acquisition of new character or
product licenses, new products or product
lines or other toy companies or
businesses; and for working capital and
general corporate purposes. We will not
receive any proceeds from the sale of our
common stock by the selling stockholders.
Nasdaq National Market Symbol............ JAKK
</TABLE>
- ---------------
(1) Includes 192,044 shares to be issued upon the exercise of options held by
certain selling stockholders that are to be sold by them in the offering.
Does not include 293,132 shares issuable upon the exercise of outstanding
warrants and 2,253,768 shares issuable upon the exercise of other
outstanding options.
RISK FACTORS
You should refer to the section entitled "Risk Factors" beginning on page
7, for a discussion of certain factors you should consider before purchasing our
common stock.
5
<PAGE> 8
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following tables present our summary financial data. The summary
historical statement of operations data for our fiscal years ended December 31,
1996, December 31, 1997 and December 31, 1998 are derived from our audited
consolidated financial statements and related notes, which appear elsewhere in
this prospectus. The summary historical statement of operations data for the
nine months ended September 30, 1998 and September 30, 1999 are derived from our
unaudited interim financial statements which, in our opinion, include all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly in all material respects our financial position and results of
operations, We acquired Berk Corporation on June 29, 1999 and we acquired Flying
Colors Toys, Inc. on October 5, 1999. The historical results of operations data
for the nine months ended September 30, 1999 include the operating results of
Berk from June 29, 1999 and do not necessarily show what the results for a full
year will be. The pro forma results of operations data give effect to our
acquisitions of Berk and Flying Colors Toys as if they occurred at the beginning
of the period presented, and the pro forma balance sheet data at September 30,
1999 give effect to our acquisition of Flying Colors Toys as if it occurred on
September 30, 1999. You should read the following information together with the
historical and pro forma financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- ---------------------------------------
PRO PRO PRO
FORMA FORMA FORMA
1996 1997 1998 1998 1998 1999 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales..................... $12,052 $41,945 $85,253 $135,431 $61,379 $121,177 $94,023 $157,984
Gross profit................ 4,821 16,070 33,253 49,959 23,710 50,171 34,104 61,449
Income from operations...... 1,209 4,175 9,246 15,403 7,263 16,861 9,788 18,509
Net income.................. 1,180 2,786 6,375 10,175 4,854 13,002 6,318 13,808
======= ======= ======= ======== ======= ======== ======= ========
Basic earnings per share.... $ 0.24 $ 0.40 $ 0.75 $ 1.19 $ 0.58 $ 0.98 $ 0.75 $ 1.04
======= ======= ======= ======== ======= ======== ======= ========
Weighted average shares
outstanding.............. 4,927 6,932 8,539 8,539 8,393 12,843 8,393 12,843
======= ======= ======= ======== ======= ======== ======= ========
Diluted earnings per
share.................... $ 0.22 $ 0.35 $ 0.59 $ 0.93 $ 0.45 $ 0.86 $ 0.58 $ 0.91
======= ======= ======= ======== ======= ======== ======= ========
Weighted average shares and
equivalents
outstanding.............. 5,256 9,013 11,403 11,403 11,377 15,249 11,377 15,249
======= ======= ======= ======== ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
----------------------------------------
ACTUAL PRO FORMA AS ADJUSTED(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 73,427 $ 20,882 $
Working capital........................................... 73,748 41,096
Total assets.............................................. 156,621 164,429
Total stockholders' equity................................ 110,956 110,956
</TABLE>
- ------------------------------
(1) As adjusted to reflect our sale of 2,200,000 shares of our common stock at
an estimated public offering price of $ and our application of the
estimated net proceeds we receive from that sale.
6
<PAGE> 9
RISK FACTORS
The purchase of our common stock involves substantial investment risks. You
should carefully consider the following risk factors, in addition to the
remainder of this prospectus, before purchasing our common stock.
WE ARE SUBJECT TO CHANGING CONSUMER PREFERENCES AND NEW PRODUCT INTRODUCTIONS
Consumer preferences in the toy industry are continuously changing and
difficult to predict. Relatively few products become popular with consumers and
they often have short life cycles. We cannot assure you that:
- our current products will continue to be popular with consumers;
- our product lines or products we introduce will achieve any significant
degree of market acceptance; or
- the life cycles of our products will be sufficient to permit us to
recover licensing, design, manufacturing, marketing and other costs
associated with those products.
Accordingly, our success will depend on our ability to enhance existing
product lines and to develop new products and product lines. The failure of new
product lines to achieve or sustain market acceptance could adversely affect our
business, financial condition and results of operations. In addition, the
success of many of our character- and theme-related products depends on the
popularity of characters in movies, television programs, live wrestling
exhibitions and other media. We cannot assure you that:
- if the media related to our existing character- and theme-related product
lines are successful, this success will result in substantial promotional
value to our products;
- we will be successful in obtaining licenses to produce new character-and
theme-related products in the future; or
- media related to our character- and theme-related product lines will be
released at the times we expect or will be successful.
A LIMITED NUMBER OF OUR PRODUCT LINES ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR
NET SALES
We derive a substantial portion of our net sales from a limited number of
product lines. Sales of the World Wrestling Federation, Road Champs, Remco and
Flying Colors product lines represented approximately 79.8% of our pro forma net
sales in 1998 and 82.7% for the nine months ended September 30, 1999. We cannot
assure you that any of the products in these branded product lines will retain
their current popularity. A decrease in the popularity of any one of these
branded product lines may adversely affect our business, financial condition and
results of operations.
THERE ARE RISKS ASSOCIATED WITH OUR LICENSE AGREEMENTS
1. OUR CURRENT LICENSES REQUIRE US TO PAY MINIMUM ROYALTIES
Sales of products under trademarks or trade or brand names licensed from
others accounted for substantially all of our net sales in 1997 and 1998.
Product licenses allow us to capitalize on characters, designs, concepts and
inventions owned by others or developed by toy inventors and designers. Our
license agreements generally require us to make specified minimum royalty
payments, even if we fail to sell a sufficient number of units to cover these
amounts. In addition, under certain of our license agreements, if we fail to
achieve certain prescribed sales targets, we
7
<PAGE> 10
may be unable to retain or renew these licenses. Royalties earned under our
license agreements were approximately $6.3 million in 1998 and approximately
$12.0 million for the nine months ended September 30, 1999. As of September 30,
1999, our aggregate minimum royalty payments under our then current license
agreements, including those relating to Flying Colors, for the succeeding 12
months were approximately $4.5 million.
2. THE USE OF OUR LICENSES IS RESTRICTED
Under some of our license agreements, the licensors have the right to
review and approve our use of licensed products, designs or materials before we
are permitted to make any sales. The refusal to permit our use of any licensed
property in the way we propose, or any delay resulting from their review
process, could prohibit or impede our development or sale of new products.
3. NEW LICENSES ARE DIFFICULT TO OBTAIN
Our success will depend in part on our ability to obtain additional
licenses. Competition for desirable licenses is intense. We cannot assure you
that we will be able to secure or renew significant licenses on terms acceptable
to us. In addition, as we add licenses, the need to fund additional royalty
advances and guaranteed minimum royalty payments may strain our cash resources.
THE NEW JOINT VENTURE IS SUBJECT TO NUMEROUS RISKS AND UNCERTAINTIES
In addition to the risks relating to us and the toy industry, the joint
venture faces the following risks:
- The joint venture depends entirely on a single license, which gives it
the exclusive right to produce and market video games based on World
Wrestling Federation characters and themes. The popularity of wrestling,
in general, and the World Wrestling Federation, in particular, is subject
to changing consumer tastes and demands. A decline in the popularity of
the World Wrestling Federation could adversely affect the joint venture's
and our business, financial condition and results of operations.
- The joint venture will rely on hardware manufacturers and THQ's
non-exclusive licenses with them for the right to publish titles for
their platforms and for the manufacture of the joint venture's titles. If
THQ's licenses were to terminate and the joint venture could not
otherwise obtain these licenses from the manufacturers, it would be
unable to publish additional titles for these manufacturers' platforms,
which would materially adversely affect its and our business, financial
condition and results of operations.
- The software industry has experienced periods of significant growth in
consumer interest, followed by periods in which growth has substantially
declined. The joint venture's sales of software titles will be dependent,
among other factors, on the popularity and unit sales of platforms
generally, as well as on the relative popularity and unit sales of
various platforms. The relative popularity of platforms has fluctuated
significantly in recent years. An unexpected decline in the popularity of
a particular platform can be expected to have a material adverse effect
on consumer demand for titles released or to be released by the joint
venture for these platforms.
- The joint venture's failure to timely develop titles for new platforms
that achieve significant market acceptance, to maintain net sales that
are commensurate with product development costs or to maintain
compatibility between its PC CD-ROM titles and the related hardware
8
<PAGE> 11
and operating systems would adversely affect the joint venture's and our
business, financial condition and results of operations.
- In general, THQ will control the day-to-day operations of the joint
venture and all of its product development and production operations and,
accordingly, the joint venture will rely exclusively on THQ to manage
these operations effectively.
THE TOY INDUSTRY IS HIGHLY COMPETITIVE
The toy industry is highly competitive. Many of our competitors have
certain competitive advantages over us due to:
- greater financial resources;
- larger sales and marketing and product development departments;
- stronger name recognition;
- longer operating histories; and
- greater economies of scale.
In addition, the toy industry has no significant barriers to entry.
Competition is based primarily on the ability to design and develop new toys, to
procure licenses for popular characters and trademarks and to successfully
market products. Many of our competitors offer similar products or alternatives
to our products. Our competitors have obtained and are likely to continue to
obtain licenses that overlap our licenses with respect to products, geographic
areas and markets. We cannot assure you that we will be able to obtain adequate
shelf space in retail stores to support our existing products or to expand our
products and product lines or that we will be able to continue to compete
effectively against current and future competitors.
WE MAY NOT BE ABLE TO SUSTAIN OR MANAGE OUR RAPID GROWTH
We experienced rapid growth in net sales and net income in 1996, 1997 and
1998. As a result, comparing our period-to-period operating results may not be
meaningful and results of operations from prior periods may not be indicative of
future results. We cannot assure you that we will continue to experience growth
in, or maintain our present level of, net sales or net income.
Our growth strategy calls for us to continuously develop and diversify our
toy business by acquiring other companies, entering into additional license
agreements and expanding into international markets, which will place additional
demands on our management, operational capacity and financial resources and
systems. The increased demand on management may necessitate the recruitment and
retention by JAKKS of additional qualified management personnel. We cannot
assure you that we will successfully recruit and retain qualified personnel or
expand and manage our operations effectively and profitably.
In addition, implementation of our growth strategy is subject to risks
beyond our control, including competition, market acceptance of new products,
changes in economic conditions, our ability to obtain or renew licenses on
commercially reasonable terms and our ability to finance increased levels of
accounts receivable and inventory necessary to support our sales growth, if any.
Accordingly, we cannot assure you that our growth strategy will be implemented
successfully.
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<PAGE> 12
WE NEED TO BE ABLE TO ACQUIRE AND INTEGRATE COMPANIES AND NEW PRODUCT LINES
SUCCESSFULLY
Our growth strategy depends in part upon our ability to acquire companies
or new product lines. To do this, we may require financing from external sources
which we may not be able to obtain on acceptable terms. Future acquisitions will
only succeed if we can effectively assess characteristics of potential target
companies or product lines, such as:
- financial condition and results of operations;
- attractiveness of products;
- suitability of distribution channels;
- management ability; and
- the degree to which acquired operations can be integrated with our
operations.
We cannot assure you that we can identify attractive acquisition candidates
or negotiate acceptable acquisition terms, and our failure to do so may
adversely affect our results of operations and our ability to sustain growth.
Our acquisition strategy involves a number of risks, each of which could
adversely affect our operating results, including:
- difficulties in integrating acquired businesses or product lines,
assimilating new facilities and personnel and harmonizing diverse
business strategies and methods of operation;
- diversion of management attention from operation of our existing
business;
- loss of key personnel from acquired companies; and
- failure of an acquired business to achieve targeted financial results.
A FEW CUSTOMERS ACCOUNT FOR A LARGE PORTION OF OUR NET SALES
Our five largest customers accounted for 74.2% of our pro forma net sales
in the nine-month period ended September 30, 1999 and 69.0% of our pro forma net
sales in 1998. Except for outstanding purchase orders for specific products, we
do not have written contracts with or commitments from any of our customers. A
substantial reduction in or termination of orders from any of our largest
customers could adversely affect our business, financial condition and results
of operations. In addition, pressure by large customers seeking a reduction in
prices, financial incentives, a change in other terms of sale or for JAKKS to
bear the risks and the cost of carrying inventory could also adversely affect
our business, financial condition and results of operations.
WE DEPEND ON OUR KEY PERSONNEL
Our success is largely dependent upon the experience and continued services
of Jack Friedman, our Chairman and Chief Executive Officer, and Stephen G.
Berman, our President and Chief Operating Officer. We cannot assure you that we
would be able to find an appropriate replacement for Mr. Friedman or Mr. Berman
if the need should arise, and any loss or interruption of Mr. Friedman's or Mr.
Berman's services could adversely affect our business, financial condition and
results of operations. We maintain key-man life insurance on Mr. Friedman in the
amount of $4.0 million, which may be insufficient to fund the cost of employing
his successor.
10
<PAGE> 13
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY POLITICAL OR ECONOMIC DEVELOPMENTS IN
CHINA
Substantially all of our products are produced by unaffiliated
manufacturers in the People's Republic of China. As a result, our operations may
be affected by many factors, including:
- economic, political, governmental and labor conditions in China;
- the possibility of expropriation, supply disruption, currency controls
and exchange fluctuations;
- China's relationship with the United States; and
- fluctuations in the exchange rate of the U.S. dollar against foreign
currencies.
1. LOSS OF CHINA'S "MOST FAVORED NATION" STATUS
China currently enjoys "Most Favored Nation" status under United States
tariff laws. China's Most Favored Nation status is reviewed annually by
Congress, and the renewal of this status is subject to significant political
uncertainties. The loss of China's Most Favored Nation status or the imposition
of retaliatory or protectionist trade policies, such as a substantial increase
in the duty on products we import into the United States from China, would
adversely affect our business, financial condition and results of operations.
2. IMPOSITION OF TRADE RESTRICTIONS
China may be subject to retaliatory trade restrictions imposed by the
United States under various provisions of the Trade Act of 1974. In the past,
the United States has threatened the imposition of punitive 100% tariffs on
selected goods and has withdrawn this threat very shortly before sanctions were
to take effect. The imposition by the United States of trade sanctions and
subsequent actions by China would result in manufacturing and distribution
disruptions or higher costs to us which, in turn, would adversely affect our
business, financial condition and results of operations.
3. POLITICAL UNCERTAINTY IN HONG KONG
We maintain an office in Hong Kong to supervise and monitor manufacturing
and product promotion in China. On July 1, 1997, sovereignty over Hong Kong was
transferred from the United Kingdom to China. If Hong Kong's business climate
were to become less favorable as a result of the transfer of sovereignty, it
would adversely affect our business, financial condition and results of
operations.
OUR PRODUCT SALES ARE SUBJECT TO SEASONAL AND QUARTERLY FLUCTUATIONS
Our product sales are highly seasonal, with a majority of our sales
occurring between September and December, the traditional holiday season. As a
result, approximately 74.1% of our 1998 pro forma net sales occurred in the
third and fourth quarters. This seasonality causes our quarterly operating
results and working capital needs to fluctuate significantly.
OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND TO POTENTIAL
PRODUCT LIABILITY CLAIMS
Our business is 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 under these acts. These statutes are
administered by the Consumer Product Safety
11
<PAGE> 14
Commission, which has the authority to remove from the market products that are
found to be defective and present a substantial hazard or risk of serious injury
or death. The Consumer Product Safety Commission can require a manufacturer to
recall, repair or replace these products under certain circumstances. We cannot
assure you that defects in our products will not be alleged or found. Any such
allegations or findings could result in:
- product liability claims;
- loss of sales;
- diversion of resources;
- damage to our reputation;
- increased warranty costs; and
- removal of our products from the market.
any of which may adversely affect our business, financial condition and results
of operations. There can be no assurance that our product liability insurance
will be sufficient to avoid or limit our loss in the event of an adverse outcome
of any product liability claim.
WE DEPEND ON OUR PROPRIETARY RIGHTS
We rely on trademark, copyright and trade secret protection, nondisclosure
agreements and licensing arrangements to establish, protect and enforce our
proprietary rights in our products. The laws of certain foreign countries may
not protect intellectual property rights to the same extent or in the same
manner as the laws of the United States. We cannot assure you that we or our
licensors will be able to successfully safeguard and maintain our proprietary
rights. Further, we cannot assure you that third parties will not assert
intellectual property claims against us in the future. These claims could divert
management attention from operating our business or result in unanticipated
legal and other costs, which could adversely affect our business, financial
condition and results of operations.
WE DEPEND ON THIRD-PARTY MANUFACTURERS
We depend on third parties to manufacture all our products. Although we own
the tools, dies and molds used to manufacture our products, we have limited
control over the manufacturing processes themselves. As a result, any
difficulties encountered by the third-party manufacturers that result in product
defects, production delays, cost overruns or the inability to fulfill orders on
a timely basis could adversely affect our business, financial condition and
results of operations.
We do not have long-term contracts with our third-party manufacturers.
Although we believe we would be able to secure other third-party manufacturers
to produce our products as a result of our ownership of the tools, dies and
molds used in the manufacturing process, our operations would be adversely
affected if we lost our relationship with any of our current suppliers or if our
current suppliers' operations or sea or air transportation with our China-based
manufacturers were disrupted or terminated even for a relatively short period of
time. Our tools, dies and molds are located at the facilities of our third-party
manufacturers. Accordingly, significant damage to these facilities could result
in the loss of or damage to a material portion of our tools, dies and molds, in
addition to production delays while new facilities were being arranged and
replacement tools, dies and molds were being produced. We do not maintain an
inventory of sufficient size to provide protection for any significant period
against an interruption of supply, particularly if we were required to utilize
alternative sources of supply.
12
<PAGE> 15
Although we do not purchase the raw materials used to manufacture our
products, we are potentially subject to variations in the prices we pay our
third-party manufacturers for products, depending on what they pay for their raw
materials.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE
Market prices of the securities of toy companies are often volatile. The
market price of our common stock may be affected by many factors, including:
- fluctuations in our financial results;
- the actions of our customers and competitors (including new product line
announcements and introductions);
- new regulations affecting foreign manufacturing;
- other factors affecting the toy industry in general; and
- sales of our common stock into the public market.
In addition, the stock market periodically has experienced significant price and
volume fluctuations which may have been unrelated to the operating performance
of particular companies.
FUTURE SALES OF OUR SHARES COULD ADVERSELY AFFECT OUR STOCK PRICE
As of November 1, 1999, there were 16,204,181 shares of our common stock
outstanding. At the closing of this offering, we will issue 192,044 shares upon
the exercise of options held by certain selling stockholders. An additional
965,654 shares of our common stock are issuable upon the exercise of currently
exercisable warrants and options. If all these shares were issued, we would have
17,361,879 shares of our common stock outstanding. In addition, 1,571,247 shares
of our common stock are issuable upon the exercise of outstanding options that
are not currently exercisable. Any sale of a substantial number of shares of our
common stock in the public market after this offering, or the perception that
such sales could occur, may adversely affect the market price of our common
stock.
OUR MANAGEMENT EXERCISES SUBSTANTIAL CONTROL OVER OUR BUSINESS
As of November 1, 1999, our directors and executive officers beneficially
owned, in the aggregate, 1,700,510 shares of our common stock, representing
approximately 10.1% of the common stock outstanding. Immediately after this
offering, they will beneficially own, in the aggregate, 1,200,510 shares,
representing approximately 6.3% of the common stock then to be outstanding.
Accordingly, if these persons act together, they could exercise considerable
influence over matters requiring approval of our stockholders, including the
election of our Board of Directors.
THE COMPUTER SYSTEMS WE RELY ON MAY NOT ACHIEVE YEAR 2000 READINESS
Many currently installed computer systems and software products are
dependent upon internal calendars coded to accept only two digit entries in the
date code field. These date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a result, our
computer systems and software may need to be upgraded to comply with Year 2000
requirements. Otherwise, system failures or miscalculations leading to
disruptions in our operations could occur. We also depend on third parties,
including suppliers and customers, for the operation of our day-to-day business.
We cannot assure you that our efforts or those being taken by these
13
<PAGE> 16
third parties, if any, will be sufficient to eliminate any Year 2000 problem
from the computer systems used by us or these third parties. In the event that
any modifications or conversions to computer systems required to be Year 2000
compliant are not completed on a timely basis, non-compliant systems or programs
may fail or malfunction, which could disrupt our operations, create additional
costs, divert management's attention and otherwise adversely affect our
business, financial condition and results of operations. For a more detailed
discussion of our efforts to address the Year 2000 problem, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of the Year 2000."
OUR ABILITY TO ISSUE "BLANK CHECK" PREFERRED STOCK AND OUR OBLIGATION TO MAKE
SEVERANCE PAYMENTS COULD PREVENT OR DELAY TAKEOVERS
Our certificate of incorporation authorizes the issuance of "blank check"
preferred stock (that is, preferred stock which our Board of Directors can
create and issue without prior stockholder approval) with rights senior to those
of our common stock. In addition, our employment agreements with two of our
executive officers require us, under certain conditions, to make substantial
severance payments to them if they resign after a change of control. These
provisions could delay or impede a merger, tender offer or other transaction
resulting in a change in control of JAKKS, even if such a transaction would have
significant benefits to our stockholders. As a result, these provisions could
limit the price that certain investors might be willing to pay in the future for
shares of our common stock.
OUR MANAGEMENT HAS BROAD DISCRETION AS TO THE USE OF THE NET PROCEEDS OF THIS
OFFERING
We are allocating a substantial portion of the net proceeds of this
offering to potential acquisitions, working capital and other general corporate
purposes. We do not currently have any binding agreement with respect to any
acquisition of any company or product line that would require the application of
any significant portion of these net proceeds. In addition, our management may
apply our net proceeds to purposes different from those currently contemplated
or change the allocation of our net proceeds among these purposes. Thus, our
management will have substantial discretion with regard to the ultimate use of
the net proceeds of this offering.
------------------------------
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. For example, statements included in this prospectus
regarding our financial position, business strategy and other plans and
objectives for future operations, and assumptions and predictions about future
product demand, supply, manufacturing, costs, marketing and pricing factors are
all forward-looking statements. When we use words like "intend," "anticipate,"
"believe," "estimate," "plan" or "expect," we are making forward-looking
statements. We believe that the assumptions and expectations reflected in such
forward-looking statements are reasonable, based on information available to us
on the date hereof, but we cannot assure you that these assumptions and
expectations will prove to have been correct or that we will take any action
that we may presently be planning. We have disclosed certain important factors
that could cause our actual results to differ materially from our current
expectations under "Risk Factors" above and elsewhere in this prospectus. You
should understand that forward-looking statements made in connection with this
offering are necessarily qualified by these factors. We are not undertaking to
publicly update or revise any forward-looking statement if we obtain new
information or upon the occurrence of future events or otherwise.
14
<PAGE> 17
USE OF PROCEEDS
We expect to receive net proceeds from the sale of 2,200,000 shares in this
offering of approximately $ million. This is based upon a public offering price
of $ per share and after deducting underwriting discounts and commissions
and estimated expenses payable by us of approximately $ million. We expect to
receive additional net proceeds of up to approximately $ million if the
underwriters exercise the option granted to them in connection with this
offering to purchase additional shares of our common stock to cover
over-allotments. We will not receive any proceeds from the sale of shares by the
selling stockholders.
We currently intend to use the net proceeds of this offering received by us
(1) to enhance existing products and to develop new products for introduction
under our current product lines, (2) for the acquisition of new character or
product licenses, new products or product lines or other toy companies or
businesses and (3) for working capital and general corporate purposes.
Depending on future events, we may determine at a later time to use our net
proceeds for different purposes or to allocate our net proceeds differently
among the uses described above. Pending these uses, we expect to invest these
funds in short-term, interest-bearing, investment grade securities.
15
<PAGE> 18
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is traded on the Nasdaq National Market under the symbol
"JAKK." The following table sets forth, for the periods indicated, the range of
high and low sales prices for our common stock on the Nasdaq National Market.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
----------------
HIGH LOW
<S> <C> <C>
1997:
First quarter............................................... $ 5.75 $ 4.75
Second quarter......................................... 5.50 3.00
Third quarter.......................................... 7.21 3.83
Fourth quarter......................................... 7.42 5.08
1998:
First quarter.......................................... 6.58 4.75
Second quarter......................................... 8.50 5.17
Third quarter.......................................... 8.96 4.75
Fourth quarter......................................... 7.58 4.67
1999:
First quarter.......................................... 13.67 7.00
Second quarter......................................... 19.92 12.17
Third quarter.......................................... 26.83 15.50
Fourth quarter (through November 3,1999)............... 29.33 22.79
</TABLE>
As of November 1, 1999, there were approximately 70 holders of record of
our common stock. On November 3, 1999, the last sale price of our common stock
reported on the Nasdaq National Market was $26 per share.
We have never paid cash dividends on our common stock. We intend to retain
our future earnings, if any, to finance the growth and development of our
business, and, accordingly, we do not plan to pay any cash dividends on our
common stock in the foreseeable future.
16
<PAGE> 19
CAPITALIZATION
The following table reflects our capitalization as of September 30, 1999,
pro forma to reflect the acquisition of Flying Colors Toys as of September 30,
1999 and as adjusted to reflect our receipt and application of the estimated net
proceeds from the sale of our common stock offered by us hereby at an estimated
public offering price of $ per share, after deducting underwriting discounts
and commissions and estimated offering expenses. You should read the information
in this table together with the more detailed information presented in the
financial statements and related notes included in this prospectus, beginning on
page F-1.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents............................ $ 73,427 $ 20,882 $
======== ======== =======
Long-term debt....................................... $ -- $ -- $ --
Stockholders' equity:
Common stock, $.001 par value, 25,000,000 shares
authorized; 16,084,680 shares issued and
outstanding, actual and pro forma; 18,284,680
shares issued and outstanding, as adjusted...... 16 16 18
Additional paid-in capital......................... 87,598 87,598 --
Retained earnings.................................. 23,342 23,342 23,342
-------- -------- -------
Total stockholders' equity.................... 110,956 110,956
-------- -------- -------
Total capitalization.......................... $110,956 $110,956 $
======== ======== =======
</TABLE>
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations data for each
of the three years in the period ended December 31, 1998 and selected
consolidated balance sheet data as of December 31, 1997 and 1998 have been
derived from our audited consolidated financial statements, which begin on page
F-1 of this prospectus. The following selected consolidated statement of
operations data for the nine-month period ended December 31, 1995 and selected
consolidated balance sheet data as of December 31, 1995 and 1996 have been
derived from our audited consolidated financial statements, but these statements
are not included in this prospectus. The following selected consolidated
statement of operations data for each of the nine months ended September 30,
1998 and 1999 and selected consolidated balance sheet data as of September 30,
1999 have also been derived from our unaudited consolidated financial
statements, which, in management's opinion, reflect all adjustments (consisting
solely of normal recurring accruals) necessary to present fairly, in all
material respects, our financial condition and results of operations. The
results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year. We
acquired Berk Corporation on June 29, 1999, and we acquired Flying Colors Toys,
Inc. on October 5, 1999. The historical results of operations data for the
nine-month period ended September 30, 1999 include the operating results of Berk
from June 29, 1999 and do not necessarily show what the results for a full year
will be. The pro forma results of operations data give effect to our
acquisitions of Berk and Flying Colors Toys as if they occurred at the beginning
of the period presented, and the pro forma balance sheet data at September 30,
1999 give effect to our acquisition of Flying Colors Toys as if it occurred on
September 30, 1999. You should read the financial data set forth below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical and pro forma financial statements
and the related notes included in this prospectus, beginning on page F-1.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
APRIL 1, 1995 --------------------------------------- ------------------------------------------
(INCEPTION) TO PRO FORMA PRO FORMA PRO FORMA
1995 1996 1997 1998 1998(1) 1998 1999 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net sales............... $6,078 $12,052 $41,945 $85,253 $135,431 $61,379 $121,177 $94,023 $157,984
Cost of sales........... 4,131 7,231 25,875 52,000 85,472 37,669 71,005 59,919 96,535
------ ------- ------- ------- -------- ------- -------- ------- --------
Gross profit............ 1,947 4,821 16,070 33,253 49,959 23,710 50,172 34,104 61,449
Selling, general and
administrative
expenses.............. 1,400 3,612 11,895 24,007 34,556 16,447 33,311 24,316 42,940
------ ------- ------- ------- -------- ------- -------- ------- --------
Income from
operations............ 547 1,209 4,175 9,246 15,403 7,263 16,861 9,788 18,509
Interest, net........... 8 (134) 418 423 423 369 (895) 369 (895)
Other (income)
expense............... (12) -- 328 591 591 320 -- 320 --
------ ------- ------- ------- -------- ------- -------- ------- --------
Income before provision
for income taxes...... 551 1,343 3,429 8,232 14,390 6,574 17,756 9,099 19,404
Provision for income
taxes................. 115 163 643 1,857 4,215 1,720 4,754 2,781 5,596
------ ------- ------- ------- -------- ------- -------- ------- --------
Net income.............. $ 436 $ 1,180 $ 2,786 $ 6,375 $ 10,175 $ 4,854 $ 13,002 $ 6,318 $ 13,808
====== ======= ======= ======= ======== ======= ======== ======= ========
Basic earnings per
share................. $ 0.15 $ 0.24 $ 0.40 $ 0.75 $ 1.19 $ 0.58 $ 0.98 $ 0.75 $ 1.04
====== ======= ======= ======= ======== ======= ======== ======= ========
Weighted average shares
outstanding........... 3,000 4,927 6,932 8,539 8,539 8,393 12,843 8,393 12,843
====== ======= ======= ======= ======== ======= ======== ======= ========
Diluted earnings per
share................. $ 0.13 $ 0.22 $ 0.35 $ 0.59 $ 0.93 $ 0.45 $ 0.86 $ 0.58 $ 0.91
====== ======= ======= ======= ======== ======= ======== ======= ========
Weighted average shares
and equivalents
outstanding........... 3,287 5,256 9,013 11,403 11,403 11,377 15,249 11,377 15,249
====== ======= ======= ======= ======== ======= ======== ======= ========
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30, 1999
------------------------------------------ -------------------------
1995 1996 1997 1998 ACTUAL PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $ 82 $ 6,355 $ 2,536 $12,452 $ 73,427 $ 20,882
Working capital (deficit)............. (621) 7,824 3,368 13,736 73,748 41,096
Total assets.......................... 4,128 14,200 43,605 58,736 156,621 164,429
Long-term debt, net of current
portion............................. 613 -- 6,000 5,940 -- --
Total stockholders' equity............ 1,850 11,746 25,959 37,754 110,956 110,956
</TABLE>
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under "Risk Factors" and elsewhere in this prospectus.
You should read this section in conjunction with the historical and pro forma
financial statements and the related notes, which begin on page F-1.
OVERVIEW
JAKKS was founded to design, develop, produce and market children's toys
and related products. We commenced business operations when we assumed operating
control over the toy business of Justin Products Limited (Justin), and have
included the results of Justin's operations in our consolidated financial
statements from July 1, 1995, the effective date of that acquisition. The Justin
product lines, which consisted primarily of fashion dolls and accessories and
electronic products for children, accounted for substantially all of our net
sales for the period from April 1, 1995 (inception) to December 31, 1995.
One of our key strategies has been to grow through the acquisition or
licensing of product lines, concepts and characters. In 1996, we expanded our
product lines to include products based on licensed characters and properties,
such as World Wrestling Federation action figures and accessories.
We acquired Road Champs in February 1997, and have included the results of
operations of Road Champs from February 1, 1997, the effective date of the
acquisition. We acquired the Child Guidance and Remco trademarks in October
1997, both of which contributed to operations nominally in 1997, but contributed
more significantly to operations commencing in 1998. We acquired Berk in June
1999 and have included the results of operations of Berk since June 29, 1999. In
October 1999, we acquired Flying Colors Toys. We expect the Flying Colors
product lines to contribute to operations beginning in the fourth quarter of
1999.
Our products currently include (1) action figures and accessories featuring
licensed characters, principally from the World Wrestling Federation, (2) Flying
Colors molded plastic activity sets, clay compound playsets and lunch boxes, (3)
Wheels division products, including Road Champs die-cast collectible and toy
vehicles and Remco toy vehicles and role-play toys and accessories, (4) Child
Guidance infant and pre-school electronic toys, toy foam puzzle mats and blocks,
activity sets and outdoor products and (5) fashion and mini dolls and related
accessories.
In June 1998, we formed a joint venture with THQ, a developer, publisher
and distributor of interactive entertainment software, and the joint venture
licensed the rights from World Wrestling Federation Entertainment to publish
World Wrestling Federation electronic video games on all platforms. The license
agreement permits the joint venture to release these games after November 16,
1999. We expect that the first game produced under this license will be released
in November 1999. We are entitled to receive a guaranteed preferred return,
based on sales of the video games, and THQ is entitled to receive the balance of
the profits.
In general, we acquire products or product concepts from others or we
engage unaffiliated third parties to develop our own products, thus minimizing
operating costs. Royalties payable to our developers generally range from 1% to
6% of the wholesale price for each unit of a product sold by
20
<PAGE> 23
us. We expect that outside inventors will continue to be a source of new
products in the future. We also generate internally new product concepts, for
which we pay no royalties.
We contract the manufacture of most of our products to unaffiliated
manufacturers located in China. We sell the finished products on a letter of
credit basis or on open account to our customers, who take title to the goods in
Hong Kong. These methods allow us to reduce certain operating costs and working
capital requirements. A portion of our sales, primarily sales of our Road Champs
and Flying Colors products, originate in the United States, so we hold certain
inventory in warehouse and fulfillment facilities operated by unaffiliated third
parties. In addition, we hold inventory of other products from time to time in
support of promotions or other domestic programs with retailers. To date,
substantially all of our sales have been to domestic customers. We intend to
expand distribution of our products into foreign territories and, accordingly,
we have (1) engaged representatives to oversee sales in certain territories, (2)
engaged distributors in certain territories, and (3) established direct
relationships with retailers in certain territories.
We establish reserves for sales allowances, including promotional
allowances and allowances for anticipated defective product returns, at the time
of shipment. The reserves are determined as a percentage of net sales based upon
either historical experience or on estimates or programs agreed upon by our
customers.
Our cost of sales consists primarily of the cost of goods produced for us
by unaffiliated third-party manufacturers, royalties earned by licensors on the
sale of these goods and amortization of the tools, dies and molds owned by us
that are used in the manufacturing process. Other costs include inbound freight
and provisions for obsolescence. Significant factors affecting our cost of sales
as a percentage of net sales include (1) the proportion of net sales generated
by various products with disparate gross margins, (2) the proportion of net
sales made domestically, which typically carry higher gross margins than sales
made in Hong Kong, and (3) the effect of amortizing the fixed cost components of
cost of sales, primarily amortization of tools, dies and molds, over varying
levels of net sales.
Selling, general and administrative expenses include costs directly
associated with the selling process, such as sales commissions, advertising and
travel expenses, as well as general corporate expenses, goodwill and trademark
amortization and product development. We have recorded goodwill of approximately
$15.3 million and trademarks of approximately $14.4 million in connection with
acquisitions made to date. Goodwill is being amortized over a 30-year period,
while trademark acquisition costs are being amortized over periods ranging from
10 to 30 years.
