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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
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(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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
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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 [ ]
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The number of shares outstanding of the issuer's common stock is 19,362,553 (as
of May 10, 2000).
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q/A
QUARTER ENDED MARCH 31, 2000
ITEMS IN FORM 10-Q/A
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Facing page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed consolidated balance sheet -
December 31, 1999 and March 31, 2000 (unaudited) 3
Condensed consolidated statements of operations for the three months
ended March 31, 1999 and 2000 (unaudited) 4
Condensed consolidated statements of cash flows for the three months ended
March 31, 1999 and 2000 (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. 13
Part II OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities and Use of Proceeds. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to
a Vote of Security Holders. None
Item 5. Other Information. 14
Item 6. Exhibits and Reports on Form 8-K. 14
Signatures. 15
</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
ASSETS
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000
----------------- --------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 57,546,406 $ 72,441,969
Marketable securities 39,333,944 24,264,618
Accounts receivable, net 38,024,903 39,978,118
Inventory, net 19,863,508 17,262,114
Advance royalty payments 1,137,238 2,407,265
Prepaid expenses and other current assets 1,617,692 273,873
------------ ------------
Total current assets 157,523,691 156,627,957
------------ ------------
Office furniture and equipment 1,233,068 1,507,907
Molds and tooling 15,283,211 16,497,300
Leasehold improvements 344,263 1,128,311
------------ ------------
Total 16,860,542 19,133,518
Less accumulated depreciation and amortization 5,320,103 6,545,675
------------ ------------
Property and equipment, net 11,540,439 12,587,843
------------ ------------
Investment in joint venture 3,658,339 5,256,967
Goodwill, net 46,020,232 45,605,175
Trademarks, net 12,633,248 12,501,072
Intangibles and deposits, net 1,502,147 1,337,408
------------ ------------
Total assets $232,878,096 $233,916,422
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 9,962,655 $ 8,513,712
Accrued expenses 15,856,505 12,739,579
Reserve for sales returns and allowances 15,318,001 12,300,554
Income taxes payable 3,211,926 5,046,154
Current portion of long term debt 4,967 4,967
------------ ------------
Total current liabilities 44,354,054 38,604,966
------------ ------------
Long term debt 8,713 7,471
Deferred income taxes 1,013,834 895,859
------------ ------------
Total liabilities 45,376,601 39,508,296
------------ ------------
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;
19,272,692 and 19,338,056 shares issued and outstanding 19,273 19,338
Additional paid-in capital 155,172,781 155,475,914
Retained earnings 32,309,441 38,912,874
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Total stockholders' equity 187,501,495 194,408,126
------------ ------------
Total liabilities and stockholders' equity $232,878,096 $233,916,422
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</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 Months Ended March 31, 1999 and 2000 (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 2000
<S> <C> <C>
Net sales $24,960,292 $50,782,075
Cost of sales 14,196,532 30,678,416
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Gross profit 10,763,760 20,103,659
Selling, general and administrative expenses 8,020,425 16,099,802
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Income from operations 2,743,335 4,003,857
Other (income) and expense:
Income from Joint Venture -- (5,211,345)
Other expense -- 451,803
Interest income (132,466) (952,046)
Interest expense 133,151 --
----------- -----------
Income before provision for income taxes 2,742,650 9,715,445
Provision for income taxes 737,453 3,112,012
----------- -----------
Net income $ 2,005,197 $ 6,603,433
=========== ===========
Net income per share - basic $ 0.18 $ 0.34
=========== ===========
Net income per share - diluted $ 0.17 $ 0.32
=========== ===========
</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 Three Months Ended March 31, 1999 and 2000 (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 2000
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,005,197 $ 6,603,433
----------- -----------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 747,265 1,881,137
Change in operating assets and liabilities
Accounts receivable 1,461,912 (1,953,215)
