<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO
_________________
Commission file number: 0-28104
JAKKS Pacific, Inc.
(Exact name of registrant as specified in its charter)
Delaware 95-4527222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22761 Pacific Coast Highway
Malibu, California 90265
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 456-7799
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
---------------
The number of shares outstanding of the issuer's common stock is 10,683,378 (as
of August 9, 1999).
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<PAGE> 2
JAKKS PACIFIC, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 1999
ITEMS IN FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Facing page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed consolidated balance sheet -
June 30, 1999 (unaudited) 3
Condensed consolidated statements of operations for the three and six months
ended June 30, 1998 and 1999 (unaudited) 4
Condensed consolidated statements of cash flows for the six months ended
June 30, 1998 and 1999 (unaudited) 5
Notes to condensed consolidated financial
statements (unaudited) 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations. 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 12
Part II OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities and Use of Proceeds. 13
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to
a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K. 13
Signatures. 14
</TABLE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report 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 report 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 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.
2
<PAGE> 3
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
June 30, 1999 (Unaudited)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets
Cash and cash equivalents $ 64,236,214
Accounts receivable, net 21,864,336
Inventory, net 7,485,157
Prepaid expenses and other current assets 1,475,611
------------
Total current assets 95,061,318
------------
Property and equipment, at cost 10,404,438
Less accumulated depreciation and amortization 3,158,305
------------
Property and equipment, net 7,246,133
------------
Goodwill, net 14,469,093
Trademarks, net 13,225,307
Investment in joint venture 1,053,852
Other 179,660
------------
Total assets $131,235,363
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 14,953,630
Reserve for sales returns and allowances 10,671,082
Income taxes payable 2,617,582
------------
Total current liabilities 28,242,294
------------
Deferred income taxes 17,455
------------
Total liabilities 28,259,749
------------
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;
10,665,670 shares issued and outstanding 10,665
Additional paid-in capital 87,296,219
Retained earnings 15,700,296
------------
103,007,180
Less unearned compensation from grant of options 31,566
------------
Net stockholders' equity 102,975,614
------------
Total liabilities and stockholders' equity $131,235,363
============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 1998 and 1999 (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Net sales $16,131,480 $35,981,209 $27,161,251 $60,941,501
Cost of sales 10,013,122 21,332,316 16,693,025 35,528,848
----------- ----------- ----------- -----------
Gross profit 6,118,358 14,648,893 10,468,226 25,412,653
Selling, general and administrative expenses 4,692,019 10,424,163 8,274,028 18,444,588
----------- ----------- ----------- -----------
Income from operations 1,426,339 4,224,730 2,194,198 6,968,065
Other (income) and expense:
Interest income (42,005) (398,385) (51,049) (530,851)
Interest expense 152,647 36,576 319,430 169,727
----------- ----------- ----------- -----------
Income before provision for income taxes 1,315,697 4,586,539 1,925,817 7,329,189
Provision for income taxes 357,732 1,231,602 505,991 1,969,055
----------- ----------- ----------- -----------
Net income $ 957,965 $ 3,354,937 $ 1,419,826 $ 5,360,134
=========== =========== =========== ===========
Net income per share - basic $ 0.16 $ 0.37 $ 0.26 $ 0.66
=========== =========== =========== ===========
Net income per share - diluted $ 0.14 $ 0.32 $ 0.22 $ 0.58
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1999 (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,419,826 $ 5,360,134
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,368,509 1,469,549
Change in accounts receivable (3,072,401) (9,937,611)
Change in inventory (828,730) (4,566,216)
Change in accounts payable and accrued expenses 1,259,081 13,405,187
Net change in other operating assets and liabilities (613,882) (267,714)
----------- -----------
Total adjustments (1,887,423) 103,195
----------- -----------
Net cash provided (used) by operating activities (467,597) 5,463,329
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (1,793,792) (3,816,830)
Investment in joint venture (1,000,000) (53,852)
Acquisition cost of trademarks (12,252) --
Cash paid in excess of fair value
of toy business assets acquired (goodwill) -- (4,320,501)
(Increase) decrease in other assets (168,158) 310,276
----------- -----------
Net cash used by investing activities (2,974,202) (7,880,907)
----------- -----------
Cash flows from financing activities:
Repayment of bank debt (114,700) --
Repayment of acquisition debt (1,766,376) --
Proceeds from sale of common stock -- 51,898,066
Proceeds from sale of convertible preferred stock 4,787,761 --
Dividends paid on convertible preferred stock -- (437,500)
Proceeds from warrants and stock options exercised 113,817 2,741,025
----------- -----------
Net cash provided by financing
activities 3,020,502 54,201,591
----------- -----------
Net increase (decrease) in cash and cash equivalents (421,297) 51,784,013
Cash and cash equivalents, beginning of period 2,535,925 12,452,201
----------- -----------
Cash and cash equivalents, end of period $ 2,114,628 $64,236,214
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 259,757 $ 897,486
=========== ===========
Interest $ 357,037 $ 169,727
=========== ===========
See note 4 for additional supplemental information to condensed consolidated financial statements.
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 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 included in the Company's Form 10-KSB, which contains financial
information for the years ended December 31, 1996, 1997 and 1998.
The information provided in this report reflects all adjustments (consisting
solely of normal recurring accruals) that are, in the opinion of management,
necessary to present fairly the results of operations for this period. The
results for this period are not necessarily indicative of the results to be
expected for the full year.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries.
Basic earnings per share has been computed using the weighted average number of
common shares. Diluted earnings per share has been computed using the weighted
average number of common shares and common share equivalents (which consist of
warrants, options and convertible securities, to the extent they are dilutive).
6
<PAGE> 7
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
June 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>
THREE MONTHS ENDED JUNE 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................... $957,965 $3,354,937
Preferred stock dividends.... -- (87,500)
-------- ----------
Net income available to
common stockholders......... $957,965 5,882,658 $0.16 $3,267,437 8,829,339 $0.37
-------- --------- ----- ---------- --------- -----
Effect of dilutive securities
Options and warrants......... -- 301,206 -- 905,703
9% convertible debentures.... 93,183 1,043,478 23,684 217,390
7% convertible preferred
stock..................... -- 558,658 87,500 535,071
-------- --------- ---------- ---------
Net income per share - diluted
Income available to common
stockholders plus assumed
exercises and conversions... $1,051,148 7,786,000 $0.14 $3,378,621 10,487,503 $0.32
========== ========= ===== ========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 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................... $1,419,826 $5,360,134
Preferred stock dividends.... -- (437,500)
---------- -----------
Net income available to
common stockholders......... $1,419,826 5,423,223 $0.26 $4,922,634 7,473,894 $0.66
-------- --------- ----- ---------- --------- -----
Effect of dilutive securities
Options and warrants......... -- 216,415 -- 762,040
9% convertible debentures.... 186,366 1,043,478 116,867 628,985
4% convertible preferred
stock..................... -- 459,555 -- --
7% convertible preferred
stock..................... -- 279,329 437,500 546,864
-------- --------- ---------- ---------
Net income per share - diluted
Income available to common
stockholders plus assumed
exercises and conversions... $1,606,192 7,422,000 $0.22 $5,477,001 9,411,783 $0.58
========== ========= ===== ========== ========= =====
</TABLE>
Note 3 -- Preferred stock and common stock
In May 1999, the Company issued and sold 2,666,563 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 939,998 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 1,043,479 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 558,658 shares of the Company's common stock.
7
<PAGE> 8
JAKKS PACIFIC, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read together with the Company's Condensed Consolidated
Financial Statements and Notes thereto which appear elsewhere herein.
OVERVIEW
JAKKS was founded to 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. In June 1999, we acquired
Berk Corporation with its lines of educational toy foam puzzle mats and activity
sets. We expect Berk to contribute modestly beginning in the third quarter of
1999.
Our products currently include (1) toys and action figures featuring
licensed characters, including popular wrestling characters under our World
Wrestling Federation license, (2) die-cast collectible and toy vehicles marketed
under our Road Champs and Remco brand names, (3) pre-school electronic toys
marketed under our Child Guidance brand name, (4) educational toy foam puzzles,
mats and activity sets, and (5) fashion dolls and related accessories.
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 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.
In June 1998, we formed a joint venture with THQ Inc., a developer,
publisher and distributor of interactive entertainment software, and the joint
venture licensed the rights from Titan Sports, Inc. to publish World Wrestling
Federation electronic video game software 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 late 1999. We also expect that JAKKS and THQ Inc. will share equally any
profits generated by the joint venture.
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
products, originate in the United States, so we hold certain inventory in a
warehouse and fulfillment facility operated by an unaffiliated third party. 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 a
representative 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.
8
<PAGE> 9
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.
RESULTS OF OPERATIONS
The following unaudited table sets forth, for the periods indicated,
certain statement of operations data as a percentage of net sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................................... 62.1 59.3 61.5 58.3
----- ----- ------ -----
Gross profit.......................................... 37.9 40.7 38.5 41.7
Selling, general and administrative expenses.......... 29.1 29.0 30.4 30.3
----- ----- ------ -----
Income from operations................................ 8.8 11.7 8.1 11.4
Interest, net......................................... (0.7) 1.0 (1.0) 0.6
----- ----- ------ -----
Income before income taxes............................ 8.1 12.7 7.1 12.0
Provision for income taxes............................ 2.2 3.4 1.9 3.2
----- ----- ------ -----
Net income............................................ 5.9% 9.3% 5.2% 8.8%
===== ===== ====== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Net Sales. Net sales increased $19.9 million, or 123%, to $36.0 million in
1999 from $16.1 million in 1998. The significant growth in net sales was due
primarily to the continuing growth of the World Wrestling Federation product
line with its expanded product offerings in the action figures and accessories
categories and frequent character releases, as well as to increasing sales of
Child Guidance pre-school toys and fashion and holiday dolls. Contributions made
by sales of Road Champs die-cast toy and collectible vehicles and Remco toy
vehicles were comparable with the prior year.
Gross Profit. Gross profit increased $8.5 million, or 139%, to $14.6
million in 1999, or 40.7% of net sales, from $6.1 million, or 37.9% 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.
9
<PAGE> 10
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $5.7 million, or 122%, to $10.4 million, or
29.0% of net sales, in 1999, from $4.7 million, or 29.1% of net sales, in 1998.
Selling, general and administrative expenses decreased nominally 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 of our various products in 1999. The overall dollar increase of $5.7
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 travel
expenses. We produced television commercials in support of several of our
products, including World Wrestling Federation action figures, in 1998 and 1999.
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 significantly lower interest-bearing obligations in
1999 than in 1998 with the conversion of our 9% 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 in 1998 and 1999, at effective tax rates of 27.2%
in 1998 and 26.9% in 1999, 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.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net Sales. Net sales increased $33.8 million, or 124%, to $60.9 million in
1999 from $27.1 million in 1998. The significant growth in net sales was due
primarily to the continuing growth of the World Wrestling Federation product
line with its expanded product offerings in the action figures and accessories
categories and frequent character releases, as well as to increasing sales of
Child Guidance pre-school toys and fashion and holiday dolls. Contributions made
by sales of Road Champs die-cast toy and collectible vehicles and Remco toy
vehicles were comparable with the prior year.
Gross Profit. Gross profit increased $14.9 million, or 143%, to $25.4
million in 1999, or 41.7% of net sales, from $10.5 million, or 38.5% 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
3.2% 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 $10.1 million, or 123%, to $18.4 million, or
30.3% of net sales, in 1999, from $8.3 million, or 30.4% of net sales, in 1998.
Selling, general and administrative expenses decreased nominally 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 of our various products in 1999. The overall dollar increase of $10.1
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 travel
expenses. We produced television commercials in support of several of our
products, including World Wrestling Federation action figures, in 1998 and 1999.