21
<PAGE> 24
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data as a percentage of net sales.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 60.0 61.7 61.0 61.4 58.6
----- ----- ----- ----- -----
Gross profit............................... 40.0 38.3 39.0 38.6 41.4
Selling, general and administrative
expenses................................. 30.0 28.4 28.2 26.8 27.5
----- ----- ----- ----- -----
Income from operations..................... 10.0 9.9 10.8 11.8 13.9
Interest, net.............................. (1.1) 1.0 0.4 0.6 (0.7)
Other (income) expense..................... -- 0.7 0.7 0.5 --
----- ----- ----- ----- -----
Income before income taxes................. 11.1 8.2 9.7 10.7 14.6
Provision for income taxes................. 1.3 1.6 2.2 2.8 3.9
----- ----- ----- ----- -----
Net income................................. 9.8% 6.6% 7.5% 7.9% 10.7%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net Sales. Net sales increased $59.8 million, or 97.4%, to $121.2 million
in 1999 from $61.4 million in 1998. The significant growth in net sales was due
primarily to the continuing growth of the World Wrestling Federation action
figure product line with its expanded product offerings and frequent character
releases, as well as to increasing sales of Child Guidance pre-school toys and
the addition of Berk products, which contributed nominally to operations in the
third quarter of 1999. Contributions made by sales of Road Champs die-cast toy
and collectible vehicles and Remco toy vehicles and fashion and holiday dolls
were consistent with the prior period.
Gross Profit. Gross profit increased $26.5 million, or 111.6%, to $50.2
million, or 41.4% of net sales, in 1999 from $23.7 million, or 38.6% of net
sales, in 1998. The overall increase in gross profit was attributable to the
significant increase in net sales. The increase in the gross profit margin of
2.8% of net sales was due in part to the changing product mix, which included
products, such as World Wrestling Federation action figures, with higher margins
than some of our other products, and the amortization expense of molds and tools
used in the manufacture of our products, which decreased on a percentage basis
due to the fixed nature of these costs. The higher margin resulting from lower
product costs was offset in part by higher royalties.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $16.9 million, or 102.5%, to $33.3 million, or
27.5% of net sales, in 1999 from $16.4 million, or 26.8% of net sales, in 1998.
Selling, general and administrative expenses increased nominally as a percentage
of net sales due in part to increases in advertising expenses and product
development costs of our various products in 1999, which were offset in part by
a decrease as a percentage of net sales due to the fixed nature of certain of
these expenses in conjunction with the significant increase in net sales. The
overall dollar increase of $16.9 million was due to the significant increase in
net sales with their proportionate impact on variable selling costs, such as
freight and shipping related expenses, sales commissions, cooperative
advertising and
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<PAGE> 25
travel expenses. We produced television commercials in support of several of our
products, including World Wrestling Federation action figures, in 1998 and 1999.
We may increase our advertising efforts, including the use of more expensive
advertising media, such as television, if we deem it appropriate for particular
products.
Interest, Net. We had significantly lower interest-bearing obligations in
1999 than in 1998 with the conversion of our convertible debentures in 1999. In
addition, we had significantly higher average cash balances during 1999 than in
1998 due to the net proceeds from the sale of our common stock in May 1999.
Provision for Income Taxes. Provision for income taxes included federal,
state and foreign income taxes at effective tax rates of 26.8% and 26.2% in 1999
and 1998, respectively, benefiting from a flat 16.5% Hong Kong Corporation Tax
on our income arising in, or derived from, Hong Kong. As of December 31, 1998,
we had deferred tax assets of approximately $493,000 for which no allowance has
been provided 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, 1998 AND 1997
Net Sales. Net sales increased $43.4 million, or 103.2%, to $85.3 million
in 1998 from $41.9 million in 1997. The significant growth in net sales was due
primarily to the continuing growth of the World Wrestling Federation action
figure product line with its expanded product offerings and frequent character
releases, as well as to the full year impact on sales of the Remco toy vehicles
and Child Guidance pre-school toys which contributed only nominally in 1997 from
their acquisition date in late October 1997. Contributions made by sales of Road
Champs die-cast collectible and toy vehicles and our holiday doll line were
comparable with the prior year, while our line of radio-controlled vehicles made
only nominal contributions to net sales in 1998.
Gross Profit. Gross profit increased $17.2 million, or 106.9%, to $33.3
million in 1998, or 39.0% of net sales, from $16.1 million, or 38.3% of net
sales, in 1997. The overall increase in gross profit was attributable to the
significant increase in net sales. The increase in the gross profit margin of
0.7% of net sales was due in part to the changing product mix, which included
products, such as World Wrestling Federation action figures, with higher margins
than some of our other products. The higher margin resulting from lower product
costs was offset in part by higher royalties, and the amortization expense of
molds and tools used in the manufacture of our products was comparable on a
percentage basis.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $12.1 million, or 101.8%, to $24.0 million, or
28.2% of net sales, in 1998, from $11.9 million, or 28.4% of net sales, in 1997.
The overall significant increase of $12.1 million in these costs was due in
large part to the full year impact of costs associated with our addition of
infrastructure in the United States and Hong Kong in connection with the Road
Champs acquisition, as well as to development and marketing costs of products
under our recently-acquired Child Guidance and Remco trademarks and under
existing products lines, such as the World Wrestling Federation action figures.
Selling, general and administrative expenses decreased modestly as a percentage
of net sales due in part to the fixed nature of certain of these expenses, which
were offset in part by increases in advertising expenses and product development
costs in 1998. The overall dollar increase was also due to the significant
increase in net sales with their proportionate impact on variable selling costs,
such as freight and shipping related expenses, sales commissions,
23
<PAGE> 26
cooperative advertising and travel expenses. We produced television commercials
in support of several of our products, including World Wrestling Federation
action figures in 1998 and 1997, as well as radio-controlled vehicles in 1997.
From time to time, we may increase our advertising efforts, including the use of
more expensive advertising media, such as television, if we deem it appropriate
for particular products.
Interest, Net. We had comparable interest-bearing obligations in 1998 and
in 1997 with our convertible debentures and seller notes issued in connection
with the Child Guidance/Remco and Road Champs acquisitions. In addition, we had
comparable average cash balances during 1998 and 1997.
Provision for Income Taxes. Provision for income taxes included federal,
state and foreign income taxes in 1998 and also included a tax benefit generated
by operating losses for federal and state purposes in 1997. Our earnings were
subject to effective tax rates of 22.6% and 18.8% in 1998 and 1997,
respectively, benefiting from a flat 16.5% Hong Kong Corporation Tax on our
income arising in, or derived from, Hong Kong. As of December 31, 1997, we had
federal and state net operating loss carry-forwards of $727,000 and $306,000,
respectively, available to offset future taxable income. The carry-forwards were
fully utilized in 1998. As of December 31, 1998, we had deferred tax assets of
approximately $493,000 for which no allowance has been provided 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, 1997 AND 1996
Net Sales. Net sales increased $29.8 million, or 248.0%, to $41.9 million
in 1997 from $12.1 million in 1996. The significant growth in net sales was due
primarily to the continuing growth of the World Wrestling Federation action
figure product line with its expanded product offerings and frequent character
releases, as well as to the contribution made by sales of Road Champs die-cast
collectible and toy vehicles, which have been included from the effective date
of the acquisition, February 1, 1997. Our holiday doll line performed comparably
with the prior year and our new line of radio-controlled vehicles made modest
contributions to net sales in 1997.
Gross Profit. Gross profit increased $11.3 million, or 233.3%, to $16.1
million, or 38.3% of net sales, in 1997 from $4.8 million, or 40.0% of net
sales, in 1996. The overall increase in gross profit was attributable to the
significant increase in net sales. The decline in the gross profit margin of
1.7% of net sales was due in part to the changing product mix, which included
products, such as Road Champs and radio-controlled vehicles, with lower margins
than some of our other products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $8.3 million, or 229.4%, to $11.9 million, or
28.4% of net sales, in 1997 from $3.6 million, or 30.0% of net sales, in 1996.
The significant overall increase of $8.3 million in such costs was due in large
part to the costs associated with our addition of infrastructure in the United
States and Hong Kong in connection with the Road Champs acquisition. We have
since combined the acquired operations in Hong Kong with those of our existing
operations and may achieve other efficiencies in our 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 their
proportionate impact on variable selling costs, such as freight and shipping
related expenses, sales commissions and
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<PAGE> 27
travel expenses. Additionally, we produced television commercials in support of
several of our products, including World Wrestling Federation action figures and
radio-controlled vehicles.
Interest, Net. We had significantly higher interest-bearing obligations in
1997 than in 1996 resulting from the issuance of our convertible debentures and
seller notes in connection with the Road Champs acquisition. In addition, we had
lower average cash balances during 1997 than in 1996 due to significant cash
payments made and working capital employed in connection with the Road Champs
acquisition.
Provision for Income Taxes. Provision for income taxes included state and
foreign income taxes in 1997 and also included a tax benefit generated by
operating losses for Federal and state purposes in 1996. Our 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 our
income arising in, or derived from, Hong Kong. As of December 31, 1997, we had
federal and state net operating loss carry-forwards of $727,000 and $306,000,
respectively, available to offset future taxable income.
QUARTERLY FLUCTUATIONS AND SEASONALITY
We have experienced significant quarterly fluctuations in operating results
and anticipate these fluctuations in the future. The operating results for any
quarter are not necessarily indicative of results for any future period. Our
first quarter is typically expected to be the least profitable as a result of
lower net sales but substantially similar fixed operating expenses. This is
consistent with the performance of many companies in the toy industry.
The following tables present our unaudited quarterly results for the years
indicated. The seasonality of our business is reflected in this quarterly
presentation.
<TABLE>
<CAPTION>
1997 1998
------------------------------------- -----------------
FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales................... $5,235 $8,059 $15,919 $12,732 $11,030 $16,131
As a % of full year......... 12.5% 19.2% 38.0% 30.4% 12.9% 18.9%
Gross profit................ $1,911 $3,203 $ 6,620 $ 4,336 $ 4,350 $ 6,118
As a % of full year........ 11.9% 19.9% 41.2% 27.0% 13.1% 18.4%
As a % of net sales........ 36.5% 39.7% 41.6% 34.1% 39.4% 37.9%
Income from operations...... $ 173 $ 721 $ 2,021 $ 1,260 $ 768 $ 1,427
As a % of full year........ 4.1% 17.3% 48.4% 30.2% 8.3% 15.4%
As a % of net sales........ 3.3% 8.9% 12.7% 9.9% 7.0% 8.8%
Income before income
taxes...................... $ 124 $ 604 $ 1,908 $ 793 $ 610 $ 1,316
As a % of net sales........ 2.4% 7.5% 12.0% 6.2% 5.5% 8.2%
Net income.................. $ 203 $ 457 $ 1,455 $ 671 $ 462 $ 958
As a % of net sales........ 3.9% 5.7% 9.1% 5.3% 4.2% 5.9%
Diluted earnings per
share...................... $ 0.03 $ 0.07 $ 0.19 $ 0.07 $ 0.05 $ 0.09
Weighted average shares and
equivalents outstanding.... 6,498 7,128 7,638 10,430 10,740 11,679
<CAPTION>
1998 1999
----------------- ---------------------------
THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales................... $34,218 $23,873 $24,960 $35,981 $60,236
As a % of full year......... 40.1% 28.0% NA NA NA
Gross profit................ $13,242 $ 9,542 $10,764 $14,649 $24,759
As a % of full year........ 39.8% 28.7% NA NA NA
As a % of net sales........ 38.7% 40.0% 43.1% 40.7% 41.1%
Income from operations...... $ 5,069 $ 1,983 $ 2,743 $ 4,225 $ 9,893
As a % of full year........ 54.8% 21.4% NA NA NA
As a % of net sales........ 14.8% 8.3% 11.0% 11.7% 16.4%
Income before income
taxes...................... $ 4,648 $ 1,658 $ 2,743 $ 4,587 $10,426
As a % of net sales........ 13.6% 6.9% 11.0% 12.7% 17.3%
Net income.................. $ 3,434 $ 1,521 $ 2,005 $ 3,355 $ 7,642
As a % of net sales........ 10.0% 6.4% 8.0% 9.3% 12.7%
Diluted earnings per
share...................... $ 0.30 $ 0.14 $ 0.17 $ 0.21 $ 0.44
Weighted average shares and
equivalents outstanding.... 11,808 11,756 12,624 15,732 17,541
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had working capital of $73.8 million, as
compared to $13.7 million as of December 31, 1998. This increase was primarily
attributable to operating activities and the public offering of our common stock
in May 1999.
Operating activities provided net cash of $16.6 million in the nine months
ended September 30, 1999 as compared to $5.1 million in the corresponding period
of 1998. Net cash was provided primarily by net income and non-cash charges,
such as depreciation, amortization and
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<PAGE> 28
recognition of compensation expense for options, as well as an increase in
accounts payable and accrued liabilities, which were offset in part by increases
in accounts receivable and inventory. As of September 30, 1999, we had cash and
cash equivalents of $73.4 million.
Operating activities provided net cash of $12.0 million in 1998 as compared
to $3.2 million in 1997. Net cash was provided primarily by net income, non-cash
charges, such as depreciation, amortization and recognition of compensation
expense for options, and increases in operating liabilities, which were offset
in part by increases in accounts receivable and inventory.
Our investing activities used net cash of $10.1 million in the nine months
ended September 30, 1999, as compared to $4.0 million in the corresponding
period of 1998, consisting primarily of the purchase of molds and tooling used
in the manufacture of our products in 1999 and 1998 and goodwill acquired in the
acquisition of Berk in 1999. As part of our strategy to develop and market new
products, we have entered into various character and product licenses with
royalties ranging from 1% to 10% payable on net sales of such products. As of
September 30, 1999, these agreements required future aggregate minimum
guarantees of $17.7 million, exclusive of $0.9 million in advances already paid.
Our investing activities used net cash of $5.1 million in 1998, as compared
to $24.4 million in 1997, consisting primarily of the purchase of molds and
tooling used in the manufacture of our products, the initial funding of the
World Wrestling Federation joint venture in 1998, trademarks purchased in
connection with the acquisitions of Road Champs and the Child Guidance and Remco
brands, and goodwill acquired in connection with the acquisition of Road Champs
in 1997. As part of our strategy to develop and market new products, we have
entered into various character and product licenses with royalties ranging from
1% to 10% payable on net sales of such products. As of January 1, 1999, these
agreements required future aggregate minimum guarantees of $17.2 million,
exclusive of $1.3 million in advances already paid.
Our financing activities provided net cash of $54.5 million in the nine
months ended September 30, 1999, consisting primarily of the issuance of our
common stock in our public offering in May 1999 and the exercises of options and
warrants, partially offset by dividends paid to holders of our Series A
Cumulative Convertible Preferred Stock. In the corresponding period of 1998,
financing activities provided net cash of $3.0 million, consisting primarily of
the issuance of our Series A Cumulative Convertible Preferred Stock partially
offset by the repayment of various notes and other debt issued in connection
with our acquisitions in 1997.
Our financing activities provided net cash of $3.0 million in 1998,
consisting primarily of the issuance of 1,000 shares of our preferred stock at a
price of $5,000 per share in 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 1997, financing
activities provided net cash of $17.4 million, consisting of the issuance of our
4% Redeemable Convertible Preferred Stock in October 1997, which provided $6.8
million, net of offering costs, the placement of our convertible debentures in
January 1997, which provided $5.5 million, net of offering costs, and various
notes and other debt issued in connection with our acquisitions in 1997, less
approximately $5.2 million in debt repaid.
In January 1997, we received proceeds, net of issuance costs, of
approximately $5.5 million from the issuance of $6.0 million in convertible
debentures, which were converted in March and April 1999 into 1,565,218 shares
of our common stock at a conversion price of $3.83 per share. These debentures
bore interest at 9% per annum, payable monthly, and were due in December 2003.
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<PAGE> 29
In February 1997, we acquired Road Champs for approximately $12.5 million.
Consideration paid at closing was approximately $4.7 million in cash plus the
issuance of 297,030 shares of our common stock (valued at approximately $1.5
million) and the assumption of approximately $766,000 of liabilities. The
balance of the cash consideration ($5.5 million) was paid during the
twelve-month period ended in February 1998. 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, we 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 10% note payable in the amount of $1.2 million,
which was paid in five quarterly installments ended December 31, 1998. In
addition, we incurred legal and accounting fees of approximately $203,000 and
assumed liabilities of $1.4 million. The acquisition was funded in part by the
issuance of shares of our 4% Redeemable Convertible Preferred Stock, which were
converted into 939,998 shares of our common stock in March 1998. Also in
connection with this acquisition, we 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.
That agreement provides for four quarterly payments to the seller of $110,000,
followed by six quarterly payments of $160,000, which commenced on December 31,
1997.
In October 1997, we entered into a credit facility agreement with Norwest
Bank Minnesota, N.A. which provides our Hong Kong subsidiaries with a working
capital line of credit and letters of credit for the purchase of products and
the operation of those subsidiaries. The facility expired on May 31, 1999.
In April 1998, we received $4.7 million in net proceeds from the sale of
shares of our Series A Cumulative Convertible Preferred Stock to two investors
in a private placement, which were converted into 837,987 shares of our common
stock at a conversion price of $5.97 per share. The use of proceeds was for
working capital and general corporate purposes.
In May 1999, we received $51.9 million in net proceeds from the sale of
3,999,844 shares of our common stock. We used substantially all of these
proceeds to fund our acquisition of Flying Colors Toys and the balance has been
and is expected to be applied to our product acquisition, development, working
capital and general corporate needs.
In June 1999, we purchased all the outstanding capital stock of Berk for
approximately $3.1 million. We also agreed to pay an earn-out of up to $500,000
if sales of Berk products achieve certain prescribed levels over the 12-month
period ending June 30, 2000. Berk is a leading producer of educational toy foam
puzzle mats and blocks featuring popular licensed characters, including Mickey
Mouse, Minnie Mouse, Winnie the Pooh, Blue's Clues, Barney, Teletubbies, Sesame
Street, Looney Tunes and Toy Story II characters, and non-licensed activity sets
and outdoor products.
On October 5, 1999, we completed the acquisition of the Flying Colors
product line through the purchase of all the outstanding capital stock of Flying
Colors Toys, a privately-held company based in Dexter, Michigan. At or shortly
after the closing we paid approximately $34.7 million for the stock and paid off
approximately $17.6 million of indebtedness. We also agreed to pay an earn-out
of up to $13.5 million over the 36-month period following the closing if net
sales of Flying Colors products achieve certain targeted levels during this
period. Two of Flying Colors Toys' senior executives and most of its creative
design and product development staff have remained with Flying Colors Toys.
Flying Colors Toys' principal products include molded plastic activity kits,
clay compound playsets and lunch boxes featuring licensed characters, including
Barbie, Rugrats, Blue's Clues and Looney
27
<PAGE> 30
Tunes characters. The kits cover a broad range of products and activities, such
as make and paint your own characters, jewelry making, art studios, posters,
puzzles and other projects.
We believe that our cash flows from operations, cash and cash equivalents
on hand and the net proceeds of this offering will be sufficient to meet our
working capital and capital expenditure requirements and provide us with
adequate liquidity to meet our anticipated operating needs for at least the next
12 months. Although operating activities are expected to provide cash, to the
extent we grow significantly in the future, our operating and investing
activities may use cash and, consequently, this growth may require us to obtain
additional sources of financing. There can be no assurance that any necessary
additional financing will be available to us on commercially reasonable terms,
if at all.
EXCHANGE RATES
We sell all of our products in U.S. dollars and pay for all of our
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. We cannot assure you 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 our business, financial condition or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which is effective for financial statements issued for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and displaying comprehensive income and its components in financial
statements. Comprehensive income, as defined, includes all changes to equity
(net assets) during a period from non-owner sources. To date, we have not had
any transactions that are required to be reported in other comprehensive income.
The FASB recently issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which is effective for financial statements
issued for fiscal years beginning after December 15, 1997. This statement
establishes standards for the way public business enterprises are to report
information about operating segments in annual financial statements and requires
those enterprises to report selected information about operating segments in
interim financial reports. We operate in one reportable segment: the
development, production and marketing of toys and related products.
IMPACT OF THE YEAR 2000
Many currently installed computer systems and software products are
dependent upon internal calendars coded to accept only two digit entries in the
date code field. These date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a result, our
computer systems and software were required to be upgraded to comply with Year
2000 requirements. Otherwise, system failures or miscalculations leading to
disruptions in our operations could occur. We have taken actions to address this
potential problem, including the identification of any non-compliant processes
or systems and the implementation of corrective measures. We replaced critical
internal software with non-compliant codes with software that is compliant in
October 1999.
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<PAGE> 31
We believe the financial reporting systems of our Hong Kong subsidiaries
are Year 2000 compliant. Their systems were upgraded in 1998 in the normal
course of business with software and hardware which the manufacturer has
represented as being Year 2000 compliant. We implemented a new software package
in our corporate office in October 1999 which the manufacturer has represented
as being Year 2000 compliant. We estimate the cost of this new software,
including implementation and data conversion costs, to be approximately
$120,000. Our other software is generally certified as Year 2000 compliant or is
not considered critical to our operations.
Other than the cost of the new software that was implemented in our
corporate office, we have spent only nominal amounts on the Year 2000 issue, and
we do not expect any significant future expenditures. Although we believe our
cost estimates to be accurate, we cannot assure you that these costs will not
increase or that the proposed solutions will be installed on schedule by the
date estimated.
We have addressed the Year 2000 preparedness of our critical suppliers and
major customers and related electronic data interfaces with these third parties.
We have contacted critical suppliers and larger customers to determine whether
they are, or will be, compliant by the Year 2000. Based on our evaluation and
testing, these third parties are, or are expected to be, compliant by the Year
2000. However, we will continue to monitor the situation and we will formulate
contingency plans to resolve customer-related issues that may arise. At this
time we cannot estimate the impact that noncompliant suppliers and customers may
have on us or our level of operations in the Year 2000. At present, we have not
developed contingency plans, but we will determine whether to develop such plans
when our assessment is completed.
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<PAGE> 32
BUSINESS
COMPANY OVERVIEW
We are a multi-line, multi-brand toy company that designs, develops,
produces and markets toys and related products. Our principal products are (1)
action figures and accessories featuring licensed characters, principally from
the World Wrestling Federation, (2) Flying Colors molded plastic activity sets,
clay compound playsets and lunch boxes, (3) Wheels division products, including
Road Champs die-cast collectible and toy vehicles and Remco toy vehicles and
role-play toys and accessories, (4) Child Guidance infant and pre-school
electronic toys, toy foam puzzle mats and blocks, activity sets and outdoor
products and (5) fashion and mini dolls and related accessories. We focus our
business on evergreen branded products that are less subject to market fads or
trends and feature well-known brand names and simpler, lower-priced toys and
accessories.
We formed our joint venture with THQ in June 1998 to develop, manufacture
and market, under an exclusive license with World Wrestling Federation
Entertainment, video games based on World Wrestling Federation characters and
themes. The joint venture's first product is expected to be released in November
1999.
We have been successful at acquiring and capitalizing on evergreen brands,
which are well-recognized trademarks or corporate, trade or brand names with
long product histories. We continually review the marketplace to identify and
evaluate evergreen brands that, for various reasons, we believe have potential
for significant growth. We seek to acquire or license these brands and
revitalize them by intensifying the marketing effort to restore and enhance
consumer recognition and retailer interest. We reinforce brands by linking them
with other evergreen brands on our products, adding to the branded product lines
new items that we expect to enjoy greater popularity, eliminating products with
fading popularity, adding new features and improving the functionality of
products in the line. We also try to improve point-of-sale brand visibility
through better shelf positioning and more eye-catching product packaging.
We license much of the intellectual property we use in our business. We
license the World Wrestling Federation trademark, as well as numerous other
trademarks, corporate, trade and brand names and logos, from third parties,
including Car and Driver, Schwinn, GT, Haro, Rod & Custom, Barbie, Rugrats,
Blue's Clues, Mickey Mouse, Barney, Teletubbies, Sesame Street, Looney Tunes and
Toy Story II. This enables us to use high-profile marks at a lower cost than
that which we would incur if we purchased these marks or developed comparable
marks on our own. By licensing marks, we have access to a far greater range of
marks than those that would be available for purchase, and we maintain the
flexibility to acquire newly-popular marks and to discontinue our use of marks
whose popularity or value has faded. We also license technology produced by
unaffiliated inventors and product developers to improve the design and
functionality of our products. We believe that our experience in the toy
industry, our flexibility and our recent success in developing and marketing
products make us more attractive to toy inventors and developers.
Most of our current products are relatively simple and inexpensive toys. We
believe that these products have proven to have enduring appeal and are less
subject to general economic conditions, toy product fads and trends, changes in
retail distribution channels and other factors. In addition, the simplicity of
these products enables us to choose among a wider range of manufacturers and
affords us greater flexibility in product design, pricing and marketing.
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<PAGE> 33
We sell our products through our in-house sales staff and independent sales
representatives. Purchasers of our products include toy and mass-market retail
chain stores, department stores, toy specialty stores and wholesalers. The Road
Champs and Flying Colors products are also sold to smaller hobby shops,
specialty retailers and corporate accounts, among others. Our five largest
customers are Toys 'R Us, Wal-Mart, Kay Bee Toys, Kmart and Target. We also sell
through e-commerce sites, including ToysRUs.com, Amazon.com and eToys.com.
INDUSTRY OVERVIEW
According to the Toy Manufacturers of America, Inc. (the TMA), the leading
industry trade group, total manufacturers' shipments of toys, excluding video
games, in the U.S., were approximately $15.2 billion in 1998. According to the
TMA, the United States is the world's largest toy market, followed by Japan and
Western Europe. Sales by U.S. toy manufacturers to non-U.S. customers totaled
approximately $5.5 billion in 1998. We believe the two largest U.S. toy
companies, Mattel and Hasbro, collectively hold a dominant share of the domestic
non-video toy market. In addition, hundreds of smaller companies compete in the
design and development of new toys, the procurement of character and product
licenses, and the improvement and expansion of previously-introduced products
and product lines. In the video game segment, manufacturers' shipments of video
game software were approximately $3.0 billion in 1998.
Over the past few years, the toy industry has experienced substantial
consolidation among both toy companies and toy retailers. We believe that the
ongoing consolidation of toy companies provides us with increased growth
opportunities due to retailers' desire not to be entirely dependent on a few
dominant toy companies. Retailer concentration also enables us to ship products,
manage account relationships and track retail sales more effectively with a
smaller staff.
OUR GROWTH STRATEGY
- EXPAND CORE PRODUCTS
We manage our existing and new brands through strong product development
initiatives, including introducing new products, modifying existing products and
extending existing product lines. Our product designers strive to develop new
products or product lines to offer added technological, aesthetic and functional
improvements to our product lines. In October 1999, we introduced an interactive
wrestling action figure which has the ability to accept voice downloads from the
World Wrestling Federation web site.
- ENTER NEW PRODUCT CATEGORIES
We will continue to use our extensive experience in the toy industry to
evaluate toys and licenses in new product categories and to develop additional
product lines. We have entered the video game market through our participation
in a joint venture with THQ. The joint venture expects to launch its line of
World Wrestling Federation licensed video games in November 1999.
- CONTINUE TO PURSUE STRATEGIC ACQUISITIONS
Since our inception, we have successfully concluded and integrated five
acquisitions. These include our Road Champs, Remco, Child Guidance, Berk and
Flying Colors products. We will continue focusing our acquisition strategy on
businesses or brands which offer valuable trademarks or brands and have
compatible product lines.
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- ACQUIRE ADDITIONAL CHARACTER AND PRODUCT LICENSES
We have acquired the rights to use many familiar corporate, trade and brand
names and logos from third parties that we use with our primary trademarks and
brands. Currently, we have license agreements with World Wrestling Federation
Entertainment, Nickelodeon, Disney, Mattel, Caterpillar, Peterson Publishing Co.
and B.A.S.S. Masters, as well as with the licensors of the many popular licensed
children's characters previously mentioned. We intend to continue to pursue new
licenses from these entertainment and media companies and other licensors. We
also intend to continue to purchase additional inventions and product concepts
through our existing network of product developers.
- EXPAND INTERNATIONAL SALES
We believe that foreign markets, especially Europe, Canada and Latin
America, offer us the opportunity for growth. We intend to expand our
international sales by capitalizing on our experience and our relationships with
foreign distributors and retailers.
- CAPITALIZE ON OUR OPERATING EFFICIENCIES
We believe that our current infrastructure and low-overhead operating
methods can accommodate significant growth without a proportionate increase in
our operating and administrative expenses, thereby increasing our operating
margins.
PRODUCTS
WORLD WRESTLING FEDERATION ACTION FIGURES AND ACCESSORIES
We have an extensive toy license with World Wrestling Federation
Entertainment pursuant to which we have the exclusive right, until December 31,
2009, to develop and market a full line of toy products based on the popular
World Wrestling Federation professional wrestlers in the United States, Canada,
Europe (excluding Great Britain), Australia and Africa. These wrestlers perform
throughout the year at live events that attract large crowds, many of which are
broadcast on free and cable television, including pay-per-view specials. We
launched this product line in 1996 with various series of six-inch articulated
action figures that have movable body parts and feature real-life action sounds
from our patented bone-crunching mechanism that allows the figures' "bones" to
crack when they are bent. The six-inch figures currently make up a substantial
portion of the overall World Wrestling Federation line, which has since grown to
include many other new products. Our strategy has been to release new figures
and accessories frequently to keep the line fresh and to retain the interest of
the consumers.
Following the launch of the action figures, we marketed wrestling ring play
sets and microphones with action background sounds to enhance the play value of
the action figures. Since then, we have continually added new products,
including action figures of varying sizes, such as three-inch sets with
wrestling rings, amplifying microphones, seven-inch collector's editions, large
soft body figures and small bean-bag figures with electronic sound chips of the
popular wrestlers' catch phrases and in-ring banter. Building on the popularity
of World Wrestling Federation and its wrestlers, we have continued to develop
the line with exciting and innovative technological and functional concepts to
enhance the value of the line.
In 1999, we introduced a line of 12-inch interactive figures that has
created a new category of toys in the industry. The line was launched with a
figure based on the World Wrestling Federation World Champion, "Stone Cold Steve
Austin." The figures in the line are capable of accepting daily
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downloads of sound bites from a World Wrestling Federation web site, to which we
contribute content compatible with our toy products. We expect to add other
characters, beginning with another popular wrestler, "The Rock," in 2000.
Another technological innovation added in 1999 is the "Titan Tron," featuring
sensor-based technology that enables this play set to recognize the character of
specially-equipped wrestling figures in order to play the wrestler's unique
theme music and display his picture with flashing lights. In 2000, the
sensor-based technology will be added to other products based on real elements
of the live wrestling shows, like back stage, to further expand the play pattern
of wrestling. Other enhancements to the World Wrestling Federation product line
include a sweating functionality in the "Maximum Sweat" line of action figures
where the figures, when filled with water, "sweat" from the brow and chest,
adding more realism and play value to the line. In 2000, technology will again
be added to the figures giving them more realism with multiple sensored joints
that when moved activate sound chips containing real sound bites of the
wrestlers. The various World Wrestling Federation products retail from $5.99 to
$49.99.
FLYING COLORS ACTIVITY SETS, CLAY COMPOUND PLAYSETS AND LUNCH BOXES
Through our acquisition of Flying Colors Toys we entered into the toy
activity category with plastic molded activity cases containing a broad range of
activities, such as make and paint your own characters, jewelry making, art
studios, posters, puzzles and other projects. These sets include all of the
materials needed for each activity, including paints, markers, stampers and
crayons. The cases, with molded and painted likenesses of popular characters,
such as Barbie, Nickelodeon's Rugrats and Blue's Clues, Looney Tunes, Hello
Kitty and Scooby Doo, have immediate visual appeal. Using a related production
technology, our lunch boxes complement this line with similarly-styled molded
and painted likenesses featuring these and other popular characters. Other
products offered by Flying Colors include stationery, back-to-school pens,
pencils and notebooks, party favors and molding compounds.
Our molding compounds present a new area of emphasis for Flying Colors.
Launched under the Blue's Clues license, this line has expanded from play clay
in a bucket to an entire Blue's Clue play set featuring book molds, extrusion
and other devices. We are continuing to expand the compound area and expect to
introduce innovative compounds with and without licensed characters or marks.
WHEELS DIVISION PRODUCTS
- Road Champs die-cast collectible and toy vehicles
The Road Champs product line consists of highly-detailed, die-cast replicas
of new and classic cars, trucks, motorcycles, emergency vehicles and service
vehicles, primarily in 1/43 scale (including police cars, fire trucks and
ambulances), buses and aircraft (including propeller planes, jets and
helicopters). As a part of the Road Champs acquisition in February 1997, we
acquired the right to produce the Road Champs line of die-cast and collectible
vehicle replicas, including various well-known vehicles from Ford, Chevrolet and
Jeep, as well as the right to use familiar corporate names on the die-cast
vehicles, such as Pepsi and Hershey. Recently, we licensed the right to
reproduce vehicles featured on the covers of automotive magazines, such as Rod &
Custom and Car and Driver, and to market vehicles with the B.A.S.S. Masters logo
and replicas of the World Wrestling Federation Attitude Racing NHRA Team. We
believe that these licenses increase the perceived value of the products and
enhance their marketability. Under the terms of these licenses, which expire on
various dates through May 10, 2001 (many of which include automatic annual
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extensions without affirmative action taken by either party), we pay the
licensor a royalty based on our sales of each product bearing such licensed
name. While we are not required to pay any royalty on some of the products, the
royalties on a majority of the products range from 1% to 9% of sales. The Road
Champs products are produced by unaffiliated foreign manufacturers. These
products are sold individually, retailing from $2.99 to $7.99 each, and in play
sets which retail from $9.99 to $24.99 each.
We have divided the markets of this product line into adult collectible and
children's toy segments, recognizing the specific needs of these different
consumers. Each collector product features a collector case in which to store
and display the vehicle and a certificate of authenticity. We produce a limited
number, generally not more than 10,000, of each distinctive product to enhance
its collectibility. This line presently has numerous themes, including
Anniversary Collection, Police, Then & Now, World War II Fighter Planes and
Classics Scenes, with die-cast scenic accessories, such as 1950's soda machines
or gas pumps. The toy segment is marketed by focusing on size and value with its
slogan "Crankin' It Up." Our die-cast vehicles are 1/43 scale, which are larger
than most other competing die-cast vehicles. The size appeals to collectors,
since it enables us to show greater detail on the vehicles, and to children and
their parents, who perceive a greater value in the larger size. The toys are
packaged on two-pack blister cards, further highlighting the value. In addition,
series were created to encourage children to collect our vehicles. Our toy
vehicle line has been expanded to include 1/64th scale cars featuring new
functionality that allows the consumer to adjust the vehicle's suspension for
different terrain. Initially, the cars will include new sports cars such as the
2000 Corvette, Ford GT 90 and Porsche 959.
- BXS die-cast collectible and toy bicycles
In 1999, we introduced a new line of die cast bicycles called BXS. These
BMX-style bicycles feature removable and interchangeable parts for complete
customization by users as well as working cranks. To enhance collectibility, we
created a patent-pending trickstick in several different styles which allow the
user to perform signature moves like professional cyclists and navigate stairs,
half-pipes, ramps and other street gear. Certain elements of the playsets will
contain pressure points that will activate sound chips containing real BXS bike
event sounds, such as crowd cheers, music riffs and announcers. We have licensed
the Schwinn, GT and Haro brand names, as well as the names of some of the top
riders, such as Dave Mirra and Ryan Nyquist, for use in connection with this
product line. In 2000, we will be adding fully-articulated action figures of
these and other free-style riders that will ride their signature edition bikes.
Bicycles are sold individually and in sets that include the street gear
accessories.