Preferred return from joint venture -- (1,598,628)
Inventory (2,584,801) 2,601,394
Advanced royalty payments (206,059) (1,270,027)
Prepaid expenses and other (272,057) 1,343,818
Accounts payable 976,038 (1,448,943)
Accrued expenses 121,985 (3,116,926)
Income taxes payable (53,195) 1,834,228
Reserve for sales returns and allowances 1,415,261 (3,017,447)
Deferred income taxes 1,876 (117,975)
Sale of marketable securities -- 15,069,326
----------- -----------
Total adjustments 1,608,225 10,206,742
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Net Cash provided by operating activities 3,613,422 16,810,175
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Deferred offering and acquisition costs (12,682) --
Purchase of Property and equipment (1,629,955) (2,272,976)
Other assets 397,463 56,408
Investment in joint venture (9,144) --
----------- ----------
Net Cash used by investing activities (1,254,318) (2,216,568)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Offering costs - common stock (143,808) --
Proceeds from stock options and warrants exercised 1,663,083 303,198
Dividends paid on convertible preferred stock (350,000) --
Repayment of long term debt -- (1,242)
----------- -----------
Net Cash provided by financing activities 1,169,275 301,956
----------- -----------
Net increase in cash and cash equivalents 3,528,379 14,895,563
Cash and cash equivalents, beginning of period 12,452,201 57,546,406
----------- -----------
Cash and cash equivalents, end of period $15,980,580 $72,441,969
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 749,793 $ 1,277,784
=========== ===========
Interest $ 133,151 $ --
=========== ===========
See note 4 for additional supplemental information to condensed consolidated financial statements.
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2000
Note 1 - Basis of presentation
The accompanying 1999 and 2000 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-K, which contains financial
information for the years ended December 31, 1997, 1998 and 1999.
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).
All common shares and common share equivalents have been adjusted retroactively
to give effect to a three-for-two stock split paid on November 4, 1999.
6
<PAGE> 7
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
March 31, 2000
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 MARCH 31,
---------------------------------------------------------------------------------
1999 2000
------------------------------------ ------------------------------------
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................... $2,005,197 $6,603,433
Preferred Dividends
Declared/Paid............... (350,000) --
---------- ----------
Net income available to
common stockholders......... 1,655,197 9,170,945 $0.18 6,603,433 19,289,560 $0.34
---------- ---------- ----- ---------- ---------- -----
Effect of dilutive securities
Options and warrants......... -- 1,049,879 -- 1,084,437
9% convertible debentures.... 93,183 1,565,217 -- --
7% convertible preferred
stock..................... 350,000 837,987 -- --
-------- ---------- ---------- ---------
Net income per share - diluted
Income available to common
stockholders plus assumed
exercises and conversions... $2,098,380 12,624,028 $0.17 $6,603,433 20,373,997 $0.32
========== ========== ===== ========== ========== =====
</TABLE>
Note 3 -- Preferred stock and common stock
During 1999, the Company issued and sold 6,810,955 shares of its common
stock in public offerings and received $117.8 million of net proceeds.
Note 4 -- Supplemental information to condensed consolidated statements of cash
flows
In 1999, the holders of $6.0 million principal amount of the Company's 9%
convertible debentures converted all such debentures into an aggregate of
1,565,218 shares of the Company's common stock. Additionally, all 1,000
outstanding shares of 7% cumulative convertible preferred stock with a total
stockholders' equity value of $4,731,152 were converted into an aggregate of
837,987 shares of the Company's common stock.
Note 5 -- Acquisitions
In June 1999, the Company purchased all of the outstanding shares of Berk
Corporation, a producer of educational toy foam puzzle mats and activity sets,
for approximately $3.3 million in cash. In connection with this acquisition, the
Company assumed liabilities of approximately $3.1 million and incurred
acquisition costs of approximately $113,000.
In October 1999, the Company acquired all of the stock of Flying Colors
Toys, Inc. for approximately $52.9 million. Consideration paid at closing was in
cash. Professional fees totaling $310,667 were incurred as part of the
acquisition costs. Contingent consideration includes an earn-out in an amount of
up to $4.5 million in each of the three 12-month periods following the closing,
if gross profits of Flying Colors Toys branded products achieve certain
prescribed levels in each of such periods.