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 significantly lower interest-bearing obligations in
1999 than in 1998 with the conversion of our 9% 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 in 1998 and 1999, at effective tax rates of 26.3%
in 1998 and 26.9% in 1999, 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.
10
<PAGE> 11
SEASONALITY
The retail toy industry is inherently seasonal. Generally, in the past, the
Company's sales have been highest during the third and fourth quarters, and
collections for those sales have been highest during the succeeding fiscal
quarters. The Company's working capital needs have been highest during the third
and fourth quarters.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, we had working capital of $66.8 million, as compared
to $13.7 million as of December 31, 1998. This increase was primarily
attributable to the sale of our common stock in May 1999 as well as to our
operating activities.
Operating activities provided net cash of $5.5 million in 1999 as compared
to using net cash of $0.5 million in 1998. Net cash was provided primarily by
net income and non-cash charges, such as depreciation, amortization and
recognition of compensation expense for options, as well as a decrease in
accounts receivable and increases in operating liabilities, which were offset in
part by an increase in inventory. As of June 30, 1999, we had cash and cash
equivalents of $64.2 million.
Our investing activities used net cash of $7.9 million in 1999, as compared
to $3.0 million in 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 Berk Acquisition 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 June 30, 1999, these agreements required future aggregate minimum guarantees
of $17.2 million, exclusive of $1.2 million in advances already paid.
Our financing activities provided net cash of $54.2 million in 1999,
consisting primarily of the issuance of common stock pursuant to 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 1998, financing activities provided net cash of $3.0 million,
consisting primarily of the issuance of our 7% Series A Convertible Preferred
Stock partially offset by the repayment of various notes and other debt issued
in connection with our acquisitions in 1997.
In March and April 1999, the holders of $6.0 million principal amount of
our 9.0% convertible debentures converted all such debentures into 1,043,479
shares of our common stock.
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, which expired on May 31,
1999, had an overall limit of $5.0 million, but was subject to other limitations
based on advance rates on letters of credit and open accounts receivable. We
expect to seek an alternative facility.
In April 1998, we received $4.7 million in net proceeds from the issuance
of shares of our Series A Cumulative Convertible Preferred Stock to two
investors in a private placement, which were converted into 558,658 shares of
our common stock in June 1999. 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 issuance of
shares of our common stock in a public offering.
We believe that our cash flow from operations and cash and cash equivalents
on hand 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.
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<PAGE> 12
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 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 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 expect to
replace internal software with non-compliant codes with software that is
compliant by September 1999.
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 are currently in the process of
selecting a new software package in our corporate office which the manufacturer
has represented as being Year 2000 compliant, and we believe it will be
implemented by July 1999. We estimate the cost of this new software, including
implementation and data conversion costs, to be approximately $60,000. 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 to be 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 began in 1998, and are continuing our efforts, to contact 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> 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
in the areas of changes in United States and international borrowing rates and
changes in foreign currency exchange rates. In addition, we are exposed to
market risk in certain geographic areas that have experienced or remain
vulnerable to an economic downturn, such as China. We purchase substantially all
of our inventory from companies in China, and, therefore, we are subject to the
risk that such suppliers will be unable to provide inventory at competitive
prices. While we believe that, if such an event were to occur we would be able
to find alternative sources of inventory at competitive prices, we cannot assure
you that we would be able to do so. These exposures are directly related to our
normal operating and funding activities. Historically and as of June 30, 1999,
we have not used derivative instruments or engaged in hedging activities to
minimize our market risk.
INTEREST RATE RISK
As of June 30, 1999, we do not have any bank loan or other credit
facility, nor do we have any outstanding debt securities, and, accordingly, we
are not generally subject to any direct risk of loss arising from changes in
interest rates.
FOREIGN CURRENCY RISK
We have wholly-owned subsidiaries in Hong Kong. Sales from these
operations are denominated in U.S. dollars. However, purchases of inventory and
operating expenses are typically denominated in Hong Kong dollars, thereby
creating exposure to changes in exchange rates. Changes in the Hong Kong
dollar/U.S. dollar exchange rate may positively or negatively affect our gross
margins, operating income and retained earnings. 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 do not believe that near-term changes in
exchange rates, if any, will result in a material effect on our future earnings,
fair values or cash flows, and therefore, we have chosen not to enter into
foreign currency hedging transactions. We cannot assure you that this approach
will be successful, especially in the event of a significant and sudden change
in the value of the Hong Kong dollar.
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<PAGE> 14
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 1999, the Company issued a warrant to purchase 111,250
shares of its common stock to Titan Sports, Inc. and a warrant to purchase
13,750 shares of its common stock to Stanley Shenker Associates, Inc. Each
warrant is exercisable by the holder thereof at any time until December 31, 2009
to purchase common stock of the Company at an exercise price of $10.00 per share
(subject to adjustment in the event of certain changes to the Company's capital
stock or certain transactions affecting the Company). The warrants were issued
pursuant to a Consumer Products License Agreement between Titan Sports, Inc. and
a joint venture limited liability company of which the Company is a member, in
connection with the grant of certain trademark and other licenses and rights to
the joint venture. No other consideration was paid to the Company in respect of
the issuance of these warrants. Because the warrants were issued directly to the
two holders pursuant to a privately negotiated commercial agreement,
registration of the warrants (or the underlying common stock) was not required
under the Securities Act of 1933 (the "Act") by reason of the exemption provided
by Section 4(2) of the Act for transactions by the issuer of the securities not
involving any public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company(1)
3.1.1 Certificate of Designation and Preferences of Series A Cumulative
Convertible Preferred Stock of the Company(2)
3.1.2 Certificate of Elimination of All Shares of 4% Redeemable
Convertible Preferred Stock of the Company(2)
3.1.3 Certificate of Amendment of Restated Certificate of Incorporation
of the Company(3)
3.2.1 By-Laws of the Company(1)
3.2.2 Amendment to By-Laws of the Company(4)
4.1 JAKKS Pacific, Inc. 9.00% Convertible Debenture issued to
Renaissance Capital Growth & Income Fund III, Inc., dated
December 31, 1996(4)
4.2 JAKKS Pacific, Inc. 9.00% Convertible Debenture issued to
Renaissance US Growth & Income Trust PLC, dated December 31,
1996(4)
10.1 Lease Agreement, dated June 2, 1999, between Astoria Investment
Company Limited and Road Champs Limited(5)
10.2 Stock Purchase Warrant for 111,250 shares of Common Stock issued
to Titan Sports, Inc.(5)
10.3 Stock Purchase Warrant for 13,750 shares of Common Stock issued
to Stanley Shenker Associates, Inc.(5)
27 Financial Data Schedule(5)
</TABLE>
- -------------------------
(1) Filed previously as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-2048-LA), effective May 1, 1996, and
incorporated herein by reference.
(2) Filed previously as an exhibit to the Company's Current Report on Form
8-K, filed April 7, 1998, and incorporated herein by reference.
(3) Filed previously as exhibit 4.1.2 of the Company's Registration
Statement on Form S-3 (File No. 333-74717), filed on March 9, 1999, and
incorporated herein by reference.
(4) Filed previously as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-22583), effective May 1, 1997, and
incorporated herein by reference.
(5) Filed herewith.
(b) Reports on Form 8-K
No Current Report on Form 8-K was filed in the fiscal quarter ended
June 30, 1999.
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<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Registrant:
JAKKS PACIFIC, INC.
Date: August 9, 1999 By: /s/ Jack Friedman
-------------------
Chairman
(Principal Executive Officer)
Date: August 9, 1999 By: /s/ Joel M. Bennett
--------------------
Chief Financial Officer
(Principal Financial Officer)
15
<PAGE> 1
EXHIBIT 10.1
THIS AGREEMENT made the 2nd day of June, One thousand
nine hundred and ninety-nine
BETWEEN
ASTORIA INVESTMENT COMPANY LIMITED whose registered office is situate at Room
2703, Wing On House, 71 Des Voeux Road, Central, Hong Kong (hereinafter called
"the Landlord") of the one part and
ROAD CHAMPS LIMITED whose registered office is situate at Units 1008-9, 10/F.,
Peninsula Centre, 67 Mody Road, Tsimshatsui East, Kowloon, Hong Kong
(hereinafter Called "the Tenant") of the other part.
WHEREBY IT IS AGREED by and between the parties hereto as follows: -
1. The Landlord hereby lets to the Tenant and the Tenant takes from the
Landlord the premises known as Unit 1015 on 10th Floor, Peninsula Centre, No. 67
Mody Road, Kowloon, Hong Kong (hereinafter called "the said premises") Together
with the right in common with the Landlord and others having the like right to
use go pass and repass up down over and upon the common parts including inter
alia entrance passages halls staircases and lifts so far as the same are
necessary for the proper enjoyment of the said premises subject to the term and
conditions hereinafter contained TO HOLD the same unto the Tenant for the term
of TWO YEARS commencing from the 15th day of June 1999 and expiring on the 14th
day of June 2001 at a rent of HONG KONG DOLLARS THIRTY EIGHT THOUSAND NINE
HUNDRED AND TWENTY ONLY (HK $38,920.00) Hong Kong Currency per calendar month
payable in advance on the 1st day of each and every calendar month without
deduction Provided Further that the last of such payment shall be made pro-rate
according to the number of days then unexpired in the month on which such
payment is made.
2. It is hereby agreed and declared that the said premises are let for the
use of an office by the Tenant only.
3. The tenant hereby agrees with the Landlord as follows: -
(a) To pay the said rent at the times and in the manner aforesaid.
(b) To pay and discharge all rates taxes assessments duties charges
impositions and other outgoings now or at any time hereafter to
be imposed or charged by the Government of Hong Kong or other
lawful authority in respect of the said premises upon the owner
or occupier in respect thereof (Government Rent, Property Tax
and all other outgoings of a capital or non-recurring nature
excepted.)
(c) To pay all charges for electricity, water and gas consumed by
the Tenant in the said premises and all service, maintenance
charges and management fees payable in respect of the said
premises, including the deposits for the meters therefor.
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<PAGE> 2
(d) To well and sufficiently paint maintain and keep in good repair
and condition the interior of the said premises, the furniture
and fittings (if any) and all the Landlord's fixtures and
additions thereto (fair wear and tear expected). In particular,
the Tenant will at its own expense replace any broken or damaged
window panes, fancoils, pipes, wires, drains, taps, wash-basins
and cisterns on the said premises save and except damaged caused
by the agent or servant of the Landlord.
(e) To take all diligent precautions and due care to protect the
interior of the said premises against damage by fire storm
typhoon or the like.
(f) To permit the Landlord and its agents with or without workmen or
others at all reasonable times and upon reasonable notice being
given to the Tenant to enter upon the said premises and to view
the condition thereof and upon notice being given by the
Landlord forthwith to repair in accordance therewith. Upon the
Tenant failing to comply with the said notice the Landlord or
its agents shall be entitled with or without workmen or others
at all reasonable times and upon reasonable notice being given
to the tenant to enter upon the said premises to carry out any
repair and the Tenant shall be liable to pay the Landlord's
costs of carrying out any such repair and incidental charges
provided that in the event of any emergency the Landlord its
servants or agents may enter without notice and forcibly if
necessary, provided that the Landlord shall keep the Tenant
indemnified for any loss and damages caused by the negligence of
the Landlord or its agents in gaining such entry.
(g) Not without the previous written consent of the Landlord (which
consent shall not be unreasonably with held or delayed) to erect
install or alter any fixtures partitioning or other erection or
installation in the said premises or any part thereof or without
the like consent to make or permit or suffer to be made
alterations in or additions to the electrical/gas wiring/piping
and installations or to install or permit or suffer to be
installed any equipment apparatus or machinery which imposes a
weight on any part of the flooring in excess of that for which
it is designed or which requires any additional electrical/gas
main wiring/piping or which consumes electricity/gas not metered
through the Tenant's separate meter. The Landlord shall be
entitled to prescribe the maximum weight and permitted locations
of safes and other heavy equipment and to require that the same
stand on supports of such dimensions and material to distribute
the weight as the Landlord may deem necessary.