- Remco toy vehicles and role play
Our Remco toy line includes toy vehicles, role play and other toys. Our toy
vehicle line is comprised of a large assortment of rugged die-cast and plastic
vehicles. Marketed under a sub-brand called Tuff Ones, our toy vehicles range in
size from 4 3/4" to big-wheeled 17" vehicles. We have revitalized them
considerably by creating new packaging, redecorating the vehicles and adding
highly-recognized licensed names, such as NASA, Pennzoil, U-Haul and Castrol,
among others. The breadth of the line is extensive, with themes ranging from
emergency, fire, farm and construction, to racing and jungle adventure. In late
1999, we will be expanding our Remco vehicle line by adding an innovative line
of trucks called Talkin' Tuff Guys, which allows children to bring construction
vehicles to life with the real sounds of construction.
We offer a variety of branded and non-branded role play sets in this new
category under the Remco name. Themes include Caterpillar construction, B.A.S.S.
Masters fishing, police, fire and
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NASA. Role play sets retail from $6.99 to $12.99 each. Additionally,
capitalizing on the popularity of World Wrestling Federation, we will be
introducing a World Wrestling Federation role play product which will give
children the opportunity to dress like and imagine being their favorite
wrestling superstars.
We market Remco "Fight Back Action Fishing Poles" under the B.A.S.S.
Masters license for fun with simulated fishing action. These fishing poles
retail for $12.99.
CHILD GUIDANCE
- Infant and pre-school toys
We acquired the Child Guidance trade name in 1997 to accelerate our entry
into the infant/ pre-school toy category. This category has been recently
dominated by higher-priced licensed products, which creates an opportunity for
us to sell our lower price, high value line of pre-school toys. Our line of
pre-school electronic toys features products that enhance sensory stimulation
and learning through play, while offering value to the trade as well as to the
consumer. Our products are designed for children ages two and under. We have
combined the fun of music, lights, motion and sound with the early introduction
of numbers, letters, shape and color recognition, all at a value price. The line
consists of more than 50 products that are marketed in continually updated "try
me" interactive packaging that allows the consumers to sample the product prior
to purchase. We support the products with extensive advertising in popular
magazines and other publications, focusing on parenting, women's and family
publications, including Good Housekeeping. These products carry the Good
Housekeeping Seal of Approval(R). Our current products include the Wiggle Waggle
Caterpillar and Musical Pony pull-along toys, which were introduced in 1998.
Other 1998 noteworthy products include Musical Magnets, which were recognized as
one of the top toys of the year by Sesame Street Parent Magazine. In 1999, we
have extended the Wiggle Waggle line to include the Wiggle Waggle Duck, which
features spinning action. We have added approximately 30 other new products to
the line in 1999, including Talking Phonics Blocks and Talking Sentence Magnets.
We have recently expanded the distribution of the Child Guidance products to
include more upscale and specialty retailers. Child Guidance products are priced
at retail from $2.99 to $14.99.
In addition to creating products internally, we often acquire products and
concepts from numerous toy inventors with whom we have ongoing relationships.
License agreements for products and concepts call for royalties ranging from 1%
to 6% of net sales, and some may require minimum guarantees and advances. Both
development of internally-created items and acquiring items are ongoing efforts.
In either case, it may take as long as nine months for an item to reach the
market. As part of an effort to keep the product line fresh and to extend the
life of the item, we create new packaging, change sound chips and change product
colors from time to time.
- Foam puzzle mats and playsets
The acquisition of Berk added the foam toy category to our business. We
incorporated this new toy category into our Child Guidance product line, based
on the demographics and target market for foam toy products. This new line
further expands the breadth of our Child Guidance brand. The foam toy products
include puzzle mats featuring licensed characters, such as Winnie the Pooh,
Blue's Clues, Barney, Teletubbies and Sesame Street, among others, as well as
letters of the alphabet and numbers. The inter-locking puzzle pieces can also be
used to build houses and other
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play areas. Other products include foam puzzles of the United States, foam
vehicles and outdoor foam products. In 1999, we introduced three-dimension,
mechanism and sound elements to this line.
FASHION AND MINI DOLLS AND RELATED ACCESSORIES
We produce various proprietary fashion dolls and accessories for children
between the ages of three and 10. The product lines include: (1) 11 1/2 inch
fashion dolls customized with high-fashion designs that correspond with
particular holidays, events or themes, such as Christmas, birthdays, Fairytale,
Victorian Romance and Gibson Girl Romance; and (2) 6 1/2 inch fashion dolls
based on children's classic fairy tales and holidays. In 2000, we intend to add
to our doll line by producing additional dolls based on the fashion magazine
Elle. These 15 1/2 inch dolls will feature contemporary fashions.
We have introduced two new line extensions for sale in 1999: (1) 15 1/2
inch fashion dolls that have movable body parts and intricate hairstyles and
that have themes such as Era of Elegance, Renaissance and Ballet; and (2) our
American Sisters baby dolls in paired 12 inch and 8 inch sizes with themes like
Off to School, Ballet Recital, Birthday Surprise and Tea Party Fun. These dolls
are priced at retail from $9.99 to $24.99.
Our in-house product developers originate the design and functionality of
most of our fashion dolls. In many cases, they work with retailers and
incorporate their input on doll characteristics, packaging and other design
elements to create exclusive product lines for them.
WORLD WRESTLING FEDERATION VIDEO GAMES
In June 1998, we formed a joint venture with THQ, a developer, publisher
and distributor of interactive entertainment software for the leading hardware
game platforms in the home video game market. The joint venture entered into a
license agreement with World Wrestling Federation Entertainment under which it
acquired the exclusive worldwide right to publish World Wrestling Federation
video games on all hardware platforms. The games will be designed, developed,
manufactured and marketed by the joint venture. We are entitled to receive a
guaranteed preferred return, based on sales of the video games, and THQ is
entitled to receive the balance of the profits. The term of the license
agreement expires on December 31, 2009, subject to a right of the joint venture
to renew the license for an additional five years under various conditions.
The joint venture will publish titles for the Sony PlayStation and Nintendo
64 consoles, hand-held Game Boy and personal computers (PCs). We expect the
joint venture will launch its first product, a video game for the Nintendo 64
platform, and, if possible, a product for GameBoy Color, in November 1999. It
will also publish titles for new hardware platforms when and as they are
introduced to the market and have established a sufficiently installed base to
support new software. These titles will be marketed to our existing customers as
well as to game, electronics and other specialty stores, such as Electronics
Boutique and Best Buy. The home video game software market consists both of (1)
cartridge-based and CD-ROM-based software for use solely on dedicated hardware
systems, such as Sony PlayStation and Nintendo 64, and (2) software distributed
on CD-ROMs for use on PCs. According to NPD Group, a leading independent toy
industry research firm, Nintendo 64 and Sony PlayStation accounted for a
substantial portion of the installed base of all hardware platforms and software
sales in 1998.
Under non-exclusive licenses with Sony, Nintendo and Sega, the joint
venture will arrange for the manufacture of the CD-ROMs and cartridges. No other
licenses are required for the
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manufacture of the PC titles. Profit margins for cartridge products can vary
based on the cost of the memory chip used for a particular title. As software
has grown more complex, the trend in the software industry has been to utilize
chips with greater capacity and thus greater cost. CD-ROMs have significantly
lower per unit manufacturing costs than cartridge-based products. However, these
savings may be offset by typically higher development costs for titles published
on CD-ROMs; these higher costs result from increasing and enhancing content to
take advantage of the greater storage capacity of CD-ROMs.
Wrestling video games have demonstrated consistent popularity, with two
wrestling-theme video games among the top 10 video games, in terms of unit sales
volumes, in 1998. Approximately 2.3 million units of these two games were sold
in 1998, at retail prices ranging from approximately $42 to $60. We believe that
the success of the World Wrestling Federation titles is dependent on the graphic
look and feel of the software, the depth and variation of game play and the
popularity of the World Wrestling Federation. We believe that as a franchise
property, the World Wrestling Federation titles will have brand recognition and
sustainable consumer appeal, which may allow the joint venture to use titles
over an extended period of time through the release of sequels and extensions
and to re-release such products at different price points in the future. Also,
as new hardware platforms are introduced, software for these platforms requires
new standards of design and technology to fully exploit these platforms'
capabilities and requires that software developers devote substantial resources
to product design and development.
The joint venture will use external software developers to conceptualize
and develop titles. We expect that, generally, these developers will receive
advances based on specific development milestones and royalties in excess of the
advances based on a fixed amount per unit sold or on a percentage, typically
ranging from 8% to 12%, of net sales. Upon completion of development, each title
will be extensively play-tested by us and THQ and sent to the manufacturer for
its review and approval.
SALES, MARKETING AND DISTRIBUTION
We sell all of our products through our own in-house sales staff and
independent sales representatives. Purchasers of our products include toy and
mass-market retail chain stores, department stores, toy specialty stores and
wholesalers. The Road Champs and Flying Colors product lines are also sold to
smaller hobby shops, specialty retailers and corporate accounts, among others.
Our five largest customers are Toys 'R Us, Wal-Mart, Kay Bee Toys, Kmart and
Target, which accounted for approximately 69.0% of our pro forma net sales in
1998 and 74.2% of our pro forma net sales in the first nine months of 1999.
Except for purchase orders relating to products on order, we do not have written
agreements with our customers. Instead, we generally sell products to our
customers pursuant to letters of credit or, in some cases, on open account with
payment terms typically varying from 30 to 90 days. From time to time, we allow
our customers credits against future purchases from us in order to facilitate
their retail markdown and sales of slow-moving inventory. We also sell through
e-commerce sites, including ToysRUs.com, Amazon.com and eToys.com.
We obtain, directly, or through our sales representatives, orders for our
products from our customers and arrange for the manufacture of these products as
discussed below. Cancellations are generally made in writing, and we take
appropriate steps to notify our manufacturers of these cancellations. Based upon
the sales of the Road Champs products in the past, we expect approximately half
of the Road Champs products to be sold domestically through a third-party
warehouse and fulfillment center in Seattle, Washington, where we store
inventory for sale.
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We maintain a full-time sales and marketing staff, many of whom make
on-site visits to customers for the purpose of soliciting orders for products.
We also retain a number of independent sales representatives to sell and promote
our products, both domestically and internationally. Together with retailers, we
sometimes test the consumer acceptance of new products in selected markets
before committing resources to large-scale production.
We advertise our products in trade and consumer magazines and other
publications, market our products at major and regional toy trade shows,
conventions and exhibitions and carry on cooperative advertising with toy
retailers and other customers. We produce and broadcast television commercials
for our World Wrestling Federation action figure line. We may also advertise
some of our other products on television, if we expect that the resulting
increase in our net sales will justify the relatively high cost of television
advertising.
Outside of the United States, we currently sell our products primarily in
Canada, Great Britain, Latin America, Australia, Japan and South Africa. Sales
of our products abroad accounted for approximately 5.8% of our pro forma net
sales in 1998 and 6.7% of our pro forma sales in the first nine months of 1999.
We believe that foreign markets present an attractive opportunity, and we plan
to intensify our marketing efforts and expand our distribution channels abroad.
PRODUCT DEVELOPMENT
Each of our product lines has an in-house manager responsible for product
development, including identifying and evaluating inventor products and concepts
and other opportunities to enhance or expand existing product lines or to enter
new product categories. In addition, we create proprietary products, the
principal source of products for our fashion doll line, and products to more
fully exploit our concept and character licenses. While we do have the
capability to create and develop products from inception to production, we
generally use third parties to provide a substantial portion of the sculpting,
sample making, illustration and package design required for our products in
order to accommodate our increasing product innovations and introductions.
Typically, the development process takes from three to nine months to culminate
in production of the products for shipment to our customers.
We employ a staff of approximately 20 designers for our Flying Colors
product lines. We generally acquire our other product concepts from unaffiliated
third parties. If we accept and develop a third party's concept for new toys, we
generally pay a royalty on the toys developed from this concept that are sold,
and may, on an individual basis, guarantee a minimum royalty. Royalties payable
to developers generally range from 1% to 6% of the wholesale sales price for
each unit of a product sold by us. We believe that utilizing experienced
third-party inventors gives us access to a wide range of development talent. We
currently work with numerous toy inventors and designers for the development of
new products and the enhancement of existing products. We believe that toy
inventors and designers have come to appreciate our practice of acting quickly
and decisively to acquire and market licensed products. In addition, we believe
that our experience in the toy industry, our flexibility and our recent success
in developing and marketing products make us more attractive to toy inventors
and developers than some of our competitors.
Safety testing of our products is done at the manufacturers' facilities by
an engineer employed by us or independent third-party contractors engaged by us,
and is designed to meet safety regulations imposed by federal and state
governmental authorities. We also monitor quality assurance procedures for our
products for safety purposes.
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MANUFACTURING AND SUPPLIES
Our products are currently produced by manufacturers which we choose on the
basis of quality, reliability and price. Consistent with industry practice, the
use of third-party manufacturers enables us to avoid incurring fixed
manufacturing costs. All of the manufacturing services performed overseas for us
are paid for either by letter of credit or on open account with the
manufacturers. To date, we have not experienced any material delays in the
delivery of our products; however, delivery schedules are subject to various
factors beyond our control, and any delays in the future could adversely affect
our sales. Currently, we have ongoing relationships with approximately 20
manufacturers. We believe that alternative sources of supply are available,
although we cannot assure you that adequate supplies of manufactured products
can be obtained.
Although we do not conduct the day-to-day manufacturing of our products, we
participate in the design of the product prototype and production tooling and
molds for our products and we seek to ensure quality control by actively
reviewing the production process and testing the products produced by our
manufacturers. We employ quality control inspectors who rotate among our
manufacturers' factories to monitor production.
The principal raw materials used in the production and sale of our toy
products are zinc alloy, plastics, plush, printed fabrics, paper products and
electronic components, all of which are currently available at reasonable prices
from a variety of sources. Although we do not manufacture our products, we own
the molds and tooling used in the manufacturing process, and these are
transferable among manufacturers if we choose to employ alternative
manufacturers.
TRADEMARKS AND COPYRIGHTS
Most of our products are produced and sold under trademarks owned by or
licensed to us. We typically register our properties, and seek protection under
the trademark, copyright and patent laws of the United States and other
countries where our products are produced or sold. These intellectual property
rights can be significant assets. Accordingly, while we believe we are
sufficiently protected, the loss of some of these rights could have an adverse
effect on our business, financial condition and results of operations.
COMPETITION
Competition in the toy industry is intense. Many of our competitors have
greater financial resources, stronger name recognition and larger sales,
marketing and product development departments and benefit from greater economies
of scale. These factors, among others, may enable our competitors to market
their products at lower prices or on terms more advantageous to customers than
those we could offer for our competitive products. Competition often extends to
the procurement of entertainment and product licenses, as well as to the
marketing and distribution of products and the obtaining of adequate shelf
space. Competition may result in price reductions, reduced gross margins and
loss of market share, any of which could have a material adverse effect on our
business, financial condition and results of operations. In each of our product
lines we compete against one or both of the toy industry's two dominant
companies, Mattel and Hasbro. In addition, we compete, in our action figures
line, with the Toy-Biz division of Marvel Enterprises in our Flying Colors
product categories, with Rose Art, Hasbro (Play-doh), Binney & Smith (Crayola)
and, in our toy vehicle lines, with Racing Champions. We also compete with
numerous smaller domestic and foreign toy manufacturers, importers and marketers
in each of our product categories. We expect that the joint venture's principal
competition in the video game market will be
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Electronic Arts, which will produce video games based on World Championship
Wrestling characters, and Acclaim Entertainment.
SEASONALITY AND BACKLOG
Sales of toy products are seasonal. In 1998, approximately 74.1% our pro
forma net sales were made in the third and fourth quarters. Generally, the first
quarter is the period of lowest shipments and sales in our business and the toy
industry generally and therefore the least profitable due to various fixed
costs. Seasonality factors may cause our operating results to fluctuate
significantly from quarter to quarter. Due to these fluctuations, our results of
operations for any quarter may vary significantly. Our results of operations may
also fluctuate as a result of factors such as the timing of new products (and
expenses incurred in connection therewith) introduced by us or our competitors,
the advertising activities of our competitors, delivery schedules set by our
customers and the emergence of new market entrants. We believe, however, that
the low retail price product lines that we sell may be less subject to seasonal
fluctuations than higher priced toy products.
We ship products in accordance with delivery schedules specified by our
customers, which usually request delivery of their products within three to six
months of the date of their orders. Because customer orders may be canceled at
any time without penalty, our backlog may not accurately indicate sales for any
future period.
GOVERNMENT AND INDUSTRY REGULATION
Our products are subject to the provisions of the Consumer Product Safety
Act (the CPSA), the Federal Hazardous Substances Act (the FHSA), the Flammable
Fabrics Act (the FFA) and the regulations promulgated thereunder. The CPSA and
the FHSA enable the Consumer Product Safety Commission to exclude from the
market consumer products that fail to comply with applicable product safety
regulations or otherwise create a substantial risk of injury, and articles that
contain excessive amounts of a banned hazardous substance. The FFA enables the
Consumer Products Safety Commission to regulate and enforce flammability
standards for fabrics used in consumer products. The Consumer Products Safety
Commission may also require the repurchase by the manufacturer of articles which
are banned. Similar laws exist in some states and cities and in various
international markets. We maintain a quality control program designed to ensure
compliance with all applicable laws. In addition, many of our Child Guidance
products are sold under the Good Housekeeping Seal of Approval(R). To qualify
for this designation, our products are tested by Good Housekeeping to ensure
compliance with its product safety and quality standards.
EMPLOYEES
As of November 1, 1999, we employed 128 persons, including three executive
officers. Ninety-three of our employees were located in the United States as of
such date, while the remaining 35 were located in Hong Kong. We believe that we
have good relationships with our employees. None of our employees is represented
by a union.
PROPERTIES
Our principal executive offices occupy approximately 9,000 square feet of
space in Malibu, California under a lease expiring on August 31, 2002. We lease
office space of approximately 7,500 square feet in Dexter, Michigan where the
operations of Flying Colors Toys are headquartered. We lease showroom and office
space of approximately 6,000 square feet at the International Toy Center
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in New York City. We also have leased office and showroom space of approximately
5,000 square feet in Hong Kong from which we oversee our China-based third-party
manufacturing operations and 15,000 square feet in Ontario, California, and we
have a smaller leased site in Dallas, Texas. We believe that our facilities in
the United States and Hong Kong are adequate for our reasonably foreseeable
future needs.
ENVIRONMENTAL ISSUES
We are subject to legal and financial obligations under environmental,
health and safety laws in the United States and in other jurisdictions where we
operate. We are not currently aware of any material environmental liabilities
associated with any of our operations. We do not believe that any environmental
obligations will have a material adverse effect on our business, financial
condition or results of operations.
LEGAL PROCEEDINGS; INSURANCE
We are not a party to, nor is our property the subject of, any pending
legal proceeding, other than routine litigation that is incidental to our
business. We maintain comprehensive liability insurance with total coverage of
$12.0 million to reduce our exposure from product liability, consumer protection
and other claims or legal proceedings.
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<PAGE> 44
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers, key employees and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
<S> <C> <C>
Jack Friedman...................... 60 Chairman and Chief Executive
Officer
Stephen G. Berman.................. 35 Chief Operating Officer, President,
Secretary and Director
Joel M. Bennett.................... 38 Chief Financial Officer and
Assistant Secretary
Michael L. Bianco.................. 42 Senior Vice President--Sales and
Development--Flying Colors
Maureen E. Kassel.................. 36 Senior Vice President--Sales and
Marketing
Bruce H. Katz...................... 44 Vice President--Sales--Key Accounts
Elisabeth Krisel................... 47 Senior Vice President--Product
Development--Pre-school
Gina M. Lannen..................... 29 Vice President--Product
Development--Boys Toys
John J. McGrath.................... 34 Vice President--Specialty Sales and
e-commerce
Wills Hon Yen Ming................. 49 Managing Director--Hong Kong
Joshua H. Pokempner................ 49 Senior Vice
President--Development--
Flying Colors
Gary R. Swisher.................... 34 Vice President--Product
Development--Road Champs
Jamie A. Wood...................... 35 Senior Vice President--Road Champs
Robert E. Glick.................... 54 Director
Michael G. Miller.................. 52 Director
Murray L. Skala.................... 52 Director
</TABLE>
JACK FRIEDMAN has been our Chairman and Chief Executive Officer since
co-founding JAKKS with Mr. Berman in January 1995. Until December 31, 1998, he
was also our President. From January 1989 until January 1995, Mr. Friedman was
Chief Executive Officer, President and a director of THQ. From 1970 to 1989, Mr.
Friedman was President and Chief Operating Officer of LJN Toys, Ltd., a toy and
software company. After LJN was acquired by MCA/Universal, Inc. in 1986, Mr.
Friedman continued as President until his departure in late 1988.
STEPHEN G. BERMAN has been our Chief Operating Officer and Secretary and
one of our directors since co-founding JAKKS with Mr. Friedman in January 1995.
Since January 1, 1999, he has also served as our President. From our inception
until December 31, 1998, Mr. Berman was also our Executive Vice President. From
October 1991 to August 1995, Mr. Berman was a Vice President and Managing
Director of THQ International, Inc., a subsidiary of THQ. 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 us in September 1995 as Chief Financial Officer.
From August 1993 to September 1995, he served in several financial management
capacities at Time Warner
42
<PAGE> 45
Entertainment Company, L.P., including as Controller of Warner Brothers Consumer
Products Worldwide Merchandising and Interactive Entertainment. From June 1991
to August 1993, Mr. Bennett was Vice President and Chief Financial Officer of
TTI Technologies, Inc., a direct-mail computer hardware and software
distribution company. From 1986 to June 1991, Mr. Bennett held various financial
management positions at The Walt Disney Company, including Senior Manager of
Finance for its international television syndication and production division.
Mr. Bennett holds a Master of Business Administration degree and is a Certified
Public Accountant.
MICHAEL L. BIANCO joined us in October 1999 as Senior Vice President--Sales
and Development for our Flying Colors product lines. Prior to this, he had
served as president of Flying Colors Toys since March 1997. From January 1994 to
September 1996, he was an Executive Vice President of RoseArt Industries, which
produces and markets activity sets. From November 1976 to October 1994, he
served in various merchandising capacities at Kay Bee Toys, most recently as
Vice President.
MAUREEN E. KASSEL has been our Senior Vice President--Sales and Marketing
since July 1997 and before that was our Vice President--Marketing and Retail
from the time she joined JAKKS in July 1996. Currently, she is primarily
responsible for sales and marketing of our World Wrestling Federation, Child
Guidance and fashion doll lines.
BRUCE H. KATZ has been our Vice President--Sales--Key Accounts since July
1995. His account responsibilities currently include Toys 'R Us, Kay Bee Toys,
Ames and various other major retail accounts. From May 1982 to June 1995, he was
the President of JPI Toys, a toy manufacturer and parent company of Justin
Products Limited, which we acquired as of July 1995.
ELISABETH KRISEL joined us in December 1997 as Senior Vice
President--Product Development--Pre-school to manage our then recently acquired
Child Guidance brand, and she remains responsible for all aspects of product
development for our pre-school product lines. From April 1987 to April 1997, she
was director of product design for the infant and toddler product lines at
Fisher Price Toys.
GINA M. LANNEN has served as our Vice President--Product Development--Boys
Toys since January 1996. As such, she is responsible for product development and
package design for our World Wrestling Federation product lines. From August
1995 to January 1996, she held various administrative and marketing positions
with us. From May 1995 to August 1995, she served in an administrative capacity
at the international division of THQ.
JOHN J. MCGRATH has been our Vice President--Specialty Sales and e-commerce
since June 1999. From January 1999 to June 1999, he served as our Vice President
of Product Development for our Road Champs and Remco product lines. From August
1992 to February 1999, he served in various marketing capacities at the
international and Hot Wheels divisions of Mattel.
WILLS HON YEN MING has served as our Managing Director--Hong Kong since
July 1995. As such, he oversees all aspects of our Hong Kong and China based
operations. From April 1993 to June 1995, he served as general manager of Justin
Products Limited, which we acquired as of July 1995. Prior to this, he was a
merchandising department manager of Li and Fung, a trading company, and product
integrity manager at Arco Toys, a division of Mattel.
JOSHUA H. POKEMPNER joined us in October 1999 as our Senior Vice
President--Development for our recently acquired Flying Colors product lines. In
June 1984, he founded Flying Colors Toys
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<PAGE> 46
and, until joining us, was Vice President of that company, where he was
responsible for licensing, product design and new business opportunities.
GARY R. SWISHER joined us in June 1999 as Vice President--Product
Development for our Road Champs and Remco product lines, where he is responsible
for product development and package design. From June 1983 to June 1999, he
worked in the Hot Wheels design group at Mattel, where he was the Director of
Design from January 1995 to June 1999.
JAMIE A. WOOD joined us in March 1998 as Senior Vice President--Road
Champs, with principal responsibility for product development, marketing and
sales. Before that, she worked as an engineer from March 1992 until June 1994
and then, until March 1998, was in the marketing group as Director of World Wide
Marketing for the Hot Wheels product line at Mattel. From June 1990 until March
1992, she was a senior engineer at Northrop Electronics.
ROBERT E. GLICK has been one of our directors since October 1996. For more
than 20 years, Mr. Glick has been an officer, director and principal stockholder
in a number of privately-held companies which manufacture and market women's
apparel.
MICHAEL G. MILLER has been one of our directors since February 1996. From
1979 until May 1998, Mr. Miller was President and a director of several
privately-held affiliated companies, including a list brokerage and list
management consulting firm, a database management consulting firm, and a direct
mail graphic and creative design firm. Mr. Miller's interests in such companies
were sold in May 1998. Since 1991, he has been President of an advertising
company.
MURRAY L. SKALA has been one of our directors since October 1995. Since
1976, Mr. Skala has been a partner of the law firm Feder, Kaszovitz, Isaacson,
Weber, Skala & Bass LLP, our general counsel. Mr. Skala is a director of Quintel
Entertainment, Inc., a publicly-held company in the business of
telecommunications services and entertainment. Mr. Skala has also served as a
director of other public companies, including THQ from January 1991 to January
1997, Katz Digital Technologies, Inc., a digital prepress and printing company,
from December 1995 to December 1998, and Grand Toys International, Inc. from
1993 to 1994.
All directors hold office until the next annual meeting of stockholders and
until their successors are elected and qualified. Directors currently receive no
cash compensation for serving on the Board, but are reimbursed for reasonable
expenses incurred in attending meetings. Directors who are not employees are
entitled to receive options to purchase shares of our common stock upon their
initial 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.
COMMITTEES OF THE BOARD OF DIRECTORS
We have 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 primary functions of the Audit Committee are to
recommend the appointment of our independent certified public accountants and to
review the scope and effect of such audits. Messrs. Glick, Miller 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 our
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<PAGE> 47
Third Amended and Restated 1995 Stock Option Plan (the 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 Option
Plan. Messrs. Glick and Miller, both of whom are non-employee directors, are the
current members of the Stock Option Committee.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of November , 1999
with respect to the beneficial ownership of our common stock by (1) each of our
directors, (2) each of our named executive officers, (3) all our directors and
executive officers as a group and (4) each person known by us to own
beneficially more than 5% of the outstanding shares of our common stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED SHARES OWNED
PRIOR TO THIS OFFERING OFFERED AFTER THIS OFFERING
----------------------- --------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Jack Friedman(1)(2).............. 1,112,865(3) 6.8% 250,000 862,865(3) 4.7%
Stephen G. Berman(1)(2).......... 195,770(4) 1.2 100,000 95,770(5) *
Joel M. Bennett(1)............... 35,813(6) * 0 35,813(6) *
Robert E. Glick.................. 109,913(7) * 45,000 64,913(8) *
Michael G. Miller................ 99,413(9) * 45,000 54,413(9) *
Murray L. Skala.................. 247,044(10) 1.5 60,000 187,044(11) 1.0
All directors and executive officers
as a group (6 persons)......... 1,700,510(12) 10.1 500,000 1,200,510(13) 6.3
</TABLE>
- -------------------------
* Less than 1% of our outstanding shares.
(1) The address of Mr. Friedman, Mr. Berman and Mr. Bennett is 22761 Pacific
Coast Highway, Malibu, California 90265.
(2) If the underwriters' over-allotment option is exercised in full, Mr.
Friedman will sell 310,000 shares and will beneficially own 802,865 shares
(4.3% of the outstanding shares) after this offering and Mr. Berman will
sell 115,000 shares and will beneficially own 80,770 shares (0.4% of the
outstanding shares) after this offering.
(3) Includes 100,308 shares held in trusts for the benefit of children of Mr.
Friedman. Also includes 187,500 shares which Mr. Friedman may purchase upon
the exercise of certain currently exercisable stock options. Does not
include 450,000 shares which Mr. Friedman may purchase upon the exercise of
certain options that are not currently exercisable.
(4) Includes 187,500 shares which Mr. Berman may purchase upon the exercise of
certain currently exercisable stock options.
(5) Represents shares which Mr. Berman may purchase upon the exercise of
certain currently exercisable options. Does not include 612,000 shares
which Mr. Berman may purchase upon the exercise of certain options that are
not currently exercisable.
(6) Includes 34,313 shares which Mr. Bennett may purchase upon the exercise of
certain currently exercisable stock options.
(7) Includes 99,413 shares which Mr. Glick may purchase upon the exercise of
certain currently exercisable stock options.
(8) Represents shares which Mr. Glick may purchase upon the exercise of certain
currently exercisable options.
(9) Represents shares which Mr. Miller may purchase upon the exercise of
certain currently exercisable stock options.
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<PAGE> 48
(10) Includes 107,550 shares which Mr. Skala may purchase upon the exercise of
certain currently exercisable stock options and 100,308 shares held by Mr.
Skala as trustee under trusts for the benefit of children of Mr. Friedman.
(11) Includes 86,736 shares which Mr. Skala may purchase upon the exercise of
certain currently exercisable options and 100,308 shares held by Mr. Skala
as trustee under trusts for the benefit of children of Mr. Friedman.
(12) Includes 100,308 shares held in trusts for the benefit of children of Mr.
Friedman and an aggregate of 715,689 shares which the directors and
executive officers may purchase upon the exercise of certain currently
exercisable stock options.
(13) Includes 100,308 shares held in trusts for the benefit of children of Mr.
Friedman and an aggregate of 523,645 shares which the directors and
executive officers may purchase upon the exercise of certain stock options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
One of our directors, Murray L. Skala, is a partner in the law firm of
Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP, which has performed, and is
expected to continue to perform, legal services for us. Mr. Skala is one of the
selling stockholders in this offering.
DESCRIPTION OF SECURITIES
GENERAL
We are currently authorized to issue 25,000,000 shares of common stock, par
value $.001 per share, and 1,000,000 shares of preferred stock, par value $.001
per share. As of November 1, 1999, 16,204,181 shares of our common stock were
outstanding, and none of our preferred stock was outstanding. After we issue an
additional 2,200,000 shares in this offering and 192,044 shares upon the
exercise of options held by certain selling shareholders, 18,596,225 shares will
be outstanding.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share on all
matters submitted to a vote of our stockholders, including the election of
directors. Our certificate of incorporation does not provide for cumulative
voting. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so. Holders of common stock will be
entitled to receive ratably dividends, if any, declared from time to time by our
Board of Directors, and will be entitled to receive ratably all of our assets
available for distribution to them upon liquidation. Holders of common stock
have no preemptive, subscription or redemption rights. All the currently
outstanding shares of our common stock are, and all shares of our common stock
offered by us hereby, upon issuance and sale, will be, fully paid and
nonassessable.
PREFERRED STOCK
Our certificate of incorporation currently provides that we are authorized
to issue up to 1,000,000 shares of "blank check" preferred stock. Without any
further approval by our stockholders, our Board of Directors may designate and
authorize the issuance, upon the terms and conditions it may determine, of one
or more classes or series of preferred stock with prescribed preferential
dividend and liquidation rights, voting, conversion, redemption and other
rights. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could, among
other things, adversely affect the voting power of the
46
<PAGE> 49
holders of the common stock. Under certain circumstances, the issuance of
preferred stock could also make it more difficult for a third party to gain
control of JAKKS, discourage bids for our common stock at a premium or otherwise
adversely affect the market price of our common stock.
WARRANTS
In connection with our initial public offering in May 1996, we issued to
the representatives of the underwriters warrants to purchase, until May 1, 2001,
an aggregate of 225,000 shares of our common stock, of which warrants to
purchase 9,612 shares at a current exercise price of $5.625 per share remain
outstanding as of November 1, 1999.
For its assistance in connection with our sale of the convertible
debentures in January 1997, we issued to an investment banking firm a warrant to
purchase, until January 8, 2002, an aggregate of 225,000 shares of our common
stock, of which warrants to purchase 96,020 shares at a current exercise price
of $4.50 per share remain outstanding as of November 1, 1999.
In connection with the formation of our joint venture, we issued to World
Wrestling Federation Entertainment and a related party warrants to purchase, at
any time during a 10 year period, up to an aggregate of 187,500 shares of our
common stock. These warrants have an exercise price of $6.67 per share. We also
agreed to grant the holders of these warrants certain registration rights under
the Securities Act.
TRANSFER AGENT
The transfer agent for our common stock is U.S. Stock Transfer Corporation,
Glendale, California.
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<PAGE> 50
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 1999, the underwriters named below, which are
represented by Donaldson, Lufkin & Jenrette Securities Corporation, Advest,
Inc., Morgan Keegan & Company, Inc. and DLJdirect, Inc., have severally agreed
to purchase from us and the selling stockholders the respective number of shares
of our common stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Advest, Inc.................................................
Morgan Keegan & Company, Inc................................
DLJdirect, Inc..............................................
---------
Total............................................... 2,700,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
included in this offering are subject to approval of legal matters by their
counsel and to customary conditions, including the effectiveness of the
registration statement, the continuing correctness of our representations and
those of the selling stockholders, the receipt of a comfort letter from our
accountants, the listing of the shares for quotation on the Nasdaq National
Market and no occurrence of an event that would have a material adverse effect
on JAKKS. The underwriters are obligated to purchase and accept delivery of all
the shares of our common stock included in this offering, other than those
covered by the over-allotment option described below, if they purchase any of
the shares of common stock.
The underwriters propose initially to offer some of the shares of our
common stock included in this offering directly to the public at the public
offering price set forth on the cover page of this prospectus and some of these
shares to dealers (including the underwriters) at the public offering price less
a concession not in excess of $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ on sales to
other dealers. After the initial offering of these shares to the public, the
representatives of the underwriters may change the public offering price and
such concessions. The underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority. An electronic
prospectus is available on the web site maintained by DLJdirect Inc.
JAKKS and the selling stockholders have granted to the underwriters an
option, exercisable for 30 days from the date of the underwriting agreement, to
purchase up to an aggregate of 405,000 additional shares of our common stock at
the public offering price less the underwriting fees. The underwriters may
exercise this option solely to cover over-allotments, if any, made in connection
with this offering. To the extent that the underwriters exercise this option,
each underwriter will become obligated, subject to the same types of conditions
as apply to the underwriters' initial purchase commitment, to purchase a number
of additional shares approximately proportionate to such underwriter's initial
purchase commitment. If the underwriters purchase any of these additional
shares, they will sell these shares on the same terms as those on which the
shares initially purchased by them are sold.
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us and the selling stockholders in connection with
this offering. These amounts are
48
<PAGE> 51
shown assuming alternatively no exercise and full exercise of the underwriters'
over-allotment option.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
<S> <C> <C>
JAKKS:
Per share................................. $ $
Total..................................... $ $
Selling Stockholders:
Per share................................. $ $
Total..................................... $ $
</TABLE>
We expect that total expenses to be incurred in connection with this
offering (excluding the underwriting discounts and commissions) will be
approximately $ . We are obligated to pay all of these expenses,
including those incurred by or for the benefit of the selling stockholders, none
of whom is obligated to pay any of these expenses.