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 design, develop, produce and market children's toys
and related products. We commenced business operations when we assumed operating
control over the toy business of Justin Products Limited ("Justin"), and have
included the results of Justin's operations in our consolidated financial
statements from July 1, 1995, the effective date of that acquisition. The Justin
product lines, which consisted primarily of fashion dolls and accessories and
electronic products for children, accounted for substantially all of our net
sales for the period from April 1, 1995 (inception) to December 31, 1995.
One of our key strategies has been to grow through the acquisition or
licensing of product lines, concepts and characters. In 1996, we expanded our
product lines to include products based on licensed characters and properties,
such as World Wrestling Federation action figures and accessories.
We acquired Road Champs in February 1997, and have included the results of
operations of Road Champs from February 1, 1997, the effective date of the
acquisition. We acquired the Child Guidance and Remco trademarks in October
1997, both of which contributed to operations nominally in 1997, but contributed
more significantly to operations commencing in 1998. In June 1999, we acquired
Berk Corporation with its lines of educational toy foam puzzle mats and activity
sets. Berk began to contribute modestly beginning in the third quarter of 1999.
In October 1999, we acquired Flying Colors Toys, Inc., whose product lines
include licensed activity kits, play clay compound playsets and lunch boxes as
well as other related products. Flying Colors product lines contributed to
operations beginning in the fourth quarter of 1999.
Our products currently include (1) action figures and accessories featuring
licensed characters, principally from the World Wrestling Federation license,
(2) Flying Colors molded plastic activity sets, clay compound playsets and lunch
boxes, (3) Wheels division products, including Road Champs die-cast collectible
and toy vehicles and Remco toy vehicles and role-play toys and accessories, (4)
Child Guidance infant and pre-school electronic toys, educational toy foam
puzzle mats and blocks, activity sets and outdoor products, and (5) fashion
and mini 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 World Wrestling Federation Entertainment to
publish World Wrestling Federation electronic video game software on all
platforms. The first games produced under this license were released in November
1999. We are entitled to receive a guaranteed preferred return based on the
sales of the video games, and THQ is entitled to receive the balance of the
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
and Flying Colors products, originate in the United States, so we hold certain
inventory in warehouse and fulfillment facilities operated by unaffiliated third
parties. In addition, we hold inventory of other products from time to time in
support of promotions or other domestic programs with retailers. To date,
substantially all of our sales have been to domestic customers. We intend to
expand distribution of our products into foreign territories and, accordingly,
we have (1) engaged representatives to oversee sales in certain territories, (2)
engaged distributors in certain territories, and (3) established direct
relationships with retailers in certain territories.
We establish reserves for sales allowances, including promotional
allowances and allowances for anticipated defective product returns and
potential markdowns, 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.
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<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
$47.4 million and trademarks of approximately $13.9 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
MARCH 31,
------------------
1999 2000
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<S> <C> <C>
Net sales............................................. 100.0% 100.0%
Cost of sales......................................... 56.9 60.4
----- -----
Gross profit.......................................... 43.1 39.6
Selling, general and administrative expenses.......... 32.1 31.7
----- -----
Income from operations................................ 11.0 7.9
Income from joint venture............................. -- (10.3)
Interest, net......................................... 0.0 (1.8)
Other expenses........................................ 0.0 0.9
----- -----
Income before income taxes............................ 11.0 19.1
Provision for income taxes............................ 3.0 6.1
----- -----
Net income............................................ 8.0% 13.0%
===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Net Sales. Net sales increased $25.8 million, or 103.5%, to $50.8 million
in 2000 from $24.9 million in 1999. The significant growth in net sales was due
primarily to the continuing sales of the World Wrestling Federation action
figure product line with its expanded product offerings and frequent character
releases, as well as to increasing sales in our Wheels division, consisting
primarily of our Road Champs die-cast toy and collectible vehicles with the
launch of the BXS die-cast bicycles, fashion and holiday dolls and Child
Guidance pre-school toys and the additions of Berk products, which contributed
nominally to operations beginning in the third quarter of 1999 and Flying Colors
products, which began contributing to operations beginning in the fourth quarter
of 1999.