(h) Not to transfer assign underlet or otherwise part with the
possession of the said premises or any part thereof either by
way of subletting lending sharing or other means whereby any
person or persons not party to this Agreement obtains the use or
possession of the said premises or any part thereof irrespective
of whether any rental or other consideration is given for such
use or possession and in the event of any such transfer
subletting sharing assignment or parting with the possession of
the said premises (whether for monetary consideration or not)
this Agreement shall at the discretion of the Landlord determine
and the Tenant shall forthwith surrender the said premises to
the landlord. The tenancy shall be personal to the Tenant named
in this Agreement and without in any way limiting the generality
of the foregoing, the following acts and events shall, unless
previously approved in
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<PAGE> 3
writing by the Landlord (which approval the Landlord shall not
be unreasonably withheld) be deemed to be breaches of this
subclause: -
(1) in the case of a Tenant which is a partnership, the
taking in of one or more new partners whether on the
death or retirement of an existing partner or otherwise.
(2) in the case of tenant who is an individual (including a
sole surviving partner of a partnership tenant) the
death, insanity or other disability of that individual
to the intent that no right to use, possess, occupy or
enjoy the said premises or any part thereof shall vest
in the executors, administrators, personal
representatives, next of kin, trustee or committee of
any such individual.
(3) in the case of a tenant which is a corporation any
take-over reconstruction, amalgamation, merger,
voluntary liquidation or change in the person or persons
who owns or own a majority of its voting shares or who
otherwise has or have effective control thereof.
(4) the giving by the Tenant of a Power of Attorney or
similar authority whereby the donee of the Power obtains
the right to use, possess, occupy or enjoy the said
premises or any part thereof or does in fact use, occupy
or enjoy the same.
(5) the change of the Tenant's business name without the
previous written consent of the Landlord which consent
shall not be withheld or delayed.
(i) Not to do or permit or suffer to be done in or upon the said
premises or any part thereof any act or thing which may be or
become or cause a nuisance annoyance damage or disturbance to
the Landlord or to any of the tenants or occupiers of the other
parts of the said building or of the neighboring premises or
which shall amount to a breach or non-observance of any of the
covenants and conditions contained in the Government Lease of
the said premises, the Occupation Permit and the Deed of Mutual
Covenant or which shall be in anywise against the laws of
regulations of the Government of Hong Kong.
(j) Not to keep or store or cause or permit or suffer to be kept or
stored any arms, ammunition, gunpowder, salt-petre, or other
explosive or inflammable substance in the said premises.
(k) Not to use or permit or suffer to be used the said premises or
any part thereof for any illegal or immoral purposes.
(l) To observe and comply with all house rules and regulations made
by the appropriate management authorities relating to the use
and management of the common parts of the said building.
(m) Not to do or permit or suffer to be done anything in or upon the
said building and the said premises which may infringe any laws,
regulations, bye-laws and rules and all notices and requirement
of the Governmental Departments and other competent authorities
in connection with or in relation to the use and occupation of
the said premises and the said building.
(n) Not to do or cause or permit or suffer to be done anything
whereby the policy or policies of insurance on the said premises
and/or the said building against damage by fire or against other
damages howsoever caused may be rendered void or voidable or
whereby the premium for such insurance may be liable to be
3
<PAGE> 4
increased and the Tenant shall indemnify the Landlord against
such increased or additional premium as shall have been brought
about or caused by its act or default.
(o) Not to obstruct or permit any employee or agent to obstruct any
passageway lift staircase entrance exit or other common parts of
the said building, and it is hereby expressly agreed that if any
such obstruction shall happen and the Tenant shall fail to
remove the same immediately upon request either to the Tenant or
to the person then in charge of the said premises on the
Tenant's behalf, the Landlord shall be entitled to dispose of
the same in whatever manner the Landlord shall deem fit
including inter alia destroying and disposing of the same as
rubbish and selling the same on such terms and conditions as the
Landlord may deem fit.
(p) Not to use the verandah of the said premises for the purposes of
drying or hanging any clothing and not to exhibit or display
anything on or near the verandah of the said premises or any
part thereof in such a manner which will affect the appearance
of the said building.
(q) Not to erect or permit to be erected outside the said premises
any wireless or television aerial nor do to permit to be done
anything to the external walls of the said premises which will
affect the appearance of the said building.
(r) Not to place or allow to be placed any showboard name-bill
placard advertisement or notice of any description upon the
external walls and the windows of the said premises.
(s) Not to keep in the said premises any animal or domestic pet
without the prior consent of the Landlord.
(t) To pay and make good to the Landlord all and every loss and
damage whatsoever incurred or sustained by the Landlord as a
consequence of every breach or non-observance of the Tenant's
obligations and stipulations herein contained and to indemnify
the Landlord from and against all actions claims liability costs
and expenses thereby arising.
(u) At the expiration or sooner determination of this Agreement to
deliver up to the Landlord the said premises in particular the
furniture and fittings (if any) in good clean and tenantable
repair condition (fair wear and tear excepted) as aforesaid
together with any additional erections alterations or
improvements which the Tenant may with the consent of the
Landlord as aforesaid have made upon or in the said premises
without payment of any compensation for such additional
erections alterations or improvements Provided That the Landlord
may at its discretion require the Tenant to reinstate remove or
do away with any alternations fixtures or additions made to the
said premises with or without the Landlord's consent or any part
or portion thereof and make good and repair in a proper and
workmanlike manner any damage to the said premises and the
Landlord's fixtures and fittings therein as a result thereof
before delivering up the said premises to the Landlord.
(v) To allow at all reasonable times by appointment within three
calendar months immediately preceding the expiration of the said
term prospective Tenants or occupiers to inspect the said
premises.
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<PAGE> 5
4. The Landlord hereby agrees with the Tenant as follows: -
(a) That the Tenant paying the rent hereby reserved and performing
and observing the terms and conditions herein contained and on
the part of the Tenant to be performed and observed may
peaceably hold and enjoy the said premises during the said term
without any interruption by the Landlord or any person lawfully
claiming through or under it.
(b) To pay Government rent, property tax and all outgoings of a
capital or nonrecurring nature which are now or may hereafter
during the said term be imposed by the Government upon the said
premises.
(c) To use its best endeavor at the Landlord's expense to procure
the manager of the said building to maintain the main walls,
main drains and main pipes, main structures, roof, lifts,
electricity cables and all common areas and facilities of the
said building and/or the said premises in good and substantial
repair and condition throughout the said term.
5. PROVIDED ALWAYS AND IT IS HEREBY EXPRESSLY AGREED AND DECLARED as
follows: -
(a) If the rent reserved or any part thereof shall be unpaid for
seven (7) days after becoming payable (whether legally or
formally demanded or not) or if the Tenant shall fail or neglect
or perform or observe any term or condition herein contained and
on the Tenant's part to be performed or observed or if the
Tenant shall become bankrupt or in the case of a limited company
shall go into liquidation or if a petition for the Tenant's
bankruptcy or winding up, as the case may be, shall have been
filed or if the Tenant shall enter into any composition or
arrangement with creditors or shall suffer the Tenant's goods or
other property to be levied on execution then and in any of the
said cases it shall be lawful for the Landlord at any time
thereafter to determine this Agreement and to re-enter the said
premises or any part thereof in the name of the whole but
without prejudice to any right of action of the Landlord in
respect of any breach of the Tenant's terms and conditions
herein contained and the deposit paid hereunder shall be
forfeited to the Landlord but without prejudice to the
Landlord's right to claim any further damages which the Landlord
shall have sustained or may sustain and a written notice served
by the Landlord on the Tenant to the effect that the Landlord
thereby exercised the power of re-entry and determination
hereinbefore contained shall be a full and sufficient exercise
of such power.
(b) In the event of any breach of any term or condition on the part
of the Tenant herein contained, the Landlord shall not by
acceptance of rent or by any other act whatsoever or by any
omission be deemed to have waived any such breach of term or
condition notwithstanding any rule of law or equity to the
contrary and that no consent to or waiver of any breach shall be
binding on the Landlord unless the same is in writing of the
Landlord.
(bb) Notwithstanding anything hereinbefore contained in the event of
default in payment by the Tenant in respect of any payments to
be made hereunder for a period of seven days from the date on
which the same falls due for payment, the
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<PAGE> 6
Tenant shall further pay to the Landlord on demand interest on
the amount in arrears at the rate of 1.5 percent (1.5)% per
month calculated from the date on which the same becomes due for
payment until the date of payment as liquidated damages and not
as penalty provided that the demand and/or receipt by the
Landlord of interest pursuant to this provision shall be without
prejudice to and shall not affect the right of the Landlord to
exercise any other right or remedy hereof (including the right
of re-entry) exercisable under the terms of this Agreement.
(c) For the purpose of this Agreement any act default neglect or
omission of any servant, agent, licensee, visitor and invitee of
the Tenant shall be deemed to be the act default neglect or
omission of the Tenant.
(d) In the event of the said premises or any part thereof at any
time during the said term being damaged or destroyed by acts of
war, fire, typhoon, earthquake, flood, white ants or subsidence
of the soil so as to render the same unfit for occupation and
use and the cause of which is not attributable to the acts or
omissions of the Tenant then the rent hereby reserved or a fair
proportion thereof according to the nature and extent of the
damage sustained shall cease to be payable until the said
premises shall have been again rendered fit for occupation and
use PROVIDED ALWAYS that should the whole of the said premises
or the greater part thereof be so destroyed or damaged by the
happening of any of the above events as to be unfit for use and
occupation the Landlord shall not be required to rebuild or
reinstate the said premises or the said building if by reason of
the condition of the same or any local Regulations or other
circumstances beyond the control of the Landlord it is not
practicable or reasonable to do so Provided that if the Landlord
shall fail to reinstate or cause to be reinstated the said
premises or the said building within six months of receiving a
written notice to reinstate the same from the Tenant or if the
said premises or the greater part thereof or the said building
remain uninhabitable or inaccessible for a period of one month
the Tenant my forthwith or within a responsible time thereafter
by a written notice terminate this Agreement and thereupon the
same and everything herein contained shall be void as from the
date of occurrence of such damage or destruction and the
Landlord shall forthwith refund to the Tenant the said deposit
or the balance thereof but without prejudice to the rights and
remedies of either party against the other in respect of any
antecedent claim or breach or covenant.
(e) Any notice required to be served hereunder shall be sufficiently
served on the Tenant if delivered or sent by post or left
addressed to it at the said premises or at its registered office
in Hong Kong and any notice to the Landlord shall be
sufficiently served if sent to the Landlord by post at the
Landlord's registered office in Hong Kong. A notice sent by post
shall be deemed to have been received at the time when in due
course of post it would be delivered at the address to which it
is sent.
(f) For the purpose of distress for rent in terms of Part III of the
Landlord and Tenant (Consolidation) Ordinance (Cap.7) and for
the purpose of this Agreement the rent in respect of the said
premises shall be deemed to be in arrears if not paid in advance
at the time and in the manner hereinbefore provided for payment
thereof.
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<PAGE> 7
(g) The Tenant shall not be entitled to any compensation or
abatement of rent in respect of any failure howsoever caused in
respect of the lifts, electricity supply or other services
provided to the said building.
(h) The Landlord does not warrant that the light and air to the
premises would not be obstructed.