We, the selling stockholders and the underwriters have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act.
JAKKS, each of the selling stockholders and our executive officers and
directors have agreed that, for a period of 180 days from the date of this
prospectus, they will not, subject to certain exceptions, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation, do
either of the following:
- directly or indirectly, offer, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, pledge or otherwise transfer or
dispose of any shares of our common stock or any securities convertible
into or exercisable or exchangeable for our common stock; or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any of our
common stock.
Either of the foregoing transfer restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or other securities, in cash or otherwise. In addition, during the lockup period
and subject to certain exceptions, we have agreed not to file any registration
statement with respect to, and each of our executive officers and directors and
the selling stockholders has agreed not to make any demand for, or exercise any
right with respect to, the registration of any shares of our common stock or any
securities convertible into or exercisable or exchangeable for our common stock
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
Other than in the United States, no action has been taken by the selling
stockholders, the underwriters or us that would permit a public offering of the
shares of common stock included in this offering in any jurisdiction where
action for that purpose is required. The shares of common stock included in this
offering may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisement in connection with
the offer and sale of any shares of common stock be distributed or published in
any jurisdiction, except under circumstances that will result in compliance with
the applicable rules and regulations of such jurisdiction. Persons who receive
this prospectus are advised to inform themselves about and to observe any
restrictions relating to this offering of the common stock and the distribution
of this prospectus. This prospectus is not an offer to sell or a solicitation of
an offer to buy any shares of
49
<PAGE> 52
common stock included in this offering in any jurisdiction in which that would
not be permitted or legal.
In connection with this offering, any of the underwriters may engage in
transactions on the Nasdaq National Market that stabilize, maintain or otherwise
affect the price of our common stock. Specifically, the underwriters may
over-allot this offering, creating a syndicate short position. The underwriters
may bid for and purchase shares of our common stock in the open market to cover
this syndicate short position or to stabilize the price of our common stock. In
addition, the underwriting syndicate may reclaim selling concessions from
syndicate members and selected dealers if Donaldson, Lufkin & Jenrette
Securities Corporation repurchases previously distributed common stock in
syndicate covering transactions, in stabilization transactions or otherwise, or
if Donaldson, Lufkin & Jenrette Securities Corporation receives a report that
indicates that the clients of such syndicate members have "flipped" the common
stock. Also, in connection with this offering, certain underwriters and selling
group members (if any) who are qualified market makers on the Nasdaq National
Market may engage in passive market making transactions in our common stock on
the Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act. Passive market makers must comply with applicable volume and price
limitations and must be identified as such. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid for
such security; if all independent bids are lowered below the passive market
maker's bid, however, its bid must then be lowered when certain purchase limits
are exceeded. These activities may stabilize or maintain the market price of our
common stock at a level above that which might otherwise prevail in the open
market. The underwriters are not required to engage in these activities and may
end any of these activities at any time.
LEGAL MATTERS
The legality of the common stock offered hereby and certain other matters
are being passed upon for us by Feder, Kaszovitz, Isaacson, Weber, Skala & Bass
LLP, New York, New York. Murray L. Skala, a partner of that firm, is one of our
directors and holds of record 139,494 shares (of which 100,308 shares are held
in trust for the benefit of Mr. Friedman's children) and options to purchase
107,550 shares of our common stock, all of which are currently exercisable. Mr.
Skala is expected to sell 60,000 shares in this offering. Morgan, Lewis &
Bockius LLP, New York, New York will pass upon certain legal matters for the
underwriters in connection with this offering.
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus were audited by Pannell Kerr Forster, Certified Public
Accountants, A Professional Corporation, Los Angeles, California, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of that firm given upon their authority as experts in
accounting and auditing. The financial statements of the Flying Colors division
of Flying Colors Toys, Inc. as of May 31, 1998 and 1999 and for the three years
in the period ended May 31, 1999 were audited by Plante & Moran, LLP,
independent auditors, as stated in their report appearing herein and are
included in reliance upon the report of that firm given upon their authority as
experts in accounting and auditing.
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<PAGE> 53
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement we filed with the SEC.
We also file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room. Our SEC filings are also available to the public from the SEC's
Website at "http://www.sec.gov."
The SEC allows us, under certain circumstances, to "incorporate by
reference" the information we file with them, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus, and information that we file later with the SEC will automatically
update and supersede this information. We incorporate by reference the documents
listed below and any future filings we will make with the SEC under Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act (File No. 0-28104).
1. Our Annual Report on Form 10-KSB for our fiscal year ended
December 31, 1998;
2. Our Quarterly Reports on Form 10-Q for our fiscal quarters ended
March 31, 1999, June 30, 1999 and September 30, 1999;
3. Our Current Report on Form 8-K filed on October 19, 1999; and
4. The "Description of Registrant's Securities to be Registered"
contained in our Registration Statement on Form 8-A (File No. 0-28104),
filed March 29, 1996, and the "Description of Securities--Common Stock"
incorporated therein by reference to our Registration Statement on Form
SB-2 (Reg. No. 333-2048-LA).
You may request a copy of these filings, at no cost, by writing or
telephoning our Chief Financial Officer at the following address:
JAKKS Pacific, Inc.
22761 Pacific Coast Highway
Suite 226
Malibu, California 90265
(310) 456-7799
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<PAGE> 54
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
JAKKS PACIFIC, INC. AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Financial Statement Schedule: Schedule II--Valuation and
Qualifying Accounts....................................... F-21
JAKKS PACIFIC, INC. UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of September 30,
1999...................................................... F-22
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 1998 and 1999.................. F-23
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1999.................. F-24
Notes to Condensed Consolidated Financial Statements........ F-25
FLYING COLORS DIVISION OF FLYING COLORS TOYS, INC.
Independent Auditor's Report................................ F-28
Balance Sheet as of May 31, 1999 and 1998................... F-29
Statement of Operations for the years ended May 31, 1999,
1998 and 1997............................................. F-30
Statement of Changes in Stockholders' Equity for the years
ended May 31, 1999, 1998 and 1997......................... F-31
Statement of Cash Flows for the years ended May 31, 1999,
1998 and 1997............................................. F-32
Notes to Financial Statements............................... F-33
JAKKS PACIFIC, INC. UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Consolidated Financial
Statements................................................ F-41
Unaudited Pro Forma Consolidated Balance Sheet as of
September 30, 1999........................................ F-42
Unaudited Pro Forma Consolidated Statements of Operations
for the year ended December 31, 1998 and the nine months
ended September 30, 1998 and 1999......................... F-43
Notes to Unaudited Pro Forma Consolidated Financial
Statements................................................ F-45
</TABLE>
F-1
<PAGE> 55
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 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows and
the financial statement schedule listed in the accompanying index on page F-1
for each of the three years in the period ended December 31, 1998. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule 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 and schedule referred
to above present fairly, in all material respects, the financial position of
JAKKS Pacific, Inc. and Subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ PANNELL KERR FORSTER
--------------------------------------
PANNELL KERR FORSTER
Certified Public Accountants
A Professional Corporation
February 22, 1999,
except for note 18, for which
the date is March 1, 1999, and Note 1
(Stock split), for which the
date is November 4, 1999
F-2
<PAGE> 56
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 2,535,925 $12,452,201
Accounts receivable, net of allowance for uncollectible
accounts of $51,153 and $133,986 for 1997 and 1998,
respectively........................................... 8,735,528 11,926,725
Inventory, net of reserves of $129,695 and $464,133 for
1997 and 1998, respectively............................ 1,948,250 2,918,941
Deferred product development costs........................ 807,603 237,914
Prepaid expenses and other................................ 632,315 789,691
Advanced royalty payments................................. 252,603 307,542
Due from officers......................................... 15,112 --
----------- -----------
Total current assets.............................. 14,927,336 28,633,014
PROPERTY AND EQUIPMENT
Office furniture and equipment............................ 217,786 440,162
Molds and tooling......................................... 3,647,638 5,826,643
Leasehold improvements.................................... 90,432 195,909
----------- -----------
Total............................................. 3,955,856 6,462,714
Less accumulated depreciation and amortization............ 1,099,207 2,173,708
----------- -----------
Property and equipment, net....................... 2,856,649 4,289,006
Deferred offering and acquisition costs..................... 626,713 408,151
Intangibles and deposits, net............................... 318,511 489,936
Investment in joint venture................................. -- 1,044,708
Goodwill, net............................................... 10,695,488 10,322,896
Trademarks, net............................................. 14,180,118 13,548,054
----------- -----------
Total assets...................................... $43,604,815 $58,735,765
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 4,266,456 $ 3,705,116
Accrued expenses.......................................... 2,467,246 4,371,711
Reserve for sales returns and allowances.................. 1,860,821 5,341,517
Current portion of long-term debt......................... 2,361,076 60,000
Income taxes payable...................................... 603,614 1,418,763
----------- -----------
Total current liabilities......................... 11,559,213 14,897,107
Long-term debt, net of current portion...................... 6,000,000 5,940,000
Deferred income taxes....................................... 86,896 144,705
----------- -----------
Total liabilities................................. 17,646,109 20,981,812
----------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; 25,000,000 shares
authorized; issued and outstanding 7,413,141 and
9,039,063 shares, respectively......................... 7,413 9,039
Convertible preferred stock, $.001 par value; 5,000 shares
authorized; issued and outstanding 3,525 and 1,000
shares, respectively................................... 4 1
Additional paid-in capital................................ 21,690,590 27,041,523
Retained earnings......................................... 4,402,636 10,777,662
----------- -----------
26,100,643 37,828,225
Unearned compensation from grant of options............... 141,937 74,272
----------- -----------
Total stockholders' equity........................ 25,958,706 37,753,953
----------- -----------
Total liabilities and stockholders' equity........ $43,604,815 $58,735,765
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 57
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Net sales.................................. $12,052,016 $41,944,921 $85,252,563
Cost of sales.............................. 7,231,296 25,874,784 52,000,135
----------- ----------- -----------
Gross profit............................... 4,820,720 16,070,137 33,252,428
Selling, general and administrative
expenses................................. 3,611,471 11,895,260 24,006,497
----------- ----------- -----------
Income from operations..................... 1,209,249 4,174,877 9,245,931
Interest, net.............................. (133,795) 417,293 422,553
Other (income) expense..................... -- 328,139 590,948
----------- ----------- -----------
Income before provision for income taxes... 1,343,044 3,429,445 8,232,430
Provision for income taxes................. 163,275 642,949 1,857,404
----------- ----------- -----------
Net income................................. $ 1,179,769 $ 2,786,496 $ 6,375,026
=========== =========== ===========
Basic earnings per share................... $ 0.24 $ 0.40 $ 0.75
=========== =========== ===========
Diluted earnings per share................. $ 0.22 $ 0.35 $ 0.59
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 58
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
CONVERTIBLE PAR UNEARNED
COMMON PREFERRED VALUE ADDITIONAL COMPENSATION TOTAL
SHARES SHARES PER STOCK PAID-IN RETAINED FROM GRANT STOCKHOLDERS'
OUTSTANDING OUTSTANDING SHARE AMOUNT CAPITAL EARNINGS OF OPTIONS EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995.................... 3,000,000 -- $.001 $3,000 $ 1,623,238 $ 436,371 $(212,905) $ 1,849,704
Issuance of common stock
for cash.................. 2,253,000 -- .001 2,253 7,652,010 -- -- 7,654,263
Issuance of common stock
from bridge financing
conversion.............. 703,950 -- .001 704 1,044,075 -- -- 1,044,779
Issuance of common stock
in partial consideration
for purchase of toy
business assets......... 20,473 -- .001 20 (20) -- -- --
Earned compensation from
grant of options........ -- -- -- -- -- -- 17,742 17,742
Net income................ -- -- -- -- -- 1,179,769 -- 1,179,769
--------- ------ ----- ------ ----------- ----------- --------- -----------
Balance, December 31,
1996.................... 5,977,423 -- .001 5,977 10,319,303 1,616,140 (195,163) 11,746,257
Issuance of common stock
for cash................ 1,035,000 -- .001 1,035 2,920,718 -- -- 2,921,753
Exercise of options....... 103,688 -- .001 104 132,520 -- -- 132,624
Issuance of common stock
in partial consideration
for purchase of toy
business................ 297,030 -- .001 297 1,499,703 -- -- 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.................... 7,413,141 3,525 .001 7,417 21,690,590 4,402,636 (141,937) 25,958,706
Conversion of preferred
stock................... -- (3,525) .001 (4) 4 -- -- --
Issuance of common stock
from conversion of
preferred stock......... 1,409,997 -- .001 1,410 (1,410) -- -- --
Issuance of 7% convertible
preferred stock for
cash.................... -- 1,000 .001 1 4,731,151 -- -- 4,731,152
Exercise of options....... 215,925 -- .001 216 647,176 -- -- 647,392
Earned compensation from
grant of options........ -- -- -- -- -- -- 41,677 41,677
Cancellation of options,
unearned compensation... -- -- -- -- (25,988) -- 25,988 --
Net income................ -- -- -- -- -- 6,375,026 -- 6,375,026
--------- ------ ----- ------ ----------- ----------- --------- -----------
Balance, December 31,
1998.................... 9,039,063 1,000 $.001 $9,040 $27,041,523 $10,777,662 $ (74,272) $37,753,953
========= ====== ===== ====== =========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 59
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................... $1,179,769 $ 2,786,496 $ 6,375,026
---------- ------------ -----------
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization.................. 338,032 1,605,226 2,986,137
Earned compensation from stock option grants... 17,742 53,226 41,677
Loss on disposal of property and equipment..... -- 328,139 719,331
Changes in operating assets and liabilities
Accounts receivable.......................... (1,844,981) (6,315,058) (3,191,197)
Inventory.................................... (53,977) (1,808,145) (970,691)
Prepaid expenses and other................... (973,076) (450,545) 357,374
Accounts payable............................. 899,929 2,655,469 (561,340)
Accrued expenses............................. 27,049 2,262,159 1,904,465
Income taxes payable......................... 191,622 331,009 815,149
Reserve for sales returns and allowances..... (285,513) 1,685,621 3,480,696
Deferred income taxes........................ (40,186) 94,427 57,809
---------- ------------ -----------
Total adjustments......................... (1,723,359) 441,528 5,639,410
---------- ------------ -----------
Net cash provided (used) by operating
activities.............................. (543,590) 3,228,024 12,014,436
---------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Deferred offering and acquisition costs........... (85,300) -- --
Property and equipment............................ (1,058,654) (2,934,935) (3,875,852)
Due from officers................................. (120,030) 104,918 15,112
Other assets...................................... (49,129) (241,572) (197,928)
Trademarks........................................ -- (14,352,556) (12,252)
Investment in joint venture....................... -- -- (1,044,708)
Cash paid in excess of cost over toy business
assets acquired (goodwill)..................... -- (7,006,753) --
---------- ------------ -----------
Net cash used by investing activities..... (1,313,113) (24,430,898) (5,115,628)
---------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock................ 7,669,263 2,946,603 --
Proceeds from convertible preferred stock......... -- 6,818,350 4,731,152
Proceeds from debt................................ 1,104,694 13,413,659 --
Repayments of note payable to officer............. (382,816) -- --
Proceeds from stock options exercised............. -- 132,624 647,392
Repayments of debt................................ (260,930) (5,245,665) (2,361,076)
Deferred financing costs.......................... -- (682,032) --
---------- ------------ -----------
Net cash provided by financing
activities.............................. 8,130,211 17,383,539 3,017,468
---------- ------------ -----------
Net increase (decrease) in cash and cash
equivalents....................................... 6,273,508 (3,819,335) 9,916,276
Cash and cash equivalents, beginning of year........ 81,752 6,355,260 2,535,925
---------- ------------ -----------
Cash and cash equivalents, end of year.............. $6,355,260 $ 2,535,925 $12,452,201
========== ============ ===========
Cash paid during the period for:
Interest.......................................... $ 49,638 $ 648,187 $ 647,404
========== ============ ===========
Income taxes...................................... $ 11,839 $ 217,213 $ 1,042,255
========== ============ ===========
</TABLE>
See note 16 for additional supplemental information to consolidated
statements of cash flows.
See notes to consolidated financial statements.
F-6
<PAGE> 60
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1--PRINCIPAL INDUSTRY
JAKKS Pacific, Inc. (the Company), a Delaware corporation, is engaged in
the development, production 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 inter-company
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 is recognized upon the shipment of goods to customers. Provisions
for estimated defective products and markdowns are made at the time of sale.
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.
F-7
<PAGE> 61
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 offering
and certain acquisition costs were deferred. The deferred acquisition costs were
reclassified to investment costs upon completion of the acquisition of Road
Champs, Inc. The deferred offering costs related to the debentures are being
amortized over the term of the debentures, or will be written-off upon
conversion (note 8).
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 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................. 2 - 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, 1996, 1997
and 1998 was approximately $22,000, $1,304,000 and $3,903,000, 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 carry-forwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between
F-8
<PAGE> 62
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
the reported amounts of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
TRANSLATION OF FOREIGN CURRENCIES
Monetary assets and liabilities denominated in Hong Kong dollars are
translated into United States dollars at the rates of exchange ruling at the
balance sheet date. Transactions during the period are translated at the rates
ruling at the dates of the transactions.
Profits and losses resulting from the above translation policy are
recognized in the consolidated statement of operations.
GOODWILL AND OTHER INTANGIBLE ASSETS
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 1998 totaled $482,263 and $632,519, 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 other than goodwill consist of 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 1998 was $192,606 and
$1,177,306, respectively.
STOCK SPLIT
The Board of Directors approved a common stock dividend to effect a
three-for-two stock split of the Company's common stock. All common stock and
common stock equivalent shares and per share amounts have been adjusted
retroactively to give effect to the split.
EARNINGS PER SHARE (EPS)
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." 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 for entities with
complex capital structures and disclosures of the calculation of each EPS
amount.
F-9
<PAGE> 63
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
1996
------------------------------------
WEIGHTED
AVERAGE
INCOME SHARES PER SHARE
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders.......... $1,179,769 4,926,648 $0.24
=====
Effect of dilutive securities -- options and
warrants....................................... -- 329,002
---------- ---------
Diluted EPS
Income available to common stockholders plus
assumed exercises.............................. $1,179,769 5,255,650 $0.22
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------
WEIGHTED
AVERAGE
INCOME SHARES PER SHARE
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders.......... $2,786,496 6,932,053 $0.40
=====
Effect of dilutive securities
Options and warrants............................. -- 281,641
9% convertible debentures........................ 363,286 1,535,117
4% convertible preferred stock................... -- 263,856
---------- ---------
Diluted EPS
Income available to common stockholders plus
assumed exercises and conversions.............. $3,149,782 9,012,667 $0.35
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------
WEIGHTED
AVERAGE
INCOME SHARES PER SHARE
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders.......... $6,375,026 8,538,901 $0.75
=====
Effect of dilutive securities
Options and warrants............................. -- 326,847
9% convertible debentures........................ 372,732 1,565,219
4% convertible preferred stock................... -- 340,878
7% convertible preferred stock................... -- 630,792
---------- ---------
Diluted EPS
Income available to common stockholders plus
assumed exercises and conversions.............. $6,747,758 11,402,637 $0.59
========== ========= =====
</TABLE>
F-10
<PAGE> 64
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 3--ACQUISITIONS AND JOINT VENTURE
In February 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 (297,030 shares) of the Company's common stock. The
balance of the adjusted purchase price of $3,079,026 was paid in three equal
installments bearing interest at a rate of 7.0% per annum. As of December 31,
1998, all such payments were made in full. In addition, the payment for
inventory of $2,188,778, without interest, was made in 1997. Professional fees
totaling $236,707 were incurred as part of the acquisition costs. Outstanding
balances were secured by all acquired shares and assets, however, they were
subordinated to the convertible debentures due December 31, 2003 (note 8).
The assets acquired and liabilities assumed from RCI were as follows:
<TABLE>
<S> <C>
Inventory, net of reserve of $200,000.................. $ 1,956,358
Prepaid expenses....................................... 226,881
Property and equipment................................. 694,788
Deposits............................................... 105,461
Trademarks............................................. 1,000,000
Goodwill............................................... 8,506,753
Liabilities assumed.................................... (766,317)
-----------
Net assets acquired.................................... $11,723,924
===========
</TABLE>
In October 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
-----------
Total acquisition costs................................ $13,352,556
===========
</TABLE>
The total purchase price paid to the seller consisted of cash and a
promissory note totaling $11,800,000. The liabilities assumed included 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 the 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 commitment, manufacturing and supply agreement with seller
(note 12).
In June 1998, the Company formed a joint venture with a company that
develops, publishes and distributes interactive entertainment software for the
leading hardware game platforms in the home video game market. The joint venture
has entered into a license agreement under which it acquired the exclusive
worldwide right to publish video games on all hardware platforms. As of
F-11
<PAGE> 65
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
December 31, 1998, the Company has made initial contributions to the joint
venture of $1,044,708 (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.
The Company performs ongoing 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 1998 are its operating net assets, most of which are located in facilities
in Hong Kong and China and which totaled $8,948,131 and $8,627,240 for 1997 and
1998, respectively.
NOTE 5--DUE FROM OFFICERS
Due from officers represented a balance of $15,112 at December 31, 1997 due
from a Company officer. The $15,112, due on demand, was non-interest bearing and
was repaid in 1998.
NOTE 6--ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Bonuses.................................... $ 254,737 $ 841,000
Trademarks acquisition reserve............. 600,000 177,245
Interest expense........................... 37,607 --
Royalties and sales commissions............ 1,130,512 2,681,973
Hong Kong subsidiaries accruals............ 384,747 529,722
Other...................................... 59,643 141,771
---------- ----------
$2,467,246 $4,371,711
========== ==========
</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 and expenses to the law firm in the
amount of approximately $270,000 in 1996, $151,000 in 1997 and $510,000 in 1998.
Also see note 5 and note 18 for other related party transactions.
F-12
<PAGE> 66
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 8--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Convertible debentures, bearing 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
1,565,219 shares of the Company's common stock at $3.83
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 $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 Remco and Child
Guidance 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 the RCI assets...... 1,046,376 --
Line of credit facility (note 12).......................... 114,700 --
---------- ----------
8,361,076 6,000,000
Less current portion of long-term debt..................... 2,361,076 60,000
---------- ----------
Long-term debt, net of current portion..................... $6,000,000 $5,940,000
========== ==========
</TABLE>
NOTE 9--INCOME TAXES
The provision differs from the expense that would result from applying
Federal statutory rates to income before taxes because of the inclusion of a
provision for state income taxes and the income of the Company's foreign
subsidiaries is taxed at a rate of 16.5% applicable in Hong Kong. In addition,
the provision includes deferred income taxes resulting from adjustments in the
amount of temporary differences. Temporary differences arise primarily from
differences in timing in the deduction of state income taxes and the use of the
straight-line method of depreciation for financial reporting purposes and
accelerated methods of depreciation for tax purposes.
F-13
<PAGE> 67
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 are comprised of the following:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Federal.................................. $ -- $ -- $ 715,000
State and local.......................... 1,350 26,000 210,000
Hong Kong................................ 277,994 522,522 874,595
--------- -------- ----------
279,344 548,522 1,799,595
Deferred................................. (116,069) 94,427 57,809
--------- -------- ----------
$ 163,275 $642,949 $1,857,404
========= ======== ==========
</TABLE>
As of December 31, 1998, the Company has utilized all net operating loss
carry-forwards.
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Deferred tax assets resulting from deductible temporary
differences from loss carry-forwards, noncurrent..... $ 258,239 $ 493,134
Deferred tax liabilities resulting from taxable
temporary differences, noncurrent.................... (345,135) (637,839)
--------- ---------
$ (86,896) $(144,705)
========= =========
</TABLE>
The Company's management concluded that a deferred tax asset valuation
allowance as of December 31, 1997 and 1998 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>
1996 1997 1998
<S> <C> <C> <C>
Statutory income tax rate............................... 35% 35% 35%
State and local income taxes, net of Federal income tax
effect.................................................. 1 1 1
Effect of temporary differences and Hong Kong's lower
tax rate.............................................. -- -- (22)
Effect of net operating loss carry-forwards............. (40) (35) (11)
Income taxes on foreign earnings at rates other than the
United States Statutory rate not subject to United
States income taxes................................... 16 18 19
--- --- ---
12% 19% 22%
=== === ===
</TABLE>
The components of income before provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Domestic.............................. $ (360,040) $ 16,216 $3,681,456
Foreign............................... 1,703,084 3,413,229 4,550,974
---------- ---------- ----------
$1,343,044 $3,429,445 $8,232,430
========== ========== ==========
</TABLE>
F-14
<PAGE> 68
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 10--LEASES
The Company leases office and showroom facilities and certain equipment
under operating leases. The following is a schedule of minimum annual lease
payments. Rent expense for the years ended December 31, 1996, 1997 and 1998
totaled $182,690, $582,766 and $550,360, respectively.
<TABLE>
<S> <C>
1999............................ $ 549,360
2000............................ 423,940
2001............................ 324,852
2002............................ 223,632
2003............................ 23,032
----------
$1,544,816
==========
</TABLE>
NOTE 11--COMMON STOCK AND PREFERRED STOCK
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.
On April 1, 1998, the Company sold 1,000 shares of its Series A 7%
cumulative convertible preferred stock to two investors for $4,731,152, net of
issuance costs. The holders of the shares have the right, at their option, to
convert such shares into common stock of the Company at any time. The price at
which shares of common stock shall be delivered upon conversion shall initially
be $5.97 per share of common stock. The conversion price may be adjusted in
certain instances. Preferred stockholders are entitled to receive cumulative
cash dividends at an annual rate of $350 per share payable as and when declared
by the Company's Board of Directors.
During 1998, 215,925 shares of the Company's common stock were issued on
exercise of options for a total of $647,392.
During 1997, the Company issued 1,035,000 shares of its common stock in a
public offering and 198,020 shares as partial consideration for 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. In March 1998, all of the 3,525 shares of such issue were converted into
an aggregate of 1,409,997 shares of the Company's common stock based on a
conversion price of $5.00 per share.
NOTE 12--COMMITMENTS
The Company has 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 1% 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.
F-15
<PAGE> 69
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Future annual minimum royalty guarantees as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................... $ 1,752,833
2000........................... 1,653,583
2001........................... 1,551,750
2002........................... 1,475,000
2003........................... 1,380,000
Thereafter..................... 9,387,500
-----------
$17,200,666
===========
</TABLE>
The Company entered into a joint venture agreement (note 3) creating a new
limited liability company (LLC) in which the Company holds a 50% ownership
interest. On June 10, 1998, the LLC entered into a license agreement expiring
December 31, 2009, with an option for a five year automatic extension if the LLC
pays the licensor $27,000,000 in royalties during the initial ten year period of
the agreement. The license agreement includes guaranteed minimum royalty
payments of $18,000,000 payable over the ten year initial term and $7,500,000
payable over the five year renewal period, if applicable. The Company is
responsible for $7,500,000 of the $18,000,000 guaranteed royalty payments. The
guarantee payments include a $3,000,000 advance, paid within 15 days after the
agreements were executed, and ten minimum guaranteed installments of $1,500,000,
due each January 30, starting in 2000 and ending 2009. The Company was
responsible for funding $1,000,000 of the initial advance and is responsible for
funding $500,000 of the first four and $750,000 of the next six of ten yearly
installments. All unpaid guaranteed amounts for which the Company is responsible
as of December 31, 1998 are included in the totals of the "future annual minimum
royalty guarantees" table noted above. The $7,500,000 renewal guaranteed will be
payable in five yearly installments, of which the Company will be responsible
for funding 50% of each yearly payment.
The Company entered into a firm price 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 by the Company for a minimum
of $1,400,000. A minimum payment of $110,000 on the agreement was due on
December 31, 1997, with three additional payments of $110,000 and six payments
of $160,000 to follow thereafter, through March 31, 2000, which is also the date
on which the agreement terminates.
The Company and its subsidiaries are acting as joint and several guarantors
of 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 and 1998, there were unused
amounts available on the line of credit of $4,885,300 and $5,000,000 and
outstanding balances of $114,700 and $0, respectively. Outstanding balances
accrue interest at rates equal to the bank's base rate of interest plus 1% per
annum for advances of open accounts receivable, and the bank's base rate of
interest plus 1/2% for advances received under negotiation of export letters of
credit. At December 31, 1998, the credit facility carried interest at rates of
9.5% and 9%, respectively.
F-16
<PAGE> 70
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Outstanding balances are collateralized by all assets of the borrower and
accounts receivable and inventory of the guarantors. The credit facility expires
May 31, 1999, unless terminated sooner (note 8).
NOTE 13--STOCK OPTION PLAN
Under its Third Amended and Restated 1995 Stock Option Plan (the Plan), the
Company has reserved 1,875,000 shares of its common stock for issuance upon
exercise of options granted under the Plan. In 1998, stockholders approved an
increase of 750,000 shares in the number of shares available for grant. Under
the Plan, employees (including officers), non-employee 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 414,750 shares were granted at an
exercise price of $1.33 per share. The Company 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
$1.85 per share at the date of grant. Such compensation costs are recognized on
a straight-line basis over the vesting period of the options, which is 25% per
year commencing twelve months after the grant date of such options. In 1996,
1997 and 1998, 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%; dividend yield of 0%; and
expected lives of five years.
As of December 31, 1998, 462,000 shares were available for future grant.
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 Plan is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
<S> <C> <C>
Outstanding, December 31, 1995................. 16,275 $3.00
Granted........................................ 171,937 4.47
Exercised.................................... -- --
Canceled..................................... -- --
--------- -----
Outstanding, December 31, 1996................. 188,212 4.34
Granted...................................... 607,538 6.61
Exercised.................................... -- --
Canceled..................................... -- --
--------- -----
Outstanding, December 31, 1997................. 795,750 6.08
Granted...................................... 726,750 5.59
Exercised.................................... (47,700) 5.45
Canceled..................................... (109,500) 5.85
--------- -----
Outstanding, December 31, 1998................. 1,365,300 $5.86
========= =====
</TABLE>
F-17
<PAGE> 71
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Stock option activity outside of the Plan is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
<S> <C> <C>
Outstanding, December 31, 1995.................. 414,750 $1.33
Granted......................................... 112,500 5.03
Exercised..................................... -- --
Canceled...................................... -- --
-------- -----
Outstanding, December 31, 1996.................. 527,250 2.12
Granted....................................... 90,000 4.59
Exercised..................................... (103,688) 1.33
Canceled...................................... -- --
-------- -----
Outstanding, December 31, 1997.................. 513,562 2.71
Granted....................................... -- --
Exercised..................................... (151,350) 2.62
Canceled...................................... (50,625) 1.33
-------- -----
Outstanding, December 31, 1998.................. 311,587 $2.98
======== =====
</TABLE>
The weighted average fair value of options granted to employees in 1996,
1997 and 1998 was $1.53, $3.34 and $4.10 per share, respectively.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
<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>
$1.33 - $7.15............................ 1,676,887 5.7 years $5.33 651,600 $5.02
</TABLE>
In addition, as of December 31, 1998, 952,500 shares were reserved for
issuance upon exercise of warrants granted in connection with the Company's
initial public offering, follow-on public offering, private placement of
convertible debentures and certain license agreements, at exercise prices
ranging from $4.50 to $6.67 per share.
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
(EPS) for 1996, 1997 and 1998 would approximate the pro forma amounts below,
which are not indicative of future amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 1997 1998
----------------------- ----------------------- -----------------------
AS AS AS
REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
SFAS No. 123 charge, net of
tax.......................... $ -- $ 18,172 $ -- $ 132,895 $ -- $ 551,541
Net income..................... 1,179,769 1,161,597 2,786,496 2,653,601 6,375,026 5,823,485
Basic EPS...................... 0.24 0.24 0.40 0.38 0.75 0.68
Diluted EPS.................... $ 0.22 $ 0.22 $ 0.35 $ 0.33 $ 0.59 $ 0.55
</TABLE>
F-18
<PAGE> 72
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 then employed were eligible to
participate in the Plan as of the effective date. Otherwise, employees may 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 Plan each year. Participants 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 1998 was $10,000. Vesting in the Plan is based on years of service, as
follows:
<TABLE>
<CAPTION>
CUMULATIVE
YEARS OF SERVICE PERCENT VESTED
<S> <C>
1.............................. 20%
2.............................. 40
3.............................. 60
4.............................. 80
5.............................. 100
</TABLE>
Participants are immediately 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.
Upon termination, all amounts credited to participants accounts will become 100%
vested.
As of December 31, 1998, the Plan has not been "qualified" under the
provisions of the Internal Revenue Code, and for the year then ended, the
Company contributed $65,217 in matching contributions to the Plan.
NOTE 15--MAJOR CUSTOMERS AND INTERNATIONAL SALES
Net sales to major customers were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
- ----------------------- ------------------------ ------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
<S> <C> <C> <C> <C> <C>
$3,398,000 28.2% $14,689,000 35.0% $23,604,000 27.7%
1,679,000 13.9 3,422,000 8.2 11,103,000 13.0
1,008,000 8.4 3,199,000 7.6 10,944,000 12.8
847,000 7.0 2,658,000 6.3 9,951,000 11.7
509,000 4.2 1,925,000 4.6 3,717,000 4.4
- ---------- ---- ----------- ---- ----------- ----
$7,441,000.. 61.7% $25,893,000 61.7% $59,319,000 69.6%
========== ==== =========== ==== =========== ====
</TABLE>
F-19
<PAGE> 73
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Net sales to international customers totaled approximately $1,043,000,
$3,733,000 and $6,309,000 in 1996, 1997 and 1998, respectively.
NOTE 16--SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS
In March 1998, the 3,525 shares of 4% redeemable convertible preferred
stock with a total stockholders' equity value of $6,818,350 were converted into
an aggregate of 1,409,997 shares of the Company's common stock.
In 1997, 297,030 shares of common stock valued at $1,500,000 were issued in
connection with the acquisition of RCI (note 3).
In 1996, 703,950 shares of common stock were issued pursuant to the
conversion of bridge financing promissory notes which provided net proceeds of
$1,044,779.
NOTE 17--RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This new standard requires
that an enterprise classify items of other comprehensive income by their nature
in a financial statement; display the accumulated balances of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
statement is effective for fiscal years beginning after December 15, 1997. To
date, the Company has not had any transactions that are required to be reported
in other comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement requires public business
enterprises to report financial and descriptive information about reportable
segments. The statement also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
operates in one reportable segment: the development, production and marketing of
toy and related products.
NOTE 18--SUBSEQUENT EVENT
On March 1, 1999, the holders of the Company's 9% convertible debentures
have elected to convert an aggregate of $3,000,000 principal amount of the
debentures into 782,610 shares of the Company's common stock on May 25, 1999.
F-20
<PAGE> 74
JAKKS PACIFIC, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Allowances are deducted from the assets to which they apply, except for
sales returns and allowances.