Gross Profit. Gross profit increased $9.3 million, or 86.8%, to $20.1
million in 2000, or 39.6% of net sales, from $10.8 million, or 43.1% of net
sales, in 1999. The overall increase in gross profit was attributable to the
significant increase in net sales. The decrease in the gross profit margin of
3.5% of net sales was due in part to higher in-bound freight costs incurred to
more quickly launch our BXS die-cast bicycle product line and close-outs of
certain Flying Colors products in preparation of the transfer of such products
from the Michigan distribution facilities to our third party facilities in
Washington state. Additionally, the amortization expense of molds and tools used
in the manufacture of our products and royalty expense increased as a percentage
of net sales due to changes in the product mix and the launch of a larger number
of products in 2000.
9
<PAGE> 10
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $16.1 million in 2000 and $8.0 million in 1999,
constituting 31.7% and 32.1% of net sales, respectively. The overall significant
increase of $8.1 million in such costs was due to costs incurred in support of
the Company's development, marketing and distribution of products under its
recent acquisition of Flying Color Toys trademarks. Selling, general and
administrative expenses decreased as a percentage of net sales due in part to
the fixed nature of certain of these expenses. The overall dollar increase was
also due to the significant increase in net sales with its proportionate impact
on variable selling costs such as freight and shipping related expenses, sales
commissions, cooperative advertising and travel expenses, among others. We
produced television commercials in support of several of our products, including
World Wrestling Federation action figures, in 1999 and 2000. 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.
Income from Joint Venture. Beginning in the fourth quarter of 1999, we
began to earn our preferred return on the sale of World Wrestling Federation
video games by our joint venture with THQ.
Interest Net. We had no interest-bearing obligations in 2000 with the
conversion of our convertible debentures in 1999. In addition, we had
significantly higher average cash balances during 2000 than in 1999 due to the
net proceeds from the sale of our common stock in May 1999 and in December 1999.
Other Expense. Other expense in 2000 consists mainly of expenses related to
the lease termination of certain Flying Colors facilities and other related
shut-down costs. No such expenses were incurred in 1999.
Provision for Income Taxes. Provision for income taxes included Federal,
state and foreign income taxes in 1999 and 2000, at effective tax rates of 26.9%
in 1999 and 32.0% in 2000, benefiting from a flat 16.5% Hong Kong Corporation
Tax on our income arising in, or derived from, Hong Kong. As of March 31, 2000,
we had deferred tax assets of approximately $1.4 million 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 March 31, 2000, we had working capital of $118.0 million, as compared
to $113.2 million as of December 31, 1999. This increase was primarily
attributable to our operating activities.
Operating activities provided net cash of $16.8 million in 2000, as
compared to $3.6 million in 1999. Net cash was provided primarily by net income,
non-cash charges, such as depreciation and amortization, and the sale of
marketable securities, as well as a decrease in inventory, prepaid expenses and
an increase in income tax payable, which were offset in part by increases in
preferred return from joint venture, accounts receivable, advanced royalty
payments and decreases in accounts payable, accrued expenses and reserves for
sales returns and allowances. As of March 31, 2000, we had cash and cash
equivalents of $72.4 million and marketable securities of $24.3 million.
Our investing activities used net cash of $2.2 million in 2000, as compared
to $1.3 million in 1999, consisting primarily of the purchase of molds and
tooling used in the manufacture of our products in 2000 and 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 March 31, 2000, these agreements required
future aggregate minimum guarantees of $13.4 million, exclusive of $2.4 million
in advances already paid.
Our financing activities provided net cash of $.3 million in 2000,
consisting primarily of the exercises of options and warrants. In 1999,
financing activities provided net cash of $1.2 million, consisting primarily of
the exercise of options and warrants.
In 1999, the holders of $6.0 million principal amount of our 9.0%
convertible debentures converted all such debentures into 1,565,218 shares of
our common stock.
In 1999, we received $117.8 million in net proceeds from the issuance of
shares of our common stock in public offerings.