(i) The Landlord shall not be in any way liable to the Tenant or to
any person or persons claiming any right title or interest under
the Tenant or any person expressly or impliedly authorized by
the Tenant to enter leave or remain on the said building or any
part thereof for any damage to property or injury to person
which may be sustained by the Tenant or any such person or
persons as aforesaid on account of the defective or damaged
condition of the said premises the said building and the
Landlord's fixtures or fittings therein and any part thereof and
in particular the Landlord shall not be responsible to the
Tenant or any person or persons as aforesaid for any damage to
property or injury to person caused by or through or in any way
owing to the overflow of water or water leakage from any floor
flat or premises or any part of the said building any typhoon
electric current water pipes electric wiring or cables situated
upon under or in any way connected with the said premises and/or
the said building or dropping of cigarette ends broken pieces of
glass or other articles from any floor flat premises or any part
of the said building or neighborhood and the Tenant hereby
agrees to indemnify the Landlord against all claims demands
actions costs expenses whatsoever made upon the Landlord by any
person or persons in respect of the matters aforesaid and
further the Tenant shall be responsible for any damage which may
be done to any part of the said premises or the Landlord's
fixtures and fittings therein.
6.
(a) The Tenant shall on or before the signing hereof deposit with
the Landlord the sum specified in the Schedule hereto to secure
the due observance and performance by the Tenant of the
agreements stipulations and conditions herein contained and on
the Tenant's part to be observed and performed. The said deposit
shall be retained by the Landlord throughout the said term free
of any interest to the Tenant and in the event of any breach or
non-observance or nonperformance by the Tenant or any of the
agreements stipulations or conditions aforesaid the Landlord
shall be entitled to terminate this Agreement in which event the
said deposit may be forfeited to the Landlord without prejudice
to the Landlord's right of action to claim for any monetary loss
or damage which the Landlord may sustain by reasons of the
aforesaid breach non-observance or non-performance.
Notwithstanding the foregoing the Landlord may in any such event
at its option elect not to terminate this Agreement but to
deduct from the deposit the amount of any monetary loss incurred
by the Landlord in consequence of the breach non-observance or
non-performance by the Tenant in which event the Tenant shall as
a condition precedent to the continuation of the tenancy deposit
with the Landlord shall forthwith be entitled to re-enter on the
said premises or any part thereof in the name of the whole and
to determine this Agreement in which event the deposit may be
forfeited to the Landlord as hereinbefore provided.
7
<PAGE> 8
(b) Subject as aforesaid the said deposit shall be refunded to the
tenant by the Landlord without interest within thirty days after
the expiration or sooner determination of this Agreement and
delivery of vacant possession to the Landlord against the Tenant
for any arrears of rent rates and other charges and for any
breach non-observance or non-performance of any of the covenants
agreements stipulations terms and conditions herein contained
and on the part of the Tenant to be observed or performed
whichever shall be the later.
7. It is hereby expressly declared tat no key or construction money or
other premium of a similar nature has been paid by the Tenant or any person or
persons for and on behalf of the Tenant to the Landlord or any other person for
the grant of this tenancy.
8. Where more than one person is party hereto as Landlord or Tenant, the
expression "the Landlord" and "the Tenant" shall where the context admits
include all either or any of such persons and their liability contained or
implied herein shall be joint and several.
9. In this Agreement unless inconsistent with the context, words denoting
persons include corporations and firms; words denoting masculine gender include
feminine gender and neuter gender; and words denoting the singular number
include the plural number and vice versa.
10. Each party shall bear his own solicitors' costs charges and expenses of
an incidental to this Agreement and the stamp duty (including the counterpart)
and registration fee, if any, on this agreement shall be borne equally by the
parties hereto.
11. The Tenant hereby declares and confirms that the Tenant has duly
inspected the said premises and is fully aware that he is taking the said
premises in its present state and condition. The said premises is let on an "as
is" basis and in the physical state and condition as it stands and no warranty
or representation whatsoever has been given or is made by the Landlord or its
agents regarding the physical state and condition thereof or of the building of
which the said premises forms part.
12. Notwithstanding anything herein contained, the Landlord hereby agrees to
grant a rent free period to the Tenant from 15th June 1999 to 14th July 1999 for
decoration purposes only. The management fee, air-conditioning charges,
government rates and all outgoings payable in respect of the said premises for
the said rent-free period shall be borne and paid by the Tenant solely.
13. (a) The said premises are at present subject to a tenancy agreement
dated the 26th day of March 1997 (hereinafter referred as "the
preceding Tenancy Agreement") made between the Landlord of the
one part and one Toy Park (International) Limited (hereinafter
referred to as "the preceding Tenant") of the other part for the
term of two years commencing from the 1st day of June 1997 and
expiring on the 31st day of May 1999 and upon such terms and
conditions as therein more particularly mentioned. The preceding
Tenant has agreed to deliver up vacant possession of the said
premises to the Landlords on or before 31st May 1999
8
<PAGE> 9
(hereinafter referred to as "the Date of Surrender").
Notwithstanding anything herein to the contrary, this Agreement
is conditional upon the delivery of vacant possession of the
premises by the preceding Tenant as scheduled. Should the
preceding Tenant fail to deliver vacant possession of the
premises on or before the Date of Surrender, this Agreement
shall immediately become null and void and in such event the
rental deposits paid hereunder by the Tenant to the Landlord
shall be returned to the Tenant without compensation or costs.
(b) Notwithstanding the payment of rental deposits and the monthly
rental (if any) by the Tenant herein, no relationship of the
Landlord and the Tenant is hereby created unless and until the
vacant possession of the said premises is delivered to the
Landlord on the Date of Surrender.
AS WITNESS the hands of the parties hereto the day and year first above
written.
9
<PAGE> 10
THE SCHEDULE
The deposits in the sum of HK$135,798.00 on the breakdown of which are
as follows: -
(a) Rental deposit HK$116,760.00
(b) Management fee and
Air-conditioning
Charges deposit HK$ 19,038.00
-------------
HK$135,798.00
=============
10
<PAGE> 11
SIGNED by Mr. Lauw Siang Liong ) For and on behalf of
) ASTORIA INVESTMENT
for and on behalf of the Landlord in the ) CO., LTD.
)
presence of :- /s/ John Tso ) /s/ Lauw Siang Liong
SIGNED by Mr. Stephen G. Berman ) For and on behalf of
) ROAD CHAMPS LTD.
for and on behalf of the Tenant in the )
) /s/ Stephen G. Berman
presence of :- /s/ Wills Hon Yen-Ming )
RECEIVED the day and year first above written )
)
of and from the Tenant HONG KONG DOLLARS ONE )
)
HUNDRED THIRTY FIVE THOUSAND SEVEN )
)
HUNDRED AND NINETY EIGHT ONLY being the rental )
)
deposits, management fee & air-conditioning charges )
)
deposits above expressed to be paid by the Tenant to the )
)
Landlord in respect of the said premises )HK$135,798.00
For and on behalf of ASTORIA
INVESTMENT CO., LTD.
/s/ Lauw Siang Liong
----------------------------------------
the Landlord
11
<PAGE> 12
Date the 2nd day of June 1999
ASTORIA INVESTMENT COMPANY LIMITED
AND
ROAD CHAMPS LIMITED
- --------------------------------------------------------------------------------
TENANCY AGREEMENT
- --------------------------------------------------------------------------------
12
<PAGE> 1
EXHIBIT 10.2
JAKKS PACIFIC, INC.
STOCK PURCHASE WARRANT
THE WARRANT EVIDENCED HEREBY AND THE COMMON STOCK ISSUABLE UPON
EXERCISE THEREOF ARE SUBJECT TO A REGISTRATION RIGHTS AGREEMENT DATED JUNE 30,
1999 BETWEEN JAKKS PACIFIC, INC., AND TITAN SPORTS, INC.
NEITHER THIS WARRANT NOR THE UNDERLYING SHARES OF COMMON STOCK HAVE BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY STATE OR OTHER SECURITIES LAW. THE HOLDER HEREOF, BY ACQUIRING
THIS WARRANT, AGREES FOR THE BENEFIT OF THQ, INC. THAT THIS WARRANT MAY BE
RESOLD, PLEDGED, EXERCISED OR OTHERWISE TRANSFERRED ONLY (1) PURSUANT TO AN
AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, (2) PURSUANT TO
OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF
REGULATION S UNDER THE SECURITIES ACT OR (3) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH
ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES.
WARRANT TO PURCHASE COMMON STOCK OF
JAKKS PACIFIC, INC.
Expiration Date: December 31, 2009
This Warrant Certificate certifies that Titan Sports, Inc. (the
"Holder"), or registered assigns, is the registered holder of a Warrant (the
"Warrant") to purchase 111,250 shares of Common Stock, $.001 par value (the
"Common Stock"), of JAKKS PACIFIC, INC., a Delaware corporation (the
"Company'). This Warrant entitles the Holder upon exercise to purchase from the
Company, during the Exercise Period (as defined below), that number of shares of
fully paid and nonassessable Common Stock (the "Warrant Securities") set forth
below. The exercise price (the "Exercise Price") at which shares of Common Stock
shall be deliverable upon exercise of this Warrant shall initially be $10.00 per
share. Shares of Common Stock shall be deliverable upon (i) surrender of this
Warrant with the form of election to purchase attached hereto properly completed
and executed and (ii) payment of the Exercise Price at the office of the Company
designated for such purpose, pursuant to and subject only to the conditions set
forth in this Warrant.
<PAGE> 2
Notwithstanding the foregoing, upon notice of an Acquisition
Transaction (as defined in Section 7 hereof), this Warrant may be exercised
without the exchange of funds pursuant to the net exercise provisions of Section
3(a) below. The Exercise Price and number of Warrant Securities issuable upon
exercise of this Warrant are subject to adjustment upon the occurrence of
certain events set forth herein.
Section 1. Registration of Transfers and Exchanges.
(a) Subject to the limitations set forth below, this Warrant
may be exchanged at the option of the Holder, when surrendered to the Company at
its office, for another Warrant or other Warrants of like tenor and representing
in the aggregate a like number of Warrant Securities. When this Warrant is
surrendered for exchange it shall be canceled and disposed of by the Company.
Upon due presentation for registration of exchange of this Warrant at the office
of the Company, a new Warrant or Warrants of like tenor and evidencing in the
aggregate a like number of Warrant Securities shall be issued, without charge,
to the transferee(s) in exchange for this Warrant, subject to the limitations
set forth herein.
(b) Without limiting the restrictions of Section 10 hereof, in
connection with any Transfer (as defined below), the Holder shall, if required
by the Company, obtain from counsel to such Holder (who may be in-house counsel
for Titan Sports, Inc.) an opinion that the proposed Transfer of this Warrant
may be effected without registration under the Securities Act of 1933, as
amended (the "Act") or applicable state securities law. When this Warrant is
surrendered for Transfer it shall be canceled and disposed of by the Company.
Upon due presentation for registration of Transfer of this Warrant at the office
of the Company, a new Warrant or Warrants of like tenor and evidencing in the
aggregate a like number of Warrant Securities shall be issued, without charge,
to the transferee(s) in exchange for this Warrant, subject to the limitations
set forth herein. As used herein, "Transfer" means sell, assign, transfer,
pledge, hypothecate, mortgage, encumber, dispose by gift or bequest, or
otherwise transfer or disposition.
(c) The Company shall from time to time register the exchange
or Transfer of this Warrant in a Warrant register to be maintained by the
Company upon surrender of this Warrant accompanied by a written instrument or
instruments of such exchange or Transfer in form satisfactory to the Company,
duly executed by the registered holder or holders hereof.
Section 2. Vesting of Warrant; Forfeiture.
This Warrant shall be fully vested and immediately exercisable upon the
execution hereof by the Company.
Section 3. Exercise of Warrant.