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED TO CHARGED TO BALANCE
OF COSTS AND OTHER AT END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996:
Allowance for:
Uncollectible accounts... $ -- $ -- $ -- $ -- $ --
Reserve for potential
product
obsolescence.......... -- -- -- -- --
Reserve for sales returns
and allowances........ 460,513 253,568 -- 539,081 175,000
---------- ---------- ---------- ---------- ----------
$ 460,513 $ 253,568 $ -- $ 539,081 $ 175,000
========== ========== ========== ========== ==========
Year ended December 31,
1997:
Allowance for:
Uncollectible accounts... $ -- $ -- $ 51,153 $ -- $ 51,153
Reserve for potential
product
obsolescence.......... -- -- 200,000 70,305 129,695
Reserve for sales returns
and allowances........ 175,000 3,660,775 1,050,000 3,024,954 1,860,821
---------- ---------- ---------- ---------- ----------
$ 175,000 $3,660,775 $1,301,153 $3,095,259 $2,041,669
========== ========== ========== ========== ==========
Year ended December 31,
1998:
Allowance for:
Uncollectible accounts... $ 51,153 $ 82,833 $ -- $ -- $ 133,986
Reserve for potential
product
obsolescence.......... 129,695 334,438 -- -- 464,133
Reserve for sales returns
and allowances........ 1,860,821 6,525,867 -- 3,045,171 5,341,517
---------- ---------- ---------- ---------- ----------
$2,041,669 $6,943,138 $ -- $3,045,171 $5,939,636
========== ========== ========== ========== ==========
</TABLE>
F-21
<PAGE> 75
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 73,427,409
Accounts receivable, net.................................. 34,638,251
Inventory, net............................................ 9,437,805
Prepaid expenses and other current assets................. 1,584,854
------------
Total current assets............................. 119,088,319
------------
Property and equipment, at cost............................. 12,362,663
Less accumulated depreciation and amortization.............. 3,627,662
------------
Property and equipment, net...................... 8,735,001
------------
Goodwill, net............................................... 14,353,964
Trademarks, net............................................. 13,072,694
Investment in joint venture................................. 1,053,852
Other....................................................... 316,865
------------
Total assets..................................... $156,620,695
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 30,049,883
Reserve for sales returns and allowances.................. 12,063,447
Income taxes payable...................................... 3,227,346
------------
Total current liabilities........................ 45,340,676
------------
Deferred income taxes....................................... 323,787
------------
Total liabilities................................ 45,664,463
------------
Commitments
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 1,000,000 shares
authorized, no shares issued........................... --
Common stock, $.001 par value; 25,000,000 shares
authorized; 16,084,680 shares issued and outstanding... 16,085
Additional paid-in capital................................ 87,597,811
Retained earnings......................................... 23,342,336
------------
Total stockholders' equity....................... 110,956,232
------------
Total liabilities and stockholders' equity....... $156,620,695
============
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE> 76
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1999
<S> <C> <C>
Net sales................................................... $61,379,402 $121,176,908
Cost of sales............................................... 37,669,477 71,005,451
----------- ------------
Gross profit................................................ 23,709,925 50,171,457
Selling, general and administrative expenses................ 16,447,200 33,310,912
----------- ------------
Income from operations...................................... 7,262,725 16,860,545
Other (income) and expense:
Other expense............................................... 319,838 --
Interest income............................................. (98,917) (1,066,497)
Interest expense............................................ 467,638 170,820
----------- ------------
Income before provision for income taxes.................... 6,574,166 17,756,222
Provision for income taxes.................................. 1,720,069 4,754,048
----------- ------------
Net income.................................................. $ 4,854,097 $ 13,002,174
=========== ============
Net income per share--basic................................. $ 0.58 $ 0.98
=========== ============
Net income per share--diluted............................... $ 0.45 $ 0.86
=========== ============
</TABLE>
See notes to condensed consolidated financial statements.
F-23
<PAGE> 77
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 4,854,097 $ 13,002,174
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 2,643,930 2,363,609
Change in accounts receivable...................... (10,039,967) (22,711,526)
Change in inventory................................ (1,082,166) (6,518,864)
Change in accounts payable and accrued expenses.... 8,926,848 30,503,569
Net change in other operating assets and
liabilities..................................... (213,241) (70,625)
------------ ------------
Total adjustments............................ 235,404 3,566,163
------------ ------------
Net cash provided by operating activities.... 5,089,501 16,568,337
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment.................... (2,911,011) (5,899,949)
Investment in joint venture........................... (1,044,708) (9,144)
Acquisition cost of trademarks........................ (12,252) --
Cash paid in excess of fair value of toy business
assets acquired (goodwill)......................... -- (4,365,209)
(Increase) decrease in other assets................... (75,350) 173,071
------------ ------------
Net cash used by investing activities........ (4,043,321) (10,101,231)
------------ ------------
Cash flows from financing activities:
Repayment of bank debt................................ (114,700) --
Repayment of acquisition debt......................... (2,006,376) --
Proceeds from sale of common stock.................... -- 51,898,066
Proceeds from sale of convertible preferred stock..... 4,792,430 --
Dividends paid on convertible preferred stock......... -- (437,500)
Proceeds from warrants and stock options exercised.... 347,711 3,047,536
------------ ------------
Net cash provided by financing activities.... 3,019,065 54,508,102
------------ ------------
Net increase in cash and cash equivalents............... 4,065,245 60,975,208
Cash and cash equivalents, beginning of period.......... 2,535,925 12,452,201
------------ ------------
Cash and cash equivalents, end of period................ $ 6,601,170 $ 73,427,409
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes.......................................... $ 266,803 $ 2,945,465
============ ============
Interest.............................................. $ 505,245 $ 170,820
============ ============
</TABLE>
See note 4 for additional supplemental information to condensed consolidated
statements of cash flows.
See notes to condensed consolidated financial statements.
F-24
<PAGE> 78
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1--BASIS OF PRESENTATION
The accompanying 1998 and 1999 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, for the years ended December 31, 1996, 1997 and 1998 included
elsewhere in this prospectus.
The information provided in this prospectus 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). All common stock and common stock equivalent shares and per share
amounts have been adjusted retroactively to give effect to the three-for-two
stock split of the Company's common stock effected on November 4, 1999.
F-25
<PAGE> 79
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 2--EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." 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 for entities with
complex capital structures and disclosure of the calculation of each EPS amount.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
1998 1999
----------------------------------- -------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
<S> <C> <C> <C> <C> <C> <C>
Net income per share--basic
Net income........................... $4,854,097 $13,002,174
Preferred stock dividends............ -- (437,500)
---------- ---------- ----- ----------- ----------- -----
Net income available to common
stockholders....................... $4,854,097 8,392,957 $0.58 $12,564,674 12,843,090 $0.98
---------- ---------- ----- ----------- ----------- -----
Effect of dilutive securities
Options and warrants................. -- 401,865 -- 1,238,493
9% convertible debentures............ 279,549 1,565,217 116,867 624,360
4% convertible preferred stock....... -- 456,176 -- --
7% convertible preferred stock....... -- 560,712 437,500 542,842
---------- ---------- ----- ----------- ----------- -----
Net income per share--diluted
Income available to common
stockholders plus assumed exercises
and conversions.................... $5,133,646 11,376,927 $0.45 $13,119,041 15,248,785 $0.86
========== ========== ===== =========== =========== =====
</TABLE>
NOTE 3--PREFERRED STOCK AND COMMON STOCK
In May 1999, the Company issued and sold 3,999,844 shares of its common
stock in a public offering and received $51.9 million of net proceeds.
NOTE 4--SUPPLEMENTAL INFORMATION TO CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
In March 1998, all 3,525 outstanding shares of 4% redeemable convertible
preferred stock with a total stockholders' equity value of $6,818,350 were
converted into an aggregate of 1,409,997 shares of the Company's common stock.
In March and April 1999, the holders of $6.0 million principal amount of
the Company's 9% convertible debentures converted all such debentures into an
aggregate of 1,565,218 shares of the Company's common stock.
In June 1999, all 1,000 outstanding shares of 7% cumulative convertible
preferred stock with a total stockholders' equity value of $4,731,152 were
converted into an aggregate of 837,987 shares of the Company's common stock.
NOTE 5--ACQUISITION
In June 1999, the Company purchased all of the outstanding shares of Berk
Corporation, a producer of educational toy foam puzzle mats and activity sets,
for approximately $3.1 million in
F-26
<PAGE> 80
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
cash. In connection with this acquisition, the Company assumed liabilities of
approximately $300,000 and incurred acquisition costs of approximately $158,000.
NOTE 6--SUBSEQUENT EVENTS
On October 5, 1999, the Company acquired all of the outstanding capital
stock of Flying Colors Toys, Inc. (formerly Colorbok Paper Products, Inc.)
effective October 1, 1999 for an aggregate purchase price of $35.8 million, of
which $34.7 million was paid in cash on the closing of the transaction and $1.1
million is to be paid out of cash collections of the pre-closing accounts
receivable. In addition, the Company paid on the closing $17.6 million in
satisfaction of certain indebtedness of Flying Colors, assumed liabilities of
approximately $5.8 million and incurred estimated legal and other acquisition
costs of $0.5 million. The Company has also agreed to pay to the shareholders an
earn-out in an amount up to $4.5 million in each of the three 12-month periods
following the closing if Gross Profit (as defined) of Flying Colors branded
products achieves certain prescribed levels in each of such periods. Flying
Colors designs, produces and markets licensed activity kits, clay compound
playsets and lunch boxes and other related toy products.
F-27
<PAGE> 81
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Flying Colors Toys, Inc.
We have audited the accompanying balance sheet of the Flying Colors
division of Flying Colors Toys, Inc. as of May 31, 1999 and 1998 and the related
statements of operations, changes in stockholders' equity and cash flows for
each year in the three-year period ended May 31, 1999. 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 financial statements referred to above present fairly,
in all material respects, the financial position of the Flying Colors division
of Flying Colors Toys, Inc. as of May 31, 1999 and 1998 and the results of its
operations and its cash flows for each year in the three-year period ended May
31, 1999, in conformity with generally accepted accounting principles.
As disclosed in Note 1 to the financial statements, the Company changed its
method for accounting for certain film costs as of June 1, 1998.
October 25, 1999 /s/ Plante & Moran, LLP
F-28
<PAGE> 82
FLYING COLORS
BALANCE SHEET
<TABLE>
<CAPTION>
MAY 31
--------------------------
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................... $ -- $ 79,790
Accounts receivable -- Trade, less allowance for
doubtful accounts of $272,300 and $33,500 in 1999
and 1998, respectively.............................. 10,389,129 4,444,931
Deposits on inventory.................................. 316,362 230,827
Inventories (Note 3)................................... 12,682,189 3,704,387
Prepaid expenses and other current assets.............. 570,579 191,753
Refundable taxes....................................... -- 476,619
Deferred taxes (Note 7)................................ 343,000 34,000
Intercompany receivable (Note 1)....................... 6,482,035 3,632,180
----------- -----------
Total current assets.......................... 30,783,294 12,794,487
PROPERTY AND EQUIPMENT -- Net (Note 4)................... 2,095,258 583,063
----------- -----------
Total assets.................................. $32,878,552 $13,377,550
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of bank balance................ $ 785,110 $ --
Notes payable:
Line of credit (Note 5)............................. 18,365,000 8,455,000
Current portion of long-term debt (Note 5).......... 33,190 24,563
Trade accounts payable................................. 4,550,090 1,509,720
Accrued liabilities.................................... 1,677,915 634,366
----------- -----------
Total current liabilities..................... 25,411,305 10,623,649
LONG-TERM DEBT -- Less current portion (Note 5).......... 1,722,871 1,671,423
DEFERRED TAXES (Note 7).................................. 186,000 --
STOCKHOLDERS' EQUITY
Common stock -- $1 par value:
Authorized -- 50,000 shares issued and
outstanding -- 23,825 shares in 1999 and 1998.... 23,825 23,825
Additional paid-in capital............................. 608,636 608,636
Divisional retained earnings........................... 4,925,915 450,017
----------- -----------
Total stockholders' equity.................... 5,558,376 1,082,478
----------- -----------
Total liabilities and stockholders' equity.... $32,878,552 $13,377,550
=========== ===========
</TABLE>
See notes to financial statements.
F-29
<PAGE> 83
FLYING COLORS
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
---------------------------------------
1999 1998 1997
<S> <C> <C> <C>
NET SALES.................................... $54,537,614 $14,540,178 $ 996,480
COST OF SALES................................ 36,714,156 9,997,512 891,642
----------- ----------- ---------
GROSS PROFIT................................. 17,823,458 4,542,666 104,838
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 10,052,880 2,976,064 372,213
----------- ----------- ---------
OPERATING INCOME (LOSS)...................... 7,770,578 1,566,602 (267,375)
OTHER EXPENSES
Interest expense........................... (1,188,462) (486,680) (128,530)
Loss on sale of equipment.................. (15,218) -- --
----------- ----------- ---------
INCOME (LOSS) -- Before cumulative effect of
accounting change.......................... 6,566,898 1,079,922 (395,905)
FEDERAL INCOME TAX EXPENSE (BENEFIT) (Note
7)......................................... 2,219,000 367,000 (133,000)
----------- ----------- ---------
INCOME (LOSS) -- Before cumulative effect of
accounting change.......................... 4,347,898 712,922 (262,905)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE --
Net of income taxes of $66,000 (Note 2).... 128,000 -- --
----------- ----------- ---------
NET INCOME (LOSS)............................ $ 4,475,898 $ 712,922 $(262,905)
=========== =========== =========
</TABLE>
See notes to financial statements.
F-30
<PAGE> 84
FLYING COLORS
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DIVISIONAL
COMMON STOCK ADDITIONAL RETAINED EARNINGS TOTAL
----------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE -- June 1,
1996................. 20,609 $20,609 $458,931 $ -- $ 479,540
Net loss............... -- -- -- (262,905) (262,905)
------ ------- -------- ---------- ----------
BALANCE -- May 31,
1997................. 20,609 20,609 458,931 (262,905) 216,635
Issuance of stock...... 3,216 3,216 149,705 -- 152,921
Net income............. -- -- -- 712,922 712,922
------ ------- -------- ---------- ----------
BALANCE -- May 31,
1998................. 23,825 23,825 608,636 450,017 1,082,478
Net income............. -- -- -- 4,475,898 4,475,898
------ ------- -------- ---------- ----------
BALANCE -- May 31,
1999................. 23,825 $23,825 $608,636 $4,925,915 $5,558,376
====== ======= ======== ========== ==========
</TABLE>
See notes to financial statements.
F-31
<PAGE> 85
FLYING COLORS
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
-----------------------------------------
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................... $ 4,475,898 $ 712,922 $ (262,905)
Adjustments to reconcile net income (loss)
to net cash used in operating
activities:
Depreciation and amortization.......... 420,745 107,472 38,163
Bad debt expense....................... 219,025 55,040 5,352
Cumulative effect of accounting
change.............................. 194,000 -- --
Loss on sale of equipment.............. 15,218 -- --
Deferred tax expense (benefit)......... (123,000) 99,000 (133,000)
Changes in assets and liabilities:
Increase in accounts receivable..... (6,163,223) (3,888,729) (616,594)
(Increase) decrease in intercompany
receivable....................... (2,849,855) 868,313 (4,020,953)
Increase in inventories............. (8,977,802) (3,502,378) (200,009)
Increase in prepaid expenses,
deposits and other current
assets........................... (658,361) (410,023) (12,557)
(Increase) decrease in refundable
taxes............................ 476,619 (433,534) (45,085)
Increase in accounts payable and
accrued liabilities.............. 4,083,919 1,993,084 151,002
----------- ----------- -----------
Net cash used in operating
activities..................... (8,886,817) (4,398,833) (5,096,586)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and
equipment.............................. 95,000 -- --
Purchase of property and equipment........ (2,043,158) (602,365) (126,333)
----------- ----------- -----------
Net cash used in investing
activities..................... (1,948,158) (602,365) (126,333)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in checks issued in excess of
bank balance........................... 785,110 -- --
Proceeds from issuance of stock........... -- 152,921 --
Net proceeds on short-term debt........... 9,910,000 4,510,400 3,944,600
Proceeds from issuance of long-term
debt................................... 60,075 25,553 1,670,433
----------- ----------- -----------
Net cash provided by financing
activities..................... 10,755,185 4,688,874 5,615,033
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH............. (79,790) (312,324) 392,114
Cash -- Beginning of year................... 79,790 392,114 --
----------- ----------- -----------
Cash -- End of year......................... $ -- $ 79,790 $ 392,114
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-32
<PAGE> 86
FLYING COLORS
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999, 1998 AND 1997
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION
Flying Colors Toys, Inc. (the Company) was a privately held corporation,
formerly known as Colorbok Paper Products, Inc. (Colorbok), which consisted of
two operating divisions, Flying Colors and Specialty. The Flying Colors
division, which began operations in March 1997, designs and distributes
children's toys primarily to retailers throughout the United States and Canada.
The Specialty division designs and manufactures paper products.
In October 1999, the stockholders of the Company effected a sale of all of
its outstanding common stock to JAKKS Pacific, Inc. (JAKKS), a publicly held
corporation in exchange for cash (see Note 13). Immediately prior to the sale,
the net assets of the Specialty division were distributed to Colorbok LLC, which
is owned by the former stockholders of the Company.
BASIS OF PRESENTATION
These financial statements reflect the results of operations, financial
position, changes in stockholders' equity and cash flows of the Flying Colors
division (the Division) only for all periods presented. The assets, liabilities
and results of operations of the Specialty division have been excluded from this
presentation since the Specialty division was not acquired by JAKKS. The
financial statements have been prepared using the historical basis in the assets
and liabilities and historical results of operations that were either
specifically identified as Flying Colors or allocated to the Flying Colors
division on a basis using management's analysis and judgment. Management's
methods of allocation include allocating certain items on a percentage of sales
basis, pro rata allocations based on employee counts and usage factors and other
allocation methods management considers reasonable. Changes in stockholders'
equity represent the issuance of common stock and net income of the Division.
As part of the Division's cash management system, all cash generated from
and cash required to support the Specialty division were deposited to and paid
from the Division's operating cash accounts. Likewise, borrowings on the
Division's line of credit were used to support both divisions' operations.
Accordingly, the amounts represented by the caption "Intercompany Receivable" in
the Division's balance sheet represents the net effect of all cash transactions
between the Division and Specialty.
The periods presented include the allocation of certain expenses from the
Specialty division related principally to distribution, accounting, information
systems and human resource services as well as certain shared corporate costs
such as insurance and rent. These allocations took into consideration sales
volume, employee counts and other allocation methods. Management believes the
allocation of these expenses is reasonable. However, the costs of these services
are not necessarily indicative of the costs the Division would have incurred if
it contained only the Flying Colors operations or of the costs it may incur as a
subsidiary of JAKKs. Subsequent to the acquisition, these services will be
provided by Colorbok, LLC for an interim period (see Note 13), after which the
Division and JAKKS will perform these services using their own resources or
purchased services.
F-33
<PAGE> 87
FLYING COLORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999, 1998 AND 1997
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION (CONTINUED)
Interest expense shown in the financial statements relates primarily to
interest expense on the line of credit. Interest income reflects a charge to the
Specialty division for its share of borrowings on the line of credit and has
been netted against interest expense. Income tax expense has been presented as
if calculated on a separate return basis.
NOTE 2 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION -- The Division recognizes revenue as goods are shipped
to customers. The Division ships approximately 32 percent of its total sales
directly from its vendors to its customers. As notice is received from its
vendors that a shipment has taken place, the Division records the appropriate
sale and cost associated with the shipment.
ACCOUNTS RECEIVABLE -- The Division's accounts receivable are due primarily
from retailers located throughout the United States. As of May 31, 1999 and
1998, approximately 75 percent and 56 percent, respectively, of total accounts
receivable were due from four customers. During 1999, 1998 and 1997, sales to
these four customers accounted for approximately 72 percent, 54 percent and 80
percent, respectively, of total sales.
INVENTORIES -- Inventories are stated at the lower of cost, determined by
the first-in, first-out (FIFO) method, or market.
During 1999 and 1998, the Division acquired substantially all of its goods
from several suppliers in China. Although there are other suppliers of this
material, a change in suppliers could cause a delay in the production process.
As of May 31, 1999 and 1998, 24 percent of the Division's inventory was
held overseas with several vendors.
FILM ADVANCES -- Effective June 1, 1998, the Division changed its method of
accounting for the cost of special film that is used over extended production
periods, from charging the cost of special film to expense when incurred to
capitalizing and amortizing these costs over a 12-month period. The Division
believes the new method more closely approximates the useful life of the special
film and matches the cost with the revenue from the products. The cumulative
effect of the change as of June 1, 1999 of $128,000, net of income taxes of
$66,000, is reported as a one-time credit to income in 1999. As a result of this
change, income before taxes and the cumulative effect of the accounting change
for the year ended May 31, 1999 was increased by $65,000. If the new method had
been used in 1998, income before taxes would have been increased by
approximately $39,000.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost.
Depreciation is computed principally on the straight-line basis over the
estimated useful lives of the assets. Costs of maintenance and repairs are
charged to expense when incurred.
Property and equipment held outside of the United States was 88 percent and
66 percent for 1999 and 1998, respectively. There was no inventory held outside
of the United States in 1997.
F-34
<PAGE> 88
FLYING COLORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999, 1998 AND 1997
NOTE 2 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROFIT-SHARING PLAN -- Flying Colors Toys, Inc. has a profit-sharing plan
for the benefit of employees of the Company. The amount of the annual
contribution to this plan is determined by the Board of Directors. The
Division's contributions for 1999 and 1998 were $181,000 and $33,000,
respectively. No contribution was made for 1997.
INCOME TAXES -- A current tax liability or asset is recognized for the
estimated taxes payable or refundable on tax returns for the year. Deferred tax
liabilities or assets are recognized for the estimated future tax effects of
temporary differences between book and tax accounting.
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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 3 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Raw materials..................................... $ 1,910,773 $ 479,864
Finished goods.................................... 10,771,416 3,224,523
----------- ----------
Total........................................ $12,682,189 $3,704,387
=========== ==========
</TABLE>
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Machinery and equipment.............................. $2,412,721 $528,780
Office furniture and equipment....................... 315,122 266,123
---------- --------
Total cost...................................... 2,727,843 794,903
Less accumulated depreciation........................ 632,585 211,840
---------- --------
Net carrying amount............................. $2,095,258 $583,063
========== ========
</TABLE>
Depreciation and amortization expense for the three years ended May 31,
1999 totaled $420,745, $107,472 and $38,163, respectively.
NOTE 5 -- DEBT
LINE OF CREDIT -- The line of credit consists of borrowings under an
$18,500,000 line of credit, bearing interest at a rate between prime and .50
percent above the bank's prime rate, based on certain financial ratios, monthly
payments of interest only due through September 1999, balance
F-35
<PAGE> 89
FLYING COLORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999, 1998 AND 1997
NOTE 5 -- DEBT (CONTINUED)
due October 1999 and collateralized by all assets of the Division. At May 31,
1999, the bank's prime rate was 8 percent (effective rate 8.5 percent).
Subsequent to year end, the Division refinanced its line of credit. The new
line of credit allowed for borrowings of up to $25,000,000, bearing interest at
.25 percent below the bank's prime rate. Borrowings under this note were limited
to a percentage of eligible accounts receivable and inventory. In connection
with the sale of the Division's stock in September 1999, the line of credit was
paid in full.
The line of credit required the Company to meet certain financial ratios
and to maintain specific levels of tangible net worth.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Notes payable to related parties, which include a
stockholder's relative and a related company, bearing
interest at 12 percent under the terms of the note
agreement, due in monthly installments of interest only
during the term of the notes, with the principal due June
2000. The notes are unsecured and subordinated to the
$18,500,000 line of credit with the bank................. $ 800,000 $ 800,000
Note payable to a related company, bearing interest at 15.5
percent under the terms of the note agreement, monthly
payments of interest only during the life of the note with
the principal due June 2000. The note is unsecured and
subordinated to the $18,500,000 line of credit with the
bank....................................................... 626,725 626,725
Note payable to a stockholder, bearing interest at 12
percent under the terms of the note agreement, monthly
payments of interest only during the life of the note
with the principal due June 2000. The note is unsecured
and subordinated to the $18,500,000 line of credit with
the bank................................................. 190,000 190,000
Other...................................................... 15,406 24,663
Present value of net minimum lease payments relating to
capital lease obligations (Note 6)....................... 123,930 54,598
---------- ----------
Total........................................... 1,756,061 1,695,986
Less current portion............................ 33,190 24,563
---------- ----------
Long-term portion............................... $1,722,871 $1,671,423
========== ==========
</TABLE>
F-36
<PAGE> 90
FLYING COLORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999, 1998 AND 1997
NOTE 5 -- DEBT (CONTINUED)
Minimum principal payments on long-term debt to maturity as of May 31, 1999
are as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL LEASE
YEARS ENDING MAY 31 NOTES PAYABLE OBLIGATIONS TOTAL
<S> <C> <C> <C>
2000............................................. $ 4,030 $ 29,160 $ 33,190
2001........................................... 1,621,041 29,160 1,650,201
2002........................................... 4,625 29,160 33,785
2003........................................... 2,435 29,160 31,595
2004........................................... -- 7,290 7,290
---------- -------- ----------
Total....................................... $1,632,131 $123,930 $1,756,061
========== ======== ==========
</TABLE>
NOTE 6 -- CAPITAL LEASE OBLIGATIONS
The following is a schedule of future minimum lease payments under capital
leases by years ending May 31:
<TABLE>
<S> <C>
2000........................................................ $ 36,312
2001........................................................ 36,312
2002........................................................ 36,312
2003........................................................ 36,312
2004........................................................ 9,078
--------
Total minimum lease payments........................... 154,326
Less amount representing interest...................... 30,396
--------
Present value of net minimum lease payments............ $123,930
========
</TABLE>
The present value of net minimum lease payments is included with long-term
debt in Note 5.
NOTE 7 -- FEDERAL INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current expense................................ $2,408,000 $268,000 $ --
Deferred expense (benefit)..................... (123,000) 99,000 (133,000)
---------- -------- ---------
Total income tax expense (benefit)........ 2,285,000 367,000 (133,000)
Allocated to cumulative effect................. 66,000 -- --
---------- -------- ---------
Net income tax expense (benefit).......... $2,219,000 $367,000 $(133,000)
========== ======== =========
</TABLE>
F-37
<PAGE> 91
FLYING COLORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999, 1998 AND 1997
NOTE 7 -- FEDERAL INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes from continuing
operations to income taxes computed by applying the statutory United States
federal tax rate to income before taxes is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Tax computed at statutory rates.......... $2,276,265 $367,171 $(134,608)
Effect of nondeductible expenses......... 8,735 4,933 1,608
Adjustment of prior year estimates and
other.................................. -- (5,104) --
---------- -------- ---------
Total income taxes before cumulative
effect of accounting change...... $2,285,000 $367,000 $(133,000)
========== ======== =========
</TABLE>
The details of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Total deferred tax assets............................. $ 343,000 $ 64,000
Valuation allowance................................... -- --
Total deferred tax liabilities........................ (186,000) (30,000)
--------- --------
Net deferred tax asset........................... $ 157,000 $ 34,000
========= ========
</TABLE>
Deferred tax assets result from using the allowance method for recording
bad debt expense for financial reporting purposes and the direct write-off
method for tax purposes and certain expenses not deductible for tax purposes
until paid. Deferred tax liabilities result from accelerated depreciation
methods used for tax purposes.
NOTE 8 -- RELATED PARTY LEASE COMMITMENT
The Company leases certain real property from stockholders. The Company is
committed under an operating lease agreement on such real property that expires
in May 2001. Lease expense for the years ended May 31, 1999, 1998 and 1997
totaled approximately $671,000, $360,000 and $240,000, respectively, of which
$269,000, $180,000 and $72,000 was allocated to the Division, respectively. The
operating lease agreement was terminated upon the sale of the Company.
NOTE 9 -- COMPENSATION PLAN
For the year ended May 31, 1998, the Division had a compensation plan for
three officers/ stockholders of the Company. The plan included provisions for a
cash bonus and deferred compensation to be determined based on the Division's
pretax income each fiscal year. Based on the provisions of the plan, $590,000
was awarded in cash or deferred compensation for the year ended May 31, 1998, of
which $395,000 was allocated to Flying Colors. The plan was terminated effective
June 1998.
F-38
<PAGE> 92
FLYING COLORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999, 1998 AND 1997
NOTE 10 -- CONTINGENT LIABILITIES
The Division has entered into various licensing agreements that provide for
royalty payments based on sales. These agreements contain guaranteed minimum
royalties over the term of the agreements, which generally range from two to
five years. As of May 31, 1999, the amount of guaranteed royalties in excess of
royalties already paid or accrued is approximately $3,385,000, of which
approximately $2,240,000 is guaranteed to one licensor. Management believes that
these guaranteed royalties will be paid in the normal course of business, and
only royalties due on sales through May 31, 1999 have been accrued. No
additional accrued liability has been recorded for these guarantees.
NOTE 11 -- SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was approximately $1,100,000, $443,000 and $113,000
for 1999, 1998 and 1997, respectively.
Cash paid for income taxes was approximately $1,810,000, $695,000 and
$44,000 for 1999, 1998 and 1997, respectively.
NOTE 12 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
A summary of the fair values of financial instruments, as well as the
methods and significant assumptions used to estimate fair values, is as follows:
SHORT-TERM FINANCIAL INSTRUMENTS -- The fair values of short-term
financial instruments, including cash, trade accounts receivable and
payable, deposits on inventory, inventory, prepaid expenses, accrued and
other liabilities, approximate the carrying amounts in the accompanying
financial statements due to the short maturity of such instruments.
NOTES PAYABLE -- LINE OF CREDIT -- The fair value of variable rate
notes payable approximates the carrying amount since the current effective
rates reflect market rates.
NOTES PAYABLE TO RELATED PARTY -- The fair value of variable rate
notes payable to related parties approximates the carrying amount. The note
rates approximate the rates currently available to the Company for debt
with similar terms and maturities.
LONG-TERM DEBT -- The fair value of the Division's long-term debt
approximates the carrying amount since the debt rates approximate the rates
currently available to the Division for debt with similar terms and
maturities.
NOTE 13 -- SUBSEQUENT EVENTS
ACQUISITION OF THE COMPANY -- As discussed in Note 1, in October 1999, the
stockholders of the Company effected a sale of all of its outstanding common
stock to JAKKs Pacific, Inc., a publicly held corporation, in exchange for
approximately $36 million in cash. The acquisition agreement also provides for
earnout payments of up to $13.5 million over the next 36 months if the gross
profit of the Division's products achieves certain levels.
F-39
<PAGE> 93
FLYING COLORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999, 1998 AND 1997
NOTE 13 -- SUBSEQUENT EVENTS (CONTINUED)
TRANSITIONAL SERVICES AGREEMENT -- Colorbok, LLC has agreed with the
Division and JAKKs to provide certain distribution, customer service, accounting
and information system services for the Division for a period of time until the
Division and JAKKs begin performing those functions. The agreement requires a
monthly base fee of $310,000 plus a variable fee of 2.5 percent to 3 percent
monthly gross sales. The term of the agreement is month to month.
F-40
<PAGE> 94
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements as of
September 30, 1999 and for the nine months ended September 30, 1998 and 1999 and
for the year ended December 31, 1998 give effect to the acquisitions of Berk and
Flying Colors Toys. The pro forma consolidated balance sheet presents our
financial position as if the acquisition of Flying Colors Toys had occurred on
September 30, 1999. The pro forma consolidated statements of operations present
our results as if the acquisitions of Berk and Flying Colors Toys had occurred
on January 1 of each period presented. Our fiscal year end is December 31 and
Flying Colors Toys' fiscal year end is May 31. Our third quarter for our current
fiscal year ended September 30, 1999, while the first quarter of Flying Colors
Toys' fiscal year ended August 31, 1999. The pro forma consolidated balance
sheet as of September 30, 1999 is based upon our historical balance sheet as of
September 30, 1999 which has been adjusted for the effects of the Flying Colors
Toys acquisition. The pro forma consolidated statements of operations for the
nine months ended September 30, 1998 and 1999 are based upon our historical
results and the pro forma statements of operations for Flying Colors Toys for
the nine months ended September 30, 1998 and 1999 and the pro forma statements
of operations of Berk for the nine months ended September 30, 1998 and the six
months ended June 30, 1999. The pro forma consolidated statement of operations
for the year ended December 31, 1998 is based on our historical statement of
operations and the pro forma statements of operations of Berk and Flying Colors
Toys for the year ended December 31, 1998.
The pro forma consolidated financial statements include, in management's
opinion, all material adjustments necessary to reflect the acquisitions of Berk
and Flying Colors Toys. The pro forma consolidated financial statements do not
represent the Company's actual results of operations, including the
acquisitions, nor do they purport to predict or indicate our financial position
or results of operations at any future date or for any future period. The pro
forma consolidated financial statements should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and the related notes thereto
and Flying Colors Toys' financial statements and the related notes thereto
included elsewhere in this prospectus.