In June 1999, we purchased all the outstanding capital stock of Berk
Corporation for approximately $3.3 million. We also agreed to pay an earn-out of
up to $500,000 if sales of Berk products achieve certain prescribed levels over
the 12-month period ending June 30, 2000. Berk is a leading producer of
educational toy foam puzzle mats and blocks featuring popular licensed
characters, including Mickey Mouse, Minnie Mouse, Winnie the Pooh, Blue's Clues,
Barney, Teletubbies, Sesame Street, Looney Tunes and Toy Story II characters,
and non-licensed activity sets and outdoor products.
On October 5, 1999, we completed the acquisition of the Flying Colors Toys
product line through the purchase of all the outstanding capital stock of Flying
Colors Toys, a privately-held company based in Dexter, Michigan. At or shortly
after the closing we paid approximately $34.7 million for the stock and paid
off approximately $17.6 million of indebtedness. We also agreed to pay an
earn-out of up to $13.5 million over the 36-month period following the closing
if net sales of Flying Colors products achieve certain targeted levels during
this period. Two of Flying Colors Toys' senior executives and most of its
creative design and product development staff have remained with Flying Colors
Toys. Flying Colors Toys' principal products include molded plastic activity
kits, clay compound playsets and lunch boxes featuring licensed characters,
including Barbie, Rugrats, Blue's Clues and Looney Tunes characters. The kits
cover a broad range of products and activities, such as make and paint your own
characters, jewelry making, art studios, posters, puzzles and other projects.
We believe that our cash flow from operations, cash and cash equivalents on
hand and marketable securities 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.
11
<PAGE> 12
IMPACT OF THE YEAR 2000
ASSESSMENT OF INTERNAL INFRASTRUCTURE. We believe that we have identified
most of the major computers, software applications and related equipment used
in connection with our internal operations that need to be evaluated to
determine if they must be modified, upgraded or replaced to minimize the
possibility of a material disruption to our business. Based on a review of
these computer systems, we have determined that our computer systems and
applications are compliant with the year 2000 format. Since January 1, 2000, we
have not experienced any problems with our computer systems or applications
related to the year 2000 problem.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to
computers and related systems, the operation of office and facilities
equipment, such as fax machines, telephone switches, security systems and other
common devices, may be affected by the year 2000 problem. We have assessed the
potential effect of the year 2000 problem on our office and facilities
equipment and have determined that no problems exist that cannot be remediated
by the replacement of relatively inexpensive equipment. Since January 1, 2000,
we have not experienced any problems with our office and facilities equipment
related to the year 2000 problem.
COSTS OF REMEDIATION. Our total cost of completing required modifications,
upgrades or replacements of our internal systems was approximately $120,000.
Based on the activities described above, we do not believe that the year 2000
problem will have a material adverse effect on our business or operating
results.
SUPPLIERS. As part of our review of the year 2000 problem, we contacted
third-party suppliers of components and key contractors used in the production
of our products to identify and, to the extent possible, resolve issues
involving the year 2000 problem. However, we have limited or no control over
the actions of these third-party suppliers and subcontractors. Thus, while we
believe that we have resolved any significant year 2000 problems with these
third parties, there can be no assurance that these suppliers have resolved any
or all year 2000 problems before the occurrence of a material disruption to the
operation of our business. Any failure on the part of these third parties to
timely resolve year 2000 problems with their systems could have a material
adverse effect on our business. Since January 1, 2000, we have not experienced
any disruption in our business or operations resulting from any year 2000
problems of any of our third-party suppliers or contractors.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. We believe that we have
identified and resolved all year 2000 problems that could materially adversely
affect our business operations. Since January 1, 2000, we have not experienced
any year 2000 problems that have affected our business and operations. However,
we believe that it is not possible to determine with complete certainty that all
year 2000 problems affecting us have been identified or corrected. The number of
devices and systems that could be affected and the interactions among these
devices and systems are too numerous to address. In addition, we cannot
accurately predict whether failures will occur as a result of the year 2000
problem or the severity, timing, duration or financial consequences of these
potential failures. As a result, we believe it is possible that operational
inconveniences and inefficiencies for us, our contract manufacturers and our
customers may occur that will divert management's time and attention and
financial and human resources from ordinary business activities.