(a) Subject to the terms of this Warrant, the Holder shall
have the right, which may be exercised commencing on the date of this Warrant
and until 5:00 p.m., Eastern time on December 31, 2009 (the "Exercise Period"),
to receive from the Company the number of fully paid and nonassessable Warrant
Securities which the Holder may at the time be entitled to
-2-
<PAGE> 3
receive on exercise of this Warrant and payment to the Company of the
Exercise Price then in effect for such Warrant Securities. In the event the
Holder receives notice of an Acquisition Transaction, the Holder may exercise
its right to receive Warrant Securities on a net basis, such that, without the
exchange of any funds, such Holder receives that number of Warrant Securities
otherwise issuable or payable) upon exercise of this Warrant less that number of
Warrant Securities having a Current Market Price (as defined in section 7(b)
hereof) at the time of exercise equal to the aggregate Exercise Price that would
otherwise have been paid by such Holder of this Warrant. If not exercised within
the Exercise Period, this Warrant shall become void and all rights hereunder and
all rights in respect hereof shall become void and shall cease as of such time.
(b) No fractional shares shall be issued upon the exercise of
this Warrant (or any portion hereof). All shares of Common Stock (including
fractions thereof) issuable upon exercise of this Warrant (or fraction hereof)
by the Holder shall be aggregated for purposes of determining whether the
exercise would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the exercise would result in the issuance of a
fraction of a share of Common Stock, the Company shall, in lieu of issuing any
fractional share, pay the Holder otherwise entitled to such fraction a sum in
cash equal to the Current Market Price, multiplied by such fraction on the date
of exercise.
(c) This Warrant may be exercised upon surrender to the
Company at its office designated for such purpose (the address of which is set
forth in Section 9 hereof) of this Warrant with the form of election to purchase
duly filled in and signed, and upon payment to the Company of the Exercise
Price, subject to adjustment pursuant to Section 7 hereof, for the number of
Warrant Securities in respect of which this Warrant is then exercised. Payment
of the aggregate Exercise Price shall be made (i) in cash or by certified or
official bank check payable to the order of the Company or wire transfer in
immediately available funds to such account as shall be designated by the
Company or (ii) in the event the Holder receives notice of an Acquisition
Transaction, in the manner provided in Section 3(a) hereof.
(d) Upon such surrender of this Warrant and payment of the
Exercise Price by the Holder, the Company shall issue and cause to be delivered
within three (3) business days to or upon the written order of the Holder and
(subject to the provisions of Section 10 hereof) in such name or names as the
Holder may designate, a certificate or certificates for the number of full
Warrant Securities issuable upon the exercise of this Warrant. In the event the
name or names so designated are not that of the Holder, such certificate or
certificates shall be deemed to have been issued and any person so designated to
be named therein shall (subject to the provisions of Section 10 hereof) be
deemed to have become a Holder of record of such Warrant Securities as of the
date of the surrender of this Warrant and payment of the Exercise Price.
(e) This Warrant shall be exercisable, at the election of the
Holder, either in full or from time to time in part and, in the event that this
Warrant is exercised in respect of fewer than all of the Warrant Securities
issuable on such exercise at any time during the Exercise Period, the Company
shall, at the time of delivery of this Warrant, deliver to the Holder a new
Warrant, which new Warrant shall in all other respects be identical with this
Warrant but
-3-
<PAGE> 4
exercisable only for the balance of the Warrant Securities remaining
subject to the Warrant, or, at the request of the Holder, appropriate notation
may be made on this Warrant and such Warrant shall be returned to the Holder.
(f) This Warrant shall also be conditionally exercisable, at
the election of the Holder, so that if the Holder exercises this Warrant in
contemplation of the consummation of a transaction described in any of clauses
(i) - (iv) of Section 8(b) hereof and such transaction is not consummated, the
Holder may elect to revoke such exercise, in which case this Warrant shall be
deemed not to have been so exercised.
(g) This Warrant shall be canceled and disposed of by the
Company when surrendered upon exercise. The Company shall keep copies of this
Warrant and any notices given or received hereunder available for inspection by
the Holder during normal business hours at its office.
Section 4. Payment of Taxes. The Company will pay all documentary stamp
taxes attributable to the issuance of Warrant Securities upon exercise of this
Warrant.
Section 5. Mutilated or Missing Warrant Certificate. In case this
Warrant is mutilated, lost, stolen or destroyed, the Company shall issue, in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution of this Warrant, a new Warrant of like tenor and
representing an equivalent number of Warrant Securities, but only upon the
Company's receipt of evidence reasonably satisfactory to the Company of such
loss, theft or destruction of this Warrant and of suitable indemnification.
Section 6. Reservation of Warrant Securities. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the exercise of this Warrant,
a number of its shares of Common Stock as shall from time to time be sufficient
to effect the exercise of this Warrant at the then applicable Exercise Price,
and if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the exercise of this Warrant, the Company will
take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose, including, without limitation,
engaging in best efforts to obtain the requisite shareholder approval. The
Company will be irrevocably authorized and directed at all times to reserve such
number of authorized shares as shall be required for such purpose. Before taking
any action which would cause an adjustment pursuant to Section 7 hereof to
reduce the Exercise Price below the then par value (if any) of this Warrant
Securities, the Company will take any corporate action which may, in the opinion
of its counsel, be necessary in order that the Company may validly and legally
issue fully paid and nonassessable Warrant Securities at the Exercise Price as
so adjusted. The Company covenants that all Warrant Securities which may be
issued upon exercise of this Warrant will, upon issue, be fully paid,
nonassessable, free of preemptive rights and free from all taxes, liens, charges
and security interests with respect to the issue thereof (other than any such
rights, taxes, liens, charges or interests created or granted by Holder or any
other person other than the Company).
-4-
<PAGE> 5
Section 7. Adjustment of Exercise Price. The Exercise Price is subject
to adjustment from time to time upon the occurrence of the events enumerated in
this Section 7. For purposes of this Section 7, "Common Stock" means shares now
or hereafter authorized of any class of common stock of the Company and any
other stock of the Company, however designated, that has the right to
participate in any distribution of the assets or earnings of the Company.
(a) Adjustment for Change in Capital Stock. If the Company (1)
pays a dividend or makes a distribution on its Common Stock in shares of its
Common Stock, (2) subdivides its outstanding shares of Common Stock into a
greater number of shares, or (3) combines its outstanding shares of Common Stock
into a smaller number of shares, then the Exercise Price shall be adjusted in
accordance with the formula:
E1 = E x O
-
A
where:
E1 = the adjusted Exercise Price.
E = the current Exercise Price.
O = the number of shares of all classes of
Common Stock outstanding prior to such
action.
A = the number of shares of all classes of
Common Stock outstanding immediately after
such action.
In the case of a dividend or distribution, the adjustment
shall become effective immediately after the record date for determination of
holders of shares of Common Stock entitled to receive such dividend or
distribution, and in the case of a subdivision, combination or reclassification,
the adjustment shall become effective immediately after the effective date of
such corporate action. If after an adjustment the Holder of this Warrant upon
exercise hereof may receive shares of two or more classes of capital stock of
the Company, the Board of Directors of the Company (the "Board") shall determine
in good faith the allocation of the adjusted Exercise Price between the classes
of capital stock. After such allocation, the exercise privileges, the number of
shares issuable upon such exercise and the Exercise Price of each class of
capital stock shall thereafter be subject to adjustment on terms comparable to
those applicable to Common Stock in this Section 7. The adjustment required by
this Section 7(a) shall be made successively whenever any event listed above
shall occur.
-5-
<PAGE> 6
(b) Certain Definitions.
(i) Current Market Price. The "Current Market Price" per
share of Common Stock on any date is the average of the
closing prices of the Common Stock for thirty (30) consecutive
trading days commencing forty-five (45) trading days before
the date in question. The term "closing price" of the Common
Stock on any day, as indicated in the next day's Wall Street
Journal if so reported in the Wall Street Journal (or if not
reported in the Wall Street Journal, as reported by National
Quotation Bureau Incorporated or, if not so reported, by a
nationally recognized quotation service), shall be (A) the
reported closing price (last sale price) of the Common Stock
on the principal stock exchange on which the Common Stock is
listed, or (B) if the Common Stock is not listed on a stock
exchange, the last sale price of the Common Stock on the
principal automated securities price quotation system on which
sale prices of the Common Stock are reported, or (C) if the
Common Stock is not listed on a stock exchange and sale prices
of the Common Stock are not reported on an automated quotation
system, the mean of the final bid and asked prices for the
Common Stock as reported by National Quotation Bureau
Incorporated or any successor entity if at least two (2)
securities dealers have inserted both bid and asked quotations
for the Common Stock on at least five (5) of the ten (10)
preceding trading days. If none of the foregoing provisions
are applicable, the Current Market Price shall be determined
by the Board in good faith, based upon the Fair Market Value
of one hundred percent (100%) of the Company if sold as a
going concern and without regard to any discount for the lack
of liquidity or on the basis that the relevant shares of the
Common Stock do not constitute a majority or controlling
interest in the Company and assuming, if applicable, the
exercise or conversion of all "in-the-money" warrants,
convertible securities, options or other rights to subscribe
for or purchase any additional shares of capital stock of the
Company or securities convertible or exchangeable into such
capital stock that in any case may be entitled to participate
in the proceeds of such sale. The term "trading day" shall
mean (X) if the Common Stock is listed on at least one stock
exchange, a day on which there is trading on the principal
stock exchange on which the Common Stock is listed, (Y) if the
Common Stock is not listed on a stock exchange but sale prices
of the Common Stock are reported on an automated quotation
system, a day on which trading is reported on the principal
automated quotation system on which sales of the Common Stock
are reported, or (Z) if the foregoing provisions are
inapplicable, a day on which quotations are reported by
National Quotation Bureau Incorporated.
(2) Fair Market Value. The term "Fair Market Value"
means the value obtainable upon a sale in an arm's length
transaction to a third party under usual
-6-
<PAGE> 7
and normal circumstances, with neither the buyer nor the
seller under any compulsion to act, with equity to both, as
determined by the Board in good faith; provided, however, that
if a Holder or Holders, who individually or in the aggregate
own 66% or more of the Warrant Securities (collectively, a
"Significant Holder"), shall dispute the Fair Market Value as
determined by the Board, the Company shall retain an
Independent Expert (as defined in Section 7(b)(3)), provided,
however, that if the Significant Holder does not accept such
Independent Expert, then the Company and the Significant
Holder shall each select an Independent Expert and the two
Independent Experts so selected shall select a third
Independent Expert who shall determine the Fair Market Value.
The determination of Fair Market Value by the Independent
Expert shall be final, binding and conclusive on the Company
and the Significant Holder. All costs and expenses of the
Independent Expert shall be borne one-half by the Company and
one-half by the Significant Holder.
(3) Independent Expert. The term "Independent Expert"
means an investment banking firm reasonably agreeable to the
Company and the Significant Holder who does not (and whose
affiliates do not) have a financial interest in the Company or
any of its affiliates.
(c) When Adjustment Not Required. If the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them to
receive a dividend or distribution and shall, thereafter and before the
distribution to stockholders thereof, legally abandon its plan to pay or deliver
such dividend or distribution, then thereafter no adjustment shall be required
by reason of the taking of such record and any such adjustment previously made
in respect thereof shall be rescinded and annulled.
(d) Notice of Adjustment. Whenever the Exercise Price is
adjusted, the Company shall provide the notices required by Section 8 hereof.