F-41
<PAGE> 95
JAKKS PACIFIC, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
JAKKS ADJUSTMENTS BALANCE SHEET
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................. $ 73,427,409 $(52,545,000)(1) $20,882,409
Accounts receivable, net.................. 34,638,251 12,964,000(2) 47,602,251
Inventory, net............................ 9,437,805 13,503,000(2) 22,940,805
Prepaid expenses and other current
assets................................. 1,584,854 1,234,000(2) 2,818,854
------------ ------------ ------------
Total current assets............. 119,088,319 (24,844,000) 94,244,319
------------ ------------ ------------
Property and equipment, at cost............. 12,362,663 1,951,000(2) 14,313,663
Less accumulated depreciation and
amortization.............................. 3,627,662 -- 3,627,662
------------ ------------ ------------
Property and equipment, net...... 8,735,001 1,951,000 10,686,001
------------ ------------ ------------
Goodwill, net............................... 14,353,964 30,701,000(3) 45,054,964
Trademarks, net............................. 13,072,694 -- 13,072,694
Investment in joint venture................. 1,053,852 -- 1,053,852
Other....................................... 316,865 -- 316,865
------------ ------------ ------------
Total assets..................... $156,620,695 $ 7,808,000 $164,428,695
============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..... $ 30,049,883 $ 6,746,000(4) $ 36,795,883
Reserve for sales returns and
allowances............................. 12,063,447 -- 12,063,447
Income taxes payable...................... 3,227,346 1,062,000(4) 4,289,346
------------ ------------ ------------
Total current liabilities........ 45,340,676 7,808,000 53,148,676
------------ ------------ ------------
Deferred income taxes....................... 323,787 -- 323,787
------------ ------------ ------------
Total liabilities................ 45,664,463 7,808,000 53,472,463
------------ ------------ ------------
Commitments
STOCKHOLDERS' EQUITY
Preferred stock........................... -- -- --
Common stock.............................. 16,085 -- 16,085
Additional paid-in capital................ 87,597,811 -- 87,597,811
Retained earnings......................... 23,342,336 -- 23,342,336
------------ ------------ ------------
Total stockholders' equity....... 110,956,232 -- 110,956,232
------------ ------------ ------------
Total liabilities and
stockholders' equity........... $156,620,695 $ 7,808,000 $164,428,695
============ ============ ============
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
F-42
<PAGE> 96
JAKKS PACIFIC, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACTUAL
------------------------------------------ PRO FORMA
JAKKS FLYING COLORS BERK COMBINED ADJUSTMENTS PRO FORMA
(AUDITED) (UNAUDITED) (UNAUDITED) RESULTS
<S> <C> <C> <C> <C> <C> <C>
Net sales....................... $ 85,252,563 $41,124,650 $ 9,053,515 $135,430,728 $ -- $135,430,728
Cost of sales................... 52,000,135 27,127,983 6,343,384 85,471,502 -- 85,471,502
------------ ----------- ----------- ------------ ----------- ------------
Gross profit.................... 33,252,428 13,996,667 2,710,131 49,959,226 -- 49,959,226
Selling, general and
administrative expenses....... 24,006,497 6,868,305 2,502,498 33,377,300 1,178,482(5) 34,555,782
------------ ----------- ----------- ------------ ----------- ------------
Income from operations.......... 9,245,931 7,128,362 207,633 16,581,926 (1,178,482) 15,403,444
Other (income) expense.......... 1,013,501 945,889 99,843 2,059,233 (1,045,732)(6) 1,013,501
------------ ----------- ----------- ------------ ----------- ------------
Income before provision for
income taxes.................. 8,232,430 6,182,473 107,790 14,522,693 (132,750) 14,389,943
Provision for income taxes...... 1,857,404 2,102,041 948 3,960,393 254,900(7) 4,215,293
------------ ----------- ----------- ------------ ----------- ------------
Net income...................... $ 6,375,026 $ 4,080,432 $ 106,842 $ 10,562,300 $ (387,650) $ 10,174,650
============ =========== =========== ============ =========== ============
Basic earnings per share........ $ 1.19
============
Weighted average shares
outstanding................... 8,538,901
============
Diluted earnings per share...... $ 0.93
============
Weighted average shares and
equivalents outstanding....... 11,402,637
============
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL
------------------------------------------ PRO FORMA PRO FORMA
JAKKS FLYING COLORS BERK COMBINED ADJUSTMENTS RESULTS
<S> <C> <C> <C> <C> <C> <C>
Net sales........................ $ 61,379,402 $26,068,001 $ 6,575,447 $ 94,022,850 $ -- $94,022,850
Cost of sales.................... 37,669,477 17,754,975 4,494,896 59,919,348 -- 59,919,348
------------ ----------- ----------- ------------ --------- -----------
Gross profit..................... 23,709,925 8,313,026 2,080,551 34,103,502 -- 34,103,502
Selling, general and
administrative expenses........ 16,447,200 5,083,260 1,903,895 23,434,355 880,704(5) 24,315,059
------------ ----------- ----------- ------------ --------- -----------
Income from operations........... 7,262,725 3,229,766 176,656 10,669,147 (880,704) 9,788,443
Other (income) expense........... 688,559 625,775 69,579 1,383,913 (695,354)(6) 688,559
------------ ----------- ----------- ------------ --------- -----------
Income before provision for
income taxes................... 6,574,166 2,603,991 107,077 9,285,234 (185,350) 9,099,884
Provision for income taxes....... 1,720,069 885,357 800 2,606,226 175,095(7) 2,781,321
------------ ----------- ----------- ------------ --------- -----------
Net income....................... $ 4,854,097 $ 1,718,634 $ 106,277 $ 6,679,008 $(360,446) $ 6,318,562
============ =========== =========== ============ ========= ===========
Basic earnings per share......... $ 0.75
===========
Weighted average shares
outstanding.................... 8,392,957
===========
Diluted earnings per share....... $ 0.58
===========
Weighted average shares and
equivalents outstanding........ 11,376,927
===========
</TABLE>
See notes to unaudited pro forma consolidated financial statements
F-43
<PAGE> 97
NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL
------------------------------------------ PRO FORMA PRO FORMA
JAKKS FLYING COLORS BERK COMBINED ADJUSTMENTS RESULTS
<S> <C> <C> <C> <C> <C> <C>
Net sales....................... $121,176,908 $34,493,256 $ 2,313,477 $157,983,641 $ -- $157,983,641
Cost of sales................... 71,005,451 23,670,150 1,859,065 96,534,666 -- 96,534,666
------------ ----------- ----------- ------------ ----------- ------------
Gross profit.................... 50,171,457 10,823,106 454,412 61,448,975 -- 61,448,975
Selling, general and
administrative expenses....... 33,310,912 7,027,457 1,689,950 42,028,319 911,751(5) 42,940,070
------------ ----------- ----------- ------------ ----------- ------------
Income (loss) from operations... 16,860,545 3,795,649 (1,235,538) 19,420,656 (911,751) 18,508,905
Other (income) expense.......... (895,677) 936,087 68,553 108,963 (1,004,640)(6) (895,677)
------------ ----------- ----------- ------------ ----------- ------------
Income (loss) before provision
for income taxes.............. 17,756,222 2,859,562 (1,304,091) 19,311,693 92,889 19,404,582
Provision for income taxes...... 4,754,048 972,251 950 5,727,249 (130,795)(7) 5,596,454
------------ ----------- ----------- ------------ ----------- ------------
Net income (loss)............... $ 13,002,174 $ 1,887,311 $(1,305,041) $ 13,584,444 $ 223,684 $ 13,808,128
============ =========== =========== ============ =========== ============
Basic earnings per share........ $ 1.04
============
Weighted average shares
outstanding................... 12,843,090
============
Diluted earnings per share...... $ 0.91
============
Weighted average shares and
equivalents outstanding....... 15,248,785
============
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
F-44
<PAGE> 98
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial statements have been
adjusted for the items relating to the acquisition of Flying Colors as set forth
below:
BALANCE SHEET
(1) Cash paid on or about the closing:
<TABLE>
<S> <C>
Cash paid to sellers................................... $34,725,685
Settlement of certain indebtedness..................... 17,624,315
License transfer fees paid............................. 150,000
Other acquisition costs................................ 45,000
-----------
$52,545,000
===========
</TABLE>
(2) Assets acquired
(3) Excess of consideration paid over fair market value of assets acquired
(includes $1,000,000 relating to an agreement by the sellers not to compete)
(4) Liabilities assumed
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PRO FORMA NINE MONTHS
PRO FORMA ENDED SEPTEMBER 30,
YEAR ENDED ----------------------
DECEMBER 31, 1998 1998 1999
<S> <C> <C> <C>
(5) Selling, general and administrative
expenses are adjusted to reflect:
Elimination of salaries and
benefits for certain executive
officers of Berk whose
employment terminated upon the
consummation of the
acquisition................... $ (299,392) $(227,701) $(152,778)
Fees payable pursuant to a
consulting agreement entered
into between a seller of Berk
and JAKKS..................... 30,000 22,500 15,000
Amortization of goodwill and
non-compete agreements for:
Berk.......................... 145,507 109,130 72,754
Flying Colors................. 1,302,367 976,775 976,775
---------- --------- ---------
1,178,482 880,704 911,751
(6) Other (income) expense is adjusted to
reflect the elimination of interest
expense related to borrowings made by
Berk and Flying Colors as if they had
been repaid on January 1, 1998 for:
Berk............................ (99,843) (69,579) (68,553)
Flying Colors................... (945,889) (625,775) (936,087)
(7) Provision for income taxes is adjusted
to reflect the tax effect of the pro
forma adjustments...................... 254,900 175,095 (130,795)
</TABLE>
F-45
<PAGE> 99
----------------------------------------------------------------------------
----------------------------------------------------------------------------
[JAKKS LOGO]
2,700,000 SHARES OF COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
DONALDSON, LUFKIN & JENRETTE
ADVEST, INC.
MORGAN KEEGAN & COMPANY, INC.
DLJDIRECT INC.
----------------------------------------------------------------------------
You should rely only on the information contained or incorporated in this
prospectus. We and the underwriters have not authorized anyone to provide you
with information different from that contained or incorporated in this
prospectus. We are offering to sell, and seeking offers to buy, shares of common
stock only in jurisdictions where offers and sales are permitted. You should not
infer from the delivery of this prospectus or the sale of any shares of our
common stock after the date of this prospectus that the information contained or
incorporated herein or the affairs of JAKKS have not changed since the date
hereof.
- --------------------------------------------------------------------------------
<PAGE> 100
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses in connection with
the issuance and distribution of the securities being registered, other than
underwriting discounts. All such expenses will be paid by the Company; none will
be paid by the selling stockholders.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 22,443
NASD filing fee............................................. 8,573
*Blue sky fees and expenses (including legal fees).......... 5,000
Nasdaq National Market listing fee.......................... 17,500
*Printing and engraving expenses............................ 125,000
*Legal fees and expenses.................................... 100,000
*Accounting fees and expenses............................... 50,000
*Miscellaneous.............................................. 226,484
--------
*TOTAL........................................... $550,000
========
</TABLE>
- ------------------------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation provides that the personal
liability of the directors of the Registrant shall be limited to the fullest
extent permitted by the provisions of Section 102(b)(7) of the General
Corporation Law of the State of Delaware (the DGCL). Section 102(b)(7) of the
DGCL generally provides that no director shall be liable personally to the
Registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director, provided that the Certificate of Incorporation does not eliminate
the liability of a director for (1) any breach of the director's duty of loyalty
to the Registrant or its stockholders; (2) acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law; (3) acts
or omissions in respect of certain unlawful dividend payments or stock
redemptions or repurchases; or (4) any transaction from which such director
derives an improper personal benefit. The effect of this provision is to
eliminate the rights of the Registrant and its stockholders to recover monetary
damages against a director for breach of her or his fiduciary duty of care as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (1) through (4) above.
The limitations summarized above, however, do not affect the ability of the
Registrant or its stockholders to seek nonmonetary remedies, such as an
injunction or rescission, against a director for breach of her or his fiduciary
duty.
In addition, the Certificate of Incorporation provides that the Registrant
shall, to the fullest extent permitted by Section 145 of the DGCL, indemnify all
persons whom it may indemnify pursuant to Section 145 of the DGCL. In general,
Section 145 of the DGCL permits the Registrant to indemnify a director, officer,
employee or agent of the Registrant or, when so serving at the Registrant's
request, another company who was or is a party or is threatened to be made a
party to any proceeding because of his or her position, if he or she acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the Registrant and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
II-1
<PAGE> 101
The Registrant maintains a directors' and officers' liability insurance
policy covering certain liabilities that may be incurred by any director or
officer in connection with the performance of his or her duties and certain
liabilities that may be incurred by the Registrant, including the
indemnification payable to any director or officer. This policy provides for
$1.0 million in maximum aggregate coverage, including defense costs. The entire
premium for such insurance is paid by the Registrant.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
1.1 Form of Underwriting Agreement(1)
4.1 Restated Certificate of Incorporation of the Registrant(2)
4.1.1 Certificate of Designation and Preferences of Series A
Cumulative Convertible Preferred Stock of the Registrant(3)
4.1.2 Amendment to Restated Certificate of Incorporation of the
Registrant(4)
4.2 By-laws of the Registrant(2)
4.2.1 Amendment to By-laws of the Registrant(5)
5.1 Opinion of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass
LLP(1)
23.1 Consent of Pannell Kerr Forster, Certified Public
Accountants, A Professional Corporation(1)
23.2 Consent of Plante & Moran, LLP(1)
23.3 Consent of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass
LLP (included in Exhibit 5.1)(1)
24.1 Power of Attorney(1) (included on page II-4)
27.1 Financial Data Schedule(1)
</TABLE>
- ------------------------------
(1) Filed herewith.
(2) Filed previously as an exhibit to the Registrant's Registration Statement on
Form SB-2 (Reg. No. 333-2048-LA), dated May 1, 1996, and incorporated herein
by reference.
(3) Filed previously as an exhibit to the Registrant's Current Report on Form
8-K, filed August 7, 1998, and incorporated herein by reference.
(4) Filed previously as an exhibit to the Registrant's Registration Statement on
Form S-3 (Reg. No. 333-74717) dated April 26, 1999, and incorporated herein
by reference.
(5) Filed previously as an exhibit to the Registrant's Registration Statement on
Form SB-2 (Reg. No. 333-22583), effective May 1, 1997, and incorporated
herein by reference.
ITEM 17. UNDERTAKINGS
1. The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE> 102
2. The Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
3. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Malibu, State of California, on November 4, 1999.
JAKKS PACIFIC, INC.
By: /s/ JACK FRIEDMAN
------------------------------------
Jack Friedman,
Chairman
Each of the undersigned hereby constitutes and appoints Jack Friedman,
Stephen G. Berman and Joel M. Bennett, and each of them, as his
attorneys-in-fact, with full power of substitution and resubstitution, to
execute in his name, place and stead, individually and in each capacity stated
below, one or more amendments (including without limitation post-effective
amendments) to this registration statement, any related Rule 462(b) registration
statement and any other document, to file the same with the Commission and to
take any other action to effect the registration under the Securities Act of
1933 of the common stock of the registrant, as the attorney-in-fact acting in
the premises deems appropriate as fully for all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, acting severally, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ JACK FRIEDMAN Chief Executive Officer and November 4, 1999
- ------------------------------------------------ Chairman (Principal
Jack Friedman Executive Officer)
/s/ STEPHEN G. BERMAN Director November 4, 1999
- ------------------------------------------------
Stephen G. Berman
/s/ JOEL M. BENNETT Chief Financial Officer November 4, 1999
- ------------------------------------------------ (Principal Financial Officer
Joel M. Bennett and Principal Accounting
Officer)
/s/ ROBERT E. GLICK Director November 4, 1999
- ------------------------------------------------
Robert E. Glick
/s/ MICHAEL G. MILLER Director November 4, 1999
- ------------------------------------------------
Michael G. Miller
/s/ MURRAY L. SKALA Director November 4, 1999
- ------------------------------------------------
Murray L. Skala
</TABLE>
II-4
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
1.1 Form of Underwriting Agreement(1)
4.1 Restated Certificate of Incorporation of the Registrant(2)
Certificate of Designation and Preferences of Series A
Cumulative Convertible Preferred
4.1.1 Stock of the Registrant(3)
4.1.2 Amendment to Restated Certificate of Incorporation of the
Registrant(4)
4.2 By-laws of the Registrant(2)
4.2.1 Amendment to By-laws of the Registrant(5)
5.1 Opinion of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass
LLP(1)
23.1 Consent of Pannell Kerr Forster, Certified Public
Accountants, A Professional Corporation(1)
23.2 Consent of Plante & Moran, LLP(1)
23.3 Consent of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass
LLP (included in Exhibit 5.1)(1)
24.1 Power of Attorney(1) (included on page II-4)
27.1 Financial Data Schedule(1)
</TABLE>
- ------------------------------
(1) Filed herewith.
(2) Filed previously as an exhibit to the Registrant's Registration Statement on
Form SB-2 (Reg. No. 333-2048-LA), dated May 1, 1996, and incorporated herein
by reference.
(3) Filed previously as an exhibit to the Registrant's Current Report on Form
8-K, filed August 7, 1998, and incorporated herein by reference.
(4) Filed previously as an exhibit to the Registrant's Registration Statement on
Form S-3 (Reg. No. 333-74717) dated April 26, 1999, and incorporated herein
by reference.
(5) Filed previously as an exhibit to the Registrant's Registration Statement on
Form SB-2 (Reg. No. 333-22583), effective May 1, 1997, and incorporated
herein by reference.
<PAGE> 1
EXHIBIT 1.1
JAKKS PACIFIC, INC.
2,700,000 SHARES(1)
COMMON STOCK
($.001 PAR VALUE)
------------------------------
UNDERWRITING AGREEMENT
New York, New York
, 1999
Donaldson, Lufkin & Jenrette Securities Corporation
Advest, Inc.
Morgan Keegan & Company, Inc.
DLJdirect Inc.
As Representatives of the several Underwriters
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
JAKKS Pacific, Inc., a Delaware corporation (the "Company"), and the
persons named in Schedule I hereto (the "Selling Stockholders") propose to sell
to the several underwriters named in Schedule II hereto (the "Underwriters"),
for whom you (the "Representatives") are acting as representatives, a total of
2,700,000 shares of Common Stock, $.001 par value ("Common Stock"), of the
Company (said shares to be sold by the Company and the Selling Stockholders
collectively are hereinafter called the "Underwritten Securities"). Of the
2,700,000 shares of Underwritten Securities, 2,200,000 are being sold by the
Company and 500,000 by the Selling Stockholders. The Company and the Selling
Stockholders also propose to grant to the Underwriters an option to purchase up
to 405,000 additional shares of Common Stock to cover over-allotments (the
"Option Securities"; the Option Securities, together with the Underwritten
Securities, are hereinafter called the "Securities"). Of the 405,000 Option
Securities, 330,000 are being offered by the Company and 75,000 by the Selling
Stockholders; in the event that the Underwriters do not purchase all of the
Option Securities, the Company and the Selling Stockholders will sell their
respective pro rata portions of the Option Securities actually purchased. To the
extent there are no additional Underwriters listed on Schedule II other than
you, the terms Representatives and Underwriters, shall mean either the singular
or plural as the context requires. The use of the neuter in this Agreement shall
include the feminine and masculine wherever appropriate. Certain terms used
herein are defined in Section 18 hereof.
- ---------------
1Plus an option to purchase from the Company and the Selling Stockholders up to
405,000 additional shares of Common Stock to cover over-allotments.
<PAGE> 2
1. Representations and Warranties.
(a) The Company. The Company represents and warrants to, and agrees with,
each Underwriter as set forth below in this Section 1:
(i) Registration Statement; Amendments; Final Prospectus. The Company
meets the requirements for the use of Form S-3 under the Act and has
prepared and filed with the Commission a registration statement
(Registration Number 333- ) on Form S-3, including a related
preliminary prospectus, for the registration under the Act of the offering
and sale of the Securities. The Company may have filed one or more
amendments thereto, including a related preliminary prospectus, each of
which has previously been furnished to you. The Company will next file with
the Commission either (1) prior to the Effective Date of such registration
statement, a further amendment to such registration statement (including
the form of final prospectus) or (2) after the Effective Date of such
registration statement, a final prospectus in accordance with Rules 430A
and 424(b). In the case of clause (2), the Company has included in such
registration statement, as amended at the Effective Date, all information
(other than Rule 430A Information) required by the Act and the rules
thereunder to be included in such registration statement and the
Prospectus. As filed, such amendment and form of final prospectus, or such
final prospectus, shall contain all Rule 430A Information, together with
all other such required information, and, except to the extent the
Representatives shall agree in writing to a modification, shall be in all
substantive respects in the form furnished to you prior to the Execution
Time or, to the extent not completed at the Execution Time, shall contain
only such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company has advised
you, prior to the Execution Time, will be included or made therein.
(ii) Compliance. On the Effective Date, the Registration Statement
did or will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein) and
on any date on which Option Securities are purchased, if such date is not
the Closing Date (a "settlement date"), the Prospectus (and any supplements
thereto) will, comply in all material respects with the applicable
requirements of the Act and the Exchange Act and the respective rules
thereunder; on the Effective Date and at the Execution Time, the
Registration Statement did not or will not contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectus, if not filed
pursuant to Rule 424(b), did or will not, and on the date of any filing
pursuant to Rule 424(b) and on the Closing Date and any settlement date,
the Prospectus (together with any supplement thereto) will not, include any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to the
information contained in or omitted from the Registration Statement or the
Prospectus (or any supplement thereto) in reliance upon and in conformity
with information furnished herein or in writing to the Company by or on
behalf of any Underwriter through the Representatives specifically for
inclusion in the Registration Statement or the Prospectus (or any
supplement thereto).
(iii) Subsidiaries. The subsidiaries of the Company (the
"Subsidiaries") listed in Exhibit 21 to the Company's Annual Report on Form
10-KSB most recently filed with the Commission, Berk Corporation, a
California corporation, Flying Colors Toy, Inc., a Michigan corporation and
JAKKS Acquisition II, Inc., are the only material subsidiaries of the
Company.
-2-
<PAGE> 3
(iv) Due Organization. Each of the Company and the Subsidiaries has
been duly organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction in which it is organized with
full corporate power and authority to own its properties and conduct its
business as described in the Prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing under the laws of
each jurisdiction which requires such qualification.
(v) Capitalization of Subsidiaries. All the outstanding shares of
capital stock of each Subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable and, except as otherwise set
forth in the Prospectus, all outstanding shares of capital stock of the
Subsidiaries are owned by the Company either directly or through wholly
owned Subsidiaries or through a designated nominee of the Company, free and
clear of any security interests, claims, liens or encumbrances, except that
all of the outstanding shares of each of the Subsidiaries have been pledged
in connection with the issuance of the Company's Convertible Debentures
described in the Prospectus.
(vi) Capitalization. The authorized, issued and outstanding capital
stock of the Company, as of September 30, 1999, was as set forth under the
caption "Capitalization" in the Prospectus and there will be no material
change in such authorized, issued and outstanding capital stock prior to
the Closing Date. The capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectus. The
outstanding shares of capital stock of the Company have been duly and
validly authorized and issued free of preemptive rights, and are fully paid
and nonassessable. The Securities being sold hereunder by the Company and
by the Selling Stockholders have been duly and validly authorized and, when
issued and delivered to and paid for by the Underwriters pursuant to this
Agreement, will be duly issued, fully paid and nonassessable. The
Securities have been approved for listing on the Nasdaq National Market
upon notice of issuance. The certificates for the Securities are in valid
and sufficient form; no holder of capital stock of the Company is entitled
to preemptive or other rights to subscribe for the Securities and, except
as set forth in the Prospectus, no options, warrants or other rights to
purchase, agreements or other obligations to issue, or rights to convert
any obligations into or exchange any securities for, shares of capital
stock of or other ownership interests in the Company are outstanding.
(vii) Registration Statement. There is no franchise, contract or
other document of a character required to be described in the Registration
Statement or Prospectus, or to be filed as an exhibit thereto, which is not
described or filed as required; and the statements in the Prospectus under
the headings "Risk Factors--Our ability to issue "blank check" preferred
stock and our obligation to make severance payments could prevent or delay
takeovers", "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Impact of Year 2000", "Certain Relationships and
Related Transactions" and "Description of Securities" fairly summarize the
matters therein described.
(viii) Due Authorization. This Agreement has been duly authorized,
executed and delivered by the Company and constitutes its legal, valid and
binding obligation.
(ix) Investment Company. The Company is not and, after giving effect
to the offering and sale of the Securities and the application of the
proceeds thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended.
-3-
<PAGE> 4
(x) Consents. No consent, approval, authorization, filing with or
order of any court or governmental agency or body is required to be
obtained or made by the Company or the Selling Stockholders in connection
with the transactions contemplated herein, except such as have been
obtained under the Act and such as may be required under the blue sky laws
of any jurisdiction in connection with the purchase and distribution of the
Securities by the Underwriters in the manner contemplated herein and in the
Prospectus.
(xi) Market Manipulation. The Company has not taken and will not
take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result, under
the Exchange Act or otherwise, in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Securities.
(xii) No Conflicts. Neither the issue and sale of the Securities nor
the consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, or result in a
breach or violation of, or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of the Subsidiaries
pursuant to, (A) the charter or by-laws of the Company or any of the
Subsidiaries, (B) the terms of any indenture, contract, lease, mortgage,
deed of trust, note agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to which the Company or any
of the Subsidiaries is a party or bound or to which its or their property
is subject or (C) any statute, law, rule, regulation, judgment, order or
decree applicable to the Company or any of the Subsidiaries of any court,
regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or any of the
Subsidiaries or any of its or their properties.
(xiii) Registration Rights. The Company has registered all applicable
securities of any persons or entities which have registration rights,
except that the Company has not registered the shares underlying the
warrant issued to Worldwide Wrestling Federation Entertainment Inc.
(formerly, Titan Sports Inc.) on June 30, 1999.
(xiv) Financial Statements. The consolidated financial statements of
the Company and its consolidated subsidiaries included or incorporated by
reference in the Prospectus and the Registration Statement present fairly
in all material respects the financial condition, results of operations and
cash flows of the Company and its consolidated subsidiaries as of the dates
and for the periods indicated. Such consolidated financial statements
comply as to form with the applicable accounting requirements of the Act,
the Exchange Act and the respective rules and regulations of the Commission
thereunder and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as otherwise noted therein).
(xv) Litigation. No action, suit or proceeding by or before any court
or governmental agency, authority or body or any arbitrator involving the
Company or any of the Subsidiaries or its or their property is pending or,
to the best knowledge of the Company, threatened that (A) could reasonably
be expected to have a material adverse effect on the performance of this
Agreement or the consummation of any of the transactions contemplated
hereby or (B) could reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and the Subsidiaries, taken as a
whole, except as set forth in or contemplated in the Prospectus (exclusive
of any supplement thereto).
-4-
<PAGE> 5
(xvi) Properties. Each of the Company and the Subsidiaries owns or
leases all such properties as are necessary to the conduct of its
operations as currently conducted.
(xvii) Violations. Neither the Company nor any of the Subsidiaries is
in violation or default of (A) any provision of its charter or bylaws, (B)
the terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which it is a party or bound or to which its
property is subject or (C) any statute, law, rule, regulation, judgment,
order or decree of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction over
the Company or any of the Subsidiaries or any of its or their properties,
as applicable, except for any such violation or default which would not,
singly or in the aggregate, result in a material adverse change in the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and the Subsidiaries, taken as a whole, except as
set forth in or contemplated in the Prospectus (exclusive of any supplement
thereto).
(xviii) Accountants. Pannell Kerr Forster, Certified Public
Accountants, A Professional Corporation, which have certified the
consolidated financial statements of the Company and its consolidated
subsidiaries and delivered their report with respect to the consolidated
financial statements and schedules included or incorporated by reference in
the Prospectus, are independent accountants with respect to the Company
within the meaning of the Act and the rules and regulations of the
Commission thereunder. Plante & Moran, LLP, Certified Public Accountants,
which have certified the financial statements of the Flying Colors division
of Flying Colors Toys, Inc. and delivered their report with respect to the
financial statements included in the Prospectus, are independent
accountants with respect to the Company within the meaning of the Act and
the rules and regulations of the Commission thereunder.
(xix) Taxes. Except as set forth in or contemplated by the Prospectus
(exclusive of any supplement thereto), the Company and the Subsidiaries
have filed all foreign, federal, state and local tax returns that are
required to be filed by it or them or have requested extensions thereof
(except in any case in which the failure so to file would not have a
material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and the
Subsidiaries, taken as a whole, and have paid all taxes required to be paid
by it and them, and any other assessment, fine or penalty levied against it
or them, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being contested
in good faith or which would not have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and the Subsidiaries, taken as a whole,.
(xx) Labor Relations. No labor disturbance exists or is threatened or
imminent that could reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and the Subsidiaries, taken as a
whole, except as set forth in or contemplated in the Prospectus (exclusive
of any supplement thereto).
(xxi) Insurance. The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which the Company and the Subsidiaries are engaged; neither the Company nor
any such Subsidiary has been refused any insurance coverage sought or
applied for; and neither the Company nor any such Subsidiary has any reason
to believe that it
-5-
<PAGE> 6
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a currently anticipated cost that
would not have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company and
the Subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto).
(xxii) Dividends. No Subsidiary of the Company is currently
prohibited, directly or indirectly, from paying any dividends to the
Company, from making any other distribution on such Subsidiary's capital
stock, from repaying to the Company any loans or advances to such
Subsidiary from the Company or from transferring any of such Subsidiary's
property or assets to the Company or any other Subsidiary of the Company.
(xxiii) Permits. Except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto), the Company and the
Subsidiaries (A) possess all certificates, authorizations and permits,
whether from federal, state or foreign regulatory authorities, necessary to
conduct their respective businesses, except where the failure to possess
such certificates, authorizations and permits would not, singly or in the
aggregate, result in a material adverse change in the condition (financial
or otherwise), prospects, earnings, business or properties of the Company
and the Subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business and (B) have not received
any notice of proceedings relating to the revocation or modification of any
such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a material adverse change in the condition (financial or
otherwise), prospects, earnings, business or properties of the Company and
the Subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business.
(xxiv) Internal Systems Controls. The Company and the Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (A) transactions are executed in accordance with
management's general or specific authorizations; (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability; (C) access to assets is permitted only in accordance
with management's general or specific authorization; and (D) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxv) Intellectual Property. The Company and the Subsidiaries own or
have obtained licenses or other rights for all patents, patent
applications, trade and service marks, trade names, copyrights, inventions,
trade secrets, technology, know-how and other intellectual properties
(collectively, the "Intellectual Property"), necessary for the conduct of
their businesses as now conducted or as proposed to be conducted in the
Prospectus, except where the failure to so own or obtain licenses or other
rights would not singly or in the aggregate have a material adverse effect
on the condition (financial or otherwise), prospects, earnings, businesses
or properties of the Company and the Subsidiaries, taken as a whole. Except
as set forth in the Prospectus, (A) there are no rights of third parties to
any such Intellectual Property that would materially impair the rights of
the Company or any Subsidiary therein; (B) to the Company's knowledge,
there is no material infringement by third parties of any such Intellectual
Property; (C) there is no pending or, to the Company's knowledge,
threatened action, suit, proceeding or claim by others challenging the
Company's or any Subsidiary's
-6-
<PAGE> 7
rights in or to any such Intellectual Property, and the Company is unaware
of any facts which would form a reasonable basis for any such claim; (D)
there is no pending or, to the Company's knowledge, threatened action,
suit, proceeding or claim by others challenging the validity or scope of
any such Intellectual Property, and the Company is unaware of any facts
which would form a reasonable basis for any such claim; and (E) there is no
pending or, to the Company's knowledge, threatened action, suit, proceeding
or claim by others that the Company or any of the Subsidiaries infringes or
otherwise violates any patent, trademark, copyright, trade secret or other
proprietary rights of others, and the Company is unaware of any fact which
would form a reasonable basis for any such claim.
(xxvi) Relationship with Underwriters. Except as disclosed in the
Registration Statement and the Prospectus, the Company (A) does not have
any material lending or other relationship with any bank affiliate or
lending affiliate of Donaldson, Lufkin & Jenrette Securities Corporation
and (B) does not intend to use any of the proceeds from the sale of the
Securities hereunder to repay any outstanding debt owed to any affiliate of
any of the Underwriters.
Any certificate signed by any officer of the Company and delivered to the
Representatives or counsel for the Underwriters in connection with the offering
of the Securities shall be deemed a representation and warranty by the Company,
as to matters covered thereby, to each Underwriter.
(b) Selling Stockholders. Each Selling Stockholder severally represents
and warrants to, and agrees with, each Underwriter as set forth below in this
Section 1:
(i) Title. Such Selling Stockholder is the lawful owner of the
Securities to be sold by it hereunder and upon sale and delivery of, and
payment for, such Securities, as provided herein, such Selling Stockholder
will convey to the Underwriters good and marketable title to such
Securities, free and clear of all liens, encumbrances, equities and claims
whatsoever.
(ii) Market Manipulation. Such Selling Stockholder has not taken and
will not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result, under
the Exchange Act or otherwise, in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Securities.
(iii) Consents and Approvals. No consent, approval, authorization or
order of any court, governmental agency or body or other person is required
for the consummation by such Selling Stockholder of the transactions
contemplated herein, except such as may have been obtained under the Act
and such as may be required under the blue sky laws of any jurisdiction in
connection with the purchase and distribution of the Securities by the
Underwriters and such other approvals as have been obtained.
(iv) No Violation. Neither the sale of the Securities being sold by
such Selling Stockholder nor the consummation of any other of the
transactions herein contemplated by such Selling Stockholder nor the
fulfillment of the terms hereof by such Selling Stockholder will conflict
with, result in a breach or violation of, or constitute a default under any
law or the terms of any indenture or other agreement or instrument to which
such Selling Stockholder is a party or by which he is bound, or any
judgment, order or decree applicable to such Selling Stockholder of any
court, regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over such Selling Stockholder.
-7-
<PAGE> 8
Any certificate signed by any representative of a Selling Stockholder and
delivered to the Representatives or counsel for the Underwriters in connection
with the offering of the Securities shall be deemed a representation and
warranty by such Selling Stockholder, as to the matters covered thereby, to each
Underwriter.
2. Purchase and Sale.
(a) Purchase Price. Subject to the terms and conditions and in reliance
upon the representations and warranties herein set forth, (i) the Company agrees
to sell 2,200,000 shares of Underwritten Securities, as well as up to 330,000
shares of Option Securities, (ii) each Selling Stockholder agrees, severally and
not jointly, to sell the number of Underwritten Securities and Option Securities
set forth opposite the name of each such Selling Stockholder on Schedule I
hereto and (iii) each Underwriter agrees, severally and not jointly, to
purchase, at a purchase price of $ per share, the amount of the Underwritten
Securities set forth opposite such Underwriter's name in Schedule II hereto.
(b) Option Grant. Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, (i) the Company agrees to
grant an option to the several Underwriters to purchase, severally and not
jointly, up to 330,000 shares of Option Securities and (ii) each Selling
Stockholder hereby grants an option to the several Underwriters to purchase,
severally and not jointly, the number of Option Securities set forth opposite
the name of each such Selling Stockholder on Schedule I, all of which shall be
exercised at the same purchase price per share as the Underwriters shall pay for
the Underwritten Securities. Said options may be exercised only to cover
over-allotments in the sale of the Underwritten Securities by the Underwriters.
Said options may be exercised in whole or in part at any time on or before the
30th day after the date of the Prospectus upon written notice by the
Representatives to the Company setting forth the number of shares of the Option
Securities as to which the several Underwriters are exercising the options and
the settlement date. In the event that the Underwriters exercise less than their
full over-allotment option, (A) the number of shares of the Option Securities to
be purchased by each Underwriter shall be the same percentage of the total
number of shares of the Option Securities to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Securities,
subject to such adjustments as you in your absolute discretion shall make to
eliminate any fractional shares, and (B) the Company and each Selling
Stockholder shall sell that number of Option Securities based on the same,
respective percentage of Option Securities which they offered had the
Underwriters exercised their full over-allotment option.
3. Delivery and Payment. Delivery of and payment for the Underwritten
Securities and the Option Securities (if the option provided for in Section 2(b)
hereof shall have been exercised on or before the third Business Day prior to
the Closing Date) shall be made at 10:00 AM, New York City time, on
, 1999, or at such time on such later date not more than three
Business Days after the foregoing date as the Representatives shall designate,
which date and time may be postponed by agreement among the Representatives, the
Company and the Selling Stockholders or as provided in Section 9 hereof (such
date and time of delivery and payment for the Securities being herein called the
"Closing Date"). Delivery of the Securities shall be made to the Representatives
for the respective accounts of the several Underwriters against payment by the
several Underwriters through the Representatives of the respective aggregate
purchase prices of the Securities being sold by the Company and each of the
Selling Stockholders to or upon the order of the Company and the Custodian (as
defined in the Custody Agreement) on behalf of the Selling Stockholders,
respectively, by wire transfer payable in same-day funds to the accounts
specified by the Company and an Attorney-in-Fact (as defined in the Custody
Agreement) on behalf of the
-8-
<PAGE> 9
Selling Stockholders. Delivery of the Underwritten Securities and the Option
Securities shall be made through the facilities of the Depository Trust Company,
55 North Water Street, New York, New York 10041 unless the Representatives shall
otherwise instruct.
Each Selling Stockholder will pay all applicable state transfer taxes, if
any, involved in the transfer to the several Underwriters of the Securities to
be purchased by them from such Selling Stockholder and the respective
Underwriters will pay any additional stock transfer taxes involved in further
transfers.
If the option provided for in Section 2(b) hereof is exercised after the
third Business Day prior to the Closing Date, the Company and the Selling
Stockholders will deliver the Option Securities (at the expense of the Company)
to the Representatives on the date specified by the Representatives (which shall
be on the third Business Day after exercise of said option) for the respective
accounts of the several Underwriters, against payment by the several
Underwriters through the Representatives of the purchase price thereof to or
upon the order of the Company and the Selling Stockholders, as appropriate, by
wire transfer payable in same-day funds to the accounts specified by the Company
and the Selling Stockholders. If settlement for the Option Securities occurs
after the Closing Date, the Company and the Selling Stockholders will deliver to
the Representatives on the settlement date for the Option Securities, and the
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof.
4. Offering by Underwriters. The several Underwriters propose to offer
the Securities for sale to the public as set forth in the Prospectus.
5. Agreements.
(a) Agreements by the Company. The Company agrees with the several
Underwriters that:
(i) Effectiveness; Filing of Amendments. The Company will use its
best efforts to cause the Registration Statement, if not effective at the
Execution Time, and any amendment thereof, to become effective. Prior to
the termination of the offering of the Securities, the Company will not
file any amendment of the Registration Statement or supplement to the
Prospectus or any Rule 462(b) Registration Statement unless the Company has
furnished you a copy for your review prior to filing and will not file any
such proposed amendment or supplement to which you reasonably object.