CONTINGENCY PLANS. We have developed contingency plans to be implemented
if our efforts to identify and correct year 2000 problems affecting our
internal systems are not effective. Depending on the systems affected, these
plans include:
o accelerated replacement of affected equipment or software;
o short- to medium-term use of backup equipment or software or other
redundant systems;
o increased work hours for our personnel or the hiring of additional
information technology staff; and
o the use of contract personnel to correct, on an accelerated basis,
any year 2000 problems that arise or to provide interim alternative
solutions for information system deficiencies.
Our implementation of any of these strategies could have a material
adverse effect on our business.
OTHER FACTORS. The discussion of our efforts and expectations relating to
year 2000 compliance are forward-looking statements. Our ability to achieve
year 2000 compliance, and the level of incremental costs associated therewith,
could be adversely affected by, among other things, the availability and cost
of contract personnel and external resources, third-party suppliers' ability to
modify proprietary software and unanticipated problems not identified in the
ongoing compliance review.
12
<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 March 31, 2000,
we have not used derivative instruments or engaged in hedging activities to
minimize our market risk.
INTEREST RATE RISK
As of March 31, 2000, 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.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
We expect to hold our annual meeting of stockholders on June 23, 2000 and
to mail the proxy materials relating to the meeting on or about May 24, 2000.
We have not received notice of any proposal or other matter to be presented by
any stockholder at the meeting.
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)
10.3.1* Amendment, dated as of February 7, 2000, to Employment Agreement
between the Company and Jack Friedman(5)
10.3.2* Amendment, dated as of February 7, 2000, to Employment Agreement
between the Company and Stephen G. Berman(5)
27 Financial Data Schedule(6)
</TABLE>
- -------------------------
* Management contract or compensatory plan, contract or arrangement.
(1) Filed previously as an exhibit to the Company's Registration Statement
on Form SB-2 (Reg. 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 (Reg. 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 (Reg. No. 333-22583), effective May 1, 1997, and
incorporated herein by reference.
(5) Filed previously as an exhibit to the Company's Annual Report
on Form 10-K for its fiscal year ended December 31, 1999, filed on
March 30, 2000, and incorporated herein by reference.
(6) Filed herewith.
(b) Reports on Form 8-K
No Current Report on Form 8-K was filed in the fiscal quarter ended
March 31, 2000.
14
<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: May 11, 2000 By: /s/ Joel M. Bennett
--------------------
Chief Financial Officer
(Principal Financial Officer)
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
<S> <C> <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)
10.3.1* Amendment, dated as of February 7, 2000, to Employment Agreement
between the Company and Jack Friedman(5)
10.3.2* Amendment, dated as of February 7, 2000, to Employment Agreement
between the Company and Stephen G. Berman(5)
27 Financial Data Schedule(6)
</TABLE>
- -------------------------
* Management contract or compensatory plan, contract or arrangement.
(1) Filed previously as an exhibit to the Company's Registration Statement
on Form SB-2 (Reg. 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 (Reg. 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 (Reg. No. 333-22583), effective May 1, 1997, and
incorporated herein by reference.
(5) Filed previously as an exhibit to the Company's Annual Report
on Form 10-K for its fiscal year ended December 31, 1999, filed on
March 30, 2000, and incorporated herein by reference.
(6) Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 72,441,969
<SECURITIES> 24,264,610
<RECEIVABLES> 41,863,970
<ALLOWANCES> 1,885,852
<INVENTORY> 17,262,114
<CURRENT-ASSETS> 156,627,957
<PP&E> 19,133,518
<DEPRECIATION> 6,545,675
<TOTAL-ASSETS> 233,916,422
<CURRENT-LIABILITIES> 38,604,966
<BONDS> 0
0
0
<COMMON> 19,338
<OTHER-SE> 194,388,788
<TOTAL-LIABILITY-AND-EQUITY> 233,916,422
<SALES> 50,782,075
<TOTAL-REVENUES> 50,782,075
<CGS> 30,678,416
<TOTAL-COSTS> 16,099,802
<OTHER-EXPENSES> (451,803)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (952,046)
<INCOME-PRETAX> 9,715,445
<INCOME-TAX> 3,112,012
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,603,433
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.32
</TABLE>