(e) Reorganization of Company. If any capital reorganization
or reclassification of the capital stock of the Company, any consolidation or
merger of the Company with another entity, or the sale or lease of all or
substantially all of the Company's assets to another entity, other than in each
case in connection with an Acquisition Transaction shall be effected in such a
way that holders of Common Stock of the Company shall be entitled to receive
stock, securities or assets with respect to or in exchange for such Common
Stock, then, as a condition precedent to such reorganization, reclassification,
consolidation, merger, sale or lease, lawful and adequate provisions shall be
made whereby the Holder shall thereafter have the right to purchase and receive
upon the basis and the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby, such shares of stock, securities
or assets as may be issued or payable in such reorganization, reclassification,
consolidation, merger, sale or lease with respect to or in exchange for the
number of shares of Common Stock purchasable and receivable upon the exercise of
the rights represented hereby had such rights been exercised immediately prior
thereto, and in any such case appropriate provision shall be made with respect
-7-
<PAGE> 8
to the rights and interests of the Holder to the end that the provisions hereof
(including without limitation, if applicable, provisions for adjustments of the
Exercise Price and of the number of shares of Common Stock purchasable and
receivable upon the exercise of this Warrant) shall thereafter be applicable, as
nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise hereof. The Company will not effect any
such consolidation, merger, sale or lease, unless prior to the consummation
thereof the successor corporation (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing or leasing such
assets shall assume by written instrument, executed and mailed or delivered to
the Holder at the last address thereof appearing on the books of the Company,
the obligation to deliver to the Holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, the Holder may be
entitled to purchase.
Notwithstanding any provision of the preceding paragraph to
the contrary, upon consummation by the Company of an Acquisition Transaction,
this Warrant shall terminate and cease to be exercisable. As used herein,
"Acquisition Transaction" means a transaction in which (i) the Company sells or
leases, in one or a series of related transactions, all or substantially all or
the Company's assets to another entity and distributes the proceeds (or a
portion of such proceeds) of such transaction to the holders of the then
outstanding shares of Common Stock, or (ii) not less than a majority of the then
outstanding shares of Common Stock are changed into or sold or exchanged
(whether pursuant to a recapitalization, reorganization, merger, consolidation,
tender or exchange offer or otherwise) for a different kind of shares of common
stock or other securities (of the Company or of another corporation or other
entity) or for property, cash or any combination of securities, property or
cash, other than in a transaction the sole purpose of which is to change the
Company's domicile.
(f) Form of Warrant. Irrespective of any adjustments in the
Exercise Price or the number or kind of shares purchasable upon the exercise of
this Warrant, any warrant heretofore or hereafter issued may continue to express
the same price and number and kind of shares as are stated in this Warrant.
Section 8. Notices to Warrant Holders.
(a) Upon any adjustment of the Exercise Price pursuant to
Section 7 hereof, the Company shall promptly thereafter cause to be given to the
registered holder of this Warrant written notice setting forth the Exercise
Price after such adjustment and setting forth the number of Warrant Securities
(or portion thereof) issuable after such adjustment in the Exercise Price, upon
exercise of this Warrant and payment of the adjusted Exercise Price. Where
appropriate, such notice may be given in advance and included as a part of the
notice required to be mailed under the other provisions of this Section 8.
(b) In the event (i) that the Company shall authorize the
issuance of rights, options or warrants to subscribe for or purchase shares of
Common Stock or of any other subscription rights or warrants to any holders of
shares of Common Stock, (ii) that the Company shall authorize the distribution
to any holders of shares of Common Stock of evidences of its indebtedness or
assets (including without limitation regular cash dividends), (iii) of any
-8-
<PAGE> 9
consolidation or merger to which the Company is a party and for which approval
of any stockholders of the Company is required, or of the conveyance or transfer
of the properties and assets of the Company substantially as an entirety, or of
any reclassification or change of Common Stock issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or a tender offer or exchange offer made by the Company for shares of Common
Stock, or (iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company, then the Company shall cause to be given to the
Holder, at least thirty (30) days prior to the applicable record date
hereinafter specified (or such later date as notice is given to the holders of
record of Common Stock), or promptly in the case of events for which there is no
record date, a written notice stating (A) the date as of which the persons who
will receive such rights, options, warrants or distribution is determined, (B)
the initial expiration date set forth in any tender offer or exchange offer made
by the Company for shares of Common Stock, (C) the date on which any such
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up is expected to become effective or consummated, and
the date as of which it is expected that holders of record of shares of Common
Stock shall be entitled to exchange such shares for securities or other
property, if any, deliverable upon such reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up, or (D) the date on
which any such issuance, sale, grant or distribution is expected to become
effective or consummated.
(c) The Company shall distribute to the Holder copies of all
notices, materials, annual and quarterly reports, proxy statements, information
statements and any other documents distributed generally to the holders of
shares of Common Stock, at such times and by such method as such documents are
distributed to such holders of shares of Common Stock provided that the Holder
is subject to, or delivers to the Company, an undertaking satisfactory to the
Company agreeing to maintain the confidentiality of any nonpublic information.
(d) The Company shall deliver to the Holder written notice of
the expiration of the Exercise Period of this Warrant. Such notice shall be
delivered by the Company not less than thirty (30) days but not more than ninety
(90) days prior to the existing expiration date of the Exercise Period of this
Warrant.
Section 9. Notices Generally. Any notice or other communication
required or permitted to be given hereunder shall be in writing and shall be
effective (a) upon hand delivery or delivery by telex (with collect answer back
received), telecopy or facsimile at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
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<PAGE> 10
(i) If to the Company: Jakks Pacific, Inc.
22761 Pacific Coast Highway
#226
Malibu, CA 90265
Attention: Jack Friedman
Chief Executive Officer
(ii) If to the Holder: Titan Sports, Inc.
Titan Tower
1241 East Main Street
Stamford, CT 06902
Attention: August Liguori, Executive
Vice President
Edward Kaufman, General
Counsel
or at such other address as either party shall have specified by notice in
writing.
Section 10. Successors and Assigns. Except as otherwise provided
herein, this Warrant shall be binding upon and inure to the benefit of the
parties and their successors and assigns. The Company may not assign this
Warrant or any rights or obligations hereunder without the prior written consent
of Holder (which consent may be withheld for any reason in the sole discretion
of such Holder), except that the Company may assign this Warrant in connection
with the sale of all or substantially all of its assets, provided that the
Company is not released from any of its obligations hereunder, and such assignee
assumes all obligations of the Company hereunder. The Holder may not assign this
Warrant (in whole or in part) or any rights or obligations hereunder (including,
but not limited to, any right to receive any Warrant Securities then issuable
upon exercise of this Warrant) without the consent of the Company, which consent
will not be unreasonably withheld or withheld as to any transferee established
to the satisfaction of the Company to be an individual or entity to whom the
Warrant Securities may be issued by the Company without registration under the
Act pursuant to an exemption from such registration requirements. In addition,
this Warrant may not be Transferred in whole or in part other than pursuant to
an effective registration statement under the Act or an exemption from the
registration provisions thereof. Each Warrant issued upon any such Transfer
shall bear the restrictive legend set forth at the beginning hereof, unless the
Holder delivers to the Company an opinion of counsel to the effect that such
legend is not required for the purposes of compliance with the Act. The
assignment by the Company or Holder of any rights hereunder shall not affect the
obligations of such party under this Warrant.
Section 11. Governing Law. This Warrant shall be deemed to be a
contract made under the laws of the State of New York and for all purposes shall
be governed by and construed and enforced in accordance with the internal laws
of such state without regard to such state's principles of conflict of laws.
Section 12. Amendment. This Warrant may be amended only by a written
instrument, signed by the Holder and the Company, which specifically states that
it is amending this Warrant.
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<PAGE> 11
Section 13. Attorneys' Fees. The Holder shall be entitled to recover
from the Company the reasonable attorneys' fees and expenses incurred by the
Holder in connection with enforcement by the Holder of any obligation of the
Company under this Warrant.
Section 14. Headings. The headings herein are for convenience only,
do not constitute a part of this Warrant and shall not be deemed to limit or
affect any of the provisions hereof.
Section 15. Severability. If any provision of this Warrant is held to
be illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of any party hereto will not be materially and adversely
affected thereby, such provision will be fully severable.
Section 16. Entire Agreement. This Warrant contains the entire
understandings of the parties with respect to the matters covered hereby, and
except as specifically set forth herein, neither of the parties hereto makes any
representation, warranty, covenant or undertaking with respect to such matters.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by an authorized officer.
Dated: June 30, 1999
JAKKS PACIFIC, INC.
By: /s/ Stephen G. Berman
----------------------
Name: Stephen G. Berman
Its: President
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<PAGE> 12
[Form of Election to Purchase]
(To be Executed upon Exercise of this Warrant)
The undersigned registered owner of this Warrant irrevocably (subject
to Section 3(f) of the Warrant) exercises the attached Warrant for and purchases
______ shares of Common Stock and tenders payment for such shares to the order
of JAKKS PACIFIC, INC.. in the amount of $____________ in accordance with the
terms of the attached Warrant, unless the holder is exercising this Warrant
pursuant to the net exercise provisions of Section 3(a) of this Warrant. The
undersigned requests that certificate(s) for such shares be issued and
registered in the name of _____________________________, whose address is
______________________________ and that such certificate(s) be delivered to
____________________________________________ whose address is
_________________________________. If said number of shares is less than all of
the shares of Common Stock purchasable under this Warrant, the undersigned
requests that anew Warrant representing the remaining balance of such shares be
registered in the name of ________________________, whose address is
____________________________________ and that such Warrant be delivered to
________________________________________ whose address is
___________________________________.
Date:_________________ By:_________________________________
Name: ______________________________
Its: ______________________________
<PAGE> 1
EXHIBIT 10.3
JAKKS PACIFIC, INC.
STOCK PURCHASE WARRANT
NEITHER THIS WARRANT NOR THE UNDERLYING SHARES OF COMMON STOCK HAVE BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY STATE OR OTHER SECURITIES LAW. THE HOLDER HEREOF, BY ACQUIRING
THIS WARRANT, AGREES FOR THE BENEFIT OF THQ, INC. THAT THIS WARRANT MAY BE
RESOLD, PLEDGED, EXERCISED OR OTHERWISE TRANSFERRED ONLY (1) PURSUANT TO AN
AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, (2) PURSUANT TO
OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF
REGULATION S UNDER THE SECURITIES ACT OR (3) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH
ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES.
WARRANT TO PURCHASE COMMON STOCK OF
JAKKS PACIFIC, INC.
Expiration Date: December 31, 2009
This Warrant Certificate certifies that Stanley Shenker Associates,
Inc. (the "Holder"), or registered assigns, is the registered holder of a
Warrant (the "Warrant") to purchase 13,750 shares of Common Stock, $.001 par
value (the "Common Stock"), of JAKKS PACIFIC, INC., a Delaware corporation (the
"Company'). This Warrant entitles the Holder upon exercise to purchase from the
Company, during the Exercise Period (as defined below), that number of shares of
fully paid and nonassessable Common Stock (the "Warrant Securities") set forth
below. The exercise price (the "Exercise Price") at which shares of Common Stock
shall be deliverable upon exercise of this Warrant shall initially be $10.00 per
share. Shares of Common Stock shall be deliverable upon (i) surrender of this
Warrant with the form of election to purchase attached hereto properly completed
and executed and (ii) payment of the Exercise Price at the office of the Company
designated for such purpose, pursuant to and subject only to the conditions set
forth in this Warrant.
Notwithstanding the foregoing, upon notice of an Acquisition
Transaction (as defined in Section 7 hereof), this Warrant may be exercised
without the exchange of funds pursuant to the net exercise provisions of Section
3(a) below. The Exercise Price and number of Warrant Securities issuable upon
exercise of this Warrant are subject to adjustment upon the occurrence of
certain events set forth herein.
<PAGE> 2
Section 1. Registration of Transfers and Exchanges.
(a) Subject to the limitations set forth below, this Warrant
may be exchanged at the option of the Holder, when surrendered to the Company at
its office, for another Warrant or other Warrants of like tenor and representing
in the aggregate a like number of Warrant Securities. When this Warrant is
surrendered for exchange it shall be canceled and disposed of by the Company.
Upon due presentation for registration of exchange of this Warrant at the office
of the Company, a new Warrant or Warrants of like tenor and evidencing in the
aggregate a like number of Warrant Securities shall be issued, without charge,
to the transferee(s) in exchange for this Warrant, subject to the limitations
set forth herein.