Subject to the foregoing sentence, if the Registration Statement has become
or becomes effective pursuant to Rule 430A, or filing of the Prospectus is
otherwise required under Rule 424(b), the Company will cause the
Prospectus, properly completed, and any supplement thereto to be filed with
the Commission pursuant to the applicable paragraph of Rule 424(b) within
the time period prescribed and will provide evidence satisfactory to the
Representatives of such timely filing. The Company will promptly advise the
Representatives (A) when the Registration Statement, if not effective at
the Execution Time, shall have become effective, (B) when the Prospectus,
and any supplement thereto, shall have been filed (if required) with the
Commission pursuant to Rule 424(b) or when any Rule 462(b) Registration
Statement shall have been filed with the Commission, (C) when, prior to
termination of the offering of the Securities, any amendment to the
Registration Statement shall have been filed or become effective, (D) of
any request by the Commission or its staff for any amendment of the
Registration Statement, or any Rule 462(b) Registration Statement, or for
any supplement to the Prospectus or for any additional information, (E) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the institution or
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<PAGE> 10
threatening of any proceeding for that purpose and (F) of the receipt by
the Company of any notification with respect to the suspension of the
qualification of the Securities for sale in any jurisdiction or the
institution or threatening of any proceeding for such purpose. The Company
will use its best efforts to prevent the issuance of any such stop order or
the suspension of any such qualification and, if issued, to obtain as soon
as possible the withdrawal thereof.
(ii) Amendments. If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs as a
result of which the Prospectus as then supplemented would include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein in the light of the circumstances
under which they were made not misleading, or if it shall be necessary to
amend the Registration Statement or supplement the Prospectus to comply
with the Act or the Exchange Act or the respective rules thereunder, the
Company promptly will (A) notify the Representatives of any such event; (B)
prepare and file with the Commission, subject to the second sentence of
Section 5(a)(i) hereof, an amendment or supplement which will correct such
statement or omission or effect such compliance; and (C) supply any
supplemented Prospectus to you in such quantities as you may reasonably
request.
(iii) Earnings Statement. As soon as practicable, the Company will
make generally available to its security holders and to the Representatives
an earnings statement or statements of the Company and the Subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule 158
under the Act.
(iv) Copies of the Registration Statement. The Company will furnish,
without charge, to the Representatives and counsel for the Underwriters
signed copies of the Registration Statement (including exhibits thereto)
and to each other Underwriter a copy of the Registration Statement (without
exhibits thereto) and, so long as delivery of a prospectus by an
Underwriter or dealer may be required by the Act, as many copies of each
Preliminary Prospectus and the Prospectus and any supplement thereto as the
Representatives may reasonably request. The Company will pay the expenses
of printing and producing all documents relating to the offering.
(v) Qualification of Securities. The Company will arrange, if
necessary, for the qualification of the Securities for sale under the laws
of such jurisdictions as the Representatives may designate, will maintain
such qualifications in effect so long as required for the distribution of
the Securities and will pay any fee of the National Association of
Securities Dealers, Inc. (the "NASD") in connection with NASD's review of
the offering; provided that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified
or to take any action that would subject it to service of process in suits,
other than those arising out of the offering or sale of the Securities, in
any jurisdiction where it is not now so subject.
(vi) Lock-Up. The Company will not, without the prior written consent
of the Representatives, for a period commencing on the date of the final
prospectus relating to the offering contemplated by the Registration
Statement and continuing for 180 days thereafter, offer, sell, offer to
sell, solicit an offer to buy, contract to sell, encumber, distribute,
pledge, grant any option for the sale of, or otherwise transfer or dispose
of, directly or indirectly, in one or a series of transactions (or enter
into any transaction which is designed to, or reasonably might be expected
to, result in the disposition (whether by actual disposition or effective
economic disposition due to cash settlement or otherwise) by the Company or
any
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<PAGE> 11
affiliate of the Company) any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities
convertible or exercisable into or exchangeable for shares of Common Stock;
provided, however, that (i) the Company may make automatic annual grants of
options to its non-employee directors and may make grants of options and
issue and sell Common Stock pursuant to any director or employee stock
option plan, stock ownership plan or dividend reinvestment plan of the
Company in effect at the Execution Time, (ii) the Company may issue Common
Stock issuable upon the exercise of warrants outstanding at the Execution
Time and (iii) the Company may issue shares in connection with an
acquisition made by the Company and approved by the Company's Board of
Directors provided that the holders of such issued shares agree to be bound
by the provisions set forth in this section 5(a)(vi).
(vii) Market Manipulation. The Company will not take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result, under the Exchange Act or
otherwise, in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities.
(viii) Certificate, Letters and Opinions. The Company will cause (i)
the certificate and the letters to be delivered to the several Underwriters
pursuant to paragraphs (b) and (e) of Section 6 at the Execution Time and
the Closing Date, also to be addressed to the directors of the Company and
(ii) each opinion of counsel delivered to the Underwriters pursuant to
paragraph (b) of Section 6 on the Closing Date to be accompanied by a
letter from the counsel authorizing the directors to rely upon such opinion
to the same extent as if it had been addressed to them.
(ix) Effectiveness. If the Registration Statement at the Execution
Time does not cover all of the Shares, the Company will file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so
covered in compliance with Rule 462(b) by 10:00 P.M., New York City time,
on the date of this Agreement and to pay to the Commission the filing fee
for such Rule 462(b) Registration Statement at the time of the filing
thereof or to give irrevocable instructions for the payment of such fee
pursuant to Rule 111(b) under the Act.
(b) Agreements of the Selling Stockholders. Each Selling Stockholder
agrees with the several Underwriters that:
(i) Lock-Up. The Selling Stockholders shall have executed the form of
Lock-up Agreement attached hereto as Exhibit B.
(ii) Notice of Change. Such Selling Stockholder will advise you
promptly, and if requested by you, will confirm such advice in writing, so
long as delivery of a prospectus relating to the Securities by an
underwriter or dealer may be required under the Act, of (A) any material
change in the Company's condition (financial or otherwise), prospects,
earnings, business or properties which comes to the attention of such
Selling Stockholder or (B) any material change in the information set forth
in the Registration Statement or the Prospectus relating to such Selling
Stockholder.
(iii) Market Manipulation. Such Selling Stockholder will not take any
action designed to or which has constituted or which might reasonably be
expected to cause or result, under the Exchange Act or otherwise, in the
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Securities.
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<PAGE> 12
(c) Fees and Expenses. The Company agrees to pay the costs and expenses
relating to the following matters: (i) the preparation, printing or reproduction
and filing with the Commission of the Registration Statement (including the
financial statements therein and the exhibits thereto), each Preliminary
Prospectus, the Prospectus, and each amendment or supplement to any of them;
(ii) the printing (or reproduction) and delivery (including postage, air freight
charges and charges for counting and packaging) of such copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, and all
amendments or supplements to any of them, as may, in each case, be reasonably
requested for use in connection with the offering and sale of the Securities;
(iii) the preparation, printing, authentication, issuance and delivery of
certificates for the Securities, including any stamp or transfer taxes in
connection with the original issuance or the sale of the Securities; (iv) the
printing (or reproduction) and delivery of this Agreement, any other
underwriting-related agreement, any blue sky memorandum and all other agreements
or documents printed (or reproduced) and delivered in connection with the
offering of the Securities; (v) the listing of the Securities on the Nasdaq
National Market; (vi) any registration or qualification of the Securities for
offer and sale under the securities or blue sky laws of the several states
(including filing fees and the reasonable fees and expenses of counsel for the
Underwriters relating to such registration and qualification); (vii) any filings
required to be made with the NASD (including filing fees and the reasonable fees
and expenses of counsel for the Underwriters relating to such filings, which
fees, together with the counsel fees described in subparagraph (vi) shall not
exceed $5,000); (viii) the transportation and other expenses incurred by or on
behalf of Company representatives in connection with presentations to
prospective purchasers of the Securities; (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company; and (x) all other costs and expenses incident
to the performance by the Company of its obligations hereunder. Each Selling
Stockholder agrees to pay the fees and expenses of its counsel (including local
and special counsel) and all costs and expenses, other than those set forth
above, incident to the performance of his obligations hereunder.
6. Conditions to the Obligations of the Underwriters. The obligations of
the Underwriters to purchase the Underwritten Securities and the Option
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the statements
of the Company and the Selling Stockholders made in any certificates pursuant to
the provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder and to the following
additional conditions:
(a) Effective Time. If the Registration Statement has not become
effective prior to the Execution Time, unless the Representatives agree in
writing to a later time, the Registration Statement will become effective
not later than 10:00 PM New York City time on the date of determination of
the public offering price. If the Company is required to file a Rule 462(b)
Registration Statement after the Execution Time, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York
City time, on the date of this Agreement. If filing of the Prospectus, or
any supplement thereto, is required pursuant to Rule 424(b), the
Prospectus, and any such supplement, will be filed in the manner and within
the time period required by Rule 424(b); and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or threatened.
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<PAGE> 13
(b) Opinion of Counsel to the Company. The Company shall have
furnished to the Representatives the opinion of Feder, Kaszovitz, Isaacson,
Weber, Skala & Bass LLP, counsel for the Company, dated the Closing Date
and addressed to the Representatives, to the effect that:
(i) Organization. Each of the Company and each of its Subsidiaries
has been duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction in which it is
organized, with full corporate power and authority to own or lease, as
the case may be, and to operate its properties and conduct its business
as described in the Prospectus, and is duly qualified to do business as
a foreign corporation and is in good standing under the laws of each
jurisdiction set forth on a schedule to such opinion.
(ii) Capitalization of Subsidiaries. All the outstanding shares of
capital stock of each Subsidiary have been duly and validly authorized
and issued and are fully paid and nonassessable and, except as otherwise
set forth in the Prospectus, all outstanding shares of capital stock of
the Subsidiaries are held of record by the Company, either directly or
through wholly owned subsidiaries, free and clear of any perfected
security interest and, to the knowledge of such counsel, after due
inquiry, any other security interest, claim, lien or encumbrance, except
that the shares of JP (HK) Limited, JAKKS Pacifice (HK) Limited and Road
Champs Ltd. are owned of record by Jack Friedman, as nominee of the
Company, and the Company.
(iii) Capital Stock. The capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock (including the
Securities being sold hereunder by the Selling Stockholders) have been
duly and validly authorized and issued and are fully paid and
nonassessable; the Securities being sold hereunder by the Company have
been duly and validly authorized, and, when issued and delivered to and
paid for by the Underwriters pursuant to this Agreement, will be fully
paid and nonassessable; all of the Securities have been approved for
listing on the Nasdaq National Market; the form of certificates for the
Securities complies with the requirements of the Delaware General
Corporation Law; the holders of outstanding shares of capital stock of
the Company are not entitled to preemptive or other rights to subscribe
for the Securities; and, except as set forth in the Prospectus, no
options, warrants or other rights to purchase, agreements or other
obligations to issue, or rights to convert any obligations into or
exchange any securities for, shares of capital stock of or other
ownership interests in the Company are, to the knowledge of such
counsel, outstanding.
(iv) Litigation. To the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding by or before any court
or governmental agency, authority or body or any arbitrator involving
the Company or any of the Subsidiaries or its or their property of a
character required to be disclosed in the Registration Statement that is
not adequately disclosed in the Prospectus, and there is no franchise,
contract or other document of a character required to be described in
the Registration Statement or Prospectus, or to be filed as an exhibit
thereto, that is not described or filed as required.
(v) Effectiveness; Compliance. Such counsel has been advised that
the Registration Statement has become effective under the Act; any
required filing of the Prospectus, and any supplements thereto, pursuant
to Rule 424(b) has been made in the manner and
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<PAGE> 14
within the time period required by Rule 424(b); to the knowledge of such
counsel, no stop order suspending the effectiveness of the Registration
Statement has been issued, no proceedings for that purpose have been
instituted or threatened and the Registration Statement and the
Prospectus (other than the financial statements and other financial
information contained therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the applicable
requirements of the Act and the Exchange Act and the respective rules
thereunder.
(vi) Due Authorization. This Agreement has been duly authorized,
executed and delivered by the Company.
(vii) Investment Company. The Company is not and, after giving
effect to the offering and sale of the Securities and the application of
the proceeds thereof as described in the Prospectus, will not be, an
"investment company" as defined in the Investment Company Act of 1940,
as amended.
(viii) Consents. No consent, approval, authorization, filing with
or order of any court or governmental agency or body is required for the
consummation by the Company or the Selling Stockholders of the
transactions contemplated herein, except such as have been obtained
under the Act and such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the
Securities by the Underwriters in the manner contemplated in this
Agreement and in the Prospectus and such other approvals (specified in
such opinion) as have been obtained.
(ix) Conflicts. Neither the issue and sale of the Securities, nor
the consummation of any other of the transactions herein contemplated
nor the fulfillment of the terms hereof will, in any material respect,
conflict with, result in a breach or violation of or imposition of any
lien, charge or encumbrance upon any property or assets of the Company
or the Subsidiaries pursuant to, (A) the charter or by-laws of the
Company or the Subsidiaries, or (B) the terms of any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan agreement
or other agreement, obligation, condition, covenant or instrument, known
to such counsel, to which the Company or any of the Subsidiaries is a
party or bound or to which its or their property is subject, or (C) any
statute, law, rule, regulation, judgment, order or decree applicable to
the Company or any of the Subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company or the Subsidiaries or any of its
or their properties.
(x) Registration Statement. The statements under the captions
"Certain Relationships and Related Transactions," "Business--Government
and Industry Regulation" and "Description of Securities" in the
Prospectus and Items 14 and 15 of Part II of the Registration Statement,
insofar as such statements constitute a summary of the legal matters,
documents or proceedings referred to therein, fairly represent the
information called for with respect to such legal matters, documents and
proceedings.
(xi) Violations. Neither the Company nor any of the Subsidiaries
is in violation or default of (A) any provision of its charter or
bylaws, (B) the terms of any indenture, contract, lease, mortgage, deed
of trust, note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which it is a party or bound or to
which its property is subject or (C) any statute, law, rule, regulation,
judgment, order or decree of any court, regulatory body, administrative
agency, governmental body,
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<PAGE> 15
arbitrator or other authority having jurisdiction over the Company or
any of the Subsidiaries or any of its or their properties, as
applicable, except for any such violation or default which would not,
singly or in the aggregate, result in a material adverse change in the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and the Subsidiaries, taken as a whole, except
as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
(xii) No Registration Rights. The Company has registered all
applicable securities of any persons or entities which have registration
rights, except that the Company has not registered the shares underlying
the warrant issued to Worldwide Wrestling Federation Entertainment, Inc.
(formerly Titan Sports, Inc.) on June 30, 1999.
Such counsel shall further state that they have no reason to believe that
on the Effective Date or at the Execution Time the Registration Statement
contains or contained any untrue statement of a material fact or omitted or
omits to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus as of
its date and on the Closing Date includes or included any untrue statement
of a material fact or omitted or omits to state a material fact required to
be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading
(in each case, other than the financial statements and other financial
information contained therein, as to which such counsel need express no
belief).
In rendering the foregoing opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than
the State of New York, the Federal laws of the United States or the General
Corporation Law of the State of Delaware, to the extent they deem proper
and specified in such opinion, upon the opinion of other counsel of good
standing whom they believe to be reliable and who are satisfactory to
counsel for the Underwriters and (B) as to matters of fact, to the extent
they deem proper, on certificates of responsible officers of the Company
and public officials. References to the Prospectus in this paragraph 6(b)
include any supplements thereto at the Closing Date. The opinion of any
such other counsel shall be rendered to the Underwriters at the request of
the Company and shall so state therein and shall further state that counsel
for the Underwriters may rely upon such opinion in rendering their opinion
to the Underwriters.
(c) Opinion of Counsel to the Selling Stockholders. Each of the
Selling Stockholders shall have furnished to the Representatives the
opinion of its counsel (who shall be acceptable to the Representatives)
dated the Closing Date and addressed to the Representatives, to the effect
that:
(i) Due Authorization. This Agreement has been duly authorized,
executed and delivered by such Selling Stockholder. Such Selling
Stockholder has full legal right and authority to sell, transfer and
deliver, in the manner provided in this Agreement, the Securities being
sold by it hereunder.
(ii) Title. Such Selling Stockholder is the lawful owner of the
Securities to be sold by it hereunder and has good and valid title to
such Securities, free and clear of all liens, encumbrances, equities or
claims. The Securities being sold hereunder by such Selling Stockholder
has been transferred to each Underwriter that has purchased such
Securities without notice of an adverse claim thereto (within the
meaning of the Uniform Commercial Code of the State of New York).
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<PAGE> 16
(iii) No Consent. All consents, approvals, authorizations and
filings required to be made or obtained by such Selling Stockholder for
the sale and delivery of the Securities being sold by it to the
Underwriters hereunder have been made or obtained, as the case may be.
(iv) No Conflict. Neither the sale of the Securities being sold by
such Selling Stockholder, nor the consummation of the transactions
herein contemplated by such Selling Stockholder nor the fulfillment of
the terms hereof by such Selling Stockholder will result in a breach or
violation of, or constitute a default under, (A) the charter or by-laws
or other organizational documents of such Selling Stockholder, or (B)
the terms of any indenture or other agreement or instrument, to which
such Selling Stockholder is a party or by which it or its properties are
bound, or (C) any law, judgment, order or decree of any court,
regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over such Selling Stockholder.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the State
of New York, the Federal laws of the United States and the General
Corporation Law of the State of Delaware, to the extent they deem proper
and specified in such opinion, upon the opinion of other counsel of good
standing whom they believe to be reliable and who are satisfactory to
counsel for the Underwriters, and (B) as to matters of fact, to the extent
they deem proper, on certificates of officers or other representatives of
such Selling Stockholder and public officials. The opinion of any such
other counsel shall be rendered to the Underwriters at the request of such
Selling Stockholder and shall so state therein and shall further state that
counsel for the Underwriters may rely upon such opinion in rendering their
opinion to the Underwriters.
(d) Opinion of Counsel to the Underwriters. The Representatives shall
have received from Morgan, Lewis & Bockius LLP, counsel for the
Underwriters, such opinion or opinions, dated the Closing Date and
addressed to the Representatives, with respect to the issuance and sale of
the Securities, the Registration Statement, the Prospectus (together with
any supplement thereto) and other related matters as the Representatives
may reasonably require, and the Company and each Selling Stockholder shall
have furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(e) Certificate from the Company. The Company shall have furnished to
the Representatives a certificate of the Company, signed by the Chairman of
the Board or the President and the principal financial or accounting
officer of the Company, dated the Closing Date, to the effect that the
signers of such certificate have carefully examined the Registration
Statement, the Prospectus, any supplements to the Prospectus and this
Agreement and that:
(i) Bring-down of Representations and Warranties. The
representations and warranties of the Company in this Agreement that are
qualified as to materiality shall be true and correct and all other
representations and warranties of the Company in this Agreement shall be
true and correct in all material respects on and as of the Closing Date
with the same effect as if made on the Closing Date and the Company has
complied with all the agreements and satisfied all the conditions on its
part to be performed or satisfied by it at or prior to the Closing Date.
(ii) Stop Orders. The Company has not received or become aware of
the issuance of any stop order suspending the effectiveness of the
Registration Statement, nor, to the Company's knowledge, have
proceedings for that purpose been instituted or threatened.
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<PAGE> 17
(iii) Adverse Change. Since the respective dates as of which the
information is given in the Prospectus, other than set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement), (x) there shall have not
occurred any change or any development involving a prospective change in
condition, financial or otherwise, or the earnings, business, management
or operations of the Company and the Subsidiaries, taken as a whole, (y)
there shall not have been any change or any development involving a
prospective change in the capital stock or in the long-term debt of the
Company or any of the Subsidiaries and (z) neither the Company nor any
of its subsidiaries shall have incurred any liability or obligation,
direct or contingent, the effect of which, in any such case described in
clause 6(e)(iii)(x), 6(e)(iii)(y) or 6(e)(iii)(z), in your judgment, is
material and adverse and, in your reasonable judgment, makes it
impracticable to market the Securities on the terms and in the matter
contemplated in the Prospectus.
(f) Certificate from the Selling Stockholders. Each Selling
Stockholder shall have furnished to the Representatives a certificate,
signed by a duly authorized person and dated the Closing Date, to the
effect that the representations and warranties of such Selling Stockholder
in this Agreement that are qualified as to materiality shall be true and
correct and all other representations and warranties of such Selling
Stockholder in this Agreement shall be true and correct in all material
respects on and as of the Closing Date to the same effect as if made on the
Closing Date and such Selling Stockholder has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied by it at or prior to the Closing Date.
(g) Accountant's Letters. At the Execution Time and at the Closing
Date, the Company shall have caused Pannell Kerr Foster, Certified Public
Accountants, A Professional Corporation and Plante & Moran, LLP to furnish
to the Representatives letters, dated respectively as of the Execution Time
and as of the Closing Date, in form and substance satisfactory to the
Representatives, confirming that they are independent accountants within
the meaning of the Act and the Exchange Act and the applicable published
rules and regulations thereunder and covering other customary matters with
respect to the Registration Statement, the Preliminary Prospectus and the
Prospectus.
(h) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement
thereto), there shall not have been (i) any change or decrease specified in
the letter or letters referred to in Section 6(g) hereof or (ii) any
change, or any development involving a prospective change, in or affecting
the condition (financial or otherwise), earnings, business or properties of
the Company and the Subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business, except as set forth
in or contemplated in the Prospectus (exclusive of any supplement thereto)
the effect of which, in any case referred to in clause (i) or (ii) above,
is, in the sole judgment of the Representatives, so material and adverse as
to make it impractical or inadvisable to proceed with the offering or
delivery of the Securities as contemplated by the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of any
supplement thereto).
(i) Lock-Up Agreements. At or prior to the Execution Time, a letter
substantially in the form of Exhibit B hereto, shall have been furnished to
the Representatives by each officer and director of the Company.
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<PAGE> 18
(j) Listing of Securities. The Securities shall have been approved
for listing on the Nasdaq National Market upon official notice of issuance.
(k) Additional Information. Prior to the Closing Date, the Company
and the Selling Stockholders shall have furnished to the Representatives
such further information, certificates and documents as the Representatives
may reasonably request.
If any of the conditions specified in this Section 6 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or if
any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of such
cancellation shall be given to the Company and each Selling Stockholder in
writing or by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall be delivered
at the office of Morgan, Lewis & Bockius LLP, counsel for the Underwriters, at
101 Park Avenue, New York, New York 10178, on the Closing Date.
7. Reimbursement of Underwriters' Expenses. If the sale of the Securities
provided for herein is not consummated because any condition to the obligations
of the Underwriters set forth in Section 6 hereof is not satisfied, because of
any termination pursuant to Section 10 hereof or because of any refusal,
inability or failure on the part of the Company or any Selling Stockholder to
perform any agreement herein or comply with any provision hereof other than by
reason of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally through Donaldson, Lufkin & Jenrette Securities
Corporation on demand for all out-of-pocket expenses (including reasonable fees
and disbursements of counsel) that shall have been incurred by them in
connection with the proposed purchase and sale of the Securities. The Company
also agrees to reimburse the Underwriters, their directors and officers and any
persons controlling any of the Underwriters for any and all reasonable fees and
expenses (including, without limitation, the fees and disbursements of counsel)
incurred by them in connection with enforcing their rights hereunder (including,
without limitation, pursuant to Section 8 hereof). If the Company is required to
make any payments to the Underwriters under this Section 7 because of any
Selling Stockholder's refusal, inability or failure to satisfy any condition to
the obligations of the Underwriters set forth in Section 6, the Selling
Stockholders pro rata in proportion to the percentage of Securities to be sold
by each shall reimburse the Company on demand for all amounts so paid.
8. Indemnification and Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify
and hold harmless each Underwriter, the directors, officers, employees and
agents of each Underwriter and each person who controls any Underwriter
within the meaning of either the Act or the Exchange Act against any and
all losses, claims, damages or liabilities, joint or several, to which they
or any of them may become subject under the Act, the Exchange Act or other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the registration
statement for the registration of the Securities as originally filed or in
any amendment thereof, or in any Preliminary Prospectus or the Prospectus,
or in any amendment thereof or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state
-18-
<PAGE> 19
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and agrees to reimburse each such
indemnified party, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company specifically for inclusion therein by
or on behalf of any Underwriter through the Representatives. This indemnity
agreement will be in addition to any liability which the Company may
otherwise have.
(b) Indemnification by Selling Stockholders. Each Selling Stockholder
agrees to indemnify and hold harmless each Underwriter, the directors,
officers, employees and agents of each Underwriter, and each person who
controls any Underwriter within the meaning of either the Act or the
Exchange Act, to the same extent as the foregoing indemnity to each
Underwriter. Notwithstanding the foregoing, no Selling Stockholder shall be
liable under this Section 8 for an amount which exceeds the amount of
proceeds received by such Selling Stockholder from the sale of its portion
of the Underwritten Securities. This indemnity agreement will be in
addition to any liability which any Selling Stockholder may otherwise have.
(c) Indemnification by Underwriters. Each Underwriter severally and
not jointly agrees to indemnify and hold harmless the Company, each of its
directors, each of its officers who signs the Registration Statement, and
each person who controls the Company within the meaning of either the Act
or the Exchange Act and each Selling Stockholder, to the same extent as the
foregoing indemnities to each Underwriter, but only with reference to
written information relating to such Underwriter furnished to the Company
by or on behalf of such Underwriter through the Representatives
specifically for inclusion in the documents referred to in paragraph (a)
above. This indemnity agreement will be in addition to any liability which
any Underwriter may otherwise have.
(d) Notice of Action. Promptly after receipt by an indemnified party
under this Section 8 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against
the indemnifying party under this Section 8, notify the indemnifying party
in writing of the commencement thereof. The indemnifying party shall be
entitled to appoint counsel of the indemnifying party's choice at the
indemnifying party's expense to represent the indemnified party in any
action for which indemnification is sought (in which case the indemnifying
party shall not thereafter be responsible for the fees and expenses of any
separate counsel retained by the indemnified party or parties except as set
forth below); provided, however, that such counsel shall be reasonably
satisfactory to the indemnified party. Notwithstanding the indemnifying
party's election to appoint counsel to represent the indemnified party in
an action, the indemnified party shall have the right to employ separate
counsel (including local counsel), and the indemnifying party shall bear
the reasonable fees, costs and expenses of such separate counsel if (i) the
use of counsel chosen by the indemnifying party to represent the
indemnified party would present such counsel with a conflict of interest,
(ii) the actual or potential defendants in, or targets of, any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party,
(iii) the indemnifying party shall not have employed counsel reasonably
-19-
<PAGE> 20
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of the institution of such action or
(iv) the indemnifying party shall authorize the indemnified party to employ
separate counsel at the expense of the indemnifying party. An indemnifying
party will not, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any pending or threatened claim, action, suit or proceeding in
respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified parties are actual or potential parties to
such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(e) Contribution. In the event that the indemnity provided in
paragraph (a), (b) or (c) of this Section 8 is unavailable or insufficient
to hold harmless an indemnified party for any reason, the Company and the
Underwriters severally agree to contribute to the aggregate of the losses,
claims, damages and liabilities (including legal or other expenses
reasonably incurred in connection with investigating or defending same)
(collectively, "Losses") to which the Company and one or more of the
Underwriters may be subject in such proportion as is appropriate to reflect
the relative benefits received by the Company, the Selling Stockholders and
the Underwriters from the offering of the Securities; provided, however,
that in no case shall any Underwriter (except as may be provided in any
agreement among underwriters relating to the offering of the Securities) be
responsible for any amount in excess of the underwriting discount or
commission applicable to the Securities purchased by such Underwriter
hereunder. If the allocation provided by the immediately preceding sentence
is unavailable for any reason, the Company, the Selling Stockholders and
the Underwriters severally shall contribute in such proportion as is
appropriate to reflect the relative fault of the Company, the Selling
Stockholders and the Underwriters in connection with the statements or
omissions which resulted in such Losses as well as any other relevant
equitable considerations. Benefits received by the Underwriters shall be
deemed to be equal to the total underwriting discounts and commissions, in
each case as set forth on the cover page of the Prospectus and under the
heading "Underwriting", and the Company shall be deemed to receive all
remaining benefits (which shall be deemed to be equal to the total net
proceeds from the Offering (before deducting expenses) received by it and
the Selling Stockholders. Relative fault shall be determined by reference
to, among other things, whether any untrue or any alleged untrue statement
of a material fact or the omission or alleged omission to state a material
fact relates to information provided by the Company, the Selling
Stockholders or the Underwriters, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The Company, the Selling
Stockholders and the Underwriters agree that it would not be just and
equitable if contribution were determined by pro rata allocation or any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (e), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For
purposes of this Section 8, each person who controls an Underwriter within
the meaning of either the Act or the Exchange Act and each director,
officer, employee and agent of an Underwriter shall have the same rights to
contribution as such Underwriter, and each person who controls the Company
within the meaning of either the Act or the Exchange Act, each officer of
the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of
this paragraph (e).
-20-
<PAGE> 21
9. Default by an Underwriter. If any one or more Underwriters shall fail
to purchase and pay for any of the Securities agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule II hereto bears to the aggregate amount
of Securities set forth opposite the names of all the remaining Underwriters)
the Securities which the defaulting Underwriter or Underwriters agreed but
failed to purchase; provided, however, that in the event that the aggregate
amount of Securities which the defaulting Underwriter or Underwriters agreed but
failed to purchase shall exceed 10% of the aggregate amount of Securities set
forth in Schedule II hereto, the remaining Underwriters shall have the right to
purchase all, but shall not be under any obligation to purchase any, of the
Securities, and if such nondefaulting Underwriters do not purchase all the
Securities, this Agreement will terminate without liability to any nondefaulting
Underwriter, the Selling Stockholders or the Company. In the event of a default
by any Underwriter as set forth in this Section 9, the Closing Date shall be
postponed for such period, not exceeding five Business Days, as the
Representatives shall determine in order that the required changes in the
Registration Statement and the Prospectus or in any other documents or
arrangements may be effected. Nothing contained in this Agreement shall relieve
any defaulting Underwriter of its liability, if any, to the Company, the Selling
Stockholders and any nondefaulting Underwriter for damages occasioned by its
default hereunder.
10. Termination. This Agreement may be terminated at any time on or prior
to the Closing Date by you by written notice to the Company if any of the
following has occurred: (i) any outbreak or escalation of hostilities or other
national or international calamity or crisis or change in economic conditions or
in the financial markets of the United States or elsewhere that, in your
judgment, is material and adverse and, in your judgment, makes it impracticable
to market the Securities on the terms and in the manner contemplated in the
Prospectus, (ii) the suspension or material limitation of trading in securities
or other instruments on the New York Stock Exchange, the American Stock
Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile
Exchange, the Chicago Board of Trade or the Nasdaq National Market or limitation
on prices for securities or other instruments on any such exchange or Nasdaq
National Market, (iii) the suspension of trading of any securities of the
Company on any exchange or in the over-the-counter market, (iv) the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which in
your opinion materially or adversely affects, or will materially or adversely
affect, the business, prospects, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole, (v) the declaration of a
banking moratorium by either federal or New York State authorities or (vi) the
taking of any action by any federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your opinion has a material
adverse effect on the financial markets in the United States.
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of each Selling Stockholder and of the Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter,
any Selling Stockholder or the Company or any of the officers, directors or
controlling persons referred to in Section 8 hereof, and will survive delivery
of and payment for the Securities. The provisions of Sections 5(c), 7 and 8
hereof shall survive the termination or cancellation of this Agreement.
-21-
<PAGE> 22
The provision of Sections 5(a)(vi) and 5(b)(i) shall terminate upon the
termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and:
(1) if sent to the Representatives, will be mailed, delivered or
telefaxed to Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park
Avenue, New York, New York 10172, Attention: Joseph Atencio (Fax number:
(212) 892-7528) (with a copy forwarded to Morgan, Lewis & Bockius LLP, 101
Park Avenue, New York, NY 10178, Attention: Christopher T. Jensen, Esq.
(Fax number: (212) 309-6273));
(2) if sent to the Company, will be mailed, delivered or telefaxed to
JAKKS Pacific, Inc., 22761 Pacific Coast Highway, Malibu, California 90265,
Attention: Stephen G. Berman (Fax number: (310) 456-7099) (with a copy to
Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP, 750 Lexington Avenue,
New York, New York 10022, Attention: Murray L. Skala (Fax number: (212)
888-7776)); or
(3) if sent to any Selling Stockholder, will be mailed, delivered or
telefaxed and confirmed to it at the address set forth in Schedule I
hereto.
13. Successors and Reliance. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 8 hereof,
and no other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
and to be performed within the State of New York.
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. Headings. The section headings used herein are for convenience only
and shall not affect the construction hereof.
17. Submission to Jurisdiction, Etc. (a) To the fullest extent permitted
by applicable law, the Company and the Selling Stockholders irrevocably submit
to the jurisdiction of any federal or state court in the City, County and State
of New York, United States of America, in any suit or proceeding based on or
arising under this Agreement, the Custody Agreement, the Registration Statement,
the Prospectus or any Preliminary Prospectus, and irrevocably agree that all
claims in respect of any such suit or proceeding may be determined in any such
court. The Company and the Selling Stockholders irrevocably and fully waive the
defense of an inconvenient forum to the maintenance of such suit or proceeding.
They hereby irrevocably designate and appoint Murray L. Skala (the "Process
Agent"), as their authorized agent upon whom process may be served in any such
suit or proceeding, it being understood that the designation and appointment of
the Process Agent as such authorized agent shall become effective immediately
without any further action on the part of the Selling Stockholders. The Selling
Stockholders represent to the Underwriters that they have notified the Process
Agent of such designation and appointment and that the Process Agent has
accepted the same in writing. The Selling Stockholders hereby irrevocably
authorize and direct the Process Agent to accept such service. They further
agree that service of process upon the Process Agent and written notice of said
service to the Selling Stockholders mailed by prepaid
-22-
<PAGE> 23
registered first-class mail or delivered to the Process Agent at its principal
office, shall be deemed in every respect effective service of process upon the
Selling Stockholders in any such suit or proceeding. Nothing herein shall affect
the right of any Underwriter or any person controlling such Underwriter to serve
process in any other manner permitted by law. The Selling Stockholders further
agree to take any and all action, including the execution and filing of any and
all such documents and instruments as may be necessary to continue the
designation and appointment of the Process Agent in full force and effect so
long as they have any outstanding obligations under this Agreement or the
Custody Agreement. If for any reason the Process Agent is no longer able to
serve as such authorized agent, the Selling Stockholders shall appoint another
agent reasonably satisfactory to Donaldson, Lufkin & Jenrette Securities
Corporation. To the extent that the Selling Stockholders have or hereafter may
acquire any immunity from jurisdiction of any court or from any legal process
(whether through service of note, attachment prior to judgment, attachment in
aid of execution, executor or otherwise) with respect to themselves or their
properties, they hereby irrevocably waive such immunity in respect of their
obligations under this Agreement and the Custody Agreement, to the extent
permitted by law.
(b) The obligation of the parties to make payments hereunder is in U.S.
dollars (the "Obligation Currency") and such obligation shall not be discharged
or satisfied by any tender or recovery pursuant to any judgment expressed in or
converted into any currency other than the Obligation Currency or any other
realization in such other currency, whether as proceeds of set-off, security,
guarantee, distributions, or otherwise, except to the extent to which such
tender, recovery or realization shall result in the effective receipt by the
party which is to receive such payment of the full amount of the Obligation
Currency expressed to be payable hereunder, and the party liable to make such
payment agrees to indemnify the party which is to receive such payment (as an
additional, separate and independent cause of action) for the amount (if any) by
which such effective receipt shall fall short of the full amount of the
Obligation Currency expressed to be payable hereunder and such obligation to
indemnify shall not be affected by judgment being obtained for any other sums
due under this Agreement.