(b) Without limiting the restrictions of Section 10 hereof, in
connection with any Transfer (as defined below), the Holder shall, if required
by the Company, obtain from counsel to such Holder (who may be in-house counsel
for Stanley Shenker Associates, Inc.) an opinion that the proposed Transfer of
this Warrant may be effected without registration under the Securities Act of
1933, as amended (the "Act") or applicable state securities law. When this
Warrant is surrendered for Transfer it shall be canceled and disposed of by the
Company. Upon due presentation for registration of Transfer of this Warrant at
the office of the Company, a new Warrant or Warrants of like tenor and
evidencing in the aggregate a like number of Warrant Securities shall be issued,
without charge, to the transferee(s) in exchange for this Warrant, subject to
the limitations set forth herein. As used herein, "Transfer" means sell, assign,
transfer, pledge, hypothecate, mortgage, encumber, dispose by gift or bequest,
or otherwise transfer or disposition.
(c) The Company shall from time to time register the exchange
or Transfer of this Warrant in a Warrant register to be maintained by the
Company upon surrender of this Warrant accompanied by a written instrument or
instruments of such exchange or Transfer in form satisfactory to the Company,
duly executed by the registered holder or holders hereof.
Section 2. Vesting of Warrant; Forfeiture.
This Warrant shall be fully vested and immediately exercisable upon the
execution hereof by the Company.
Section 3. Exercise of Warrant.
(a) Subject to the terms of this Warrant, the Holder shall
have the right, which may be exercised commencing on the date of this Warrant
and until 5:00 p.m., Eastern time on December 31, 2009 (the "Exercise Period"),
to receive from the Company the number of fully paid and nonassessable Warrant
Securities which the Holder may at the time be entitled to receive on exercise
of this Warrant and payment to the Company of the Exercise Price then in effect
for such Warrant Securities. In the event the Holder receives notice of an
Acquisition Transaction, the Holder may exercise its right to receive Warrant
Securities on a net basis, such that, without the exchange of any funds, such
Holder receives that number of Warrant Securities otherwise issuable or payable)
upon exercise of this Warrant less that number of Warrant Securities having a
Current Market Price (as defined in section 7(b) hereof) at the time of
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<PAGE> 3
exercise equal to the aggregate Exercise Price that would otherwise have
been paid by such Holder of this Warrant. If not exercised within the Exercise
Period, this Warrant shall become void and all rights hereunder and all rights
in respect hereof shall become void and shall cease as of such time.
(b) No fractional shares shall be issued upon the exercise of
this Warrant (or any portion hereof). All shares of Common Stock (including
fractions thereof) issuable upon exercise of this Warrant (or fraction hereof)
by the Holder shall be aggregated for purposes of determining whether the
exercise would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the exercise would result in the issuance of a
fraction of a share of Common Stock, the Company shall, in lieu of issuing any
fractional share, pay the Holder otherwise entitled to such fraction a sum in
cash equal to the Current Market Price, multiplied by such fraction on the date
of exercise.
(c) This Warrant may be exercised upon surrender to the
Company at its office designated for such purpose (the address of which is set
forth in Section 9 hereof) of this Warrant with the form of election to purchase
duly filled in and signed, and upon payment to the Company of the Exercise
Price, subject to adjustment pursuant to Section 7 hereof, for the number of
Warrant Securities in respect of which this Warrant is then exercised. Payment
of the aggregate Exercise Price shall be made (i) in cash or by certified or
official bank check payable to the order of the Company or wire transfer in
immediately available funds to such account as shall be designated by the
Company or (ii) in the event the Holder receives notice of an Acquisition
Transaction, in the manner provided in Section 3(a) hereof.
(d) Upon such surrender of this Warrant and payment of the
Exercise Price by the Holder, the Company shall issue and cause to be delivered
within three (3) business days to or upon the written order of the Holder and
(subject to the provisions of Section 10 hereof) in such name or names as the
Holder may designate, a certificate or certificates for the number of full
Warrant Securities issuable upon the exercise of this Warrant. In the event the
name or names so designated are not that of the Holder, such certificate or
certificates shall be deemed to have been issued and any person so designated to
be named therein shall (subject to the provisions of Section 10 hereof) be
deemed to have become a Holder of record of such Warrant Securities as of the
date of the surrender of this Warrant and payment of the Exercise Price.
(e) This Warrant shall be exercisable, at the election of the
Holder, either in full or from time to time in part and, in the event that this
Warrant is exercised in respect of fewer than all of the Warrant Securities
issuable on such exercise at any time during the Exercise Period, the Company
shall, at the time of delivery of this Warrant, deliver to the Holder a new
Warrant, which new Warrant shall in all other respects be identical with this
Warrant but exercisable only for the balance of the Warrant Securities remaining
subject to the Warrant, or, at the request of the Holder, appropriate notation
may be made on this Warrant and such Warrant shall be returned to the Holder.
(f) This Warrant shall also be conditionally exercisable, at
the election of the Holder, so that if the Holder exercises this Warrant in
contemplation of the consummation of a
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<PAGE> 4
transaction described in any of clauses (i) - (iv) of Section 8(b) hereof
and such transaction is not consummated, the Holder may elect to revoke such
exercise, in which case this Warrant shall be deemed not to have been so
exercised.
(g) This Warrant shall be canceled and disposed of by the
Company when surrendered upon exercise. The Company shall keep copies of this
Warrant and any notices given or received hereunder available for inspection by
the Holder during normal business hours at its office.
Section 4. Payment of Taxes. The Company will pay all documentary
stamp taxes attributable to the issuance of Warrant Securities upon exercise of
this Warrant.
Section 5. Mutilated or Missing Warrant Certificate. In case this
Warrant is mutilated, lost, stolen or destroyed, the Company shall issue, in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution of this Warrant, a new Warrant of like tenor and
representing an equivalent number of Warrant Securities, but only upon the
Company's receipt of evidence reasonably satisfactory to the Company of such
loss, theft or destruction of this Warrant and of suitable indemnification.
Section 6. Reservation of Warrant Securities. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the exercise of this Warrant,
a number of its shares of Common Stock as shall from time to time be sufficient
to effect the exercise of this Warrant at the then applicable Exercise Price,
and if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the exercise of this Warrant, the Company will
take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose, including, without limitation,
engaging in best efforts to obtain the requisite shareholder approval. The
Company will be irrevocably authorized and directed at all times to reserve such
number of authorized shares as shall be required for such purpose. Before taking
any action which would cause an adjustment pursuant to Section 7 hereof to
reduce the Exercise Price below the then par value (if any) of this Warrant
Securities, the Company will take any corporate action which may, in the opinion
of its counsel, be necessary in order that the Company may validly and legally
issue fully paid and nonassessable Warrant Securities at the Exercise Price as
so adjusted. The Company covenants that all Warrant Securities which may be
issued upon exercise of this Warrant will, upon issue, be fully paid,
nonassessable, free of preemptive rights and free from all taxes, liens, charges
and security interests with respect to the issue thereof (other than any such
rights, taxes, liens, charges or interests created or granted by Holder or any
other person other than the Company).
Section 7. Adjustment of Exercise Price. The Exercise Price is subject
to adjustment from time to time upon the occurrence of the events enumerated in
this Section 7. For purposes of this Section 7, "Common Stock" means shares now
or hereafter authorized of any class of common stock of the Company and any
other stock of the Company, however designated, that has the right to
participate in any distribution of the assets or earnings of the Company.
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<PAGE> 5
(a) Adjustment for Change in Capital Stock. If the Company (1)
pays a dividend or makes a distribution on its Common Stock in shares of its
Common Stock, (2) subdivides its outstanding shares of Common Stock into a
greater number of shares, or (3) combines its outstanding shares of Common Stock
into a smaller number of shares, then the Exercise Price shall be adjusted in
accordance with the formula:
E1 = E x O
-
A
where:
E1 = the adjusted Exercise Price.
E = the current Exercise Price.
O = the number of shares of all classes of
Common Stock outstanding prior to such
action.
A = the number of shares of all classes of
Common Stock outstanding immediately after
such action.
In the case of a dividend or distribution, the adjustment
shall become effective immediately after the record date for determination of
holders of shares of Common Stock entitled to receive such dividend or
distribution, and in the case of a subdivision, combination or reclassification,
the adjustment shall become effective immediately after the effective date of
such corporate action. If after an adjustment the Holder of this Warrant upon
exercise hereof may receive shares of two or more classes of capital stock of
the Company, the Board of Directors of the Company (the "Board") shall determine
in good faith the allocation of the adjusted Exercise Price between the classes
of capital stock. After such allocation, the exercise privileges, the number of
shares issuable upon such exercise and the Exercise Price of each class of
capital stock shall thereafter be subject to adjustment on terms comparable to
those applicable to Common Stock in this Section 7. The adjustment required by
this Section 7(a) shall be made successively whenever any event listed above
shall occur.
(b) Certain Definitions.
(i) Current Market Price. The "Current Market Price" per
share of Common Stock on any date is the average of the
closing prices of the Common Stock for thirty (30) consecutive
trading days commencing forty-five (45) trading days before
the date in question. The term "closing price" of the Common
Stock on any day, as indicated in the next day's Wall Street
Journal if so reported in the Wall Street Journal (or if not
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<PAGE> 6
reported in the Wall Street Journal, as reported by National
Quotation Bureau Incorporated or, if not so reported, by a
nationally recognized quotation service), shall be (A) the
reported closing price (last sale price) of the Common Stock
on the principal stock exchange on which the Common Stock is
listed, or (B) if the Common Stock is not listed on a stock
exchange, the last sale price of the Common Stock on the
principal automated securities price quotation system on which
sale prices of the Common Stock are reported, or (C) if the
Common Stock is not listed on a stock exchange and sale prices
of the Common Stock are not reported on an automated quotation
system, the mean of the final bid and asked prices for the
Common Stock as reported by National Quotation Bureau
Incorporated or any successor entity if at least two (2)
securities dealers have inserted both bid and asked quotations
for the Common Stock on at least five (5) of the ten (10)
preceding trading days. If none of the foregoing provisions
are applicable, the Current Market Price shall be determined
by the Board in good faith, based upon the Fair Market Value
of one hundred percent (100%) of the Company if sold as a
going concern and without regard to any discount for the lack
of liquidity or on the basis that the relevant shares of the
Common Stock do not constitute a majority or controlling
interest in the Company and assuming, if applicable, the
exercise or conversion of all "in-the-money" warrants,
convertible securities, options or other rights to subscribe
for or purchase any additional shares of capital stock of the
Company or securities convertible or exchangeable into such
capital stock that in any case may be entitled to participate
in the proceeds of such sale. The term "trading day" shall
mean (X) if the Common Stock is listed on at least one stock
exchange, a day on which there is trading on the principal
stock exchange on which the Common Stock is listed, (Y) if the
Common Stock is not listed on a stock exchange but sale prices
of the Common Stock are reported on an automated quotation
system, a day on which trading is reported on the principal
automated quotation system on which sales of the Common Stock
are reported, or (Z) if the foregoing provisions are
inapplicable, a day on which quotations are reported by
National Quotation Bureau Incorporated.
(2) Fair Market Value. The term "Fair Market Value"
means the value obtainable upon a sale in an arm's length
transaction to a third party under usual and normal
circumstances, with neither the buyer nor the seller under any
compulsion to act, with equity to both, as determined by the
Board in good faith; provided, however, that if a Holder or
Holders, who individually or in the aggregate own 66% or more
of the Warrant Securities (collectively, a "Significant
Holder"), shall dispute the Fair Market Value as determined by
the Board, the Company shall retain an Independent Expert (as
defined in Section 7(b)(3)), provided, however, that if the
Significant Holder does not accept such Independent Expert,
then the Company and the Significant Holder shall each
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<PAGE> 7
select an Independent Expert and the two Independent Experts
so selected shall select a third Independent Expert who shall
determine the Fair Market Value. The determination of Fair
Market Value by the Independent Expert shall be final, binding
and conclusive on the Company and the Significant Holder. All
costs and expenses of the Independent Expert shall be borne
one-half by the Company and one-half by the Significant
Holder.
(3) Independent Expert. The term "Independent Expert"
means an investment banking firm reasonably agreeable to the
Company and the Significant Holder who does not (and whose
affiliates do not) have a financial interest in the Company or
any of its affiliates.
(c) When Adjustment Not Required. If the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them to
receive a dividend or distribution and shall, thereafter and before the
distribution to stockholders thereof, legally abandon its plan to pay or deliver
such dividend or distribution, then thereafter no adjustment shall be required
by reason of the taking of such record and any such adjustment previously made
in respect thereof shall be rescinded and annulled.
(d) Notice of Adjustment. Whenever the Exercise Price is
adjusted, the Company shall provide the notices required by Section 8 hereof.
(e) Reorganization of Company. If any capital reorganization
or reclassification of the capital stock of the Company, any consolidation or
merger of the Company with another entity, or the sale or lease of all or
substantially all of the Company's assets to another entity, other than in each
case in connection with an Acquisition Transaction shall be effected in such a
way that holders of Common Stock of the Company shall be entitled to receive
stock, securities or assets with respect to or in exchange for such Common
Stock, then, as a condition precedent to such reorganization, reclassification,
consolidation, merger, sale or lease, lawful and adequate provisions shall be
made whereby the Holder shall thereafter have the right to purchase and receive
upon the basis and the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby, such shares of stock, securities
or assets as may be issued or payable in such reorganization, reclassification,
consolidation, merger, sale or lease with respect to or in exchange for the
number of shares of Common Stock purchasable and receivable upon the exercise of
the rights represented hereby had such rights been exercised immediately prior
thereto, and in any such case appropriate provision shall be made with respect
to the rights and interests of the Holder to the end that the provisions hereof
(including without limitation, if applicable, provisions for adjustments of the
Exercise Price and of the number of shares of Common Stock purchasable and
receivable upon the exercise of this Warrant) shall thereafter be applicable, as
nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise hereof. The Company will not effect any
such consolidation, merger, sale or lease, unless prior to the consummation
thereof the successor corporation (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing or leasing such
assets shall assume by written instrument, executed and
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<PAGE> 8
mailed or delivered to the Holder at the last address thereof appearing on
the books of the Company, the obligation to deliver to the Holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions, the
Holder may be entitled to purchase.
Notwithstanding any provision of the preceding paragraph to
the contrary, upon consummation by the Company of an Acquisition Transaction,
this Warrant shall terminate and cease to be exercisable. As used herein,
"Acquisition Transaction" means a transaction in which (i) the Company sells or
leases, in one or a series of related transactions, all or substantially all or
the Company's assets to another entity and distributes the proceeds (or a
portion of such proceeds) of such transaction to the holders of the then
outstanding shares of Common Stock, or (ii) not less than a majority of the then
outstanding shares of Common Stock are changed into or sold or exchanged
(whether pursuant to a recapitalization, reorganization, merger, consolidation,
tender or exchange offer or otherwise) for a different kind of shares of common
stock or other securities (of the Company or of another corporation or other
entity) or for property, cash or any combination of securities, property or
cash, other than in a transaction the sole purpose of which is to change the
Company's domicile.
(f) Form of Warrant. Irrespective of any adjustments in the
Exercise Price or the number or kind of shares purchasable upon the exercise of
this Warrant, any warrant heretofore or hereafter issued may continue to express
the same price and number and kind of shares as are stated in this Warrant.
Section 8. Notices to Warrant Holders.
(a) Upon any adjustment of the Exercise Price pursuant to
Section 7 hereof, the Company shall promptly thereafter cause to be given to the
registered holder of this Warrant written notice setting forth the Exercise
Price after such adjustment and setting forth the number of Warrant Securities
(or portion thereof) issuable after such adjustment in the Exercise Price, upon
exercise of this Warrant and payment of the adjusted Exercise Price. Where
appropriate, such notice may be given in advance and included as a part of the
notice required to be mailed under the other provisions of this Section 8.
(b) In the event (i) that the Company shall authorize the
issuance of rights, options or warrants to subscribe for or purchase shares of
Common Stock or of any other subscription rights or warrants to any holders of
shares of Common Stock, (ii) that the Company shall authorize the distribution
to any holders of shares of Common Stock of evidences of its indebtedness or
assets (including without limitation regular cash dividends), (iii) of any
consolidation or merger to which the Company is a party and for which approval
of any stockholders of the Company is required, or of the conveyance or transfer
of the properties and assets of the Company substantially as an entirety, or of
any reclassification or change of Common Stock issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or a tender offer or exchange offer made by the Company for shares of Common
Stock, or (iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company, then the Company shall cause to be given to the
Holder, at least thirty (30) days prior
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<PAGE> 9
to the applicable record date hereinafter specified (or such later date as
notice is given to the holders of record of Common Stock), or promptly in the
case of events for which there is no record date, a written notice stating (A)
the date as of which the persons who will receive such rights, options, warrants
or distribution is determined, (B) the initial expiration date set forth in any
tender offer or exchange offer made by the Company for shares of Common Stock,
(C) the date on which any such reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up is expected to
become effective or consummated, and the date as of which it is expected that
holders of record of shares of Common Stock shall be entitled to exchange such
shares for securities or other property, if any, deliverable upon such
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up, or (D) the date on which any such issuance, sale,
grant or distribution is expected to become effective or consummated.
(c) The Company shall distribute to the Holder copies of all
notices, materials, annual and quarterly reports, proxy statements, information
statements and any other documents distributed generally to the holders of
shares of Common Stock, at such times and by such method as such documents are
distributed to such holders of shares of Common Stock provided that the Holder
is subject to, or delivers to the Company, an undertaking satisfactory to the
Company agreeing to maintain the confidentiality of any nonpublic information.
(d) The Company shall deliver to the Holder written notice of
the expiration of the Exercise Period of this Warrant. Such notice shall be
delivered by the Company not less than thirty (30) days but not more than ninety
(90) days prior to the existing expiration date of the Exercise Period of this
Warrant.
Section 9. Notices Generally. Any notice or other communication
required or permitted to be given hereunder shall be in writing and shall be
effective (a) upon hand delivery or delivery by telex (with collect answer back
received), telecopy or facsimile at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur.
The addresses for such communications shall be:
(i) If to the Company: Jakks Pacific, Inc.
22761 Pacific Coast Highway
#226
Malibu, CA 90265
Attention: Jack Friedman
Chief Executive Officer
(ii) If to the Holder: Stanley Shenker Associates, Inc.
c/o Titan Sports, Inc.
Titan Tower
1241 East Main Street
Stamford, CT 06902
Attention: Stanley Shenker
or at such other address as either party shall have specified by notice in
writing.
-9-
<PAGE> 10
Section 10. Successors and Assigns. Except as otherwise provided
herein, this Warrant shall be binding upon and inure to the benefit of the
parties and their successors and assigns. The Company may not assign this
Warrant or any rights or obligations hereunder without the prior written consent
of Holder (which consent may be withheld for any reason in the sole discretion
of such Holder), except that the Company may assign this Warrant in connection
with the sale of all or substantially all of its assets, provided that the
Company is not released from any of its obligations hereunder, and such assignee
assumes all obligations of the Company hereunder. The Holder may not assign this
Warrant (in whole or in part) or any rights or obligations hereunder (including,
but not limited to, any right to receive any Warrant Securities then issuable
upon exercise of this Warrant) without the consent of the Company, which consent
will not be unreasonably withheld or withheld as to any transferee established
to the satisfaction of the Company to be an individual or entity to whom the
Warrant Securities may be issued by the Company without registration under the
Act pursuant to an exemption from such registration requirements. In addition,
this Warrant may not be Transferred in whole or in part other than pursuant to
an effective registration statement under the Act or an exemption from the
registration provisions thereof. Each Warrant issued upon any such Transfer
shall bear the restrictive legend set forth at the beginning hereof, unless the
Holder delivers to the Company an opinion of counsel to the effect that such
legend is not required for the purposes of compliance with the Act. The
assignment by the Company or Holder of any rights hereunder shall not affect the
obligations of such party under this Warrant.
Section 11. Governing Law. This Warrant shall be deemed to be a
contract made under the laws of the State of New York and for all purposes shall
be governed by and construed and enforced in accordance with the internal laws
of such state without regard to such state's principles of conflict of laws.
Section 12. Amendment. This Warrant may be amended only by a written
instrument, signed by the Holder and the Company, which specifically states that
it is amending this Warrant.
Section 13. Attorneys' Fees. The Holder shall be entitled to recover
from the Company the reasonable attorneys' fees and expenses incurred by the
Holder in connection with enforcement by the Holder of any obligation of the
Company under this Warrant.
Section 14. Headings. The headings herein are for convenience only,
do not constitute a part of this Warrant and shall not be deemed to limit or
affect any of the provisions hereof.
Section 15. Severability. If any provision of this Warrant is held to
be illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of any party hereto will not be materially and adversely
affected thereby, such provision will be fully severable.
-10-
<PAGE> 11
Section 16. Entire Agreement. This Warrant contains the entire
understandings of the parties with respect to the matters covered hereby, and
except as specifically set forth herein, neither of the parties hereto makes any
representation, warranty, covenant or undertaking with respect to such matters.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by an authorized officer.
Dated: June 30, 1999
JAKKS PACIFIC, INC.
By: /s/ Stephen G. Berman
------------------------
Name: Stephen G. Berman
Its: President
-11-
<PAGE> 12
[Form of Election to Purchase]
(To be Executed upon Exercise of this Warrant)
The undersigned registered owner of this Warrant irrevocably (subject
to Section 3(f) of the Warrant) exercises the attached Warrant for and purchases
______ shares of Common Stock and tenders payment for such shares to the order
of JAKKS PACIFIC, INC.. in the amount of $____________ in accordance with the
terms of the attached Warrant, unless the holder is exercising this Warrant
pursuant to the net exercise provisions of Section 3(a) of this Warrant. The
undersigned requests that certificate(s) for such shares be issued and
registered in the name of _____________________________, whose address is
______________________________ and that such certificate(s) be delivered to
____________________________________________ whose address is
_________________________________. If said number of shares is less than all of
the shares of Common Stock purchasable under this Warrant, the undersigned
requests that anew Warrant representing the remaining balance of such shares be
registered in the name of ________________________, whose address is
____________________________________ and that such Warrant be delivered to
________________________________________ whose address is
___________________________________.
Date: _____________________ By: ____________________________
Name:___________________________
Its: ___________________________
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 64,236,214
<SECURITIES> 0
<RECEIVABLES> 22,031,902
<ALLOWANCES> 167,586
<INVENTORY> 7,485,157
<CURRENT-ASSETS> 95,061,318
<PP&E> 10,404,438
<DEPRECIATION> 3,158,305
<TOTAL-ASSETS> 131,235,363
<CURRENT-LIABILITIES> 28,242,294
<BONDS> 0
0
0
<COMMON> 10,665
<OTHER-SE> 102,964,949
<TOTAL-LIABILITY-AND-EQUITY> 131,235,363
<SALES> 60,941,501
<TOTAL-REVENUES> 60,941,501
<CGS> 35,528,848
<TOTAL-COSTS> 8,020,425
<OTHER-EXPENSES> (132,466)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169,727
<INCOME-PRETAX> 7,329,189
<INCOME-TAX> 1,969,055
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,360,134
<EPS-BASIC> .66
<EPS-DILUTED> .58
</TABLE>