18. Definitions. The terms which follow, when used in this Agreement,
shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"amend," "amendment" or "supplement" with respect to the Registration
Statement, any Preliminary Prospectus or the Prospectus shall mean and
include the filing of any document under the Exchange Act after the
Effective Date, or the issue date of any Preliminary Prospectus or the
Prospectus, as the case may be, deemed to be incorporated therein by
reference.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies are
authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange Commission.
"Custody Agreement" shall mean the Custody Agreement and Power of
Attorney, substantially in the form of Exhibit A attached hereto, which
will be executed by each of the Selling Stockholders in connection with
their respective sales of Common Stock pursuant to this Underwriting
Agreement.
-23-
<PAGE> 24
"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any Rule
462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this Agreement is
executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in Section 1(a)(i) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that omits
Rule 430A Information. Such term shall include the documents incorporated
by reference therein pursuant to Item 12 of Form S-3 which were filed on or
before the issue date of such Preliminary Prospectus.
"Prospectus" shall mean the prospectus relating to the Securities that
is first filed pursuant to Rule 424(b) after the Execution Time or, if no
filing pursuant to Rule 424(b) is required, shall mean the form of final
prospectus relating to the Securities included in the Registration
Statement at the Effective Date. Such term shall include the documents
incorporated by reference therein pursuant to Item 12 of Form S-3 which
were filed on or before the issue date of such Prospectus.
"Registration Statement" shall mean the registration statement
referred to in Section 1(a)(i) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at the
Execution Time, in the form in which it shall become effective) and, in the
event any post-effective amendment thereto or any Rule 462(b) Registration
Statement becomes effective prior to the Closing Date, shall also mean such
registration statement as so amended or such Rule 462(b) Registration
Statement, as the case may be. Such term shall include any Rule 430A
Information deemed to be included therein at the Effective Date as provided
by Rule 430A and the documents incorporated by reference therein pursuant
to Item 12 of Form S-3 which are filed on or before the Effective Date.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the
Act.
"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b) relating
to the offering covered by the initial registration statement.
-24-
<PAGE> 25
If the foregoing Underwriting Agreement is in accordance with your
understanding of our agreement, please sign and return to us the enclosed
duplicate hereof, whereupon this letter and your acceptance shall represent a
binding agreement among the Company and the several Underwriters.
Very truly yours,
JAKKS Pacific, Inc.
By:
------------------------------------
Name:
Title:
SELLING STOCKHOLDERS:
--------------------------------------
Jack Friedman
--------------------------------------
Stephen G. Berman
--------------------------------------
Robert E. Glick
--------------------------------------
Michael G. Miller
--------------------------------------
Murray L. Skala
The foregoing Underwriting Agreement is hereby confirmed and accepted as of
the date first above written.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ADVEST, INC.
MORGAN KEEGAN & COMPANY, INC.
DLJDIRECT INC.
Acting on behalf of themselves and as the
Representatives of the other several Underwriters
named in Schedule II hereof.
By: Donaldson, Lufkin & Jenrette
Securities Corporation
By:
--------------------------------------------------------
Name: Joseph Atencio
Title: Managing Director
-25-
<PAGE> 26
SCHEDULE I TO UNDERWRITING AGREEMENT
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITTEN NUMBER OF OPTION
SELLING STOCKHOLDERS SECURITIES TO BE SOLD SECURITIES TO BE SOLD
<S> <C> <C>
Jack Friedman................................... 250,000 60,000
c/o JAKKS Pacific, Inc.
22761 Pacific Coast Highway
Malibu, CA 90265
Fax No.: (310) 456-7099
Stephen G. Berman............................... 100,000 15,000
c/o JAKKS Pacific, Inc.
22761 Pacific Coast Highway
Malibu, CA 90265
Fax No.: (310) 456-7099
Robert E. Glick................................. 45,000
c/o JAKKS Pacific, Inc.
22761 Pacific Coast Highway
Malibu, CA 90265
Fax No.: (310) 456-7099
Michael G. Miller............................... 45,000
c/o JAKKS Pacific, Inc.
22761 Pacific Coast Highway
Malibu, CA 90265
Fax No.: (310) 456-7099
Murray L. Skala................................. 60,000
c/o JAKKS Pacific, Inc.
22761 Pacific Coast Highway
Malibu, CA 90265
Fax No.: (310) 456-7099
------- ------
Total................................ 500,000 75,000
======= ======
</TABLE>
S-1
<PAGE> 27
SCHEDULE II TO UNDERWRITING AGREEMENT
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
UNDERWRITTEN SECURITIES OPTION SECURITIES
UNDERWRITERS TO BE PURCHASED TO BE PURCHASED
<S> <C> <C>
Donaldson, Lufkin & Jenrette
Securities Corporation........................
Advest, Inc.....................................
Morgan Keegan & Company, Inc....................
DLJDirect Inc...................................
--------- -------
Total................................ 2,700,000 405,000
========= =======
</TABLE>
S-1
<PAGE> 28
EXHIBIT A
Jack Friedman
Stephen G.Berman
Robert E. Glick
Michael G. Miller
Murray L. Skala
(NAMES OF SELLING
STOCKHOLDERS)
CUSTODY AGREEMENT AND POWER OF ATTORNEY
FOR SALE OF COMMON STOCK OF
JAKKS PACIFIC, INC.
Murray L. Skala
As Attorney-in-Fact as provided herein
c/o Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP
750 Lexington Avenue
New York, New York 10022-1200
- ------------------------------------, as Custodian as provided herein
Gentlemen:
The undersigned stockholders (the "Selling Stockholders") of JAKKS Pacific,
Inc., a Delaware corporation (the "Company"), propose to sell shares of Common
Stock, $.001 par value, of the Company ("Common Stock") to certain underwriters
(the "Underwriters") for whom Donaldson, Lufkin & Jenrette Securities
Corporation, Advest, Inc., Morgan Keegan & Company, Inc. and DLJdirect Inc. will
act as the representatives (the "Representatives"). The shares are being
registered for distribution under a Registration Statement on Form S-3 (the
"Registration Statement") for distribution by the Underwriters to the public at
a price and on terms to be hereafter determined. It is understood that at this
time there is no commitment on the part of the Underwriters to purchase any
shares of Common Stock and no assurance that an offering of Common Stock will
take place. The shares of Common Stock which the undersigned propose to sell to
the Underwriters pursuant to the Underwriting Agreement (hereinafter defined)
are referred to herein as the "Securities".
1. Appointment and Powers of Attorney-in-Fact.
A. Each of the undersigned hereby irrevocably constitutes and appoints
Murray L. Skala (the "Attorney-in-Fact") as his agent and attorney-in-fact, with
full power of substitution with respect to all matters arising in connection
with the public offering and sale by the undersigned of the Securities,
including, but not limited to, the power and authority on behalf of the
undersigned to do or cause to be done any of the following things:
(i) negotiate, determine and agree upon (a) the price at which the
Securities will be initially offered to the public by the Underwriters
pursuant to the Underwriting Agreement, (b) the underwriting discount with
respect to the Securities, and (c) the price at which the Securities will
be sold to the Underwriters by the Selling Stockholders pursuant to the
Underwriting Agreement;
A-1
<PAGE> 29
(ii) execute and deliver on behalf of the undersigned an Underwriting
Agreement (the "Underwriting Agreement"), substantially in the form of the
draft dated , 1999, delivered to the undersigned
herewith, receipt of which is acknowledged, but with such insertions,
changes (including a change in the number of shares of Common Stock to be
sold by the undersigned), additions or deletions as the Attorney-in-Fact,
acting in his sole discretion, shall approve, which approval shall be
conclusively evidenced by the execution and delivery of the Underwriting
Agreement by an Attorney-in-Fact, including the making of all
representations and agreements provided in the Underwriting Agreement to be
made by, and the exercise of all authority thereunder vested in, the
undersigned;
(iii) sell, assign, transfer and deliver the Securities to the
Underwriters pursuant to the Underwriting Agreement and deliver to the
Underwriters certificates for the Securities so sold;
(iv) endorse (in blank or otherwise) on behalf of the undersigned the
certificate or certificates for the Securities to be sold by the
undersigned pursuant to the Underwriting Agreement or to execute and
deliver a stock power(s) with respect to such certificates;
(v) take any and all steps deemed necessary or desirable by the
Attorney-in-Fact in connection with the registration of the Securities
under the Securities Act of 1933, as amended (the "Securities Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and under
the securities or "blue sky" laws of various states and jurisdictions,
including, without limitation, the giving or making of such undertakings,
representations and agreements and the taking of such other steps as the
Attorney-in-Fact may deem necessary or advisable;
(vi) instruct the Company and the Custodian, as hereinafter defined,
on all matters pertaining to the sale of the Securities and delivery of
certificates therefor;
(vii) make any assurances, communications and reports (including in
the form of a signed certificate pursuant to Section 6(f) of the
Underwriting Agreement) for and on behalf of the undersigned to the
Underwriters, which may be necessary or advisable for facilitating the sale
of the Securities, or to appropriate state or governmental authorities,
which may be necessary or advisable for effecting the registration of the
Securities under the state securities or blue sky laws;
(viii) provide, in accordance with the Underwriting Agreement, for the
payment of any expenses of the offering and sale of the Common Stock
covered by the Registration Statement to be paid by the Selling
Stockholders;
(ix) exercise any power conferred upon, and to take any action
authorized to be taken by, the undersigned pursuant to the Underwriting
Agreement, in the sole discretion of the Attorney-in-Fact; and
(x) otherwise take all actions and do all things necessary or proper,
required, contemplated or deemed advisable or desirable by the
Attorney-in-Fact in his discretion, including the execution and delivery of
any documents, and generally act for and in the name of the undersigned
with respect to the sale of the Securities to the Underwriters and the
offering of the Securities by the Underwriters as fully as could the
undersigned if then personally present and acting.
B. Power to Act. The Attorney-in-Fact may act alone in exercising the
rights and powers conferred on him by this Custody Agreement and Power of
Attorney (the "Agreement"). The
A-2
<PAGE> 30
Attorney-in-Fact is hereby empowered to determine, individually, in his sole and
absolute discretion, the time or times when, the purposes for which, and the
manner in which, any power herein conferred upon him shall be exercised.
C. Reliance. The Custodian, the Underwriters, the Company and all other
persons dealing with the Attorney-in-Fact as such may rely and act upon any
writing believed in good faith to be signed by the Attorney-in-Fact.
D. Compensation. The Attorney-in-Fact shall not receive any compensation
for his services rendered hereunder, except that he shall be entitled to cause
the Custodian to pay, from the proceeds payable to the undersigned, each of the
undersigned's proportionate share of any out-of-pocket expenses incurred under
this Agreement.
2. Appointment of Custodian; Deposit of Securities.
A. Deposit of Certificates. In connection with and to facilitate the sale
of the Securities to the Underwriters, each of the undersigned hereby appoints
as custodian (the "Custodian") and herewith deposits
with the Custodian one or more certificates for Common Stock that in the
aggregate represent not less than the total number of Securities to be sold by
him to the Underwriters, which number is set forth on Schedule I hereto. Each
such certificate so deposited on the date hereof is in negotiable and proper
deliverable form, endorsed in blank with the signature of the undersigned or the
Attorney-in-Fact thereon guaranteed by a commercial bank or trust company in the
United States or by a member firm of the Nasdaq National Market, or is
accompanied by a duly executed stock power or powers in blank, bearing the
signature of the undersigned or the Attorney-in-Fact so guaranteed. The
Custodian is hereby authorized and directed, subject to the instructions of the
Attorney-in-Fact, (a) to hold in custody the certificate or certificates
deposited herewith, (b) to deliver or to authorize the Company's transfer agent
to deliver the certificate or certificates deposited hereunder (or replacement
certificate(s) for the Securities) to or at the direction of the
Attorney-in-Fact in accordance with the terms of the Underwriting Agreement and
(c) to return or cause the Company's transfer agent to return to the undersigned
new certificate(s) for the shares of Common Stock represented by any certificate
deposited hereunder which are not sold pursuant to the Underwriting Agreement.
B. Retention of Rights of Ownership. Until the Securities have been
delivered to the Underwriters against payment therefor in accordance with the
Underwriting Agreement, the undersigned shall retain all rights of ownership
with respect to the Securities deposited hereunder, including the right to vote
and to receive all dividends and payment thereon, except the right to retain
custody of or dispose of such Securities, which right is subject to this
Agreement, lock-up agreements between each of the undersigned and Advest, Inc.
and the Underwriting Agreement.
C. Compensation. The Custodian shall be entitled to customary
compensation for the services to be rendered hereunder as set forth in Schedule
II attached hereto. Such compensation shall be paid to the Custodian by the
Company.
3. Sale of Securities; Remitting Net Proceeds.
A. Delivery of Securities upon Payment. The Attorney-in-Fact is hereby
authorized and directed to deliver or cause the Custodian or the Company's
transfer agent to deliver certificates for the Securities to the
Representatives, as provided in the Underwriting Agreement, against delivery to
the Attorney-in-Fact for the account of the undersigned of the purchase price of
the Securities, at the time and in the funds specified in the Underwriting
Agreement. The Attorney-in-Fact is
A-3
<PAGE> 31
authorized, on behalf of the undersigned, to accept and acknowledge receipt of
the payment of the purchase price for the Securities and shall promptly deposit
such proceeds with the Custodian. After reserving an amount of such proceeds for
fees and expenses as provided below, the Custodian shall promptly remit to the
undersigned their respective, proportionate shares of the proceeds.
B. Retention of Fees and Expenses. Before any proceeds of the sale of the
Securities are remitted to the undersigned, the Attorney-in-Fact is authorized
and empowered to direct the Custodian to reserve from the proceeds an amount
determined by the Attorney-in-Fact to be sufficient to pay all expenses of the
Selling Stockholders, which amount shall be allocated between the undersigned
according to their respective, proportionate shares of the proceeds. The Selling
Stockholders' expenses shall include those items, if any, of expense of the
offering and sale of the Common Stock to be borne by them as provided in the
Underwriting Agreement. The Custodian is authorized to pay such expenses from
the amount reserved for that purpose pursuant to the written direction of the
Attorney-in-Fact. After payment of expenses from this reserve, the Custodian
will remit to the undersigned their respective, proportionate shares of any
balance. To the extent expenses exceed the amount reserved, the Selling
Stockholders shall remain liable for their respective, proportionate shares of
such expenses.
4. Representations, Warranties and Agreements. Each of the undersigned
represents and warrants to, and agrees with each other, the Company, the
Attorney-in-Fact, the Custodian and the Underwriters as follows:
A. Authority. Each of the undersigned has full legal right, power
and authority to enter into and perform this Agreement and the Underwriting
Agreement and to sell, transfer, assign and deliver the Securities to be
sold by him pursuant to the Underwriting Agreement, free and clear of all
liens, encumbrances, equities and claims whatsoever. If either of
undersigned is acting as a fiduciary, officer, partner, or agent, he is
enclosing with this Agreement certified copies of the appropriate
instruments pursuant to which the undersigned is authorized to act
hereunder.
B. Bring-down of Representations, Warranties and Covenants. Each of
the undersigned has reviewed the representations and warranties to be made
by the undersigned as a Selling Stockholder contained in the Underwriting
Agreement, and hereby represents, warrants and covenants that each of such
representations and warranties is true and correct as of the date hereof
and, except as the undersigned shall have notified the Attorney-in-Fact and
Donaldson, Lufkin & Jenrette Securities Corporation pursuant to paragraph F
of the attached instructions, will be true and correct at all times from
the date hereof through and including the time of the closing of the sale
of the Securities to the Underwriters. Each of the undersigned will
promptly notify the Attorney-in-Fact of any development that would make any
such representation or warranty untrue.
C. Absence of Changes. Each of the undersigned has reviewed the
Registration Statement, including the preliminary prospectus included
therein, and (i) the undersigned have no knowledge of any material adverse
information with regard to the current and prospective operations of the
Company or the Subsidiaries (as defined in the Underwriting Agreement)
except as disclosed in such preliminary prospectus, (ii) the information
contained in such preliminary prospectus with respect to the undersigned is
true and correct, and (iii) to the best of the knowledge and belief of the
undersigned, such preliminary prospectus does not contain any misstatement
of a material fact or omit to state any material fact.
A-4
<PAGE> 32
D. Non-affiliation. Neither of the undersigned is directly or
indirectly an affiliate of or associated with any member of the National
Association of Securities Dealers, Inc.
E. Lock-up. The undersigned will not sell, offer to sell, contract
to sell or otherwise dispose of any shares of Common Stock (or any
securities convertible into or exercisable or exchangeable for shares of
Common Stock) except in accordance with the terms of the Lock-Up Agreement
referred to in Section 5(b)(i) of the Underwriting Agreement.
F. Indemnification. Upon execution and delivery of the Underwriting
Agreement by the Attorney-in-Fact on behalf of each of the undersigned,
each of the undersigned agrees to indemnify and hold harmless the
Underwriters, the Company, each of its directors and each of its officers
who signs the Registration Statement, and each person, if any, who controls
any Underwriter or the Company, and to contribute to amounts paid as a
result of losses, claims, damages, liabilities and expenses, as provided in
Section 8 of the Underwriting Agreement.
G. Agreement to be Bound. Upon execution and delivery of the
Underwriting Agreement by each of the undersigned or the Attorney-in-Fact
on behalf of him, each of the undersigned agrees to be bound by and to
perform each of the covenants and agreements made by each of the
undersigned as a Selling Stockholder in the Underwriting Agreement.
H. Additional Information. Each of the undersigned agrees to deliver
to the Attorney-in-Fact such documentation as the Attorney-in-Fact, the
Company, the other Selling Stockholder or the Underwriters or any of their
respective counsel may reasonably request in order to effectuate any of the
provisions hereof or of the Underwriting Agreement, all of the foregoing to
be in form and substance satisfactory in all respects to the requesting
party.
The foregoing representations, warranties and agreements are made for the
benefit of, and may be relied upon by, each of the undersigned with respect to
the other Selling Stockholder, the Attorney-in-Fact, the Company, the Custodian,
the Underwriters and their respective representatives, agents and counsel and
are in addition to, and not in limitation of, the representations, warranties
and agreements of the Selling Stockholders in the Underwriting Agreement.
5. Irrevocability of Instruments; Termination of this Agreement.
A. Irrevocability. This Agreement, the deposit of the Securities pursuant
hereto and all authority hereby conferred, is granted, made and conferred
subject to and in consideration of (i) the interests of the Attorney-in-Fact,
the Underwriters and the Company for the purpose of completing the transactions
contemplated hereunder and by the Underwriting Agreement and (ii) the completion
of the registration of Common Stock pursuant to the Registration Statement and
the other acts of the above-mentioned parties from the date hereof to and
including the execution and delivery of the Underwriting Agreement in
anticipation of the sale of Common Stock, including the Securities, to the
Underwriters. The Attorney-in-Fact is hereby further vested with an estate,
right, title and interest in and to the Securities deposited herewith for the
purpose of irrevocably empowering and securing to him authority sufficient to
consummate said transactions. Accordingly, this Agreement shall be irrevocable
prior to the Closing Date (as defined in the Underwriting Agreement), and shall
remain in full force and effect until that date. The undersigned further agree
that this Agreement shall not be terminated by operation of law or upon the
occurrence of any event whatsoever, including the death, disability or
incompetence of either or both of the undersigned. If any event referred to in
the preceding sentence shall occur, whether with or without notice thereof to
the Attorney-in-Fact, the Custodian, any of the Underwriters or any other
person, the Attorney-in-Fact and the Custodian nevertheless shall be authorized
and empowered to deliver
A-5
<PAGE> 33
and deal with the Securities deposited under this Agreement by the undersigned
in accordance with the terms and provisions of the Underwriting Agreement and
this Agreement as if such event had not occurred.
B. Termination. If the sale of the Securities contemplated by this
Agreement is not completed by the 60th day after the date of the Prospectus (as
defined in the Underwriting Agreement), this Agreement shall terminate (without
affecting any lawful action of the Attorney-in-Fact or the Custodian prior to
such termination or the agreement of the undersigned to indemnify the
Attorney-in-Fact and the Custodian), and the Attorney-in-Fact shall cause the
Custodian to return to the undersigned all certificates for the Securities
deposited hereunder, but only after having received payment of each of the
undersigned's proportionate part of any expenses to be paid or borne by the
Selling Stockholders. The undersigned hereby covenant with the Attorney-in-Fact
and with each other that if for any reason the sale of the Securities
contemplated hereby shall not be consummated, each of the undersigned shall pay
his proportionate share of all expenses payable by the Selling Stockholders
hereunder or under the Underwriting Agreement.
6. Liability and Indemnification of the Attorney-in-Fact and
Custodian. The Attorney-in-Fact and the Custodian assume no responsibility or
liability to the undersigned or to any other person, other than to deal with the
Securities, the proceeds from the sale of the Securities and any other shares of
Common Stock deposited with the Custodian pursuant to the terms of this
Agreement in accordance with the provisions hereof. The duties and obligations
of the Custodian shall be limited to and determined solely by the express
provisions of this Agreement, and no implied duties or obligations shall be read
into this Agreement against the Custodian. The undersigned hereby agree to
indemnify and hold harmless the Attorney-in-Fact and the Custodian, and their
respective officers, agents, successors, assigns and personal representatives
with respect to any act or omission of or by any of them in good faith in
connection with any and all matters within the scope of this Agreement or the
Underwriting Agreement; provided, however, that the Attorney-in-Fact and the
Custodian may be liable to the undersigned for any such act or omission to the
extent attributable to gross negligence or fraud. The Custodian may consult with
counsel of its own choice and shall have full and complete authorization and
protection for any action taken or suffered by it hereunder in good faith and in
accordance with the opinion of such counsel.
A-6
<PAGE> 34
7. Interpretation.
A. Survival of Representations, Warranties and Agreements. The
representations, warranties and agreements of each of the undersigned contained
herein and in the Underwriting Agreement shall survive the sale and delivery of
the Securities and the termination of this Agreement.
B. Governing Law. The validity, enforceability, interpretation and
construction of this Agreement shall be determined in accordance with the laws
of the State of New York applicable to contracts made and to be performed within
the State of New York, and this Agreement shall inure to the benefit of, and be
binding upon, the undersigned and the undersigned's respective heirs, executors,
administrators, successors and assigns, as the case may be.
C. Validity. Wherever possible each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any such provision shall be prohibited by or invalid under applicable
law, it shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
D. Usage. The use of the masculine gender in this Agreement includes the
feminine and neuter, and the use of the singular includes the plural, wherever
appropriate.
E. Counterparts. This Agreement may be executed in any number of
counterparts, each of which, when so executed and delivered, shall constitute an
original and all together shall constitute one instrument.
F. Binding Effect. This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by and against, the respective successors, heirs,
personal representatives and assigns of the parties hereto.
A-7
<PAGE> 35
IN WITNESS WHEREOF, the undersigned have executed this Custody Agreement
and Power of Attorney this day of November, 1999.
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------
Selling Stockholder: Guaranteed by(2):
(1) By:
Name: Jack Friedman Name:
Title:
Name and address to which notices and
funds shall be sent:
Name:
Address:
(Street)
(City) (State) (Zip)
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------
ACCEPTED by the Attorney-in-Fact as of ACCEPTED by the Custodian as of the date
the date above set forth: above set forth:
By:
Name: Murray L. Skala
By:
Name:
Title:
- --------------------------------------------------------------------------------------
</TABLE>
SEE THE ATTACHED INSTRUCTIONS
- ------------------------------
(1) NOTE: Please sign exactly as your name appears on your stock certificate(s).
(2) NOTE: The signature must be guaranteed by a commercial bank or trust company
in the United States or by a member firm of the Nasdaq National
Market.
A-8
<PAGE> 36
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------
Selling Stockholder: Guaranteed by(2):
(1) By:
Name: Stephen G. Berman Name:
Title:
Name and address to which notices and
funds shall be sent:
Name:
Address:
(Street)
(City) (State) (Zip)
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------
ACCEPTED by the Attorney-in-Fact as of ACCEPTED by the Custodian as of the date
the date above set forth: above set forth:
By:
Name: Murray L. Skala
By:
Name:
Title:
- --------------------------------------------------------------------------------------
</TABLE>
SEE THE ATTACHED INSTRUCTIONS
- ------------------------------
(1) NOTE: Please sign exactly as your name appears on your stock certificate(s).
(2) NOTE: The signature must be guaranteed by a commercial bank or trust company
in the United States or by a member firm of the Nasdaq National
Market.
A-9
<PAGE> 37
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------
Selling Stockholder: Guaranteed by(2):
(1) By:
Name: Robert E. Glick Name:
Title:
Name and address to which notices and
funds shall be sent:
Name:
Address:
(Street)
(City) (State) (Zip)
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------
ACCEPTED by the Attorney-in-Fact as of ACCEPTED by the Custodian as of the date
the date above set forth: above set forth:
By:
Name: Murray L. Skala
By:
Name:
Title:
- --------------------------------------------------------------------------------------
</TABLE>
SEE THE ATTACHED INSTRUCTIONS
- ------------------------------
(1) NOTE: Please sign exactly as your name appears on your stock certificate(s).
(2) NOTE: The signature must be guaranteed by a commercial bank or trust company
in the United States or by a member firm of the Nasdaq National
Market.
A-10
<PAGE> 38
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------
Selling Stockholder: Guaranteed by(2):
(1) By:
Name: Michael G. Miller Name:
Title:
Name and address to which notices and
funds shall be sent:
Name:
Address:
(Street)
(City) (State) (Zip)
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------
ACCEPTED by the Attorney-in-Fact as of ACCEPTED by the Custodian as of the date
the date above set forth: above set forth:
By:
Name: Murray L. Skala
By:
Name:
Title:
- --------------------------------------------------------------------------------------
</TABLE>
SEE THE ATTACHED INSTRUCTIONS
- ------------------------------
(1) NOTE: Please sign exactly as your name appears on your stock certificate(s).
(2) NOTE: The signature must be guaranteed by a commercial bank or trust company
in the United States or by a member firm of the Nasdaq National
Market.
A-11
<PAGE> 39
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------
Selling Stockholder: Guaranteed by(2):
(1) By:
Name: Murray L. Skala Name:
Title:
Name and address to which notices and
funds shall be sent:
Name:
Address:
(Street)
(City) (State) (Zip)
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------
ACCEPTED by the Attorney-in-Fact as of ACCEPTED by the Custodian as of the date
the date above set forth: above set forth:
By:
Name: Murray L. Skala
By:
Name:
Title:
- --------------------------------------------------------------------------------------
</TABLE>
SEE THE ATTACHED INSTRUCTIONS
- ------------------------------
(1) NOTE: Please sign exactly as your name appears on your stock certificate(s).
(2) NOTE: The signature must be guaranteed by a commercial bank or trust company
in the United States or by a member firm of the Nasdaq National
Market.
A-12
<PAGE> 40
INSTRUCTIONS
(FOR COMPLETING THE CUSTODY AGREEMENT AND POWER OF ATTORNEY)
A. You have been sent five copies of the Custody Agreement and Power of
Attorney (the "Agreement"). Please complete and return four copies of the
Agreement and stock certificate(s) as set forth in paragraph D below. A fully
executed copy of the Agreement will be returned to you; a fully executed copy of
the Agreement and your stock certificate(s) will be retained by the Custodian;
and a fully executed copy of the Agreement will be delivered to each
Attorney-in-Fact and to Counsel for the Underwriters.
B. Complete Schedule I attached hereto.
C. Each copy of the Agreement and each stock certificate or stock power
deposited hereunder must be executed by you (or by the Attorney-in-Fact) with
your signature on the Agreement and the stock certificate(s) or the accompanying
stock power guaranteed by a commercial bank or trust company in the United
States or any broker which is a member firm of the Nasdaq National Market. The
stock certificate(s) or stock power and the Agreement should be signed exactly
as your name appears on your stock certificate(s).
D. Endorsed stock certificate(s) or stock certificate(s) with stock powers
attached along with all four executed copies of the completed Agreement should
be promptly returned by hand delivery or by certified mail appropriately insured
to the Custodian at:
c/o [ ]
If sent through the mail, it is recommended that the certificate(s) not be
endorsed, but an executed stock power be sent under separate cover from the
certificate(s).
E. If any certificate that you submit represents a greater number of
Securities than the aggregate number of Securities which you agree to sell
pursuant to the Underwriting Agreement (including any additional shares which
you agree to sell), the Custodian will cause to be delivered to you in due
course, but not earlier than ten days after the final closing for the purchase
of Securities by the Underwriters pursuant to the exercise by the Underwriters
of the over-allotment option described in the Underwriting Agreement, a
certificate for the excess number of shares.
F. For purposes of discharging your obligations under Section 6(f) of the
Underwriting Agreement and Section 4B of the Agreement please contact David
Blatte of Donaldson, Lufkin & Jenrette Securities Corporation by phone at (212)
892-7011 or by facsimile at (212) 892-7528 if any information or representation
included in the foregoing Agreement or the Underwriting Agreement should change,
or if you become aware of any new information, at any time prior to termination
of the period applicable to you referred to in Section 6(b)(ii) of the
Underwriting Agreement.
A-13
<PAGE> 41
EXHIBIT B
JAKKS PACIFIC, INC.
LOCK-UP AGREEMENT
November , 1999
Donaldson, Lufkin & Jenrette Securities Corporation
Advest, Inc.
Morgan, Keegan & Company
DLJdirect Inc.
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
The undersigned understands that Donaldson, Lufkin & Jenrette Securities
Corporation, Advest, Inc., Morgan, Keegan & Company and DLJdirect Inc., as
Representatives of the several underwriters (the "UNDERWRITERS"), propose to
enter into an Underwriting Agreement with JAKKS Pacific, Inc. (the "COMPANY"),
providing for the public offering (the "PUBLIC OFFERING") of common stock, par
value $.001 per share (the "COMMON STOCK") of the Company.
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned,
during the period commencing on the date hereof and ending 180 days after the
date of the final prospectus relating to the Public Offering:
(i) agrees not to (x) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
(including, without limitation, shares of Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock which may
be deemed to be beneficially owned by the undersigned in accordance with
the rules and regulations of the Securities and Exchange Commission) or (y)
enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (x) or
(y) is to be settled by the delivery of Common Stock, or such other
securities, in cash or otherwise), without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation;
(ii) agrees not to make any demand for, or exercise any right with
respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common
Stock, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation; and
(iii) authorizes the Company to cause the transfer agent to decline to
transfer and/or to note stop transfer restrictions on the transfer books
and records of the Company with respect to any shares of Common Stock and
any securities convertible into or exercisable or exchangeable for Common
Stock for which the undersigned is the record holder and, in the
B-1
<PAGE> 42
case of any such shares or securities for which the undersigned is the
beneficial but not the record holder, agrees to cause the record holder to
cause the transfer agent to decline to transfer and/or to note stop
transfer restrictions on such books and records with respect to such shares
or securities.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into the agreements set forth herein, and
that, upon request, the undersigned will execute any additional documents
necessary or desirable in connection with the enforcement hereof. All authority
herein conferred or agreed to be conferred shall survive the death or incapacity
of the undersigned and any obligations of the undersigned shall be binding upon
the heirs, personal representatives, successors, and assigns of the undersigned.
Very truly yours,
--------------------------------------
(Name -- Please Type)
(Address)
(Social Security or Taxpayer
Identification No.)
B-2
<PAGE> 1
EXHIBIT 5.1
[FEDER, KASZOVITZ, ISAACSON, WEBER, SKALA & BASS LLP LETTERHEAD]
November 4, 1999
JAKKS Pacific, Inc.
22761 Pacific Coast Highway
Malibu, CA 90265
Gentlemen:
We have acted as counsel for JAKKS Pacific, Inc., a Delaware corporation
(the "Company"), in connection with the preparation and filing by the Company of
a registration statement on Form S-3 (the "Registration Statement"), under the
Securities Act of 1933, relating to the public offering of 2,700,000 shares of
common stock, par value $.001 per share, of the Company, and up to 405,000 such
shares to be sold solely to cover over-allotments, if any (the "Shares").
We have examined the Registration Statement, the form of Underwriting
Agreement included as an exhibit thereto (the "Underwriting Agreement"),
originals or copies, certified or otherwise identified to our satisfaction, of
the Company's certificate of incorporation and by-laws, records of corporate
proceedings, including minutes of meetings and written consents of the Board of
Directors and stockholders, certificates of public officials and officers and
other authorized representatives of the Company, and such other certificates,
instruments and documents, and we have made such examination of law, as we have
deemed necessary to form the basis of the opinion expressed below. In such
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as originals and the conformity to authentic
originals of all documents submitted to us as copies thereof.
Based on the foregoing, we are of the opinion that:
(a) The currently outstanding Shares offered by the selling
stockholders are duly authorized, validly issued, fully paid and
non-assessable.
(b) The Shares offered by the Company have been duly authorized and,
when issued and sold in accordance with the terms of the Underwriting
Agreement, will be validly issued, fully paid and non-assessable.
We hereby consent to the reference to this firm in the Registration
Statement under the caption "Legal Matters" and to the filing of this opinion as
an exhibit to the Registration Statement.
Very truly yours,
/s/ FEDER, KASZOVITZ, ISAACSON, WEBER,
SKALA & BASS LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF PANNELL KERR FORSTER
We hereby consent to the inclusion in the Registration Statement on Form
S-3 of JAKKS Pacific, Inc. of our report dated February 22, 1999, except for
note 18, for which the date is March 1, 1999, and Note 1 (Stock split), for
which the date is November 4, 1999, on our audits of the consolidated financial
statements of JAKKS Pacific, Inc. as of December 31, 1997 and 1998, and for each
of the three years in the period ended December 31, 1998 and to the
incorporation by reference of our report in any registration statement relating
to the offering to which this Registration Statement relates filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended.
We also hereby consent to the reference to our firm as "Experts" in the
Registration Statement.
/s/ PANNELL KERR FORSTER
--------------------------------------
Pannell Kerr Forster
Certified Public Accountants
A Professional Corporation
Los Angeles, California
November , 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF PLANTE & MORAN, LLP
We hereby consent to the inclusion in the Registration Statement on Form
S-3 of JAKKS Pacific, Inc. of our report dated October 25, 1999 on our audits of
the financial statements of the Flying Colors division of Flying Colors Toys,
Inc. as of May 31, 1998 and 1999, and for each of the three years in the period
ended May 31, 1999, and to the reference to our firm under the caption "Experts"
in the Registration Statement. We also consent to the incorporation by reference
of our report in any registration statement relating to the offering to which
this Registration Statement relates filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended.
/s/ PLANTE & MORAN, LLP
Ann Arbor, Michigan
November 4, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 73,427,409
<SECURITIES> 0
<RECEIVABLES> 35,451,016
<ALLOWANCES> 812,765
<INVENTORY> 9,437,805
<CURRENT-ASSETS> 119,088,319
<PP&E> 12,362,663
<DEPRECIATION> 3,627,662
<TOTAL-ASSETS> 156,620,695
<CURRENT-LIABILITIES> 45,340,676
<BONDS> 0
0
0
<COMMON> 10,723
<OTHER-SE> 110,945,509
<TOTAL-LIABILITY-AND-EQUITY> 156,620,695
<SALES> 121,176,908
<TOTAL-REVENUES> 121,176,908
<CGS> 71,005,451
<TOTAL-COSTS> 33,310,912
<OTHER-EXPENSES> (1,066,497)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170,820
<INCOME-PRETAX> 17,756,222
<INCOME-TAX> 4,754,048
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,002,174
<EPS-BASIC> 0.98
<EPS-DILUTED> 0.86
</TABLE>
